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, 1997
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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 1-11594
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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.)
Wells Fargo 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 July 31, 1997.
PART I. FINANCIAL INFORMATION
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Consolidated Statement of Income Phillips Gas Company
Thousands of Dollars
--------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------
1997 1996 1997 1996
--------------------------------------
Revenues
Natural gas liquids $161,466 169,006 354,247 325,699
Residue gas 183,811 212,256 441,196 405,284
Other 28,463 21,648 47,978 36,777
- ---------------------------------------------------------------------
Total Revenues 373,740 402,910 843,421 767,760
- ---------------------------------------------------------------------
Costs and Expenses
Gas purchases 263,465 288,114 618,282 545,462
Operating expenses 46,694 44,237 92,794 83,885
Selling, general and
administrative expenses 3,866 4,150 7,482 8,320
Depreciation 19,660 17,919 38,954 37,172
Interest expense 5,021 5,975 9,719 12,222
- ---------------------------------------------------------------------
Total Costs and Expenses 338,706 360,395 767,231 687,061
- ---------------------------------------------------------------------
Income before income taxes 35,034 42,515 76,190 80,699
Provision for income taxes 13,541 16,850 29,312 31,409
- ---------------------------------------------------------------------
Net Income 21,493 25,665 46,878 49,290
Preferred stock dividend
requirements 8,038 8,038 16,077 16,077
- ---------------------------------------------------------------------
Net Income Applicable to
Common Stock $ 13,455 17,627 30,801 33,213
=====================================================================
See Notes to Financial Statements.
2
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Consolidated Balance Sheet Phillips Gas Company
Thousands of Dollars
------------------------
June 30 December 31
1997 1996
------------------------
Assets
Cash and cash equivalents $ 107,992 79,031
Accounts receivable
Affiliate 65,619 96,653
Trade (less allowances:
1997--$626; 1996--$905) 98,138 147,598
Inventories 5,260 6,418
Deferred income taxes 2,924 4,007
Prepaid expenses and other current
assets 2,390 2,660
- -----------------------------------------------------------------
Total Current Assets 282,323 336,367
Investments and long-term receivables 9,821 13,629
Properties, plants and equipment (net) 926,176 902,493
Deferred income taxes - 12,090
Deferred gathering fees 32,937 28,497
- -----------------------------------------------------------------
Total $1,251,257 1,293,076
=================================================================
Liabilities
Accounts payable
Affiliate $ 42,960 43,310
Trade 185,591 249,864
Note payable 18,500 18,500
Accrued income and other taxes 12,355 27,316
Other accruals 487 162
- -----------------------------------------------------------------
Total Current Liabilities 259,893 339,152
Long-term debt due to affiliate 310,000 310,000
Other liabilities and deferred credits 7,668 6,372
Deferred income taxes 5,885 -
Deferred gain on sale of assets 17,860 18,402
- -----------------------------------------------------------------
Total Liabilities 601,306 673,926
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Stockholders' Equity
Preferred stock--100 million shares
authorized at $.01 par value; issued
and outstanding--13,800,000 shares,
liquidation preference:
1997--$349,198; 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 162,034 131,233
- -----------------------------------------------------------------
Total Stockholders' Equity 649,951 619,150
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Total $1,251,257 1,293,076
=================================================================
See Notes to Financial Statements.
3
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Consolidated Statement of Cash Flows Phillips Gas Company
Thousands of Dollars
--------------------
Six Months Ended
June 30
--------------------
1997 1996
--------------------
Cash Flows from Operating Activities
Net income $ 46,878 49,290
Adjustments to reconcile net income
to net cash provided by operating
activities
Non-working capital adjustments
Depreciation 38,954 37,172
Deferred taxes 17,975 16,376
Deferred gathering fees (4,440) (4,143)
Gain on sale of assets (573) (3,858)
Other 354 850
Working capital adjustments
Decrease (increase) in accounts
receivable 80,494 (35,702)
Decrease in inventories 1,158 765
Decrease in prepaid expenses
and other current assets,
including deferred taxes 1,353 9,009
Increase (decrease) in accounts
payable (64,623) 4,918
Increase (decrease) in taxes and
other accruals (14,636) 3,874
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 102,894 78,551
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Cash Flows from Investing Activities
Capital expenditures and investments (58,795) (29,018)
Proceeds from asset dispositions 939 6,597
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Net Cash Used for Investing Activities (57,856) (22,421)
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Cash Flows from Financing Activities
Preferred stock dividend (16,077) (16,077)
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Net Cash Used for Financing Activities (16,077) (16,077)
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Increase in Cash and Cash Equivalents 28,961 40,053
Cash and cash equivalents at beginning
of period 79,031 53,800
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Cash and Cash Equivalents at End of Period $107,992 93,853
=================================================================
See Notes to Financial Statements.
