SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- --------------------
Commission file number 1-11594
-----------------------------------------------------
PHILLIPS GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-1395482
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
First Interstate Tower, Suite 800
1300 Post Oak Boulevard, Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
713-297-6066
(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 1,000 shares of common stock, $.01 par value, outstanding
at April 30, 1997
PART I. FINANCIAL INFORMATION
- -----------------------------------------------------------------
Consolidated Statement of Income Phillips Gas Company
Thousands of Dollars
--------------------
Three Months Ended
March 31
--------------------
1997 1996
--------------------
Revenues
Natural gas liquids $192,781 156,693
Residue gas 257,385 193,028
Other 19,515 15,129
- -----------------------------------------------------------------
Total Revenues 469,681 364,850
- -----------------------------------------------------------------
Costs and Expenses
Gas purchases 354,817 257,348
Operating expenses 46,100 39,648
Selling, general and administrative
expenses 3,616 4,170
Depreciation 19,294 19,253
Interest expense 4,698 6,247
- -----------------------------------------------------------------
Total Costs and Expenses 428,525 326,666
- -----------------------------------------------------------------
Income before income taxes 41,156 38,184
Provision for income taxes 15,771 14,559
- -----------------------------------------------------------------
Net Income 25,385 23,625
Preferred stock dividend requirements 8,039 8,039
- -----------------------------------------------------------------
Net Income Applicable
to Common Stock $ 17,346 15,586
=================================================================
See Notes to Financial Statements.
1
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Gas Company
Thousands of Dollars
------------------------
March 31 December 31
1997 1996
------------------------
Assets
Cash and cash equivalents $ 84,297 79,031
Accounts receivable
Affiliate 66,557 96,653
Trade (less allowances:
1997--$626; 1996--$905) 84,109 147,598
Inventories 5,281 6,418
Deferred income taxes 2,597 4,007
Prepaid expenses and other current
assets 4,708 2,660
- -----------------------------------------------------------------
Total Current Assets 247,549 336,367
Investments and long-term receivables 9,962 13,629
Properties, plants and equipment (net) 930,492 902,493
Deferred income taxes 2,960 12,090
Deferred gathering fees 30,737 28,497
- -----------------------------------------------------------------
Total $1,221,700 1,293,076
=================================================================
Liabilities
Accounts payable
Affiliate $ 33,767 43,310
Trade 180,678 249,864
Note payable 18,500 18,500
Accrued income and other taxes 14,931 27,316
Other accruals 483 162
- -----------------------------------------------------------------
Total Current Liabilities 248,359 339,152
Long-term debt due to affiliate 310,000 310,000
Other liabilities and deferred credits 8,714 6,372
Deferred gain on sale of assets 18,131 18,402
- -----------------------------------------------------------------
Total Liabilities 585,204 673,926
- -----------------------------------------------------------------
Stockholders' Equity
Preferred stock--100 million shares
authorized at $.01 par value; issued
and outstanding--13,800,000 shares,
liquidation preference:
1997--$348,930; 1996--$349,109 345,000 345,000
Common stock--200 million shares
authorized at $.01 par value;
Issued and outstanding--1,000 shares
Par value - -
Capital in excess of par 142,917 142,917
Retained earnings 148,579 131,233
- -----------------------------------------------------------------
Total Stockholders' Equity 636,496 619,150
- -----------------------------------------------------------------
Total $1,221,700 1,293,076
=================================================================
See Notes to Financial Statements.
