UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 30, 1999
---------------------------------------------
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 253,295,303 shares of common stock, $1.25 par value,
outstanding at July 30, 1999.
PART I. FINANCIAL INFORMATION
- ---------------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
---------------------------------
Three Months Six Months
Ended Ended
June 30 June 30
---------------------------------
1999 1998* 1999 1998*
---------------------------------
Revenues
Sales and other operating revenues $3,172 2,964 5,593 6,057
Equity in earnings of affiliated
companies 27 24 48 50
Other revenues 32 12 129 147
- ---------------------------------------------------------------------
Total Revenues 3,231 3,000 5,770 6,254
- ---------------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 1,891 1,617 3,238 3,315
Production and operating expenses 503 504 1,013 1,046
Exploration expenses 62 49 109 99
Selling, general and
administrative expenses 174 152 349 309
Depreciation, depletion and
amortization 222 222 442 453
Property impairments 51 30 51 30
Taxes other than income taxes 58 60 119 125
Interest expense 73 34 140 80
Preferred dividend requirements
of capital trusts 13 13 26 26
- ---------------------------------------------------------------------
Total Costs and Expenses 3,047 2,681 5,487 5,483
- ---------------------------------------------------------------------
Income before income taxes 184 319 283 771
Provision for income taxes 116 161 145 370
- ---------------------------------------------------------------------
Net Income $ 68 158 138 401
=====================================================================
Net Income Per Share of Common
Stock
Basic $ .27 .61 .55 1.54
Diluted .27 .60 .54 1.52
- ---------------------------------------------------------------------
Dividends Paid $ .34 .34 .68 .68
- ---------------------------------------------------------------------
Average Common Shares Outstanding
(in thousands)
Basic 252,581 260,383 252,346 261,314
Diluted 254,640 262,715 253,830 263,507
- ---------------------------------------------------------------------
See Notes to Financial Statements.
*Reclassified to conform to current presentation.
1
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-----------------------
June 30 December 31
1999 1998
-----------------------
Assets
Cash and cash equivalents $ 147 97
Accounts and notes receivable (less
allowances: 1999--$17; 1998--$13) 1,507 1,282
Inventories 546 540
Deferred income taxes 159 217
Prepaid expenses and other current assets 136 213
- -----------------------------------------------------------------
Total Current Assets 2,495 2,349
Investments and long-term receivables 1,054 1,015
Properties, plants and equipment (net) 10,964 10,585
Deferred income taxes 83 100
Deferred charges 169 167
- -----------------------------------------------------------------
Total $14,765 14,216
=================================================================
Liabilities
Accounts payable $ 1,379 1,340
Notes payable and long-term debt due
within one year 76 167
Accrued income and other taxes 311 182
Other accruals 381 443
- -----------------------------------------------------------------
Total Current Liabilities 2,147 2,132
Long-term debt 4,628 4,106
Accrued dismantlement, removal and
environmental costs 739 729
Deferred income taxes 1,324 1,317
Employee benefit obligations 449 424
Other liabilities and deferred credits 605 639
- -----------------------------------------------------------------
Total Liabilities 9,892 9,347
- -----------------------------------------------------------------
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 2,085 2,055
Treasury stock (at cost:
1999--24,485,338 shares;
1998--25,259,040 shares) (1,221) (1,259)
Compensation and Benefits Trust (CBT)
(at cost: 1999--28,647,987 shares;
1998--29,125,863 shares) (970) (987)
Accumulated other comprehensive income
Foreign currency translation adjustments (45) (22)
Unrealized gain on available-for-sale
securities 11 9
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (294) (303)
Retained earnings 4,274 4,343
- -----------------------------------------------------------------
Total Common Stockholders' Equity 4,223 4,219
- -----------------------------------------------------------------
Total $14,765 14,216
=================================================================
See Notes to Financial Statements.
2
- -----------------------------------------------------------------
Consolidated Statement of Phillips Petroleum Company
Cash Flows
Millions of Dollars
-------------------
Six Months Ended
June 30
-------------------
1999 1998*
-------------------
Cash Flows from Operating Activities
Net income $ 138 401
Adjustments to reconcile net income to net
cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and
amortization 442 453
Property impairments 51 30
Dry hole costs and leasehold
impairment 54 25
Deferred taxes 9 108
Other (1) 12
Working capital adjustments
Increase in aggregate balance of
accounts receivable sold 18 200
Decrease (increase) in other
accounts and notes receivable (261) 85
Increase in inventories (16) (112)
Decrease (increase) in prepaid
expenses and other current assets 95 (20)
Increase (decrease) in accounts payable 23 (76)
Increase in taxes and other accruals 136 3
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 688 1,109
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments,
including dry hole costs (985) (842)
Proceeds from asset dispositions 132 24
Long-term advances to affiliates and
other investments (6) (8)
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (859) (826)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of debt 547 416
Repayment of debt (117) (302)
Purchase of company common stock (13) (215)
Issuance of company common stock 18 10
Dividends paid on common stock (172) (178)
Other (42) (47)
- -----------------------------------------------------------------
Net Cash Provided by (Used for) Financing
Activities 221 (316)
- -----------------------------------------------------------------
Net Change in Cash and Cash Equivalents 50 (33)
Cash and cash equivalents at beginning of
period 97 163
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 147 130
=================================================================
See Notes to Financial Statements.
*Reclassified to conform to current presentation.
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.
Note 2--Inventories
Inventories consisted of the following:
Millions of Dollars
-----------------------
June 30 December 31
1999 1998
-----------------------
Crude oil and petroleum products $213 177
Chemical products 246 264
Materials, supplies and other 87 99
- -----------------------------------------------------------------
$546 540
=================================================================
Note 3--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Millions of Dollars
-----------------------
June 30 December 31
1999 1998
-----------------------
Properties, plants and equipment
(at cost) $23,193 22,868
Less accumulated depreciation,
depletion and amortization 12,229 12,283
- -----------------------------------------------------------------
$10,964 10,585
=================================================================
4
Note 4--Impairments
Impairments totaling $20 million after-tax were taken in second
quarter 1999 to reduce the net book values of the Maureen field,
offshore the United Kingdom, the Agate field in the Gulf of
Mexico, and several outlying fields in the greater Ekofisk area
that were shut-in during 1998. The North Sea impairments
resulted from a $41 million before-tax upward revision of
decommissioning costs. Production at the Agate field, offshore
Louisiana, has been shut-in due to a mechanical downhole well
failure. Alternatives for resuming production are being
evaluated; however, future cash flows forecasted on a risk-
adjusted basis are estimated to be less than the current book
investment, resulting in a before-tax impairment of $10 million
in the second quarter. Agate net production during the first
quarter of 1999 averaged 716 net barrels of oil per day and
6 million cubic feet of gas per day.
Note 5--Debt
During first quarter 1999, the company issued $300 million of
6 3/8% Notes due 2009, and $200 million of 7% Debentures due
2029, in the public market.
At June 30, 1999, there was no revolving debt outstanding under
the company's $1.5 billion revolving credit facility, but
$801 million of commercial paper was outstanding, which is
supported 100 percent by the credit facility. The company's
wholly owned subsidiary, Phillips Petroleum Company Norway, has a
$300 million revolving credit facility that was fully drawn at
June 30, 1999. On that same date, Phillips Petroleum Company
Norway closed on an additional $300 million revolving credit
facility.
Note 6--Income Taxes
The company's effective tax rates for the second quarter and first
six months of 1999 were 63 and 51 percent, respectively, compared
with 50 and 48 percent for each of the same periods a year ago.
The effective rate for the second quarter was negatively impacted
by increases to valuation allowances on certain deferred tax
assets. This was largely offset in the first six months of 1999
by favorable resolution of certain outstanding issues with the
Internal Revenue Service (IRS) in the first quarter. The
effective tax rates for the second quarter and first six months of
1999, excluding these items, would have been 52 and 51 percent,
respectively. The remaining increases in the 1999 effective tax
rates were due mainly to a greater proportion of foreign earnings,
which are generally taxed at a higher rate.
5
Note 7--Contingencies
In the case of all known contingencies, the company accrues an
undiscounted liability when the loss is probable and the amount
is reasonably estimable. These liabilities are not reduced for
potential insurance recoveries. If applicable, undiscounted
receivables are accrued for probable insurance or other third-
party recoveries. 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.
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
clean-up 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 clean-up under these laws at federal Superfund and comparable
state sites. In the future, the company may be involved in
additional environmental assessments, clean-ups 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.
6
Note 8--Preferred Share Purchase Rights
On July 2, 1999, the company's Board of Directors declared a
dividend distribution of one preferred share purchase right for
each outstanding share of Phillips' common stock. The dividend
distribution was made August 1, 1999, payable to stockholders of
record on that date. These rights replace the rights issued
under the company's shareholder rights plan that expired July 31,
1999. The new rights, which expire July 31, 2009, will be
exercisable only if a person or group acquires 15 percent or more
of the company's common stock or announces a tender offer that
would result in ownership of 15 percent or more of the common
stock. Each right will entitle stockholders to buy one one-
hundredth of a share of preferred stock at an exercise price of
$180. In addition, the rights enable holders to either acquire
additional shares of Phillips common stock or purchase the stock
of an acquiring company at a discount, depending on specific
circumstances. The rights may be redeemed by the company in
whole, but not in part, for one cent per right.
