UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-720
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PHILLIPS PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-0400345
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Phillips Building, Bartlesville, Oklahoma 74004
(Address of principal executive offices) (Zip Code)
918-661-6600
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The registrant had 255,745,121 shares of common stock, $1.25 par
value, outstanding at April 30, 2001.
PART I. FINANCIAL INFORMATION
- -----------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Revenues
Sales and other operating revenues $4,868 4,735
Equity in earnings of affiliated companies 27 21
Other revenues 9 12
- -----------------------------------------------------------------
Total Revenues 4,904 4,768
- -----------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 2,509 3,083
Production and operating expenses 570 519
Exploration expenses 67 51
Selling, general and administrative expenses 160 185
Depreciation, depletion and amortization 322 234
Taxes other than income taxes 154 62
Interest expense 84 61
Foreign currency transaction losses 7 18
Preferred dividend requirements of
capital trusts 13 13
- -----------------------------------------------------------------
Total Costs and Expenses 3,886 4,226
- -----------------------------------------------------------------
Income before income taxes 1,018 542
Provision for income taxes 528 292
- -----------------------------------------------------------------
Net Income $ 490 250
=================================================================
Net Income Per Share of Common Stock
Basic $ 1.92 .99
Diluted 1.91 .98
- -----------------------------------------------------------------
Dividends Paid $ .34 .34
- -----------------------------------------------------------------
Average Common Shares Outstanding
(in thousands)
Basic 255,556 253,718
Diluted 257,161 254,677
- -----------------------------------------------------------------
See Notes to Financial Statements.
1
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-----------------------
March 31 December 31
2001 2000
-----------------------
Assets
Cash and cash equivalents $ 143 149
Accounts and notes receivable (includes
receivables from related parties of
$152 million in 2001 and $227 million
in 2000), less allowances of
$18 million in 2001 and 2000 1,316 1,779
Inventories 530 357
Deferred income taxes 160 191
Prepaid expenses and other current assets 166 130
- -----------------------------------------------------------------
Total Current Assets 2,315 2,606
Investments and long-term receivables 3,105 2,999
Properties, plants and equipment (net) 15,102 14,784
Deferred income taxes 5 -
Deferred charges 133 120
- -----------------------------------------------------------------
Total $20,660 20,509
=================================================================
Liabilities
Accounts payable $ 1,783 1,914
Notes payable and long-term debt due
within one year 262 262
Accrued income and other taxes 1,000 815
Other accruals 460 501
- -----------------------------------------------------------------
Total Current Liabilities 3,505 3,492
Long-term debt 6,143 6,622
Accrued dismantlement, removal and
environmental costs 809 702
Deferred income taxes 2,013 1,894
Employee benefit obligations 446 494
Other liabilities and deferred credits 598 562
- -----------------------------------------------------------------
Total Liabilities 13,514 13,766
- -----------------------------------------------------------------
Company-Obligated Mandatorily Redeemable
Preferred Securities of Phillips
Capital Trusts I and II 650 650
- -----------------------------------------------------------------
Common Stockholders' Equity
Common stock--500,000,000 shares
authorized at $1.25 par value
Issued (306,380,511 shares)
Par value 383 383
Capital in excess of par 2,170 2,153
Treasury stock (at cost:
2001--22,831,002 shares;
2000--23,142,005 shares) (1,142) (1,156)
Compensation and Benefits Trust (CBT)
(at cost: 2001--27,856,573 shares;
2000--27,849,430 shares) (944) (943)
Accumulated other comprehensive income (121) (100)
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (257) (263)
Retained earnings 6,407 6,019
- -----------------------------------------------------------------
Total Common Stockholders' Equity 6,496 6,093
- -----------------------------------------------------------------
Total $20,660 20,509
=================================================================
See Notes to Financial Statements.
2
- -----------------------------------------------------------------
Consolidated Statement of Phillips Petroleum Company
Cash Flows
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Cash Flows from Operating Activities
Net income $ 490 250
Adjustments to reconcile net income to net
cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and
amortization 322 234
Dry hole costs and leasehold impairment 17 13
Deferred taxes 120 24
Other (16) 71
Working capital adjustments
Increase in aggregate balance of
accounts receivable sold - 118
Decrease (increase) in other accounts
and notes receivable 417 (35)
Increase in inventories (175) (58)
Increase in prepaid expenses and other
current assets (22) (5)
Increase (decrease) in accounts payable (88) 85
Increase in taxes and other accruals 190 73
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 1,255 770
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Alaskan acquisition (5) -
Capital expenditures and investments,
including dry hole costs (656) (299)
Proceeds from asset dispositions 12 7
Long-term advances to affiliates and
other investments (17) (42)
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (666) (334)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of debt - 57
Repayment of debt (496) (391)
Issuance of company common stock 4 2
Dividends paid on common stock (87) (86)
Other (16) (25)
- -----------------------------------------------------------------
Net Cash Used for Financing Activities (595) (443)
- -----------------------------------------------------------------
Net Change in Cash and Cash Equivalents (6) (7)
Cash and cash equivalents at beginning
of period 149 138
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 143 131
=================================================================
See Notes to Financial Statements.
3
- -----------------------------------------------------------------
Notes to Financial Statements Phillips Petroleum Company
Note 1--Interim Financial Information
The financial information for the interim periods presented in
the financial statements included in this report is unaudited and
includes all known accruals and adjustments which Phillips
Petroleum Company (hereinafter referred to as "Phillips" or "the
company") considers necessary for a fair presentation of the
consolidated financial position of the company and its results of
operations and cash flows for such periods. All such adjustments
are of a normal and recurring nature.
On March 31, 2000, Phillips and Duke Energy Corporation (Duke
Energy) contributed their midstream gas gathering, processing and
marketing businesses to Duke Energy Field Services, LLC (DEFS).
Effective July 1, 2000, Phillips and Chevron Corporation
(Chevron) contributed their chemicals businesses, excluding
Chevron's Oronite business, to Chevron Phillips Chemical
Company LLC (CPC). Both of these joint ventures are being
accounted for using the equity method of accounting, which
significantly impacts how the Gas Gathering, Processing, and
Marketing (GPM) and Chemicals segments' operations are reflected
in Phillips' consolidated income statement. Under the equity
method of accounting, Phillips' share of a joint venture's net
income is recorded in a single line item on the income statement:
"Equity in earnings of affiliated companies." Correspondingly,
the other income statement line items (for example, operating
revenues, operating costs, etc.) include activity related to the
GPM and Chemicals operations only up to the effective dates of
the joint ventures. As a result, the two periods are not
comparable.
Note 2--Alaskan Acquisition
In the first quarter of 2001, Phillips completed the acquisition
of ARCO's Alaskan businesses with the final settlement of all
remaining post-closing issues with BP. In addition, Phillips has
finalized its purchase price determination and allocated the
purchase price to specific assets and liabilities. Based on the
appraised value of the properties, plants and equipment acquired,
no goodwill was recorded in the purchase price allocation.
During the first quarter of 2001, net cash activity with BP
related to the acquisition was not material. However, there was
a $107 million increase in property, plant and equipment during
the quarter due to the additional quantification and recognition
of certain non-cash liabilities of the acquired ARCO businesses,
4
primarily an additional accrual, on a discounted basis, to cover
environmental remediation activities required by the state of
Alaska at exploration and production sites formerly owned by
ARCO. The expected expenditures for these remediation activities
are as follows: $23 million and $22 million in 2001 and 2002,
respectively, and $16 million each in 2003, 2004 and 2005.
Remaining expenditures thereafter are expected to be $98 million.
