UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.)
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 October 31, 1997.
PART I. FINANCIAL INFORMATION
- ---------------------------------------------------------------------
Consolidated Statement of Operations Phillips Gas Company
Thousands of Dollars
----------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------
1997 1996 1997 1996
----------------------------------------
Revenues
Natural gas liquids $179,911 196,300 534,158 521,999
Residue gas 211,691 201,136 652,887 606,420
Other 16,389 19,240 64,367 56,017
- ---------------------------------------------------------------------
Total Revenues 407,991 416,676 1,251,412 1,184,436
- ---------------------------------------------------------------------
Costs and Expenses
Gas purchases 298,467 297,530 916,749 842,992
Operating expenses 46,682 43,996 139,476 127,881
Selling, general and
administrative expenses 3,761 2,789 11,243 11,109
Depreciation 18,685 18,149 57,639 55,321
Interest expense 4,850 5,978 14,569 18,200
- ---------------------------------------------------------------------
Total Costs and Expenses 372,445 368,442 1,139,676 1,055,503
- ---------------------------------------------------------------------
Income before income taxes 35,546 48,234 111,736 128,933
Provision for income taxes 13,646 18,972 42,958 50,381
- ---------------------------------------------------------------------
Net Income 21,900 29,262 68,778 78,552
Preferred stock dividend
requirements 8,039 8,039 24,116 24,116
- ---------------------------------------------------------------------
Net Income Applicable
to Common Stock $ 13,861 21,223 44,662 54,436
=====================================================================
See Notes to Financial Statements.
1
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Gas Company
Thousands of Dollars
--------------------------
September 30 December 31
1997 1996
--------------------------
Assets
Cash and cash equivalents $ 112,465 79,031
Accounts receivable
Affiliate 68,793 96,653
Trade (less allowances:
1997--$626; 1996--$905) 109,098 147,598
Inventories 7,863 6,418
Deferred income taxes 4,268 4,007
Prepaid expenses and other current
assets 2,284 2,660
- -----------------------------------------------------------------
Total Current Assets 304,771 336,367
Investments and long-term receivables 9,668 13,629
Properties, plants and equipment (net) 932,071 902,493
Deferred income taxes - 12,090
Deferred gathering fees 35,100 28,497
- -----------------------------------------------------------------
Total $1,281,610 1,293,076
=================================================================
Liabilities
Accounts payable
Affiliate $ 31,459 43,310
Trade 200,543 249,864
Note payable 18,500 18,500
Accrued income and other taxes 15,060 27,316
Other accruals 744 162
- -----------------------------------------------------------------
Total Current Liabilities 266,306 339,152
Long-term debt due to affiliate 310,000 310,000
Other liabilities and deferred credits 8,084 6,372
Deferred income taxes 15,818 -
Deferred gain on sale of assets 17,590 18,402
- -----------------------------------------------------------------
Total Liabilities 617,798 673,926
- -----------------------------------------------------------------
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 175,895 131,233
- -----------------------------------------------------------------
Total Stockholders' Equity 663,812 619,150
- -----------------------------------------------------------------
Total $1,281,610 1,293,076
=================================================================
See Notes to Financial Statements.
2
- -----------------------------------------------------------------
Consolidated Statement of Cash Flows Phillips Gas Company
Thousands of Dollars
--------------------
Nine Months Ended
September 30
--------------------
1997 1996
--------------------
Cash Flows from Operating Activities
Net income $ 68,778 78,552
Adjustments to reconcile net income
to net cash provided by operating
activities
Non-working capital adjustments
Depreciation 57,639 55,321
Deferred taxes 27,908 28,279
Deferred gathering fees (6,603) (6,341)
Gain on sale of assets (940) (4,131)
Other 432 (1,314)
Working capital adjustments
Decrease (increase) in accounts
receivable 66,360 (37,208)
Increase in inventories (1,445) (524)
Decrease in prepaid expenses and
other current assets, including
deferred taxes 115 9,396
Increase (decrease) in accounts
payable (61,172) 10,717
Increase (decrease) in taxes and
other accruals (11,674) 2,694
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 139,398 135,441
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments (85,804) (47,308)
Proceeds from asset dispositions 3,956 7,425
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (81,848) (39,883)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Preferred stock dividend (24,116) (24,116)
Repayment of debt - (60,000)
- -----------------------------------------------------------------
Net Cash Used for Financing Activities (24,116) (84,116)
- -----------------------------------------------------------------
Increase in Cash and Cash Equivalents 33,434 11,442
Cash and cash equivalents at beginning
of period 79,031 53,800
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $112,465 65,242
=================================================================
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
--------------------------
September 30 December 31
1997 1996
--------------------------
Natural gas $2,226 1,514
Helium 1,027 1,153
Materials, supplies and other 4,610 3,751
- -----------------------------------------------------------------
$7,863 6,418
=================================================================
Note 3--Properties, Plants and Equipment
Properties, plants and equipment (net) included the following:
Thousands of Dollars
--------------------------
September 30 December 31
1997 1996
--------------------------
Properties, plants and equipment
(at cost) $2,050,182 1,972,524
Less accumulated depreciation
and amortization 1,118,111 1,070,031
- -----------------------------------------------------------------
$ 932,071 902,493
=================================================================
Note 4--Income Taxes
The company's effective tax rate for the third quarter and the
first nine months of 1997 was 38 percent, compared with
39 percent for each of the same periods a year ago.