Note 9--Non-Mineral Operating Leases
The company and its co-venturer in the Kenai liquefied natural
gas plant lease two tankers that are used to transport liquefied
natural gas from Kenai, Alaska, to Japan. In June 1999, a
purchase option held by the company and its co-venturer was
allowed to become a binding commitment. The purchase date for
the first tanker is June 2000, and December 2000 for the second.
In the event that the company and its co-venturer do not modify
the existing lease arrangements or enter into new lease
arrangements, the purchase option would be exercised and
Phillips' 70 percent interest in the aggregate purchase price for
both tankers would be approximately $240 million.
7
Note 10--Supplemental Cash Flow Information
Cash payments and non-cash investing and financing activities for
the six-month periods ended June 30 were as follows:
Millions of Dollars
-------------------
1999 1998
-------------------
Non-Cash Investing and Financing Activities
Accrued repurchase of company common stock $ - 9
Company stock issued under compensation
and benefit plans 24 7
Change in market value of investments 10 9
Deferred payment obligation to purchase
property, plant and equipment - 8
Investment in joint venture in exchange
for non-cash assets 2 -
- -----------------------------------------------------------------
Cash payments
Interest
Debt $127 72
Taxes and other 4 5
- -----------------------------------------------------------------
$131 77
=================================================================
Income taxes $ 45 267
- -----------------------------------------------------------------
Note 11--Environmental Cost Recovery
During the first six months of 1998, as part of a comprehensive
environmental cost recovery project, the company entered into
settlement agreements with certain of its historical liability
and pollution insurers in exchange for releases or commutations
of their present and future liabilities to the company under its
historical liability and pollution policies. As a result of
these settlement agreements, the company recorded a before-tax
benefit to earnings of $109 million, $71 million after-tax.
8
Note 12--Comprehensive Income
Phillips' comprehensive income for the three- and six-month
periods ended June 30, was as follows:
Millions of Dollars
-------------------------------
Three Months Six Months
Ended Ended
June 30 June 30
-------------------------------
1999 1998 1999 1998
-------------------------------
Net income $ 68 158 138 401
After-tax changes in:
Foreign currency translation
adjustments (11) (15) (23) (15)
Net unrealized gain on
available-for-sale
securities 2 - 2 -
- -----------------------------------------------------------------
Comprehensive income $ 59 143 117 386
=================================================================
Note 13--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)--Explores for and produces
crude oil, natural gas and natural gas liquids on a
worldwide basis.
(2) Gas Gathering, Processing and Marketing (GPM)--Gathers and
processes both natural gas produced by others and natural
gas produced from the company's own reserves, primarily in
Oklahoma, Texas and New Mexico.
(3) Refining, Marketing and Transportation (RM&T)--Refines,
markets and transports crude oil and petroleum products,
primarily in the United States. This segment also
fractionates and markets natural gas liquids.
(4) Chemicals--Manufactures and markets petrochemicals and
plastics on a worldwide basis.
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.
9
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 1998 annual report.
Analysis of Results by Operating Segment
Millions of Dollars
-------------------------------
Operating Segments
-------------------------------
E&P GPM RM&T Chemicals
Three Months Ended June 30, 1999 -------------------------------
Sales and Other Operating Revenues
External customers $ 683 195 1,706 587
Intersegment (eliminations) 109 156 98 35
- -------------------------------------------------------------------
Segment sales $ 792 351 1,804 622
===================================================================
Net income (loss) $ 76 18 33 41
===================================================================
Three Months Ended June 30, 1998
Sales and Other Operating Revenues
External customers $ 672 200 1,505 586
Intersegment (eliminations) 108 144 93 37
- -------------------------------------------------------------------
Segment sales $ 780 344 1,598 623
===================================================================
Net income (loss) $ 73 12 77 43
===================================================================
Six Months Ended June 30, 1999
Sales and Other Operating Revenues
External customers $1,239 349 2,923 1,081
Intersegment (eliminations) 192 267 192 61
- -------------------------------------------------------------------
Segment sales $1,431 616 3,115 1,142
===================================================================
Net income (loss) $ 166 24 25 70
===================================================================
Total Assets
At June 30, 1999 $6,464 1,106 3,199 2,853
- -------------------------------------------------------------------
At December 31, 1998 $6,173 1,080 2,910 2,790
- -------------------------------------------------------------------
Six Months Ended June 30, 1998
Sales and Other Operating Revenues
External customers $1,462 400 2,979 1,215
Intersegment (eliminations) 226 300 191 73
- -------------------------------------------------------------------
Segment sales $1,688 700 3,170 1,288
===================================================================
Net income (loss) $ 166 31 106 118
===================================================================
Millions of Dollars
-------------------------------
Corporate
and All Other Consolidated
Three Months Ended June 30, 1999 -------------------------------
Sales and Other Operating Revenues
External customers 1 3,172
Intersegment (eliminations) (398) -
- -------------------------------------------------------------------
Segment sales (397) 3,172
===================================================================
Net income (loss) (100) 68
===================================================================
Three Months Ended June 30, 1998
Sales and Other Operating Revenues
External customers 1 2,964
Intersegment (eliminations) (382) -
- -------------------------------------------------------------------
Segment sales (381) 2,964
===================================================================
Net income (loss) (47) 158
===================================================================
Six Months Ended June 30, 1999
Sales and Other Operating Revenues
External customers 1 5,593
Intersegment (eliminations) (712) -
- -------------------------------------------------------------------
Segment sales (711) 5,593
===================================================================
Net income (loss) (147) 138
===================================================================
Total Assets
At June 30, 1999 1,143 14,765
- -------------------------------------------------------------------
At December 31, 1998 1,263 14,216
- -------------------------------------------------------------------
Six Months Ended June 30, 1998
Sales and Other Operating Revenues
External customers 1 6,057
Intersegment (eliminations) (790) -
- -------------------------------------------------------------------
Segment sales (789) 6,057
===================================================================
Net income (loss) (20) 401
===================================================================
10
- -----------------------------------------------------------------
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 adequate 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 46.
RESULTS OF OPERATIONS
Unless otherwise noted, discussion of results for the three- and
six-month periods ending June 30, 1999, are based on a comparison
with the corresponding periods in 1998.
Consolidated Results
A summary of the company's net income by business segment
follows:
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
Exploration and Production
(E&P) $ 76 73 166 166
Gas Gathering, Processing
and Marketing (GPM) 18 12 24 31
Refining, Marketing and
Transportation (RM&T) 33 77 25 106
Chemicals 41 43 70 118
Corporate and Other (100) (47) (147) (20)
- -----------------------------------------------------------------
Net income $ 68 158 138 401
=================================================================
11
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 Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
Property impairments* $(20) (20) (20) (20)
Work force reduction
charges (2) - (7) -
Net gain on asset sales 16 3 49 3
Foreign currency losses (9) (11) (23) (5)
Pending claims and
settlements - 34 38 100
Deferred tax adjustments (19) - (19) -
Other items (15) - (15) -
- -----------------------------------------------------------------
Total special items $(49) 6 3 78
=================================================================
*See Note 4 to the financial statements for further information.
Excluding the special items listed above, the company's net
operating income by business segment was:
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
E&P $ 99 76 153 174
GPM 18 12 25 31
RM&T 38 74 32 103
Chemicals 37 49 60 124
Corporate and Other (75) (59) (135) (109)
- -----------------------------------------------------------------
Net operating income $117 152 135 323
=================================================================
Phillips' net income in the second quarter of 1999 was
$68 million, a 57 percent decrease from net income of
$158 million in the second quarter of 1998. Net income was
reduced $49 million by the impact of special items in the second
quarter of 1999, while it benefited $6 million in the second
quarter last year. After excluding these special items, net
operating income in the second quarter of 1999 was $117 million,
a 23 percent decline from $152 million in the second quarter of
1998.
12
The decline in net operating income for the second quarter of
1999 was primarily the result of lower margins in the company's
RM&T and Chemicals segments, as well as higher interest expense
and foreign dry hole costs. These items were partially offset by
improved crude oil and natural gas liquids prices in the upstream
segments.
Phillips' net income for the first six months of 1999 was
$138 million, a 66 percent decline from the corresponding period
in 1998. Special items benefited six-month net income by
$3 million in 1999 and $78 million in 1998. After excluding
special items, net operating income was 58 percent lower in the
1999 six-month period.
Each operating segment posted lower net operating earnings in the
six-month period of 1999, and interest expense was higher as
well. Upstream earnings declined on lower natural gas and
natural gas liquids sales prices and higher dry hole costs, while
downstream results were negatively impacted by weaker margins
compared with the 1998 period.