The effect of inflation, net of a 5 percent discount factor,
reduces the accrual by $21 million, resulting in a fair value
environmental liability of $170 million.
Note 3--Inventories
Inventories were:
Millions of Dollars
-----------------------
March 31 December 31
2001 2000
-----------------------
Crude oil $191 130
Petroleum products 207 98
Materials, supplies and other 132 129
- -----------------------------------------------------------------
$530 357
=================================================================
Note 4--Summarized Financial Data of Significant Equity
Affiliates
Duke Energy Field Services, LLC
Phillips owns 30.3 percent of DEFS. Phillips' consolidated
results of operations include 100 percent of the activity of its
gas gathering, processing and marketing business through March
31, 2000, and its 30.3 percent share of DEFS' earnings since that
date. Included in the GPM segment's operating results in the
first three months of 2001 was a $9 million benefit representing
the amortization of the $824 million basis difference between the
book value of Phillips' contribution to DEFS and its 30.3 percent
equity interest in DEFS. This difference is being amortized over
15 years, consistent with the term of Phillips' commitment to
purchase natural gas liquids from DEFS.
5
Summarized financial information for DEFS (100 percent) for the
three-month period ended March 31, 2001, follows:
Millions
of Dollars
----------
Revenues $3,380
Income before cumulative effect of a change
in accounting principle and income taxes 143
Net income 142
- -----------------------------------------------------------------
The members of DEFS are generally taxable on their respective
shares of income for U.S. and state income tax purposes.
Phillips' share of income taxes incurred directly by DEFS is
reported in equity in earnings, and as such is not included in
income taxes in Phillips' consolidated financial statements.
Chevron Phillips Chemical Company LLC
Phillips and Chevron each own 50 percent of the voting and
economic interests in CPC. Phillips' consolidated results of
operations include 100 percent of the activity of its chemicals
business through June 30, 2000, and its 50 percent share of CPC's
earnings since that date. Also included in the first three
months of 2001 operating results was a $1 million reduction for
the amortization of the $108 million basis difference between the
book value of Phillips' contribution to CPC and its 50 percent
interest in the equity of CPC. This basis difference is being
amortized over 20 years.
Summarized financial information for CPC (100 percent) for the
three-month period ended March 31, 2001, follows:
Millions
of Dollars
----------
Revenues $1,854
Loss before income taxes 117
Net loss 118
- -----------------------------------------------------------------
The members of CPC are generally taxable on their respective
shares of income for U.S. and state income tax purposes.
Phillips' share of income taxes incurred directly by CPC is
reported in equity in earnings, and as such is not included in
income taxes in Phillips' consolidated financial statements.
6
Note 5--Properties, Plants and Equipment
The company's net investment in properties, plants and equipment
was:
Millions of Dollars
-----------------------
March 31 December 31
2001 2000
-----------------------
Properties, plants and equipment
(at cost) $24,882 24,383
Less accumulated depreciation,
depletion and amortization 9,780 9,599
- -----------------------------------------------------------------
$15,102 14,784
=================================================================
Note 6--Debt
At March 31, 2001, Phillips had three bank credit facilities in
place, totaling $3 billion, available for its use either as
direct bank borrowings or as support for the issuance of
commercial paper. The facilities include a $1.5 billion
revolving facility expiring in May 2002, a $1 billion revolving
facility expiring in October 2002, and a $500 million credit
agreement expiring in October 2005. At March 31, 2001, the
company had no debt outstanding under these credit facilities,
but had $20 million in commercial paper outstanding, which is
supported 100 percent by the credit facilities. This amount
approximates fair market value.
Also at March 31, 2001, Phillips' Norwegian subsidiary had no
outstanding debt on its two $300 million revolving credit
facilities which expire in November 2001 and June 2004,
respectively.
Note 7--Derivative Instruments
The company and certain of its subsidiaries may use financial and
commodity-based derivative contracts to manage exposures to
currency and commodity price fluctuations. For every derivative
contract used, there is an offsetting physical or financial
position, firm commitment or anticipated transaction. Neither
Phillips nor its subsidiaries hold or issue derivative financial
instruments with leveraged features. In 2000 and the first
quarter of 2001, the net realized and unrealized gains and losses
from derivative contracts were not material to the company's
financial statements.
7
Financial Accounting Standards Board Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(Statement No. 133), requires companies to recognize all
derivative instruments as either assets or liabilities in the
balance sheet at fair value. The accounting for changes in the
fair value (i.e., gains or losses) of a derivative instrument
depends on the type of hedge and whether it meets the
qualifications for and has been designated as a hedge. Phillips
has elected not to use hedge accounting for any of the derivative
contracts used in the company's risk management programs during
the first quarter of 2001. All gains and losses from these
derivative contracts, realized or unrealized, have been
recognized in the statement of income. Assets and liabilities
resulting from derivative contracts open at March 31, 2001,
appear as receivables or payables on the balance sheet. Amounts
related to derivatives in other comprehensive income are the
unrealized gains and losses from the cash-flow hedges of non-
consolidated affiliates. Phillips had no cumulative effect of
accounting change as a result of adopting Statement No. 133.
Financial Derivative Contracts--The company on occasion uses
forward exchange contracts or collars to manage exposures to
currency exchange rate fluctuations associated with certain
assets, liabilities, firm commitments, and anticipated
transactions. During the first quarter of 2001, Phillips used
derivative contracts to manage the exposure to: 1) exchange rate
fluctuations between the U.S. and Australian dollars to fund an
Australian acquisition; and 2) exchange rate fluctuations between
revenues received in U.S. dollars and various European currencies
and the company's Norwegian subsidiary's expenditures payable in
kroner. Results from this activity appear in foreign currency
transaction gains and losses on the statement of income.
Commodity Derivative Contracts--The company uses commodity-based
swaps and futures to manage exposures to commodity price
fluctuations. During the first quarter of 2001, Phillips used
these contracts to manage the exposure to price fluctuations
between the purchase of feedstock for the company's refineries
and the sale of the resulting refined products. Gains and losses
from this activity appear in purchased crude oil and products on
the income statement.
8
Note 8--Comprehensive Income
Phillips' comprehensive income for the three-month periods ended
March 31 was as follows:
Millions of Dollars
-------------------
2001 2000
-------------------
Net income $490 250
After-tax changes in:
Foreign currency translation adjustments (17) (20)
Unrealized loss on derivative instruments (2) -
Unrealized gain (loss) on securities (2) 1
- -----------------------------------------------------------------
Comprehensive income $469 231
=================================================================
Accumulated other comprehensive income included:
Millions of Dollars
---------------------
March 31 December 31
2001 2000
---------------------
Foreign currency translation adjustments $(123) (106)
Unrealized gain on securities 4 6
Unrealized loss on derivative instruments (2) -
- -----------------------------------------------------------------
$(121) (100)
=================================================================
Note 9--Contingencies
In the case of all known contingencies, except those acquired in
a purchase business combination (see Note 2--Alaskan
Acquisition), the company accrues an undiscounted liability when
the loss is probable and the amount is reasonably estimable.
These liabilities are not reduced for possible insurance
recoveries. If applicable, undiscounted receivables are accrued
for probable insurance or other third-party recoveries. For
known contingencies acquired in a purchase business combination,
the accruals are presented at fair value. If applicable,
discounted receivables are accrued for probable insurance or
third-party recoveries attributable to the discounted
contingencies. Based on currently available information, the
company believes that it is remote that future costs related to
known contingent liability exposures will exceed current accruals
by an amount that would have a material adverse impact on the
company's financial statements.