2
- -----------------------------------------------------------------
Consolidated Statement of Cash Flows Phillips Gas Company
Thousands of Dollars
--------------------
Three Months Ended
March 31
--------------------
1997 1996
--------------------
Cash Flows from Operating Activities
Net income $ 25,385 23,625
Adjustments to reconcile net income
to net cash provided by operating
activities
Non-working capital adjustments
Depreciation 19,294 19,253
Deferred taxes 9,130 5,589
Deferred gathering fees (2,240) (2,096)
Gain on sale of assets (293) (282)
Other 1,797 707
Working capital adjustments
Decrease (increase) in accounts
receivable 93,585 (30,580)
Decrease in inventories 1,137 404
Decrease (increase) in prepaid
expenses and other current assets,
including deferred taxes (638) 8,788
Decrease in accounts payable (78,729) (1,297)
Decrease in taxes and other accruals (12,064) (4,163)
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 56,364 19,948
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments (43,391) (12,812)
Proceeds from asset dispositions 332 544
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (43,059) (12,268)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Preferred stock dividend (8,039) (8,039)
- -----------------------------------------------------------------
Net Cash Used for Financing Activities (8,039) (8,039)
- -----------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents 5,266 (359)
Cash and cash equivalents at beginning
of period 79,031 53,800
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 84,297 53,441
=================================================================
See Notes to Financial Statements.
3
- -----------------------------------------------------------------
Notes to Financial Statements Phillips Gas 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 that Phillips Gas
Company (hereinafter referred to as "PGC" or "the company")
considers necessary for a fair statement of the results for such
periods. All such adjustments are of a normal and recurring
nature.
Note 2--Inventories
Inventories consisted of the following:
Thousands of Dollars
----------------------
March 31 December 31
1997 1996
----------------------
Natural gas $ 4 1,514
Helium 1,027 1,153
Materials, supplies and other 4,250 3,751
- -----------------------------------------------------------------
$5,281 6,418
=================================================================
The natural gas inventory is tied to a residue gas customer's
peak winter volume needs whereby the customer takes gas in the
winter months from inventories built during the summer.
Note 3--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Thousands of Dollars
------------------------
March 31 December 31
1997 1996
------------------------
Properties, plants and equipment
(at cost) $2,019,190 1,972,524
Less accumulated depreciation
and amortization 1,088,698 1,070,031
- -----------------------------------------------------------------
$ 930,492 902,493
=================================================================
4
Note 4--Income Taxes
The company's effective tax rate for each of the three-month
periods ended March 31, 1997 and 1996, was 38 percent.
Note 5--Contingencies
In the case of all known contingencies, the company accrues an
undiscounted liability when a loss is probable and the amount can
be reasonably estimated. These liabilities are not reduced for
potential insurance recoveries. If applicable, undiscounted
receivables are accrued for probable insurance recoveries.
Currently the company is a party to a number of legal proceedings
pending in various courts or agencies for which no provision has
been made. 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.
Note 6--Related Party Transactions
Significant transactions with affiliated parties were:
Thousands of Dollars
--------------------
Three Months Ended
March 31
--------------------
1997 1996
--------------------
Operating revenues $208,622 169,010
Gas purchases 34,684 31,186
Operating expenses 29,548 26,981
Selling, general and administrative
expenses 3,063 3,800
Interest income 637 270
Interest expense 4,637 6,191
- -----------------------------------------------------------------
The company purchases raw gas from, and sells a portion of its
residue gas and substantially all of its natural gas liquids
(NGL) to, Phillips Petroleum Company (Phillips). Phillips also
provides the company with various field and general
administrative services. The company earns interest from
participation in Phillips' centralized cash management system and
incurs interest expense on its borrowings from Phillips. In
addition, the company purchases Phillips plastic pipe, which is
used in the construction of gathering systems.
5
The company pays gathering fees to GPM Gas Gathering L.L.C.
(GGG). In the first quarters of 1997 and 1996, net fees paid to
GGG for gas gathering services were $10,837,000 and $10,595,000,
respectively; $8,597,000 and $8,499,000 were expensed.
Note 7--Cash Flow Information
Cash payments for interest and income taxes for the three-month
periods ended March 31 were as follows:
Thousands of Dollars
--------------------
1997 1996
--------------------
Cash Payments
Interest $4,675 6,305
Income taxes 9,000 -
- -----------------------------------------------------------------
Note 8--Subsequent Event
The company's second quarter 1997 earnings will benefit by
approximately $9 million after-tax from the settlement in April
1997 of a dispute with a producer, related to gas processing
rights to certain leases in the Texas Panhandle. As a result of
this settlement, the company waived any future processing rights
related to these leases.