13
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
Phillips at a Glance ------------------ ----------------
U.S. crude oil
production (MBD) 52 64 55 64
Worldwide crude oil
production (MBD) 232 245 233 247
U.S. natural gas
production (MMCFD) 957 967 970 979
Worldwide natural gas
production (MMCFD) 1,343 1,458 1,411 1,530
Worldwide natural gas
liquids production (MBD) 163 179 160 178
Liquefied natural gas
sales (MMCFD) 116 102 123 122
Refinery utilization
rate (%) 99 94 97 94
U.S. automotive gasoline
sales (MBD)* 317 325 306 312
U.S. distillates
sales (MBD) 134 127 136 129
Worldwide petroleum
products sales (MBD)* 673 668 671 662
Natural gas liquids
processed (MBD) 227 230 216 229
Ethylene
production (MMlbs)** 866 825 1,568 1,658
Polyethylene
production (MMlbs)** 661 587 1,320 1,150
Polypropylene
production (MMlbs)** 123 119 249 232
Paraxylene
production (MMlbs) 127 194 234 382
- -----------------------------------------------------------------
*Includes certain sales by the Chemicals segment.
**Includes Phillips' share of equity affiliates' production.
Income Statement Analysis
Sales and other operating revenues increased 7 percent in the
second quarter of 1999, reflecting higher crude oil and petroleum
products sales prices, partially offset by lower natural gas
prices. For the six-month period of 1999, sales and other
operating revenues decreased 8 percent, due to lower sales prices
for natural gas and petroleum products, as well as chemicals and
plastics products.
14
Equity in earnings of affiliated companies increased 13 percent
in the second quarter of 1999, primarily because of improved
results from equity companies in the polyolefins business.
Equity earnings declined 4 percent in the first six months of
1999, reflecting lower ethylene margins experienced by Sweeny
Olefins Limited Partnership. Other revenues increased
$20 million in the second quarter of 1999, due to higher net
gains on asset sales, mainly an E&P producing field in the Gulf
of Mexico. In the six-month period of 1999, other revenues
decreased 12 percent, primarily because the 1998 period included
recoveries from certain of the companies historical liability and
pollution insurers related to claims made as a part of a
comprehensive environmental cost recovery project. The decrease
was mitigated by net gains on asset sales recorded in the first
six months of 1999.
Purchase costs increased 17 percent in the second quarter of
1999, reflecting higher crude oil prices and crude runs at the
company's refineries. Purchase costs were 2 percent lower in the
six-month period of 1999, the result of lower product prices in
most segments, partially offset by higher crude oil prices and
crude runs.
After adjustment for special items (mainly foreign currency
losses, severance, and contingency-related items), controllable
costs--primarily production and operating expenses; and selling,
general and administrative expenses--declined 4 percent in the
second quarter of 1999, and 5 percent in the six-month period.
These lower costs were attributable to general cost reduction
efforts across all business lines, as well as lower fuel costs
and property dispositions.
Higher foreign dry hole charges, partially offset by lower
geological and geophysical expenses, resulted in 27 percent and
10 percent increases in exploration expenses in the second
quarter and first six months of 1999, respectively. The company
recorded dry hole charges related to exploratory wells offshore
Venezuela, Australia and the United Kingdom in the second quarter
of 1999.
Depreciation, depletion and amortization (DD&A) was unchanged in
the second quarter of 1999, and 2 percent lower in the first half
of 1999. In both 1999 periods, DD&A was higher in the company's
U.K. North Sea operations, where several new fields have come
on stream. In addition, Phillips' Norwegian North Sea operations
revised upward the estimated dismantlement and removal costs
associated with Ekofisk in the second quarter of 1999. These
items were offset by lower DD&A from U.S. E&P operations, which
had decreased production volumes and lower DD&A rates caused by
property impairments in the second half of 1998.
15
Property impairments increased 70 percent in the second quarter
and first six months of 1999. Upward revisions of estimated
dismantlement and removal costs related to several North Sea
fields resulted in property impairments recorded in the second
quarter of 1999. In addition, an impairment was taken on a field
in the Gulf of Mexico which had been shut in due to well
problems. The 1998 amount included impairments on certain Gulf
of Mexico fields, as well as a plastics recycling facility that
was closed.
Taxes other than income taxes declined 3 percent and 5 percent in
the second quarter and six-month period of 1999, respectively,
mainly the result of lower emission taxes in Norway, partly
offset by higher production taxes. Lower emission taxes in
Norway were primarily due to lower fuel consumption resulting
from the increased efficiency of the new Ekofisk II turbines, as
well as lower production volumes.
Interest expense increased 115 percent in the second quarter of
1999, and 75 percent in the first six months, primarily
reflecting higher average debt levels compared with the
corresponding periods in 1998. In addition, the second quarter
and first half of 1998 included reversals of the interest expense
component of contingency accruals. Preferred dividend
requirements were unchanged from a year ago.
16
Segment Results
E&P
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
Millions of Dollars
-------------------------------------
Operating Income
Reported net income $ 76 73 166 166
Less special items (23) (3) 13 (8)
- -----------------------------------------------------------------
Net operating income $ 99 76 153 174
=================================================================
Dollars Per Unit
-------------------------------------
Average Sales Prices
Crude oil (per barrel)
United States $14.10 10.68 11.93 11.44
Foreign 15.35 13.07 13.52 13.54
Worldwide 15.09 12.45 13.15 13.01
Natural gas--lease (per
thousand cubic feet)
United States 1.91 1.96 1.76 1.97
Foreign 2.26 2.46 2.36 2.51
Worldwide 2.04 2.18 1.99 2.22
- -----------------------------------------------------------------
Millions of Dollars
-------------------------------------
Worldwide Exploration
Expenses
Geological and geophysical $27 33 51 69
Leasehold impairment 7 7 13 12
Dry holes 26 6 41 13
Lease rentals 2 3 4 5
- -----------------------------------------------------------------
$62 49 109 99
=================================================================
Thousands of Barrels Daily
-------------------------------------
Operating Statistics
Crude oil produced
United States 52 64 55 64
Norway 92 119 97 117
United Kingdom 36 21 32 24
Nigeria 21 20 22 21
China 10 13 12 14
Australia 8 - 4 -
Canada 8 8 8 7
Denmark 4 - 2 -
Venezuela 1 - 1 -
- -----------------------------------------------------------------
232 245 233 247
=================================================================
Natural gas liquids produced
United States 2 3 2 3
Norway 4 7 4 8
Other areas 5 5 5 5
- -----------------------------------------------------------------
11 15 11 16
=================================================================
17
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
Millions of Cubic Feet Daily
-------------------------------------
Natural gas produced*
United States 957 967 970 979
Norway 114 249 131 258
United Kingdom 188 146 221 200
Canada 83 96 88 93
Nigeria 1 - 1 -
- -----------------------------------------------------------------
1,343 1,458 1,411 1,530
=================================================================
*Represents quantities available for sale. Excludes gas
equivalent of natural gas liquids shown above.
Liquefied natural gas
sales 116 102 123 122
- -----------------------------------------------------------------
E&P's net operating income increased 30 percent in the second
quarter of 1999, on the strength of improved crude oil prices.
For the six-month period, E&P net operating income declined
12 percent, primarily due to lower natural gas prices, partially
offset by lower U.S. E&P DD&A charges. Both periods were
negatively impacted by higher foreign dry hole costs.
Phillips' average worldwide crude oil sales price increased to
$15.09 in the second quarter of 1999, compared with $12.45 in the
second quarter of 1998, and $10.88 in the first quarter of 1999.
Industry crude oil prices have risen to their highest levels
since November 1997 in response to the late-March 1999 agreement
by major exporting countries to reduce output. Market
fundamentals remain supportive of the improved pricing, with 1999
demand growth ahead of last year's pace.
18
U.S. E&P
- --------
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
Operating Income
Reported net income $79 50 152 109
Less special items 8 2 43 (1)
- -----------------------------------------------------------------
Net operating income $71 48 109 110
=================================================================
Net operating income in the company's U.S. E&P operations
increased 48 percent in the second quarter of 1999, while net
operating earnings declined slightly in the six-month period.
The improvement in the second quarter is attributable to lower
costs, with DD&A, exploration expenses and lifting costs all down
from the prior year. The decrease in DD&A costs resulted from
lower production volumes plus lower depreciation rates due to
impairments taken in mid-to-late 1998. Exploration expenses were
down because of lower geological and geophysical expenses, while
the reduced lifting costs resulted from cost reduction efforts
and property dispositions. Crude oil and natural gas revenues in
total were about the same in the second quarter of 1999 as in the
second quarter of 1998, with higher crude oil prices being offset
by lower production and lower natural gas prices.
The six-month period of 1999 also benefited from lower costs, but
this was more than offset by lower natural gas sales prices and
lower crude oil production volumes.
U.S. crude oil production continued to trend downward in the
second quarter of 1999, averaging 19 percent less than the second
quarter of the prior year, and 9 percent less than the first
quarter of 1999. These reductions reflect the impact of normal
field declines, as well as property dispositions in late 1998 and
the first quarter of 1999, primarily in Texas and central
Oklahoma. U.S. natural gas production decreased slightly in the
second quarter of 1999, compared with the corresponding quarter a
year ago, as field declines and property dispositions were partly
offset by increased production in the San Juan Basin.
Special items in the second quarter of 1999 primarily included net
gains on asset sales and an impairment of the Agate subsalt field,
which has been shut in due to well problems. The six-month 1999
period included $49 million after-tax of net gains on asset sales,
partially offset by the Agate property impairment.