9
As facts concerning contingencies become known to the company,
the company reassesses its position both with respect to accrued
liabilities and other potential exposures. Estimates that are
particularly sensitive to future change include contingent
liabilities recorded for environmental remediation, tax and legal
matters. Estimated future environmental remediation costs are
subject to change due to such factors as the unknown magnitude of
cleanup costs, the unknown time and extent of such remedial
actions that may be required, and the determination of the
company's liability in proportion to other responsible parties.
Estimated future costs related to tax and legal matters are
subject to change as events evolve and as additional information
becomes available during the administrative and litigation
process.
Environmental--The company is subject to federal, state and local
environmental laws and regulations. These may result in
obligations to remove or mitigate the effects on the environment
of the placement, storage, disposal or release of certain
chemical, mineral and petroleum substances at various sites. The
company is currently participating in environmental assessments
and cleanup under these laws at federal Superfund and comparable
state sites. In the future, the company may be involved in
additional environmental assessments, cleanups and proceedings.
Other Legal Proceedings--The company is a party to a number of
other legal proceedings pending in various courts or agencies for
which, in some instances, no provision has been made.
Other Contingencies--The company has contingent liabilities
resulting from throughput agreements with pipeline and processing
companies in which it holds stock interests. Under these
agreements, Phillips may be required to provide any such company
with additional funds through advances, most of which can be
recovered through reductions of future charges for the shipping
or processing of petroleum liquids, natural gas and refined
products.
Note 10--Income Taxes
The company's effective tax rates for the three-month periods
ended March 31, 2001 and 2000, were 52 percent and 54 percent,
respectively. The first quarter rate for 2001 reflects a lower
proportion of income in higher-tax-rate jurisdictions, compared
with the first quarter of 2000.
10
Note 11--Foreign Currency
The following table summarizes the foreign currency transaction
gains (losses) included in the company's reported net income for
the three-month periods ended March 31:
Millions of Dollars
-------------------
2001 2000
-------------------
After-Tax
E&P $ 2 (3)
RM&T 3 -
Chemicals - (1)
Corporate and Other (12) (4)
- -----------------------------------------------------------------
Total $ (7) (8)
=================================================================
Before-Tax
E&P $ 2 (12)
RM&T 2 -
Chemicals - (1)
Corporate and Other (11) (5)
- -----------------------------------------------------------------
Total $ (7) (18)
=================================================================
11
Note 12--Supplemental Cash Flow Information
Non-cash investing and financing activities and cash payments for
interest and income taxes for the three-month periods ended
March 31 were as follows:
Millions of Dollars
-------------------
2001 2000
-------------------
Non-Cash Investing and Financing Activities
Company stock issued under compensation
and benefit plans $ 10 5
Change in fair value of securities (13) 9
Investment in equity affiliate through
exchange of non-cash assets and
liabilities* - 1,068
Investment in equity affiliate through
direct guarantee of debt 13 -
Investment in property, plant and equipment
of ARCO's Alaskan businesses through the
assumption of net non-cash liabilities of
the acquired businesses 107 -
- -----------------------------------------------------------------
Cash Payments
Interest
Debt $ 35 80
Taxes and other 7 4
- -----------------------------------------------------------------
$ 42 84
=================================================================
Income taxes $131 70
- -----------------------------------------------------------------
*On March 31, 2000, Phillips combined its gas gathering,
processing and marketing assets with the gas processing and
gathering business of Duke Energy into DEFS. See Note 4--
Summarized Financial Data of Significant Equity Affiliates.
The working capital and non-working capital adjustments for the
three months ended March 31, 2000, are net of the effect of
assets and liabilities transferred to Duke Energy Field Services.
Note 13--Receivables Monetization
At March 31, 2001, the company had two agreements with bank-
sponsored entities for the revolving sale of undivided interests
in a pool of credit card and trade receivables, and receivables
from its E&P segment. The two agreements combined allowed for
the sale of receivables of up to $500 million. Interests
retained in the pool of receivables were measured and recorded at
face value, which is also fair value. The company also incurred
a limited recourse obligation for bad debt experience for its
credit card and trade receivables, which is recorded at a fair
value that is equal to estimated bad debt experience rates.
12
Total cash flows received from and paid to the bank-sponsored
entities in the first quarter of 2001 were as follows:
Millions
of Dollars
----------
Receivables sold at December 31, 2000
Under a revolving agreement $ 400
Under a non-revolving agreement 100
New receivables sold 1,605
Cash collections remitted (1,605)
- -----------------------------------------------------------------
Receivables sold at March 31, 2001 $ 500
=================================================================
Discounts and other fees paid on
revolving balances $ 6
- -----------------------------------------------------------------
Note 14--Related Party Transactions
Significant transactions with affiliated parties were:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Operating revenues (a) $ 299 349
Purchases (b) 328 175
Operating expenses (c) 79 12
Selling, general and
administrative
expenses (d) 13 29
Interest income (e) - 3
Interest expense (f) 2 -
- -----------------------------------------------------------------
(a) Phillips' E&P segment sells natural gas to DEFS for
processing and marketing. The company sells natural gas
liquids, solvents and petrochemical feedstocks to CPC and
charges CPC for the use of common facilities, such as steam
generators, waste and water treaters, and warehouse
facilities at its refining operations.
(b) Phillips purchases natural gas and natural gas liquids from
DEFS and CPC for use in its refinery processes and other
feedstocks from various affiliates.
(c) Phillips pays processing fees to various affiliates--
primarily Merey Sweeny, L.P. for the processing of heavy oil
through the partnership's coker unit.
13
(d) Phillips charges both DEFS and CPC for corporate services
provided to the two equity companies under transition service
agreements. Phillips pays fees to its pipeline equity
companies for transporting product and pays common facility
fees to other affiliates.
(e) Prior to July 1, 2000, Phillips earned interest on loans to
certain affiliates, primarily Sweeny Olefins Limited
Partnership.
(f) Phillips paid interest to Merey Sweeny, L.P. for a loan
related to improvements at the Sweeny Complex.
Elimination of the company's equity percentage share of profit or
loss on the above transactions was not material.
Note 15--Segment Disclosures
The company has organized its reporting structure based on the
grouping of similar products and services, resulting in four
operating segments:
(1) Exploration and Production (E&P)--This segment explores for
and produces crude oil, natural gas and natural gas liquids
on a worldwide basis.
(2) Gas Gathering, Processing and Marketing (GPM)--This segment
gathers and processes natural gas produced by Phillips and
others. Since March 31, 2000, Phillips' GPM segment has
consisted primarily of its equity investment in DEFS.
(3) Refining, Marketing and Transportation (RM&T)--This segment
refines, markets and transports crude oil and petroleum
products in the United States. This segment also
fractionates and markets natural gas liquids.
(4) Chemicals--This segment manufactures and markets
petrochemicals and plastics on a worldwide basis. Since
July 1, 2000, Phillips' Chemicals segment has consisted
primarily of its equity investment in CPC.
Corporate and All Other includes general corporate overhead; all
interest revenue and expense, including preferred dividend
requirements of capital trusts; certain eliminations; and various
other corporate activities, such as the company's captive
insurance subsidiary and tax items not directly attributable to
the operating segments.
14
The company evaluates performance and allocates resources based
on, among other items, net income. Intersegment sales are
recorded at market value. There have been no material changes in
the basis of segmentation or in the basis of measurement of
segment net income since the 2000 annual report.