4
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
nine months of 1997 as the company utilized a net operating loss
carryforward and accumulated 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 Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
------------------ -----------------
Operating revenues $190,016 200,495 567,014 544,642
Gas purchases 28,816 31,576 88,247 93,625
Operating expenses 27,872 27,658 85,770 81,037
Selling, general and
administrative expenses 3,494 2,301 9,796 9,985
Interest income 643 801 1,924 1,393
Interest expense 4,939 5,950 14,490 18,170
- -----------------------------------------------------------------
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
5
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.
The company pays gathering fees to GPM Gas Gathering L.L.C.
(GGG). In the third quarters of 1997 and 1996, net fees paid to
GGG for gas gathering services were $10,639,000 and $10,618,000,
respectively; $8,476,000 and $8,420,000 were expensed. For the
nine-month periods ended September 30, 1997 and 1996, net fees
paid were $32,213,000 and $31,703,000, respectively; $25,610,000
and $25,362,000 were expensed.
Note 7--Cash Flow Information
Cash payments for interest and income taxes for the nine-month
periods ended September 30 were as follows:
Thousands of Dollars
--------------------
1997 1996
--------------------
Cash payments
Interest $14,664 18,361
Income taxes 23,432 11,473
- -----------------------------------------------------------------
Utilization of an alternative minimum tax net operating loss
carryforward from 1995 reduced tax cash payments made during the
first nine months of 1996.
Note 8--Subsequent Event
On October 30, 1997, the company's Board of Directors authorized
the redemption on December 15, 1997, of its Series A, 9.32%
Cumulative Preferred Stock, PGC's only class of publicly held
stock. The total issue of 13.8 million shares will be redeemed
at par, or $25 per share, plus accrued dividends of $.2006 per
share. PGC has given notice to the New York Stock Exchange of
the redemption, and, as a result of such notice, trading in the
preferred stock will cease as of the close of business Eastern
Standard Time on December 12, 1997, when the transfer books are
closed. The $348 million required for the stock redemption will
be provided by a loan from a subsidiary of Phillips Petroleum
Company to PGC. Phillips owns 100 percent of PGC's common stock
outstanding.
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 11.
RESULTS OF OPERATIONS
The company had net income of $22 million and $69 million for the
third quarter and first nine months of 1997, respectively,
compared with $29 million and $79 million for the same periods in
1996.
Millions of Dollars
-------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
------------------ -----------------
Reported net income $22 29 69 79
Less non-operating items (2) (3) 1 (7)
- -----------------------------------------------------------------
Net operating income $24 32 68 86
=================================================================
Net operating income decreased $8 million and $18 million for the
third quarter and first nine months of 1997, respectively,
compared with the same periods in 1996. In both periods, higher
residue gas sales prices and natural gas liquids (NGL) sales
volumes were more than offset by higher natural gas purchase
costs, lower NGL sales prices, lower residue gas sales volumes,
and higher operating expenses.
7
Non-operating items include interest income and expense,
settlement of a dispute with a producer in the second quarter of
1997, a gain on the sale of a plant and gathering system in the
second quarter of 1996, and severance cost adjustments in the
third quarter of 1996.