Special items in the second quarter of 1998 included a reversal
of a previously accrued contingency related to producing
properties in Alabama, which was mostly offset by impairments
taken on two producing properties in the Gulf of Mexico. The
June year-to-date period also included a contingency accrual.
19
Foreign E&P
- -----------
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
Operating Income
Reported net income (loss) $ (3) 23 14 57
Less special items (31) (5) (30) (7)
- -----------------------------------------------------------------
Net operating income $ 28 28 44 64
=================================================================
Net operating income in the company's foreign E&P operations was
the same in the second quarters of both 1999 and 1998, and
31 percent lower in the six-month period of 1999. The second
quarter results benefited from new crude oil production offshore
Australia, Denmark and the United Kingdom, as well as higher
crude oil sales prices. This was offset by higher dry hole
charges and lifting costs, as well as lower natural gas prices
and sales volumes. The company recorded dry hole charges related
to exploratory wells offshore Venezuela, Australia and the United
Kingdom in the second quarter of 1999.
In the six-month period of 1999, the benefit of new crude oil
production was more than offset by lower natural gas revenues and
higher dry hole costs.
Foreign crude oil production declined slightly in the second
quarter of 1999, compared with the second quarter of 1998, while
foreign natural gas production decreased 21 percent. Production
was negatively impacted by downtime at both J-Block and Ekofisk
in the North Sea, while gas production in Canada was lowered by
outages at third-party plants. Gas production was also reduced
as a result of the reduced design capacity of the new Ekofisk
facilities. When the production license for Ekofisk was extended
from 2011 to 2028, Ekofisk II was designed with lower gas
processing capacity than that of the original Ekofisk facilities,
to better match the capacity requirements with the normal decline
of the field. The company expects this to yield a better overall
economic performance over the remaining years of the production
license. These declines in production were partly offset by new
crude oil production from Australia, Denmark and Venezuela, as
well as new oil and gas production from the Britannia, Janice and
Renee/Rubie fields offshore the United Kingdom. The new
production offshore Australia was part of the interests acquired
from Broken Hill Proprietary Co. Ltd. in the second quarter.
A part of the Ekofisk shutdown was required to repair and upgrade
a gas cooler. During the shutdown, the company was also able to
repair a poorly performing low-pressure separator and complete
priority maintenance work. Phillips still plans to shut down the
20
Ekofisk Complex in August for approximately two weeks to
eliminate production bottlenecks in the gas processing
facilities. Materials were not available for the company to make
these modifications during the second quarter shutdown.
Special items in the second quarter of 1999 included charges to
increase the decommissioning accruals for certain North Sea
fields, as well as deferred tax asset adjustments. Special items
in the second quarter and first six months of 1998 included
foreign currency transaction losses.
21
GPM
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
Millions of Dollars
-------------------------------------
Operating Income
Reported net income $18 12 24 31
Less special items - - (1) -
- -----------------------------------------------------------------
Net operating income $18 12 25 31
=================================================================
Dollars Per Unit
-------------------------------------
Average Sales Prices
U.S. residue gas (per
thousand cubic feet) $ 2.03 2.08 1.86 2.08
U.S. natural gas liquids
(per barrel--
unfractionated) 11.11 9.41 9.54 9.76
- -----------------------------------------------------------------
Millions of Cubic Feet Daily
-------------------------------------
Operating Statistics
Natural gas purchases
Outside Phillips 1,263 1,326 1,235 1,337
Phillips 141 152 147 154
- -----------------------------------------------------------------
1,404 1,478 1,382 1,491
=================================================================
Raw gas throughput 1,752 1,893 1,726 1,904
- -----------------------------------------------------------------
Residue gas sales
Outside Phillips 931 943 908 962
Phillips 39 54 46 58
- -----------------------------------------------------------------
970 997 954 1,020
=================================================================
Thousands of Barrels Daily
-------------------------------------
Natural gas liquids net
production
From Phillips E&P
leasehold gas 14 15 15 15
From gas purchased
outside Phillips 138 149 134 147
- -----------------------------------------------------------------
152 164 149 162
=================================================================
GPM's net operating income increased 50 percent in the second
quarter of 1999, while declining 19 percent in the six-month
period. Natural gas liquids prices were the driver in the second
quarter of 1999, averaging 18 percent higher than the second
quarter of 1998. Natural gas liquids prices benefited from the
increase in crude oil prices in the second quarter of 1999, as
well as from an increase in the demand for ethane, a
22
feedstock for ethylene. In the first half of 1999, natural gas
liquids prices were 2 percent lower than the prior year, and were
accompanied by lower sales volumes. In addition, residue gas
prices for the first six months of 1999 were 11 percent lower
than the same period in 1998.
Raw gas throughput, natural gas liquids production and residue
gas sales volumes all increased in the second quarter of 1999,
compared with the first quarter, but were still lower than second
quarter 1998 levels. Due to the low price environment in the
last half of 1998 and the first quarter of 1999, there was a
reduction in new drilling activity and well workovers that would
typically help offset normal volume declines. Higher volumes in
the second quarter of 1999, compared with the first quarter,
reflected improved operating consistency and the impact of
acquisitions.
Special items in the six-month 1999 period represented work force
reduction charges.
23
RM&T
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
Millions of Dollars
-------------------------------------
Operating Income
Reported net income $33 77 25 106
Less special items (5) 3 (7) 3
- -----------------------------------------------------------------
Net operating income $38 74 32 103
=================================================================
Dollars Per Gallon
-------------------------------------
Average Sales Prices
Automotive gasoline
Wholesale $.58 .54 .50 .53
Retail .72 .68 .65 .67
Distillates .47 .45 .42 .46
- -----------------------------------------------------------------
Thousands of Barrels Daily
-------------------------------------
Operating Statistics
U.S. refinery crude oil
Capacity 355 355 355 355
Crude runs 352 332 344 333
Capacity utilization
(percent) 99% 94 97 94
Natural gas liquids
fractionation
Capacity 252 252 252 252
Processed 227 230 216 229
Capacity utilization
(percent) 90% 91 86 91
Refinery and natural gas
liquids production 615 588 592 587
- -----------------------------------------------------------------
Petroleum products outside
sales
United States
Automotive gasoline
Wholesale 245 248 240 230
Retail 36 38 35 38
Spot 23 27 19 33
Aviation fuels 36 33 32 31
Distillates
Wholesale and retail 109 108 108 100
Spot 25 19 28 29
Natural gas liquids
(fractionated) 109 108 122 121
Other products 35 29 37 29
- -----------------------------------------------------------------
618 610 621 611
Foreign 41 45 38 39
- -----------------------------------------------------------------
659 655 659 650
=================================================================
24
RM&T's net operating income decreased 49 percent in the second
quarter of 1999 and 69 percent in the first six months. The
price of crude oil feedstocks increased 31 percent in the second
quarter of 1999, compared with the corresponding quarter in 1998,
but the company's wholesale gasoline and distillates prices
increased only 7 percent and 4 percent, respectively. This had
the effect of tightening refining margins relative to a year ago.
Industry margins in the United States were negatively impacted by
increased petroleum product imports as a result of even lower
margins in foreign areas. Refining margins were also lower in
the six-month period of 1999.
The company partly offset the negative impact of lower margins in
the second quarter by increasing refining output, with refinery
production 5 percent higher than a year earlier, and crude
capacity utilization at 99 percent. Crude throughput for
Phillips' three refineries averaged 352,000 barrels per day in
the second quarter, the highest in company history. Also
benefiting earnings in the quarter was the company's strategy to
move product from the lower-margin Gulf Coast to higher-margin
areas.
Controllable costs were lower in the second quarter of 1999,
despite the higher crude throughput levels, primarily because of
lower fuel, maintenance and contract services costs.
Special items in the second quarter and six-month period of 1999
primarily included work force reduction charges and contingency
accruals. Special items in the second quarter and first six
months of 1998 consisted of gains from the sales of certain
non-strategic retail service stations.
25
Chemicals
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
Millions of Dollars
-------------------------------------
Operating Income
Reported net income $41 43 70 118
Less special items 4 (6) 10 (6)
- -----------------------------------------------------------------
Net operating income $37 49 60 124
=================================================================
Millions of Pounds
Except as Indicated
-------------------------------------
Operating Statistics
Production*
Ethylene 866 825 1,568 1,658
Polyethylene 661 587 1,320 1,150
Propylene 133 139 256 272
Polypropylene 123 119 249 232
Paraxylene 127 194 234 382
Cyclohexane (millions
of gallons) 62 50 101 98
- -----------------------------------------------------------------
*Includes Phillips' share of equity affiliates' production.
The Chemicals segment's net operating income decreased 24 percent
in the second quarter of 1999, and 52 percent in the six-month
period. Both periods were negatively impacted by lower
polyethylene margins, resulting from lower sales prices and
higher feedstock costs. In addition, in the six-month period of
1999 the company experienced lower ethylene margins.
The company's olefins and polyolefins facilities operated
efficiently in the second quarter, with ethylene production
5 percent higher than the corresponding quarter in the prior year
and polyethylene production 13 percent higher.
The company's K-Resin facility, located at the Houston Chemical
Complex (HCC), was damaged by a flash fire in June. Assessment
of the cause is ongoing. A portion of the existing K-Resin plant is
expected to be re-started in August 1999. In addition, the new K-Resin
expansion is also scheduled to re-start in August. The company's
polyolefins facilities at HCC were not affected.