Analysis of Results by Operating Segment
Millions of Dollars
-------------------------------
Operating Segments
-------------------------------
E&P GPM RM&T Chemicals
Three Months Ended March 31, 2001 -------------------------------
Sales and Other Operating Revenues
External customers $ 2,308 - 2,559 -
Intersegment (eliminations) 140 - 2 -
- ------------------------------------------------------------------
Segment sales $ 2,448 - 2,561 -
==================================================================
Net income (loss) $ 581 35 46 (44)
==================================================================
Three Months Ended March 31, 2000
Sales and Other Operating Revenues
External customers $ 1,064 255 2,616 799
Intersegment (eliminations) 190 287 182 71
- ------------------------------------------------------------------
Segment sales $ 1,254 542 2,798 870
==================================================================
Net income $ 241 51 23 26
==================================================================
Total Assets
At March 31, 2001 $14,088 96 3,404 2,087
- ------------------------------------------------------------------
At December 31, 2000 $13,834 77 3,420 2,170
- ------------------------------------------------------------------
Millions of Dollars
---------------------------
Corporate
and All Other Consolidated
Three Months Ended March 31, 2001 ---------------------------
Sales and Other Operating Revenues
External customers $ 1 4,868
Intersegment (eliminations) (142) -
- ------------------------------------------------------------------
Segment sales $ (141) 4,868
==================================================================
Net income (loss) $ (128) 490
==================================================================
Three Months Ended March 31, 2000
Sales and Other Operating Revenues
External customers $ 1 4,735
Intersegment (eliminations) (730) -
- ------------------------------------------------------------------
Segment sales $ (729) 4,735
==================================================================
Net income (loss) $ (91) 250
==================================================================
Total Assets
At March 31, 2001 $ 985 20,660
- ------------------------------------------------------------------
At December 31, 2000 $1,008 20,509
- ------------------------------------------------------------------
Note 16--Significant Transactions
Proposed Tosco Acquisition
On February 4, 2001, Phillips announced that it had agreed to
purchase Tosco Corporation (Tosco) in a $7 billion stock
transaction. Under the terms of the agreement, Phillips would
issue 0.8 shares of its common stock for each Tosco share, and
would assume approximately $2 billion of Tosco's debt. The
transaction has been approved by both companies' Boards of
Directors and in separate special shareholder meetings held on
April 11, 2001, shareholders of both Tosco and Phillips approved
the transaction. Closing of the transaction remains subject to
customary regulatory review. The transaction would be accounted
for using the purchase method of accounting.
Under the terms of the agreement, Phillips would acquire all of
Tosco's operations, including eight U.S. refineries with a total
capacity of 1.35 million barrels per day and 6,300 retail outlets
in 32 states. In 2000, Tosco had revenues of approximately
$25 billion and employed 26,400 people. The combined RM&T
operations would make Phillips one of the largest refiners and
marketers in the United States.
15
- -----------------------------------------------------------------
Management's Discussion and Phillips Petroleum Company
Analysis of Financial Condition
and Results of Operations
Management's Discussion and Analysis contains forward-looking
statements including, without limitation, statements relating to
the company's plans, strategies, objectives, expectations,
intentions, and resources, that are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform
Act of 1995. The words "intends," "believes," "expects,"
"plans," "scheduled," "anticipates," "estimates," and similar
expressions identify forward-looking statements. The company
does not undertake to update, revise or correct any of the
forward-looking information. Readers are cautioned that such
forward-looking statements should be read in conjunction with the
company's disclosures under the heading: "CAUTIONARY STATEMENT
FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995," beginning on page 35.
RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three-
month period ending March 31, 2001, is based on a comparison with
the corresponding period in 2000.
Consolidated Results
A summary of the company's net income by business segment
follows:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Exploration and Production (E&P) $ 581 241
Gas Gathering, Processing and Marketing (GPM) 35 51
Refining, Marketing and Transportation (RM&T) 46 23
Chemicals (44) 26
Corporate and Other (128) (91)
- -----------------------------------------------------------------
Net Income $ 490 250
=================================================================
16
Net income is affected by transactions, defined by Management and
termed "special items," which are not representative of the
company's ongoing operations. These transactions can obscure the
underlying operating results for a period and affect
comparability of operating results between periods. The
following table summarizes the gains/(losses), on an after-tax
basis, from special items included in the company's reported net
income:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Pending claims and settlements $ (5) (30)
Net gains/(losses) on asset sales (3) 7
Equity companies' special items (5) -
Other items (1) 2
- -----------------------------------------------------------------
Total special items $(14) (21)
=================================================================
Excluding the special items listed above, the company's net
operating income by business segment was:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2001 2000
-------------------
E&P $ 585 223
GPM 35 57
RM&T 48 27
Chemicals (39) 28
Corporate and Other (125) (64)
- -----------------------------------------------------------------
Net operating income $ 504 271
=================================================================
Phillips' net income was $490 million in the first quarter of
2001, compared with $250 million in the first quarter of 2000.
Special items reduced net income $14 million in the first quarter
of 2001 and $21 million in the first quarter of the prior year.
After excluding special items, net operating income in the first
quarter of 2001 was $504 million, compared with $271 million in
the first quarter of 2000.
The company's net operating income increased in the first quarter
of 2001, mainly due to higher U.S. Lower 48 natural gas prices,
increased crude oil production, and improved RM&T earnings.
17
RM&T's first-quarter 2001 results included a full quarter's
benefit from the coker and continuous catalytic reformer projects
at the Sweeny, Texas, refinery, which enable the company to
utilize lower-cost crude oil. These positive items were
partially offset by a $39 million net operating loss from the
Chemicals segment. Chemicals' earnings were impacted by higher
utility and feedstock costs. Phillips also had higher interest
expense at the corporate level.
Income Statement Analysis
On March 31, 2000, Phillips and Duke Energy Corporation (Duke
Energy) contributed their midstream gas gathering, processing and
marketing businesses to Duke Energy Field Services, LLC (DEFS).
Effective July 1, 2000, Phillips and Chevron Corporation
(Chevron) contributed their chemicals businesses, excluding
Chevron's Oronite business, to Chevron Phillips Chemical Company
LLC (CPC). Both of these joint ventures are being accounted for
using the equity method of accounting, which significantly
impacts how the GPM and Chemicals segments' operations are
reflected in Phillips' consolidated income statement. Under the
equity method of accounting, Phillips' share of a joint venture's
net income is recorded in a single line item on the income
statement: "Equity in earnings of affiliated companies."
Correspondingly, the other income statement line items (for
example, operating revenues, operating costs, etc.) include
activity related to the GPM and Chemicals operations only up to
the effective dates of the joint ventures.
Sales and other operating revenues increased 3 percent in the
first quarter of 2001, reflecting higher crude oil production as
a result of the Alaskan acquisition in the second quarter of 2000
and improved natural gas prices. These items were substantially
offset by the reduction in operating revenues as a result of
using the equity method of accounting for the DEFS and CPC joint
ventures, as well as the sale of the company's U.K. downstream
operations at year-end 2000.
Equity in earnings of affiliated companies increased 29 percent
in the first quarter of 2001, primarily due to equity earnings
from DEFS and Merey Sweeny, L.P., a 50-percent-owned equity
company that owns and operates the coker unit at the Sweeny
refinery. These items were partially offset by losses from CPC.
Other revenues declined 25 percent in the first quarter of 2001,
as lower results from asset dispositions and lower insurance
dividends were partially offset by more favorable contingency-
related activity.
18
Purchased crude oil and products decreased 19 percent in the
first quarter of 2001, reflecting the use of the equity method of
accounting for the DEFS and CPC joint ventures.