4
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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
------------------------
June 30 December 31
1997 1996
------------------------
Natural gas $ - 1,514
Helium 1,027 1,153
Materials, supplies and other 4,233 3,751
- -----------------------------------------------------------------
$5,260 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
------------------------
June 30 December 31
1997 1996
------------------------
Properties, plants and equipment
(at cost) $2,026,480 1,972,524
Less accumulated depreciation and
amortization 1,100,304 1,070,031
- -----------------------------------------------------------------
$ 926,176 902,493
=================================================================
5
Note 4--Income Taxes
The company's effective tax rates for the second quarter and the
first six months of 1997 were 39 and 38 percent, respectively,
compared with 40 and 39 percent for each of the same periods a
year ago.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for tax purposes. The deferred tax balance changed from a
deferred tax asset to a deferred tax liability during the first
six months of 1997 as the company continued to utilize a net
operating loss carryforward and accumulate temporary differences
related to depreciation.
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 Six Months Ended
June 30 June 30
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1997 1996 1997 1996
------------------ -----------------
Operating revenues $168,376 175,137 376,998 344,147
Gas purchases 24,747 30,863 59,431 62,049
Operating expenses 28,350 26,671 57,898 53,379
Selling, general and
administrative expenses 3,239 3,611 6,302 7,684
Interest income 644 322 1,281 592
Interest expense 4,914 6,029 9,551 12,220
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6
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 plastic pipe from Phillips, which
is used in the construction of gathering systems.
The company pays gathering fees to GPM Gas Gathering L.L.C.
(GGG). In the second quarters of 1997 and 1996, net fees paid to
GGG for gathering and compression were $10,737,000 and
$10,490,000, respectively; $8,537,000 and $8,443,000,
respectively, were expensed. For the six-month period ended
June 30, 1997 and 1996, net fees paid were $21,574,000 and
$21,085,000, respectively, and $17,134,000 and $16,942,000,
respectively, were expensed.
Note 7--Cash Flow Information
Cash payments for interest and income taxes for the six-month
periods ended June 30 were as follows:
Thousands of Dollars
---------------------
1997 1996
---------------------
Cash payments
Interest $ 9,677 12,428
Income taxes 21,431 1,452
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Utilization of an alternative minimum tax net operating loss
carryforward from 1995 reduced tax cash payments made during the
first six months of 1996.
7
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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 13.
RESULTS OF OPERATIONS
The company had net income of $21 million and $47 million for the
second quarter and first six months of 1997, respectively,
compared with $26 million and $49 million for the same periods in
1996.
Millions of Dollars
-------------------------------------
Three Months Ended Six Months Ended
June 30 June
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1997 1996 1997 1996
------------------ ----------------
Reported net income $21 26 47 49
Less non-operating items 5 (1) 3 (5)
- -----------------------------------------------------------------
Net operating income $16 27 44 54
=================================================================
Net operating income decreased $11 million and $10 million for
the second quarter and first six months of 1997, respectively,
compared with the same periods in 1996. For the second quarter,
net operating income declined due to lower NGL and residue gas
sales prices, lower residue gas sales volumes, and increased
operating and depreciation expenses, offset somewhat by lower gas
purchase costs and higher NGL sales volumes.
8
For the first six months, net operating income decreased due to
lower residue gas sales volumes and increased gas purchase costs
and operating and depreciation expenses, offset somewhat by
higher residue gas and NGL sales prices and increased NGL sales
volumes. Non-operating items included interest income and
expense, settlement of a dispute with a producer in the second
quarter of 1997, and a gain on the sale of a plant and gathering
system in the second quarter of 1996.
Three Months Ended Six Months Ended
June 30 June 30
Sales, Purchases and --------------------- --------------------
Throughput Statistics 1997 1996 Change 1997 1996 Change
--------------------- --------------------
Natural gas liquids
sales (thousands
of barrels daily) 155 150 3% 152 145 5%
Residue gas sales
(millions of cubic
feet daily) 1,034 1,080 (4) 1,048 1,080 (3)
Average sales prices
Natural gas liquids
(per barrel) $11.48 12.39 (7) 12.88 12.34 4
Residue gas (per
thousand cubic
feet) $ 1.95 2.16 (10) 2.33 2.06 13
Natural gas purchases
(millions of cubic
feet daily) 1,533 1,584 (3) 1,521 1,537 (1)
Raw gas throughput
(millions of cubic
feet daily) 2,000 1,938 3 2,005 1,915 5
- ------------------------------------------------------------------
Revenues
NGL revenues were $161 million and $354 million for the second
quarter and first six months of 1997, respectively, compared with
$169 million and $326 million for the same periods in 1996. NGL
sales prices in the second quarter of 1997 fell below 1996 second
quarter prices; however, prices for the first six months of 1997
remained higher than 1996 levels. NGL sales prices stabilized in
the second quarter of 1997 after declining during the first
quarter of 1997 from a sharp run up in prices during the last
four months of 1996. NGL sales volumes increased in the second
quarter and first six months of 1997 compared with 1996, mainly
due to an acquisition made late in January 1997, and higher NGL
extractions and greater operating consistency at the company's
Linam Ranch plant in New Mexico.