Special items in the second quarter and first six months of 1999
included favorable settlements. Special items in the second
quarter and first six months of 1998 included foreign currency
losses and an impairment taken on a plastics recycling facility
that was closed.
26
Corporate and Other
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
------------------ ----------------
Operating Results
Reported Corporate and
Other $(100) (47) (147) (20)
Less special items (25) 12 (12) 89
- -----------------------------------------------------------------
Adjusted Corporate and
Other $ (75) (59) (135) (109)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $ (17) (12) (37) (37)
Net interest (49) (32) (95) (62)
Preferred dividend
requirements (11) (11) (21) (21)
Other 2 (4) 18 11
- -----------------------------------------------------------------
Adjusted Corporate and
Other $ (75) (59) (135) (109)
=================================================================
Corporate general and administrative expenses increased
$5 million in the second quarter of 1999, and were at the same
level in the six-month period as in the prior year. The increase
in the second quarter is attributable to the timing of the
allocation of company benefit plan costs to the operating
segments.
Net interest represents interest income and expense, net of
capitalized interest. Net interest costs increased 53 percent in
both the second quarter and first six months of 1999, primarily
resulting from higher average debt balances.
Preferred dividend requirements includes dividends on the
preferred securities of the Phillips 66 Capital Trusts I and II.
Other consists primarily of the company's captive insurance
subsidiary, along with income tax and other items that are not
directly associated with the operating segments on a stand-alone
basis. Other improved relative to a year ago due to lower income
taxes, partially offset by higher environmental accruals.
Special items in the second quarter of 1999 included non-cash
foreign currency losses, deferred tax adjustments and damage
estimates for the K-Resin flash fire to be covered by the
company's wholly owned captive insurance subsidiary. In
addition, the six-month period of 1999 also included a
27
$24 million favorable resolution of prior years' U.S. income tax
issues.
Special items in the second quarter of 1998 included favorable
contingency-related settlements or accrual reversals, partially
offset by foreign currency losses. The six-month period also
included insurance recoveries related to the company's
comprehensive environmental cost recovery project.
28
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
-----------------------------
At At At
June 30 December 31 June 30
1999 1998 1998
-----------------------------
Current ratio 1.2 1.1 1.1
Total debt $4,704 4,273 3,130
Company-obligated mandatorily
redeemable preferred securities $ 650 650 650
Common stockholders' equity $4,223 4,219 4,841
Percent of total debt to capital* 49% 47 36
Percent of floating-rate debt
to total debt 34% 37 23
- -----------------------------------------------------------------
*Capital includes total debt, company-obligated mandatorily
redeemable preferred securities and common
stockholders' equity.
In December 1998, agreement was reached with the Internal Revenue
Service (IRS) on the Kenai LNG and certain other tax issues for
years 1987 through 1992, the last years in which the Kenai LNG
income issue was in dispute. As a result, 1998 net income was
increased by $115 million. During first quarter 1999, net income
was increased by $24 million, reflecting favorable resolution of
other outstanding issues with the IRS. Cash refunds totaling
approximately $120 million applicable to all these issues were
received by the company in second quarter 1999.
Cash from operations in the first six months of 1999 decreased
$421 million from the same period in 1998. Contributing to this
decrease was a $188 million decrease in net operating income,
partially offset by the previously mentioned cash refunds from
the IRS of $120 million. Additional decreases in cash from
operations were driven by increases in non-cash working capital
and a $182 million decrease in cash provided by the sale of
accounts receivable under the company's receivables monetization
program. This resulted from the sale of $200 million of
receivables during the first six months of 1998, compared with
only $18 million during the same period in 1999.
In March 1999, the company issued $300 million of 6 3/8% Notes
due 2009, and $200 million of 7% Debentures due 2029, in the
public market. After the issue of these securities, $200 million
of securities remained available under the company's shelf
registration filed with the U.S. Securities and Exchange
Commission. In June 1999, the company filed a universal shelf
registration statement with the U.S. Securities and Exchange
Commission for an additional $800 million of various types of
29
debt and equity securities, and securities convertible into
either. This registration statement has not yet been declared
effective. When it becomes effective, securities to be issued
under this universal shelf registration statement can be combined
by prospectus with the $200 million of securities that remain
under the earlier shelf registration. As a result, the company
will have available, to issue and sell, a total of $1 billion of
the various types of securities offered under the universal shelf
registration statement.
During the first six months of 1999, cash increased $50 million.
Cash was provided by operating activities, asset dispositions of
$132 million, the previously mentioned $300 million of notes and
$200 million of debentures, and $48 million of revolving debt.
Funds were used to retire $84 million of medium-term notes and
$25 million of revolving debt, fund the company's capital
expenditures program, and pay dividends.
At June 30, 1999, there was no revolving debt outstanding under
the company's $1.5 billion revolving credit facility, but
$801 million of commercial paper was outstanding, which is
supported 100 percent by the credit facility. Also, the Phillips
Petroleum Company Norway $300 million revolving credit facility
was fully drawn at June 30, 1999. On that same date, Phillips
Petroleum Company Norway closed on an additional $300 million
revolving credit facility.
In May 1999, Phillips increased the total available under master
leasing arrangements, under which it leases and supervises
construction of retail marketing outlets, by $25 million, to a
total of $125 million. At June 30, 1999, approximately
$105 million had been financed under the arrangements. The
company now expects to enter into arrangements for an additional
$100 million during third quarter 1999, of which $25 million will
be used to refinance the $25 million secured in the second
quarter. The company has another $45 million leasing arrangement
to provide for the leasing of approximately 600 new covered
hopper railcars. At June 30, 1999, about $18 million had been
financed under this arrangement.
In late 1998, reductions of approximately 1,400 positions were
identified, primarily in the company's E&P segment and corporate
staffs, which resulted in a $91 million before-tax charge to
income. During the first six months of 1999, an additional
before-tax accrual of $11 million was made, reflecting further
reductions of approximately 150 positions in the company's GPM,
RM&T, and Chemicals segments. Of these 1,550 positions
identified, about 1,100 had been eliminated at June 30, 1999, and
about $55 million in severance benefits had been paid.
30
The company and its co-venturer in the Kenai liquefied natural
gas plant lease two tankers that are used to transport liquefied
natural gas from Kenai, Alaska, to Japan. In June 1999, a
purchase option held by the company and its co-venturer was
allowed to become a binding commitment. The purchase date for
the first tanker is June 2000, and December 2000 for the second.
In the event that the company and its co-venturer do not modify
the existing lease arrangements or enter into new lease
arrangements, the purchase option would be exercised and
Phillips' 70 percent interest in the aggregate purchase price for
both tankers would be approximately $240 million. Phillips
anticipates entering into a new leasing arrangement for these
tankers prior to the mandatory purchase dates.
During second quarter, Phillips closed the sale of its 50 percent
interest in the Breton Sound field, offshore Louisiana. This
sale resulted in an after-tax financial gain of $17 million. In
August 1999, the company signed a purchase and sale agreement to
sell interests in 42 leases in 22 Gulf of Mexico fields. Closing
of the transaction is expected to occur after preferential
purchase rights have been exercised or lapse. Phillips expects
to complete the sale of its remaining oil and gas interests in
the Gulf of Mexico and South Louisiana, with the exception of
certain key strategic fields, during the third and fourth
quarters of 1999. During first quarter, Phillips closed the sale
of its oil and gas interests in central Oklahoma, which resulted
in an after-tax financial gain of $33 million.
To meet its liquidity requirements, including funding its capital
program, the company will look primarily to existing cash
balances, cash generated from operations and the sale of certain
non-strategic assets, and financing.
31
Capital Expenditures and Investments
Millions of Dollars
----------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
Estimated 1999 1999 1998 1999 1998
-------------- ------------------ ----------------
E&P $1,253 439 273 653 541
GPM 110 50 16 64 29
RM&T 352 95 42 188 105
Chemicals 179 21 66 54 122
Corporate
and Other 64 12 29 26 45
- ------------------------------------------------------------------
$1,958 617 426 985 842
==================================================================
United States $1,020 290 227 493 459
Foreign 938 327 199 492 383
- ------------------------------------------------------------------
$1,958 617 426 985 842
==================================================================
In July 1999, the company increased its 1999 capital budget a
second time, raising it to $2 billion from the original 1999
capital budget of $1.465 billion. Of this $2 billion,
approximately $1.958 billion has been allocated. The E&P capital
spending program received the largest increase--from $800 million
to $1.253 billion. The increase has been or is expected to be
applied to the acquisition of an additional interest in the Bayu-
Undan unitized gas/condensate field in the Timor Sea's Zone of
Cooperation, the acquisition of interests in exploration and
production assets in North Louisiana, appraisal wells in
Block 11/05 of China's Bohai Bay, and other anticipated
acquisitions.