Management defines controllable costs as production and operating
expenses; selling, general and administrative expenses; and the
general administrative, geological, geophysical and lease rentals
(G&G) component of exploration expenses. Controllable costs,
adjusted to exclude special items and G&G expenses, increased
8 percent in the first quarter of 2001. The increase was due to
the Alaskan acquisition; higher utility costs at the company's
refineries; new coker-related, crude-processing fees at the
Sweeny refinery; and higher benefit-related expenses. These
items were partially offset by the reduction in controllable
costs caused by the use of the equity method of accounting for
the DEFS and CPC joint ventures.
Exploration expenses increased 31 percent in the first quarter of
2001, reflecting higher G&G and lease impairment costs in the
period.
Depreciation, depletion and amortization (DD&A) increased
38 percent in the first quarter of 2001. The increase was mainly
due to the company's larger asset base and higher production
rates as a result of the Alaskan acquisition, partially offset by
the use of equity-method accounting for the DEFS and CPC joint
ventures.
Taxes other than income taxes increased 148 percent in the first
quarter of 2001, reflecting higher production and property taxes
following the Alaskan acquisition.
Interest expense increased 38 percent in the first quarter of
2001, primarily due to higher debt balances incurred for the
Alaskan acquisition, partially offset by an increase in the
amount of interest charges that are being capitalized.
Foreign currency transaction losses of $7 million were incurred
in the first quarter of 2001, compared with $18 million in the
first quarter of 2000. Preferred dividend requirements were
unchanged in the first quarter of 2001 from the corresponding
quarter of the prior year.
19
Segment Results
E&P
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income $ 581 241
Less special items (4) 18
- -----------------------------------------------------------------
Net operating income $ 585 223
=================================================================
Dollars Per Unit
-------------------
Average Sales Prices
Crude oil (per barrel)
United States
Alaska $25.95 22.01
Lower 48 27.10 27.70
Total 26.06 26.79
Foreign 25.33 27.13
Worldwide 25.81 27.07
Natural gas--lease
(per thousand cubic feet)
United States
Alaska 1.79 -
Lower 48 6.41 2.40
Total 6.10 2.40
Foreign 2.83 2.31
Worldwide 4.90 2.36
- -----------------------------------------------------------------
Millions of Dollars
-------------------
Worldwide Exploration Expenses
Geological, geophysical and lease rentals $ 50 38
Leasehold impairment 11 5
Dry holes 6 8
- -----------------------------------------------------------------
$ 67 51
=================================================================
20
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Thousands of
Barrels Daily
-------------------
Operating Statistics
Crude oil produced
United States
Alaska 349 8
Lower 48 33 36
- -----------------------------------------------------------------
Total 382 44
Norway 122 112
United Kingdom 20 31
Nigeria 30 24
China 13 14
Canada 1 6
Timor Sea 8 6
Denmark 4 4
Venezuela 3 3
- -----------------------------------------------------------------
583 244
=================================================================
Natural gas liquids produced
United States
Alaska 27* -
Lower 48 1 1
- -----------------------------------------------------------------
Total 28 1
Norway 5 5
Other areas 4 5
- -----------------------------------------------------------------
37 11
=================================================================
*Includes 16,000 barrels per day that were sold from the Prudhoe
Bay lease to the Kuparuk lease for reinjection to enhance crude
oil production.
Millions of
Cubic Feet Daily
-------------------
Natural gas produced*
United States
Alaska 182 122
Lower 48 721 767
- -----------------------------------------------------------------
Total 903 889
Norway 138 141
United Kingdom 202 257
Canada 22 87
Nigeria 43 27
Australia 40 -
- -----------------------------------------------------------------
1,348 1,401
=================================================================
*Represents quantities available for sale. Excludes gas
equivalent of natural gas liquids shown above.
Liquefied natural gas sales 116 115
- -----------------------------------------------------------------
21
Net operating income from Phillips' E&P segment increased
162 percent in the first quarter of 2001. The increase reflects
higher U.S. natural gas prices, as well as higher crude oil
production resulting from the Alaskan acquisition and increased
output from Norway and Nigeria.
U.S. natural gas prices peaked in January 2001, and trended
downward in February and March. Crude oil prices moved downward
from the prices experienced in the second half of 2000.
U.S. E&P
- --------
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Operating Income
Reported net income $472 121
Less special items (2) 7
- -----------------------------------------------------------------
Net operating income $474 114
=================================================================
Alaska $245 24
Lower 48 229 90
- -----------------------------------------------------------------
$474 114
=================================================================
Net operating income from the company's U.S. E&P operations
increased 316 percent in the first quarter of 2001, with the
increase attributable to the Alaskan acquisition and higher
natural gas prices.
U.S. crude oil production increased substantially in the first
quarter of 2001 due to the Alaskan acquisition and the startup of
the Alpine field in Alaska in late 2000. Crude oil production in
the Lower 48 continued to trend downward in the first quarter,
reflecting property dispositions. U.S. natural gas production
increased slightly in the first quarter of 2001, primarily due to
higher output in Alaska.
Special items in the first quarter of 2001 included a net loss on
the disposition of assets. Special items in the first quarter of
2000 primarily consisted of a net gain on asset sales.
22
Foreign E&P
- -----------
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Operating Income
Reported net income $109 120
Less special items (2) 11
- -----------------------------------------------------------------
Net operating income $111 109
=================================================================
Net operating income from the company's foreign E&P operations
increased 2 percent in the first quarter of 2001. Earnings
benefited from improved natural gas prices and lower production
and operating expenses. Although foreign E&P crude oil
production increased slightly in the first quarter of 2001,
production declined in countries with lower tax rates (e.g., the
United Kingdom and Canada) and increased in countries with higher
tax rates (e.g., Norway and Nigeria), reducing after-tax results
in the period. The company's average foreign crude oil price was
also 7 percent lower in the first quarter of 2001.
Natural gas production decreased 13 percent in the first quarter
of 2001. It declined in the U.K. North Sea as a result of field
declines, and in Canada due to the sale of the Zama-area
properties in late 2000. Natural gas production increased in
Nigeria and new production began in Australia.
Special items in the first quarter of 2001 consisted of a net
loss on asset dispositions. Special items in the first quarter
of 2000 primarily consisted of a deferred tax adjustment and a
net gain on property dispositions.
23
GPM
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income $ 35 51
Less special items - (6)
- -----------------------------------------------------------------
Net operating income $ 35 57
=================================================================
Dollars Per Barrel
-------------------
Average Sales Prices
U.S. natural gas liquids* $25.38 19.48
- -----------------------------------------------------------------
Millions of
Cubic Feet Daily
-------------------
Operating Statistics**
Raw gas throughput 2,121 1,824
- -----------------------------------------------------------------
Thousands of
Barrels Daily
-------------------
Natural gas liquids production 112 162
- -----------------------------------------------------------------
*The price for 2000 represents Phillips' realized price prior to
the formation of DEFS. The price for 2001 is based on index
prices from the Mont Belvieu and Conway market hubs that are
weighted by DEFS' natural-gas-liquids-component and location
mix.
**Production and throughput volumes for 2000 represent Phillips'
production and throughput prior to the formation of DEFS. The
volumes in 2001 reflect Phillips' 30.3 percent share of DEFS'
production and throughput.
Net operating income from the GPM segment decreased 39 percent in
the first quarter of 2001. Since Phillips combined its gas
gathering, processing and marketing business with Duke Energy's
to form DEFS on March 31, 2000, Phillips has used equity
accounting for its investment in DEFS. As a result, GPM-segment
earnings are not directly comparable between the first quarter of
2001 and the first quarter of 2000. Factors affecting the
results of operations for the two periods were:
o Natural gas liquids prices in the first quarter of 2001 were
approximately 30 percent higher than those in the first quarter
of 2000. This benefit was partially offset by higher natural gas
prices, which increased purchase costs.