6
- -----------------------------------------------------------------
Management's Discussion and Analysis Phillips Gas Company
Management's Discussion and Analysis is the company's analysis of
its financial performance and of significant trends that may
affect future performance. It should be read in conjunction with
the financial statements and notes. It contains forward-looking
statements including, without limitation, statements relating to
the company's plans, strategies, objectives, expectations,
intentions, and adequate resources, and are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The words "intends," "possible," "probable,"
"believe," "expect," "plans," "scheduled," "anticipate,"
"estimate," "begin," 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 10.
RESULTS OF OPERATIONS
The company had net income of $25 million in the first quarter of
1997, compared with $24 million for the same period in 1996.
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1997 1996
-------------------
Reported net income $25 24
Less non-operating items (3) (4)
- -----------------------------------------------------------------
Net operating income $28 28
=================================================================
Net operating income for both the first quarters of 1997 and 1996
was $28 million. Higher residue and NGL sales prices and
increased NGL sales volumes were offset by increased gas purchase
costs and increased operating expenses. Non-operating items
consisted of interest revenue and expense in both periods.
7
Three Months Ended
March 31
----------------------
Sales, Purchases and Throughput Statistics 1997 1996 Change
----------------------
Natural gas liquids sales
(thousands of barrels daily) 149 140 6%
Residue gas sales
(millions of cubic feet daily) 1,062 1,080 (2)
Average sales prices
Natural gas liquids (per barrel) $14.34 12.29 17
Residue (per thousand cubic feet) $ 2.69 1.96 37
Natural gas purchases
(millions of cubic feet daily) 1,510 1,490 1
Raw gas throughput
(millions of cubic feet daily) 2,011 1,892 6
- -----------------------------------------------------------------
Revenues
NGL revenues increased 23 percent to $193 million in the first
quarter of 1997, compared with the same period in 1996. Average
NGL sales prices increased to $14.34 per barrel, compared with
$12.29 per barrel in 1996. NGL sales volumes increased nine
thousand barrels per day, mainly due to an acquisition made in
January 1997 and to more efficient operations at two of the
company's plants that had experienced start-up delays on new
turbines in the first quarter of 1996.
Residue gas sales were $257 million in the first quarter of 1997,
compared with $193 million in 1996. This increase in residue gas
sales was due to an increase in residue gas sales prices, partly
offset by a 2 percent decrease in residue gas sales volumes.
Residue gas sales prices were very volatile in the first quarter
of 1997, with January's average sales price of $3.91 per thousand
cubic feet being 90 percent higher than January 1996, however
prices dropped over the remainder of the quarter to an average of
$1.66 per thousand cubic feet in March 1997, or 14 percent below
March 1996 prices. The decrease in prices during the first
quarter of 1997 was primarily attributable to milder weather and
adequate storage levels.
Raw gas throughput volumes were higher due to acquisitions. A
portion of these raw gas volumes have resulted in increased
gathering and processing of third-party gas. Residue gas sales
volumes were down slightly, primarily as a result of field
declines in the Austin Chalk area of Texas, partially offset by
higher sales volumes in the Panhandle and New Mexico regions.
Other revenue increased 29 percent in the first quarter of 1997,
compared with the same period in 1996, due to an increase in by-
product revenues.
8
Expenses
Gas purchase costs were $355 million for the first three months
of 1997, compared with $257 million for the same period of 1996.
The higher gas purchase costs reflect the interaction of the
company's gas purchase contracts with the higher first quarter
1997 residue gas and NGL sales prices, along with higher gas
purchase volumes. As a percentage of operating revenue, gas
costs were 76 percent and 71 percent for the first quarters of
1997 and 1996, respectively. Some contracts are index-based
purchase contracts or gathering agreements under which the
company is required to make up fuel usage and processing
shrinkage. Shrinkage costs increased in the first quarter of
1997 as a result of high gas sales prices relative to NGL sales
prices. This caused the increase in gas purchase costs as a
percentage of revenue.