In April 1999, Phillips acquired The Broken Hill Proprietary
Company Limited's (BHP) 23.4 percent interest in the Bayu-Undan
gas/condensate field in the Timor Sea's Zone of Cooperation
(ZOCA) with the acquisition of BHP's 42.42 percent interest in
ZOCA block 91-12 (Undan). Along with Phillips' 60 percent
interest in the adjacent ZOCA block 91-13 (Bayu), the acquisition
brought Phillips' total interest in the unitized Bayu-Undan field
to 50.3 percent, and Phillips became operator of the unitized
field. The company also acquired BHP's interests in three
producing oil fields--Elang, Kakatua and Kakatua North--as well
as permits for static gas resources in other properties in ZOCA
and Australian Commonwealth waters. Phillips expects to book
approximately 80 million barrels of oil, condensate and natural
gas liquids in 1999 as a result of this acquisition. The Bayu-
Undan co-venturers are finalizing the unitization and unit
operating agreements for the field.
32
In May 1999, the company closed on an exploration and development
agreement with Contour Energy Company (Contour), formerly Kelley
Oil & Gas Corporation, relating to its interests in the West
Bryceland and Sailes fields in North Louisiana. Under the
agreement, Phillips will operate, develop, exploit and explore
the assets. Contour will retain an eight-year volumetric
overriding royalty interest totaling approximately 42 billion
cubic feet of gas. The agreement added approximately 130 billion
cubic feet of gas to the company's reserves at closing, with
additional reserves expected in future years as the fields are
developed.
During the second quarter, Phillips announced the discovery of
oil and gas in block 11/05 of China's Bohai Bay. An appraisal
well was drilled and tested immediately following the discovery
well and analyses of test results indicate that production wells
should be capable of producing at a rate of 3,000 to
5,000 barrels of oil per day. As many as five more appraisal
wells are expected to be drilled by year-end 1999 to delineate
the productive area of this large feature. Joint
commercialization studies with China National Offshore Oil
Corporation (CNOOC) have begun. Phillips acquired the right to
explore Block 11/05 in 1994 when it signed a petroleum contract
with CNOOC. Phillips now has a 100 percent undivided working
interest in the block, after acquiring Atlantic Richfield
Company's (ARCO) 40 percent interest during the second quarter.
CNOOC has the right to acquire up to a 51 percent interest in any
development in this block.
In connection with the anticipated submission of a cessation plan
to the Norwegian government in late 1999 for the redundant
Ekofisk facilities and the shut-in of outlying fields, cost
estimates for the removal of the facilities were revised upwards.
The revision negatively impacted second quarter net income by
approximately $10 million, of which $4 million related to the
shut-in outlying fields.
Work is proceeding according to schedule on the Eldfisk water
injection project. This is the largest development project in
E&P's 1999 capital budget and is comprised of a new platform and
pipelines, as well as modifications to existing platforms, in
order to accomplish waterflood, gas injection and gas lift. The
new water-injection platform, controlled from an existing manned
Eldfisk platform, is scheduled to begin water injection in fourth
quarter 1999. The remaining modifications to the existing
platforms are expected to be completed in the first quarter of
2000.
33
During second quarter 1999, Phillips and its co-venturers
announced the discovery of oil and gas on the Ebba prospect, in
the Norwegian North Sea, near the company's Ekofisk production
facility. The commerciality of this discovery is currently being
evaluated.
In late 1998, Phillips acquired a 7.1 percent interest in an
exploration project in the Kazakhstan sector of the Caspian Sea.
Drilling is now expected to begin on the first well there in
August 1999.
In the South China Sea, the company has scheduled an extended
maintenance shutdown in 1999 for the Xijiang production platform
and floating production storage and offloading vessel. Two
months of downtime is expected, beginning in August. The company
estimates that the net production deferred during the shutdown
will be approximately 800,000 barrels.
In Denmark, first oil was produced from the Siri field in
March 1999. Phillips owns a 12.5 percent interest in the field.
Net production reached 5,900 barrels of oil per day by the end of
the second quarter, and is expected to reach a maximum level of
6,000 barrels of oil per day in the fourth quarter of 1999. Nine
production and injection wells are planned there and drilling is
scheduled to be completed early in the year 2000.
In the United Kingdom, production began from the Janice field in
February 1999, with production reaching 13,500 barrels of oil per
day, net to Phillips, by the end of the second quarter. Joint
development of the Renee and Rubie fields is under way with first
production from Renee starting in February 1999, and first
production from Rubie starting in May 1999. Net production from
Renee/Rubie reached 10,600 barrels of oil per day by the end of
the second quarter.
GPM's 1999 capital budget was increased from $90 million to
$110 million, due to anticipated acquisitions. GPM acquired a
gathering system in the Austin Chalk area of south central Texas
on April 30, 1999, and another smaller gathering system in
Oklahoma on July 1, 1999. Also, purchase of a co-venturer's
interest in a plant and gathering system in New Mexico was
completed on July 1, 1999. These acquisitions added about
74 million cubic feet of gas per day to GPM's total raw gas
throughput, in addition to providing opportunities to improve
operating efficiencies.
RM&T continued its retail-marketing rationalization and expansion
during the first six months of 1999, with the opening of eight
new outlets. In addition, 10 outlets were razed and rebuilt.
34
Since the expansion program began in 1996, the company has
acquired 42 retail outlets, opened 53 new ones, and razed and
rebuilt 34 others. Both new outlets and those that are razed and
rebuilt utilize the Kicks 66 convenience store design.
During the first six months of 1999, the company also sold three
units, bringing the total to 79 retail units in non-strategic
areas sold since the program began.
Construction of a new 55-mile natural gas liquids pipeline from
Wichita, Kansas, to Conway, Kansas, was completed during the
second quarter. The new pipeline began flowing product in May
1999, and will allow RM&T to better serve its customers by
providing better access to propane and butane bulk storage in the
Midwest. Also, an expansion of the El Paso terminal and pipeline
system was completed during the second quarter and is expected to
start up in August 1999. A 25-percent interest in this terminal
and system was purchased from Ultramar Diamond Shamrock during
1998. Phillips' participation in the expansion will increase the
company's interest to 33 percent.
During second quarter 1999, Phillips and its co-venturer in the
Seaway Pipeline Company (Seaway) announced plans to increase the
capacity of its 30-inch crude oil pipeline by approximately
110,000 barrels per day, with completion expected by
January 2000. Seaway also announced it signed new connection
agreements with Exxon Pipeline Company. These agreements are
expected to permit the delivery of crude oil, originating in the
western Gulf of Mexico, to two Seaway crude oil transportation
systems. Start-up of expanded operations is expected in
second quarter 2000.
During 1998, Phillips, the Venezuelan state oil company,
Petroleos de Venezuela S.A. (PdVSA), and affiliates signed
agreements forming a limited partnership to build a
58,000 barrels-per-day delayed coker and related facilities at
the Sweeny Complex. A delayed coker allows the processing of
heavy, sour, lower-cost crude oil, thus lowering crude oil
acquisition costs. Under terms of the series of agreements,
PdVSA will supply the refinery with up to 165,000 barrels per day
of heavy Venezuelan crude oil, once the project is completed,
which is scheduled for the fourth quarter of 2000. Phillips and
PdVSA each hold a 50 percent interest in the limited partnership.
The total construction cost of the project, including the coker
and related facilities, is estimated at $538 million. During
second quarter 1999, the limited partnership issued $350 million
of 8.85% Bonds due 2019, the proceeds of which will be used to
fund the project. Remaining expenditures will be funded through
bank financing and equity contributions.
35
In May 1999, Phillips announced the completion of a
100-million-pounds-per-year expansion of its K-Resin copolymer
plant at the company's Houston Chemical Complex, increasing
capacity to 370 million pounds per year. In June 1999, a spare
reactor of the existing K-Resin plant experienced a flash fire
resulting in two contractor-employee fatalities. Damage to the
K-Resin plant is currently estimated at $15 million; however,
there was no damage to Phillips' polyethylene or polypropylene
facilities. On August 13, 1999, the company notified its K-Resin
customers that it was declaring force majeure, and would have to
delay or cancel certain existing orders of K-Resin. However,
limited production is expected by the end of August which, when
combined with K-Resin imported from a licensee plant, should
allow the company to meet its supply requirements.
Year 2000 Update
General
Phillips' companywide Year 2000 Project (Project) is
substantially complete. The Project addresses the issue of
computer programs and embedded computer chips being unable to
distinguish between the year 1900 and the year 2000. In 1995, in
order to improve access to business information through common,
integrated computing systems across the company, Phillips began a
worldwide business systems replacement project with systems that
use programs primarily from SAP America, Inc. (SAP) and, for
certain upstream operations, Oracle Corporation (Oracle). The
new systems, which have made approximately 70 percent of the
company's business computer systems Year 2000 compliant, have
been completed on schedule. Remaining business software programs
were remediated as a part of the company's Year 2000 Project, and
are substantially complete. None of the company's other
information technology (IT) projects have been delayed due to the
implementation of the Year 2000 Project.
"Year 2000 compliant," as used in this discussion, means that a
date-handling problem relating to the Year 2000 date change that
would cause computers, software or other equipment to fail to
correctly perform, process and handle date-related data for the
dates within and between the 20th and 21st centuries, is not
expected to interfere with normal business operations.