24
o DEFS' earnings in the first quarter of 2001 were reduced by
interest charges on the $2.8 billion in financing incurred
shortly after the closing of the transaction. Prior to the
formation of DEFS, the GPM segment did not have interest expense.
Also, by receiving equal cash distributions with Duke Energy,
Phillips monetized approximately 25 percent of its GPM investment
(absent the equal cash distribution to each joint venturer,
Phillips' share in DEFS would have been approximately 39 percent
based on the relative fair values of the contributed businesses).
Special items in the first quarter of 2000 consisted of work
force reduction charges.
25
RM&T
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income $ 46 23
Less special items (2) (4)
- -----------------------------------------------------------------
Net operating income $ 48 27
=================================================================
Dollars Per Unit
-------------------
Average Sales Prices (per gallon)
Automotive gasoline
Wholesale $ .89 .86
Retail 1.02 .99
Distillates .84 .81
- -----------------------------------------------------------------
Thousands of
Barrels Daily
-------------------
Operating Statistics
U.S. refinery crude oil
Rated capacity 368 360
Crude runs 346 345
Capacity utilization (percent) 94% 96
Natural gas liquids fractionation
Rated capacity 137 252
Processed 102 212
Capacity utilization (percent) 74% 84
Refinery and natural gas liquids production 503 589
- -----------------------------------------------------------------
Petroleum products outside sales
United States
Automotive gasoline
Branded 242 229
Unbranded 22 33
Spot 37 29
Aviation fuels 43 38
Distillates
Wholesale and retail 106 107
Spot 29 29
Natural gas liquids (fractionated) 102 142
Other products 38 35
- -----------------------------------------------------------------
619 642
Foreign - 44
- -----------------------------------------------------------------
619 686
=================================================================
26
Net operating income from the RM&T segment increased 78 percent
in the first quarter of 2001. The increase was attributable to
the Sweeny refinery, which benefited from a full quarter's
operation of the coker and continuous catalytic reformer. The
coker allows for the processing of heavier, lower-cost crude
oil, thereby reducing crude oil purchase costs. This was
particularly beneficial in the first quarter of 2001, as the
spread in prices between heavy and light crude oils was greater
than historical averages. In the first quarter of 2001, average
crude oil acquisition costs at the Sweeny refinery were
29 percent lower than the average price of West Texas
Intermediate (WTI) crude oil, compared with the first quarter of
2000 when the acquisition costs were only 1 percent lower than
the average WTI price. This, combined with higher product
prices, led to improved gasoline and distillates margins at the
refinery.
The improved results at the Sweeny refinery were partially offset
by lower earnings at the company's two other refineries, due
mainly to higher utility costs and a scheduled maintenance
turnaround at the company's Borger, Texas, refinery. Also, the
company had lower earnings from its wholesale marketing business,
which experienced lower gasoline and distillates margins. In
addition, RM&T results declined due to the sale of the U.K.
downstream business at year-end 2000.
Phillips' refineries processed 346,000 barrels per day in the
first quarter of 2001, compared with 345,000 barrels per day in
the first quarter of 2000. Effective January 1, 2001, RM&T's
rated crude oil refining capacity increased to 368,000 barrels
per day as a result of completing the coker and continuous
catalytic reformer projects.
Special items in the first quarter of 2001 consisted of a
property impairment recorded by an equity-affiliate pipeline
company. Special items in the first quarter of 2000 included
contingency-related charges.
27
Chemicals
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income (loss) $(44) 26
Less special items (5) (2)
- -----------------------------------------------------------------
Net operating income (loss) $(39) 28
=================================================================
Millions of Pounds
-------------------
Operating Statistics
Production*
Ethylene 828 890
Polyethylene 479 562
Styrene 109 -
Normal alpha olefins 130 -
- -----------------------------------------------------------------
*Production volumes for the first quarter of 2001 represent
Phillips' 50 percent share of Chevron Phillips Chemical Company
LLC.
The company's Chemicals segment posted a net operating loss of
$39 million in the first quarter of 2001, compared with net
operating income of $28 million in the first quarter of 2000. On
July 1, 2000, Phillips and Chevron combined the two companies'
worldwide chemicals businesses, excluding Chevron's Oronite
business, into CPC. Phillips is using the equity method of
accounting for its 50 percent interest in CPC.
As a result of the CPC transaction, earnings from Phillips'
Chemicals segment are not directly comparable between the first
quarter of 2001 and the first quarter of 2000. Some factors
affecting the results for the two periods were:
o Beginning in the third quarter of 2000, margins in the
chemical industry weakened due to higher feedstock prices in key
product lines. Margins continued to weaken in the fourth quarter
of 2000, with the Chemicals segment posting a net operating loss
of $41 million for the quarter. Difficult market conditions
continued in the first quarter of 2001, as margins in key product
lines remained low.
o CPC's earnings in the first quarter of 2001 were reduced by
interest charges on the financing incurred upon formation to fund
operations and initial cash distributions to the parent
companies. Prior to the formation of CPC, the Chemicals segment
did not have interest expense.
Special items in the first quarter of 2001 consisted of
contingency-related items. Special items in the first quarter of
2000 related to the K-Resin plant incident that occurred on
March 27, 2000.
28
Corporate and Other
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
2001 2000
-------------------
Operating Results
Reported Corporate and Other $(128) (91)
Less special items (3) (27)
- -----------------------------------------------------------------
Adjusted Corporate and Other $(125) (64)
=================================================================
Adjusted Corporate and Other includes:
Net interest $ (68) (43)
Corporate general and
administrative expenses (31) (18)
Preferred dividend requirements (10) (11)
Other items (16) 8
- -----------------------------------------------------------------
Adjusted Corporate and Other $(125) (64)
=================================================================
Net interest represents interest income and expense, net of
capitalized interest. Net interest expense increased 58 percent
in the first quarter of 2001, reflecting higher debt levels as a
result of funding the Alaskan acquisition in 2000. This was
partially offset by higher capitalized interest, primarily
related to projects acquired in that acquisition.
Corporate general and administrative expenses increased in the
first quarter of 2001, primarily due to higher benefit-related
expenses.
Preferred dividend requirements represent dividends on the
preferred securities of the Phillips 66 Capital I and II trusts.
The category "Other" consists primarily of the company's captive
insurance subsidiary, certain foreign currency transaction gains
and losses, and income tax and other items that are not directly
associated with the operating segments on a stand-alone basis.
Results from Other were lower in the first quarter of 2001,
reflecting higher foreign currency transaction losses and higher
income tax expenses not associated with the operating segments.
Special items in the first quarter of 2001 consisted of an
environmental accrual. Special items in the first quarter of
2000 primarily consisted of costs related to a K-Resin facility
incident insured by the company's captive insurance subsidiary.
29
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
-------------------------------
At At At
March 31 December 31 March 31
2001 2000 2000
-------------------------------
Current ratio .7 .7 1.0
Total debt $6,405 6,884 3,969
Company-obligated mandatorily
redeemable preferred securities $ 650 650 650
Common stockholders' equity $6,496 6,093 4,705
Percent of total debt to capital* 47% 51 43
Percent of floating-rate debt
to total debt 11% 17 21
- -----------------------------------------------------------------
*Capital includes total debt, company-obligated mandatorily
redeemable preferred securities and common stockholders' equity.
Cash from operations in the first quarter of 2001 increased
$485 million from the same period in 2000, primarily the result
of a $240 million increase in net income and a net decrease in
working capital accounts. The increase in inventories was more
than offset by the decrease in other accounts and notes
receivable. Sales of accounts receivable under the company's
receivables monetization programs increased cash from operations
by $118 million less than they did in the same period in 2000.