9
Residue gas revenues were $184 million and $441 million in the
second quarter and first six months of 1997, respectively,
compared with $212 million and $405 million for the same periods
in 1996. Residue gas revenue decreased in the second quarter of
1997, compared with the second quarter of 1996, due to lower
residue sales prices and lower residue sales volumes, primarily
resulting from field declines in the Austin Chalk area of south
central Texas. After reaching a 1997 low in March, gas prices
rebounded during the second quarter of 1997 to approximately the
same level as a year ago.
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.
Other revenue increased $7 million and $11 million for the second
quarter and first six months of 1997, respectively, compared with
the same periods in 1996. The increase in the second quarter of
1997 was mainly the result of a settlement of a dispute with a
producer related to gas processing rights to certain leases in
the Texas Panhandle. Second quarter 1996 included a gain on the
sale of a small, non-strategic plant and gathering system in
Oklahoma.
Expenses
Gas purchase costs decreased $25 million for the second quarter
1997 and increased $73 million for the first six months of 1997,
compared with the same periods in 1996. Gas purchase costs
reflect the interaction of the company's gas purchase contracts
with residue gas and NGL sales prices, along with changes in gas
purchase volumes. As a percentage of operating revenue, gas
costs were 73 percent for the second quarter and 75 percent for
the first six months of 1997, compared with 72 percent and
71 percent for the same periods in 1996, respectively. Gas costs
as a percentage of revenues increased partly as a result of low
fuel allowances on gathering agreements on the majority of the
volumes associated with the assets acquired from ANR Pipeline
Company (ANR) in December 1996. To expedite the Federal Energy
Regulatory Commission abandonment approval process, the company
offered default gathering agreements for a maximum term of two
years, at previously regulated rates, to previous shippers on the
former ANR systems.
Operating expenses increased 6 percent and 11 percent for the
second quarter and first six months of 1997, respectively,
compared with the same periods in 1996. The increase for the
first six months was mainly the result of bonus payments under
Phillips' incentive pay programs in excess of previous estimates
10
made in the first quarter, incremental costs associated with
acquisitions, and slightly higher repair and maintenance costs.
In addition, the company transferred the majority of its producer
settlements administrative 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 decreased 7 percent
and 10 percent for the second quarter and first six months of
1997, respectively, compared with the same periods in 1996,
mainly due to the transfer of a majority of the company's
producer settlements administrative functions to its regional
operations in the third quarter of 1996.
When compared with the same periods in 1996, depreciation expense
for both the three- and six-month periods of 1997 increased due
to acquisitions made in December 1996 and January 1997.
Interest expense decreased in the second quarter and first six
months of 1997, primarily due to the company's lower outstanding
loan balances in 1997, compared with 1996.
11
CAPITAL RESOURCES AND LIQUIDITY
The company's cash and cash equivalents balance at June 30, 1997,
was $108 million, $29 million higher than the December 31, 1996,
balance. Operating activities increased cash $103 million in the
first six months of 1997. The decrease in accounts receivable
and offsetting decrease in accounts payable were mainly the
result of the June decline in prices, compared with December 1996
prices.
Cash disbursed for capital expenditures and investments in the
first six months of 1997 was $59 million, compared with
$29 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
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.
Property dispositions in the first six months of 1996 included
the sale of the Lucien plant and system located in Oklahoma.
In July 1997, the capital spending budget allocated to the
company by Phillips was increased from $100 million to
$135 million. The additional capital spending budget will be
mainly directed towards expansion of the company's Spraberry
plant in Midland County, Texas; improving operating efficiencies;
adding new raw gas supplies; and the reactivation of one of the
two processing units at the Dumas plant, which has been idle
since late 1995. The Dumas plant, located in the Panhandle
region, will process raw gas currently being processed by the
company at a third-party processing plant.
The company continues to consider strategic acquisitions and
expansion opportunities within its core operating areas. Future
capital investments will be determined by the company in
coordination with Phillips' capital spending budget.
OUTLOOK
Prices during the remainder of the year are expected to continue
to be impacted by seasonal factors. The company anticipates
increased NGL production volumes during the second half of 1997
due to its continued optimization activities. Operating expenses
are expected to be slightly higher than 1996, mainly due to
acquisitions made by the company.
12
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.
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.
13
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.
14
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual stockholders' meeting on May 13,
1997. A brief description of each proposal and the voting
results follows:
Election of two directors by holders of the company's Series A
9.32% Cumulative Preferred Stock.
For Against & Withheld
------------------------------------
John L. Adams 10,863,618 74,879
Otway B. Denny, Jr. 10,859,627 78,870
Election of five directors by Phillips Petroleum Company, the
sole holder of the company's Common Stock.
E. L. Batchelder 1,000 -
George B. Beitzel 1,000 -
C. L. Bowerman 1,000 -
J. J. Mulva 1,000 -
M. J. Panatier 1,000 -
All directors were elected.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
27 Financial Data Schedule
Reports on From 8-K
- -------------------
During the three months ended June 30, 1997, the company did not
file any reports on Form 8-K.
15
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)
August 7, 1997
16