36
Project
The Project is divided into four major sections--Infrastructure,
Applications Software (Infrastructure and Applications Software
are collectively referred to as "IT Systems"), third-party
suppliers and customers (External Agents), and process control
and instrumentation (PC&I). The four sections are coordinated
companywide by a Program Management Office (PMO), which is
comprised of a cross-functional team and includes a business
continuity/contingency manager. PMO representatives meet
regularly with executive management, and periodically advise the
Audit Committee and the Board of Directors on the status of the
Project.
The company has engaged various third parties to assist in the
completion of certain phases of the Project. The general phases
common to all sections are: (1) inventorying Year 2000 items;
(2) assigning priorities to identified items; (3) assessing the
Year 2000 compliance of items determined to be material to the
company; (4) repairing or replacing material items that are
determined not to be Year 2000 compliant; (5) testing material
items; and (6) designing and implementing contingency and
business continuation plans for each organization and company
location.
The inventory, prioritization and assessment phases of each
section of the Project have been completed. The remediation,
testing and business continuity planning phases are substantially
complete. Material items are those believed by the company to
have a risk involving the safety of individuals, or that may
cause damage to property or the environment, or affect net income
or cash flows. The testing phases of the Project are being
performed by the company.
37
The company estimates that 99 percent of scheduled Project
activities were complete at June 30, 1999. The following table
shows the estimated percentage of completed scheduled activities
at June 30, 1999:
Percent
Completed
---------
Sections
SAP/Oracle 100%
Infrastructure 98
Applications software 99
(Third-party remediation 100%)
(In-house remediation 99%)
(Vendor upgrades/replacements 97%)
PC&I 99
External agents 90*
(Tier 1 assessment 100%)
(Tier 2 assessment 100%)
(Tier 1 contingency planning 100%)
(Tier 1 reassessment 100%)
(Tier 2 reassessment 100%)
(Tier 2 contingency planning 100%)
(Third round Tier 1 reassessment--
scheduled for third quarter 1999)
Business continuity planning 99
Total Year 2000 effort (weighted calculation) 99
- ----------------------------------------------------------------
*All external agent activities scheduled through June 30, 1999,
have been completed. The remaining external agent activities,
which are about 10 percent of the total external agents' effort,
are scheduled for completion in the last half of 1999.
Substantially all scheduled Year 2000 activities for the
Infrastructure, Applications Software and PC&I sections were
completed by June 30, 1999. The remaining activities in those
sections are expected to be completed in the last half of 1999
because of scheduled facility turnarounds and vendor scheduling.
The company will continue to monitor new releases and updates of
vendor-supplied software, and will apply new releases as
necessary for Year 2000 compliance.
IT Systems
The Infrastructure section consists of hardware and systems
software other than Applications Software. This section is
substantially complete. The company estimates that approximately
98 percent of the planned activities related to the section had
been completed at June 30, 1999. The testing phase was completed
as hardware or system software was remediated, upgraded or
replaced. Contingency planning for this section was completed in
June 1999.
38
The Applications Software section includes both the conversion of
applications software that is not Year 2000 compliant and, where
available from the supplier, the replacement of such software.
This section is substantially complete. The company estimates
that the software conversion portion was 99 percent complete at
June 30, 1999. The vendor software replacements and upgrades
were approximately 97 percent complete at June 30, 1999. The
company estimates that, overall, 99 percent of the planned
activities of the Applications Software section were complete at
June 30, 1999. Testing was conducted as software was repaired or
replaced. Contingency planning for this section began in third
quarter 1998 and was completed in June 1999.
PC&I
The PC&I section of the Project includes the hardware, software
and associated embedded computer chips that are used in the
operation of all facilities operated by the company. This
section is substantially complete. The company estimates that
the repair and testing of PC&I equipment was approximately
99 percent complete at June 30, 1999. Contingency planning for
this section began in third quarter 1998 and was completed by
June 30, 1999.
External Agents
The External Agents section includes the process of identifying
and prioritizing critical suppliers, customers and partners, by
direct contact if possible, and communicating with them about
their plans and progress in addressing the Year 2000 problem.
Initial detailed evaluations of approximately 1,700 third parties
have been completed, with an estimated 650 of those classified as
most critical to the company. These evaluations were followed by
the development of preliminary contingency plans where results of
the initial assessment indicated that such plans might be
necessary. Contingency planning for this section was completed
by June 30, 1999. The company estimates that this section was on
schedule and 90 percent of its scheduled activities were complete
at June 30, 1999. The process of evaluating these external
agents began in third quarter 1998 and two rounds of evaluation
were completed by June 30, 1999. The company plans to
continuously monitor critical external agents by conducting
follow-up reviews of those critical external agents on a schedule
that extends to year-end 1999.
39
Business Continuity/Contingency Planning
The company has business continuity and disaster recovery plans
in place that cover its worldwide operations. Specific Year 2000
contingency planning is substantially complete for each section
of the Project. In addition, the company has incorporated
specific Year 2000 contingency planning into its existing
business continuity and disaster recovery plans and the planning
process is substantially complete as of June 30, 1999. Follow-up
reviews will take place through year end.
The company currently believes that the most reasonably likely
worst-case scenario is that there will be some Year 2000
disruptions at individual locations that could affect individual
business processes, facilities or third parties for a short time.
The company does not expect such disruptions to be long-term, or
for the disruptions to affect the operations of the company as a
whole. Because of the uncertainty as to the exact nature or
location of potential Year 2000-related problems that might
arise, the business continuity/contingency planning will focus on
development of flexible plans to minimize the scope and duration
of any Year 2000 disruptions that might occur. The company
expects to have personnel and resources available to deal with
any Year 2000 problems that occur. Some of the contingency
actions under consideration include designating emergency
response teams, stockpiling inventories, increasing staffing at
critical times, arranging for alternative suppliers of critical
products and services, and developing manual workarounds.
Costs
The company's latest estimate of total cost of the Year 2000
Project is expected to not exceed $40 million. This estimate
includes Phillips' estimated share of Year 2000 repair and
replacement costs that may be incurred by partnerships and joint
ventures in which the company participates but is not the
operator, but does not include any estimates of liability for
non-compliance. The costs of implementing the SAP and Oracle
business replacement systems are not included in these cost
estimates. The following table shows the approximate amounts
expended by various sections of the Project through June 30,
1999:
Millions
of Dollars
----------
Sections
IT systems (includes program management costs) $23
PC&I 9
External agents (includes continuity planning costs) 2
- -----------------------------------------------------------------
Total $34
=================================================================
40
The company estimates that the future cost of completing the
Year 2000 Project will not exceed $6 million--$1 million to
repair or replace IT systems and manage the overall Year 2000
Project, $2 million to repair or replace non-compliant PC&I
equipment and software and monitor IT systems that are already
Year 2000 compliant, less than $.5 million for follow-up
activities associated with external agents and refinement of
contingency plans, including business continuity planning, and
$3 million for operations for which Phillips is not the operator.
The costs of implementing the SAP and Oracle business replacement
systems are not included in these cost estimates.
Risks
The failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and
adversely affect the company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent
in the Year 2000 problem, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers and
customers, the company is unable to determine at this time
whether the consequences of Year 2000 failures will have a
material impact on the company's results of operations, liquidity
or financial condition. The Year 2000 Project is expected to
significantly reduce the company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000
compliance and readiness of its material external agents. The
company believes that, with the implementation of new business
systems and the completion of the Project as scheduled, the
possibility of significant interruptions of normal operations
should be reduced.
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.
41
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 1998, Phillips reported 45 sites where it had
information indicating that it might have been identified as a
Potentially Responsible Party (PRP). Since then, three sites have
been resolved. Of the 42 sites remaining, the company believes it
has a legal defense or its records indicate no involvement for
13 sites. At six sites, present information indicates that it is
probable that the company's exposure is less than $100,000 per
site. At seven sites, Phillips has had no communication or
activity with government agencies or other PRPs in more than two
years. Of the 16 remaining sites, the company has provided for
any probable costs that can be reasonably estimated.
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
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 clean-up 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 clean-up, 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 clean-up costs
generally occur after the parties obtain EPA or equivalent state
agency approval.
42
At June 30, 1999, $5 million had been accrued for the company's
unresolved PRP sites. In addition, the company has accrued
$57 million for other planned remediation activities, including
resolved state, PRP, and other federal sites, as well as sites
where no claims have been asserted, and $4 million for other
environmental contingent liabilities, for total environmental
accruals of $66 million.
After an assessment of environmental exposures for clean-up and
other costs, the company makes accruals on an undiscounted basis
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, although claims for
recovery of remediation costs have been filed with certain of the
company's insurers.
OUTLOOK
A late-March 1999 agreement by OPEC to further reduce production
volumes has caused crude oil prices to increase to their highest
levels since late 1997. If OPEC maintains production restraint,
markets have the potential to tighten further as demand increases
seasonally. Since mid-March, natural gas prices improved due to
higher fuel oil prices and reductions in excess inventories.
Natural gas prices will be influenced by the pace of storage
injections, additions to production deliverability, and weather.
During first quarter 1999, Phillips and its co-venturers
announced the discovery of a new Prudhoe Bay satellite field on
the North Slope of Alaska. A discovery well in the Kuparuk
formation tested over 1,900 barrels of oil per day and
1.3 million cubic feet of gas per day. The Kuparuk accumulation,
the Aurora field, is estimated to contain 20 to 35 million
recoverable barrels of oil, including adjacent leases held by
Phillips and its co-venturers. Plans are being evaluated for
additional appraisal activities at Aurora during 1999. Phillips
holds a 12 percent interest in Aurora.