Phillips has $200 million of master leasing arrangements, under
which it leases and supervises the construction of retail
marketing outlets. At March 31, 2001, approximately $144 million
had been utilized under these arrangements. The company also has
in place a $90 million leasing arrangement for its corporate
aircraft. At March 31, 2001, $52 million had been utilized under
this arrangement.
During the first three months of 2001, cash and cash equivalents
decreased $6 million. Cash of $1,255 million was provided by
operating activities. Funds were primarily used to retire
revolving debt, support the company's capital expenditures
program and pay dividends.
At March 31, 2001, Phillips had three bank credit facilities in
place, totaling $3 billion, available for its use either as
direct bank borrowings or as support for the issuance of
commercial paper. The facilities include a $1.5 billion
revolving facility expiring in May 2002, a $1 billion revolving
facility expiring in October 2002, and a $500 million dollar
credit agreement expiring in October 2005. At March 31, 2001,
the company had no debt outstanding under these credit
30
facilities, but had $20 million in commercial paper outstanding,
which is supported 100 percent by the credit facilities. This
amount approximates fair market value.
Also at March 31, 2001, Phillips' Norwegian subsidiary had no
outstanding debt on its two $300 million revolving credit
facilities which expire in November 2001 and June 2004,
respectively.
At March 31, 2001, in addition to its bank credit facilities, the
company had agreements with bank-sponsored entities for the
revolving sale of undivided interests in a pool of up to
$500 million of credit card and trade receivables, all of which
were sold at March 31, 2001. (see Note 13--Receivables
Monetization).
During separate special shareholder meetings held on April 11,
2001, shareholders of both Tosco and Phillips approved Phillips'
proposed acquisition of Tosco. The Phillips shareholders also
approved amending the company's charter to increase the number of
authorized shares of common stock from 500 million to 1 billion.
After the closing of the transaction, which is expected by the
end of the third quarter of 2001, subject to customary regulatory
reviews, Phillips estimates capturing about $250 million in
annual synergies. Phillips' Board of Directors has authorized a
share repurchase program of up to $1 billion, but no shares have
been purchased under this program to date.
Capital Expenditures and Investments
Millions of Dollars
-------------------------------
Three Months Ended
March 31
Estimated ------------------
2001 2001 2000
--------- ------------------
E&P
Alaska $ 914 248 8
Lower 48 269 65 48
Foreign 1,037 279 141
- -----------------------------------------------------------------
2,220 592 197
GPM - - 12
RM&T 246 49 50
Chemicals - - 38
Corporate and Other 73 15 2
- -----------------------------------------------------------------
$2,539 656 299
=================================================================
United States $1,502 377 133
Foreign 1,037 279 166
- -----------------------------------------------------------------
$2,539 656 299
=================================================================
31
The Polar Endeavour, the first of five double-hulled Millennium
Class tankers which Phillips is having built for use in
transporting Alaskan North Slope crude oil to the U.S. West
Coast, has completed its sea trials and is expected to enter
service by the end of the second quarter of 2001. The second
tanker, the Polar Resolution, was christened on March 3, 2001,
and is expected to enter service this year as well. In addition
to the five Millennium Class tankers already built or under
construction, the company has an option for two additional
tankers. The option for the sixth ship is subject to exercise in
the third quarter of 2001; the seventh during the fourth quarter
of 2001.
On May 3, 2001, Eni SpA, the recently appointed operator of the
Offshore Kazakhstan International Operating Company (OKIOC)
consortium, announced the completion of testing at the Kashagan
West 1 well. The test section flowed at a rate of up to
3,300 barrels of oil per day and 7.5 million cubic feet of gas
per day on a 32/64 inch choke. The oil gravity at the well site
ranged from 42 to 45 degrees API. Kashagan West 1 is the second
exploration well drilled by the OKIOC in the Kashagan structure
and is located over 25 miles from the Kashagan East 1 discovery
well. Following completion of the Kashagan West 1 well, the
drilling rig will return to Kashagan East to begin an appraisal
drilling program. Phillips has a 7.14 percent interest in OKIOC.
In China's Bohai Bay, development activities continued in the
first quarter of 2001 in line with the overall development plan
for Peng Lai 19-3 Phase I. First production is scheduled for mid-
year 2002. The overall Phase I development plan was agreed to by
the China National Offshore Oil Corporation and has been
submitted to the Chinese authorities for approval, which is
currently pending.
Phillips announced on April 19, 2001, that it had successfully
completed and started up a new 6,000-barrel-per-day unit at its
Borger, Texas, refinery that demonstrates the ability of the
company's proprietary S Zorb Sulfur Removal Technology to
significantly reduce sulfur content in gasoline. Refiners who
license the technology can use it to meet more stringent
Environmental Protection Agency standards beginning in 2004.
Phillips is also developing an S Zorb Sulfur Removal Technology
process for diesel fuel. Pilot plant testing of S Zorb Sulfur
Removal Technology for diesel is currently under way.
Effective April 25, 2001, Phillips acquired the Midcontinent-
region gasoline marketing assets of various subsidiaries of The
Coastal Corporation. The assets included 101 company-operated
stores and the assumption of 45 Coastal branded-marketer supply
contracts.
32
Contingencies
Legal and Tax Matters
Phillips accrues for contingencies when a loss is probable and
the amounts can be reasonably estimated. Based on currently
available information, the company believes that it is remote
that future costs related to known contingent liability exposures
will exceed current accruals by an amount that would have a
material adverse impact on the company's financial statements.
Environmental
Most aspects of the businesses in which the company engages are
subject to various federal, state, local and foreign
environmental laws and regulations. Similar to other companies
in the petroleum and chemical industries, the company incurs
costs for preventive and corrective actions at facilities and
waste disposal sites.
Phillips may be obligated to take remedial action as the result
of the enactment of laws, such as the federal Superfund law, the
issuance of new regulations, or as a result of leaks and spills.
In addition, an obligation may arise when a facility is closed or
sold. Most of the expenditures to fulfill these obligations
relate to facilities and sites where past operations followed
practices and procedures that were considered appropriate under
regulations, if any, existing at the time, but may now require
investigatory or remedial work to adequately protect the
environment or address new regulatory requirements.
At year-end 2000, Phillips reported 30 sites where it had
information indicating that it might have been identified as a
Potentially Responsible Party (PRP). Since then, no sites have
been resolved or added. Of the 30 sites, the company believes it
has a legal defense or its records indicate no involvement for
five sites. At six other sites, present information indicates
that it is probable that the company's exposure is less than
$100,000 per site. At five sites, Phillips has had no
communication or activity with government agencies or other PRPs
in more than two years. Of the 14 remaining sites, the company
has provided for any probable costs that can be reasonably
estimated. No one site represents more than 10 percent of the
total.
Phillips does not consider the number of sites at which it has
been designated potentially responsible by state or federal
agencies as a relevant measure of liability. Some companies may
be involved in few sites but have much larger liabilities than
companies involved in many more sites. Although liability of
33
those potentially responsible is generally joint and several for
federal sites and frequently so for state sites, the company is
usually but one of many companies cited at a particular site. It
has, to date, been successful in sharing cleanup costs with other
financially sound companies. Many of the sites at which the
company is potentially responsible are still under investigation
by the Environmental Protection Agency (EPA) or the state
agencies concerned. Prior to actual cleanup, those potentially
responsible normally assess site conditions, apportion
responsibility and determine the appropriate remediation. In
some instances, Phillips may have no liability or attain a
settlement of liability. Actual cleanup costs generally occur
after the parties obtain EPA or equivalent state agency approval.