First quarter 1997 operating expenses increased 16 percent from
the first quarter 1996. This increase was mainly the result of
bonus payments under Phillips' incentive pay programs in excess
of previous estimates and additional costs associated with
acquisitions. In addition, the company transferred the majority
of its accounting functions to its regional operations in the
third quarter of 1996. These service costs were previously
reported as selling, general and administrative expenses.
Selling, general and administrative expenses for the first
quarter of 1997 decreased $1 million, or 13 percent from the
first quarter of 1996, mainly due to the transfer of a majority
of the company's accounting support functions to its regional
operations in the third quarter of 1996.
Interest expense decreased in the first quarter of 1997,
primarily due to a decrease in the company's outstanding loan
balances in the first quarter 1997, compared with 1996.
CAPITAL RESOURCES AND LIQUIDITY
The company's cash and cash equivalents balance at March 31,
1997, was $84 million, $5 million higher than the December 31,
1996, balance. Operating activities increased cash $56 million
in the first quarter of 1997. The decrease in accounts receivable
and offsetting decrease in accounts payable were the result of
the March decline in prices, compared with year-end 1996 levels.
Cash disbursed for capital expenditures and investments in the
three months ended March 31, 1997, was $43 million, compared with
$13 million for the same period in 1996. Capital spending in
1997 was higher, primarily due to the purchase from Amoco
Production Company of gathering assets and partial interest in a
9
plant. The plant has been shut down and the gathering facilities
have been integrated into the company's existing operations. The
1996 capital expenditures were primarily directed toward asset
maintenance and projects that added new raw gas supplies.
The company has proposed a project to expand its Spraberry plant
in Midland County, Texas, subject to PGC Board of Directors'
approval. This project is anticipated to increase the plant's
processing capacity from 40 million cubic feet of gas per day to
65 million cubic feet of gas per day, allowing the company to
shut down another, smaller plant. The expansion should be
completed by year-end 1997 and is being funded within the
company's approved $100 million capital budget.
The company's second quarter 1997 earnings will benefit by
approximately $9 million after-tax from the settlement in April
1997 of a dispute with a producer related to gas processing
rights to certain leases in the Texas Panhandle. As a result of
this settlement, the company waived any future processing rights
from these leases.
The company continues to consider strategic acquisition and
expansion opportunities within its core operating areas. Future
capital investments will be determined by the company in
coordination with Phillips' capital spending budget. Phillips
annually allocates its overall capital spending budget to each of
its strategic business units, of which the company is one. The
company has budgeted $100 million for capital spending in 1997.
OUTLOOK
Both NGL and residue gas sales prices declined during February
and March 1997, but seem to be leveling off in the second
quarter. Prices during the remainder of the year are expected to
continue to be impacted by seasonal factors. The company expects
to see increased NGL production volumes during the second quarter
of 1997 as the company continues to optimize its operations.
Operating expenses are expected to be slightly higher than 1996,
mainly due to the recent acquisitions made by the company.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Phillips Gas Company 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.
10
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 for the construction or modernization of gathering and
processing facilities, and the timing of production from
such facilities are subject to, in certain instances,
approval from the company's board of directors and the
amount allocated for the company in Phillips' capital budget
program; and in general, to the issuance by federal, state
and municipal governments, or agencies thereof, of building,
environmental and other permits; the availability of
specialized contractors and work force; prices of and demand
for products; the company's ability to control its costs;
availability of raw materials; and transportation mainly in
the form of pipelines, and to a lesser extent, railcars or
trucks; and changes in laws, particularly tax and
environmental.
o Estimates of raw natural gas supplies, additional volumes
and costs from acquisitions, 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 generally accepted accounting principles
and other applicable requirements; however, new or revised
information or changes in scope or economics could cause
results to vary, perhaps materially.
11
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
27 Financial Data Schedule.
Reports on Form 8-K
- -------------------
During the three months ended March 31, 1997, the company did not
file any reports on Form 8-K.
12
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 GAS COMPANY
/s/ E. L. Batchelder
--------------------------------------
E. L. Batchelder
Senior Vice President, Treasurer,
Controller and Chief Financial Officer
(Chief Accounting and Duly
Authorized Officer)
May 8, 1997
13