Phillips and its co-venturers consented to the transfer of the
operator's interest in the Point Arguello field, offshore
California, to another company, which also assumed operatorship.
A planned shutdown of the three platforms by the previous
operator will not occur. Production from the Point Arguello
field averaged 4,600 net barrels of oil per day during the second
quarter of 1999.
43
On June 30, 1999, Phillips and its co-venturers, including a
subsidiary of Venezuela's state oil company, approved a project
to develop the heavy oil reserves from the Hamaca region in
Venezuela's Orinoco Oil Belt. Construction of an upgrader,
pipelines and associated production facilities is expected to
begin in the second quarter of 2000. During the construction
phase, anticipated gross production of 36,000 barrels per day of
crude will be blended with 20,000 barrels per day of lighter oil
(30-degree API gravity). The upgrader is expected to begin
producing 26-degree API gravity oil in 2004. Phillips and its
co-venturers are discussing whether to transfer their working
interests in the Hamaca project to a newly formed, jointly owned
entity, which would place the project debt in the financial
markets, and for which Phillips would use equity method
accounting.
In July 1999, Phillips exchanged its 18 percent interest in the
LL-652 oil field in Lake Maracaibo, Venezuela, for two-thirds of
ARCO's 30 percent working interest in the Hamaca heavy oil
project. Under the exchange, the LL-652 interest is subject to
preferential rights to purchase by the partners. The exchange
increased Phillips' share in the Hamaca project from 20 percent
to 40 percent. The LL-652 field interest, which Phillips
exchanged with ARCO, is a redevelopment and secondary recovery
project in Lake Maracaibo. The field was acquired in the
Venezuela third bid round. The additional working interest in,
and approval of, the Hamaca Project will result in Phillips'
reporting approximately 700 million additional barrels-of-oil-
equivalent in 1999, increasing Phillips' total worldwide reserves
by 32 percent, to nearly 3 billion barrels-of-oil-equivalent.
Two other projects were acquired in the Venezuela third bid
round, La Vela and Ambrosio. Phillips holds a 31.5 percent
interest in and is operator of the La Vela block offshore
northwest Venezuela where two exploratory wells have been
drilled. The investment in both wells was written off to dry
hole expense in the second quarter. Additional exploration
prospects in the Northern area of the block are being evaluated.
Ambrosio, in which Phillips holds a 90 percent interest, is a
redevelopment project operated by the company in Lake Maracaibo.
Drilling began on the first major development well there during
first quarter 1999 and is expected to be completed during third
quarter 1999.
On June 14, 1999, Phillips signed an exploration and production
sharing agreement with the state of Oman, covering 4.23 million
acres miles in southwest Oman. Phillips has a 100 percent
working interest in the block and plans geological and
geophysical studies in the first exploration phase (three years).
44
Block 38 is the second concession in Oman for Phillips and is
contiguous to Block 36, where Phillips plans to drill a well in
2000.
During the second quarter, nominations for crude oil shipments on
Phillips Alaska Pipeline Company's (PAPCO) 1.44 percent divided
interest in the Trans Alaska Pipeline System (TAPS) have been
well below its capacity of 19,000 barrels of oil per day. This
is due to declining production from the Alaska North Slope, and
competition from other TAPS pipeline owners for shipments. Under
these conditions, earnings from PAPCO are expected to be reduced
by approximately $6 million per annum if shipments continue to be
affected to a similar extent. Phillips Alaska Pipeline Company
is a wholly owned indirect subsidiary of Phillips. Its tariffs
are regulated by the Federal Energy Regulatory Commission.
In July 1999, the construction of a major petrochemical complex
in Qatar was approved. During 1998, Phillips formed a joint-
venture company with Qatar General Petroleum Corporation (QGPC)
to construct a petrochemical complex to produce ethylene,
polyethylene and hexene-1 using natural gas liquids. Pending
approval by QGPC's Board of Directors, construction could begin
in late 1999, with commercial production commencing in late 2002.
The project is anticipated to have annual capacities of
1.1 billion pounds of ethylene, 1 billion pounds of polyethylene
and 100 million pounds of hexene-1. Phillips' ownership share is
49 percent.
Phillips operates in three countries where cutbacks in production
were announced in 1998. The Norwegian Ministry of Petroleum and
Energy has increased the production curtailment measures for oil
production on the Norwegian continental shelf, and has extended
the curtailment to year-end 1999. It will amount to a
6.8 percent reduction, based on updated production forecasts
given to the Ministry. The Nigerian government dictated quota
reductions totaling 19.5 percent, effective April 1, 1999, which
are expected to continue throughout 1999. These affect leases
operated on behalf of the company under the joint operating
agreement with Nigerian Agip Oil Company. Venezuela, an OPEC
member, has agreed to cut back oil production, but Phillips and
other third-bid-round-property operators have not been asked to
curtail production. Based on the above, the company does not
expect the economic impact of these announced production
curtailments in any of the three countries to have a material
adverse impact on the company's results of operations or
financial position in 1999.
45
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 in any
forward-looking statement made by, or on behalf of, the company.
Where any such forward-looking statement includes a statement of
the assumptions or bases underlying such forward-looking
statement, the company cautions that, while it 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, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will
result, or be achieved or accomplished.
Taking into account the foregoing, the following are identified
as important 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 drill wells and develop offshore or onshore
exploration and production properties are subject to (1) the
company's ability to obtain agreements from co-venturers or
partners, and governments; engage drilling, construction and
other contractors; obtain economical and timely financing;
(2) geological, land, or sea conditions; (3) world prices for
oil, natural gas and natural gas liquids; and (4) foreign and
United States laws, including tax laws.
o Plans for the construction, modernization or debottlenecking
of domestic and foreign refineries and chemical plants, and
the timing of production from such plants are subject to
approval from the company's and/or subsidiaries' Boards of
Directors; loan 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 and
work force. 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
46
of transportation in the form of pipelines, railcars, trucks
or ships.
o The ability to meet liquidity requirements, including the
funding of the company's capital program from borrowings,
asset sales and operations, is subject to the negotiation and
execution of certain project financings and other financing
documents; the identification of buyers and the negotiation
and execution of instruments of sale; and changes in the
commodity prices of the company's basic products of oil,
natural gas and natural gas liquids, over which Phillips has
no control, and to a lesser extent the commodity prices for
its chemical and other products; its ability to operate its
refineries and chemical plants consistently; 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, raw natural gas supplies,
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.
o The dates on which the company believes the Year 2000 Project
will be completed and the SAP and Oracle business computer
systems will be implemented are based on Management's best
estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of
certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these
estimates will be achieved, or that there will not be a delay
in, or increased costs associated with, the implementation of
the Year 2000 Project. Specific factors that might cause
differences between the estimates and actual results include,
but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and
correct all relevant computer code, timely responses to and
corrections by third-parties and suppliers, the ability to
implement interfaces between the new systems and the systems
not being replaced, and similar uncertainties. Due to the
general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000
readiness of third-parties and the interconnection of global
businesses, the company cannot ensure its ability to timely
and cost-effectively resolve problems associated with the
Year 2000 issue that may affect its operations and business,
or expose it to third-party liability.
47
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual stockholders' meeting on May 3, 1999.
A brief description of each proposal and the voting results
follow:
A company proposal to elect eleven directors.
For Against & Withheld
-----------------------------------
W. W. Allen 236,774,370 14,469,135
Norman R. Augustine 239,666,181 11,577,324
David L. Boren 239,469,306 11,774,199
C. L. Bowerman 239,058,399 12,185,106
Robert E. Chappell, Jr. 240,263,214 10,980,291
Lawrence S. Eagleburger 239,456,539 11,786,966
Larry D. Horner 240,128,990 11,114,515
J. J. Mulva 237,499,749 13,743,756
Randall L. Tobias 239,848,829 11,394,676
Victoria J. Tschinkel 239,926,289 11,317,216
Kathryn C. Turner 239,586,267 11,657,238
A company proposal to approve the designation of Ernst &
Young LLP as independent auditors for 1999.
For 240,461,570
Against 8,260,297
Abstentions 2,521,638
Not Voted 30,031,444
All eleven nominated directors were elected, and the independent
public accountants designated by the company were approved.
Item 5. OTHER INFORMATION
On June 21, 1999, W. W. Allen announced his plans to retire as
Chief Executive Officer of the company, effective June 30, 1999.
J. J. Mulva was elected Vice Chairman and Chief Executive
Officer, effective July 1, 1999. Mr. Allen will retire as an
employee and as Chairman of the company on October 13, 1999.
48
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
10(a) Phillips Petroleum Company Executive Severance Plan.
(b) Key Employee Supplemental Retirement Plan of Phillips
Petroleum Company.
(c) Phillips Petroleum Company Supplemental Executive
Retirement Plan.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
Reports on Form 8-K
- -------------------
During the three months ended June 30, 1999, the company did not
file any reports on Form 8-K.
49
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)
August 13, 1999
50