At March 31, 2001, contingent liability accruals of $7 million
and $3 million had been made for the company's PRP sites and
other environmental contingent liabilities, respectively. In
addition, the company had accrued $222 million for other planned
remediation activities, including resolved state, PRP, and other
federal sites, as well as sites where no claims have been
asserted, for total environmental accruals of $232 million,
compared with $127 million at December 31, 2000. The increase
in accrued environmental costs of $105 million in the first
quarter of 2001 was primarily driven by an accrual to cover
remediation activities required by the state of Alaska at
exploration and production sites formerly owned by ARCO.
Because this accrual relates to environmental conditions that
existed when Phillips acquired the properties on April 26, 2000,
the charge impacted the allocation of the purchase price of the
acquisition, not the company's net income.
After an assessment of environmental exposures for cleanup and
other costs, the company makes accruals on an undiscounted basis
(unless acquired in a purchase business combination) for planned
investigation and remediation activities for sites where it is
probable that future costs will be incurred and these costs can
be reasonably estimated. These accruals have not been reduced
for possible insurance recoveries.
OUTLOOK
Governance of the Timor Gap Zone of Cooperation is in transition
and Phillips is working closely with the Australian government,
the United Nations Transitional Administration in East Timor
(UNTAET) and recognized East Timorese leaders. Currently, East
Timor and Australia are negotiating a new Treaty affecting the
Timor Gap. Phillips is closely monitoring these negotiations in
order to assess any possible impact they may have on its current
development plans in the area.
34
Oil prices eased in the first quarter of 2001 to about 10 percent
lower than the fourth-quarter 2000 average but held above $25 for
the benchmark West Texas Intermediate crude. OPEC cut second-
quarter production quotas to avoid building an inventory surplus
and to support prices. A heavy refinery maintenance schedule in
the United States and Europe allowed crude stocks to build above
last year's record low levels while refined products inventories
declined. Demand for distillates, including heating oil,
remained strong due to switching from high priced natural gas.
U.S. demand for gasoline grew in the first quarter and growth is
projected to continue despite slower economic growth. Very low
inventories and limited refining capacity are raising concerns
over potential summer shortages of gasoline. Record high natural
gas prices in January forced a marked reduction in industrial and
commercial demand. Fuel switching from natural gas to heating
oil, plus plant closures, low ethane extraction, and warmer
weather, allowed prices to ease during the quarter. Natural gas
in storage remains at record low levels. Concerns over high
summer natural gas demand for electricity generation and the
potential failure to rebuild stocks before next winter kept
prices high.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
Phillips is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 for any forward-looking
statement made by, or on behalf of, the company. The factors
identified in this cautionary statement are important factors
(but not necessarily all important factors) that could cause
actual results to differ materially from those expressed. Where
any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement,
the company believes such assumptions or bases to be reasonable
and makes them in good faith. Assumed facts or bases almost
always vary from actual results, and the differences between
assumed facts or bases and actual results can be material,
depending on the circumstances. Where, in any forward-looking
statement, the company, or its Management, expresses an
expectation or belief as to future results, there can be no
assurance that the statement of expectation or belief will
result, or be achieved or accomplished.
35
The following are identified as important risk factors, but not
all of the risk factors, that could cause actual results to
differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the company:
o Plans to implement Management's announced strategy for its
four business segments are subject to: the completion of the
announced acquisition of Tosco Corporation (Tosco) for RM&T;
receipt of any approvals that may be required from state and
federal government agencies and third parties; required
disposition of assets, if any, to meet regulatory requirements;
the successful development and operation of the company's current
projects and the achievement of production estimates, cost
savings and synergies that are dependent on the integration of
personnel, business systems and operations; and the successful
operation and financing of the DEFS and CPC joint ventures.
o Plans to drill wells and develop offshore or onshore
exploration and production properties are subject to: the
company's ability to obtain agreements with co-venturers,
partners and governments, including necessary permits; its
ability to engage specialized drilling, construction and other
contractors and equipment; its ability to obtain economical and
timely financing; construction of pipelines, processing and
production facilities for its Bayu-Undan, Bohai Bay and Hamaca
projects; geological, land, or sea conditions; world prices for
oil, natural gas and natural gas liquids; adequate and reliable
transportation systems, including the Trans Alaska Pipeline
System, the Valdez Marine Harbor Terminal, and the acquired and
to-be-constructed crude oil tankers; and foreign and United
States laws, including tax laws.
o Plans for the construction, modernization or debottlenecking
of refineries and the timing of production from such plants are
subject to: approval from the company's and/or subsidiaries'
Boards of Directors; obtaining loans and/or project financing;
the issuance by foreign, federal, state, and municipal
governments, or agencies thereof, of building, environmental and
other permits; and the availability of specialized contractors,
work force and equipment. Production and delivery of the
company's products are subject to: worldwide prices and demand
for the products; availability of raw materials; and the
availability of transportation for products in the form of
pipelines, railcars, trucks or ships.
36
o The ability to meet liquidity requirements, including the
funding of the company's capital program from borrowings, asset
sales, if any, and operations, is subject to: the negotiation and
execution of various bank, project and public financings and
related financing documents, the market for any such debt, and
interest rates on the debt; the identification of buyers and the
negotiation and execution of instruments of sale for any assets
that may be identified for sale; changes in the commodity prices
of the company's basic products of oil, natural gas and natural
gas liquids, over which Phillips has little or no control, and to
a lesser extent the commodity prices for its chemicals and other
hydrocarbon products; its ability to operate its refineries and
exploration and production operations consistently and safely,
with no major disruption in production or transportation of such
products; and the effect of foreign and domestic legislation of
federal, state and municipal governments that have jurisdiction
in regard to taxes, the environment and human resources.
o Estimates of proved reserves, project cost estimates, and
planned spending for maintenance and environmental remediation
were developed by company personnel using the latest available
information and data, and recognized techniques of estimating,
including those prescribed by the U.S. Securities and Exchange
Commission, generally accepted accounting principles and other
applicable requirements. Estimates of cost savings, synergies
and the like were developed by the company from current
information. The estimates for reserves, supplies, costs,
maintenance, remediation, savings and synergies can change
positively or negatively as new information and data become
available.
37
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION.
Effective May 7, 2001, the Board of Directors of Phillips elected
J. Stapleton Roy as a new director and Lawrence S. Eagleburger
retired. The election of Mr. Roy and retirement of
Mr. Eagleburger maintains the total number of Phillips directors
at 10, of which nine are outside directors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
- --------
3(i) Articles of Incorporation
(a) Restated Certificate of Incorporation of Phillips
Petroleum Company, as filed with the State of Delaware
July 17, 1989.
(b) Certificate of Amendment to the Restated Certificate of
Incorporation of Phillips Petroleum Company.
(c) Certificate of Designations of Series B Junior
Participating Preferred Stock of Phillips Petroleum
Company.
12 Computation of Ratio of Earnings to Fixed Charges.
Reports on Form 8-K
- -------------------
During the three months ended March 31, 2001, the company filed
two reports on Form 8-K.
The first report was filed February 5, 2001, to report in Item 5
the company's February 4 announcement that it had entered into an
agreement to purchase Tosco Corporation.
The second report was filed February 21, 2001, to report in
Item 5 the company's 2000 reserve production replacement and
finding and development costs.
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PHILLIPS PETROLEUM COMPANY
/s/ Rand C. Berney
---------------------------------
Rand C. Berney
Vice President and Controller
(Chief Accounting and Duly
Authorized Officer)
May 11, 2001
39