Three Months Ended Nine Months Ended
September 30 September 30
Sales, Purchases and --------------------- -------------------
Throughput Statistics 1997 1996 Change 1997 1996 Change
--------------------- -------------------
Natural gas liquids
sales (thousands
of barrels daily) 158 152 4% 154 147 5%
Residue gas sales
(millions of cubic
feet daily) 1,054 1,073 (2) 1,050 1,078 (3)
Average sales prices
Natural gas liquids
(per barrel) $12.39 14.05 (12) 12.71 12.93 (2)
Residue gas (per
thousand cubic
feet) $ 2.18 2.04 7 2.28 2.05 11
Natural gas purchases
(millions of cubic
feet daily) 1,548 1,570 (1) 1,530 1,548 (1)
Raw gas throughput
(millions of cubic
feet daily) 1,973 1,930 2 1,995 1,920 4
- -----------------------------------------------------------------
Revenues
NGL revenues were $180 million and $534 million for the third
quarter and first nine months of 1997, respectively, compared
with $196 million and $522 million for the same periods in 1996.
Average NGL sales prices in the third quarter of 1997 were
12 percent lower than the same period in 1996, but improved
8 percent over second quarter 1997 prices. NGL sales prices for
the first nine months of 1997 were slightly lower than in 1996.
NGL sales volumes increased in the third quarter and first nine
months of 1997 compared with 1996, mainly due to acquisitions and
improved operating consistency.
Residue gas revenues were $212 million and $653 million in the
third quarter and first nine months of 1997, respectively,
compared with $201 million and $606 million for the same periods
in 1996. The higher residue gas revenues resulted from stronger
residue gas sales prices, partially offset by lower residue gas
sales volumes, resulting primarily from field declines in the
Austin Chalk area of south central Texas.
8
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 revenues decreased $3 million for the third quarter 1997 but
increased $8 million for first nine months of 1997, compared with
the same periods in 1996. The decrease in the third quarter was
mainly due to lower by-product revenues. The increase in the
first nine months of 1997 was mainly the result of the settlement
in the second quarter 1997 of a dispute with a producer related
to gas processing rights to certain leases in the Texas
Panhandle. In second quarter 1996, revenues included a gain on
the sale of a small, non-strategic plant and gathering system in
Oklahoma.
Expenses
Gas purchase costs increased $1 million and $74 million for the
third quarter and first nine months of 1997, respectively,
compared with the same periods in 1996. Gas purchase costs
reflects 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 third quarter and 74 percent for
the first nine months of 1997, respectively, compared with
72 percent for each of the same periods in 1996.
Operating expenses increased 6 percent and 9 percent for the
third quarter and first nine months of 1997, respectively,
compared with the same periods in 1996. The increase for the
first nine months was mainly the result of bonus payments made in
the first quarter of 1997 under Phillips' incentive pay programs
in excess of previous estimates, incremental costs associated
with acquisitions, and 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 increased $1 million
in the third quarter 1997, compared with 1996. The third quarter
of 1996 benefited from a $2 million severance accrual reversal
due to the company being able to place more personnel with other
Phillips business units than had previously been anticipated.
Excluding the severance accrual reversal, expenses decreased
$2 million during the first nine months of 1997, compared with
1996, mainly due to the transfer of a majority of the company's
producer settlements administrative functions to its regional
operations during the third quarter of 1996.
9
When compared with the same periods in 1996, depreciation expense
for both the three- and nine-month periods of 1997 increased due
to acquisitions made in December 1996 and January 1997.
Interest expense decreased in the third quarter and first nine
months of 1997, primarily resulting from the company's lower
outstanding loan balances in 1997, compared with 1996.
CAPITAL RESOURCES AND LIQUIDITY
The company's cash and cash equivalents balance at September 30,
1997, was $112 million, $33 million higher than the December 31,
1996, balance. Operating activities increased cash $139 million
in the first nine months of 1997. The decrease in accounts
receivable and offsetting decrease in accounts payable were
mainly the result of the September decline in prices, compared
with December 1996 prices.
Cash disbursed for capital expenditures and investments in the
first nine months of 1997, was $86 million, compared with
$47 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 nine months of 1997 included
the divestiture of certain gas gathering assets as required by
the Federal Trade Commission related to the December 1996
purchase of gas gathering assets from ANR. The first nine 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 from 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 Spraberry plant
expansion and the Dumas plant restart are expected to be
completed in the fourth quarter of 1997.
10
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.
On October 30, 1997, the company's Board of Directors authorized
the redemption of its Series A, 9.32% Cumulative Preferred Stock
on December 15, 1997. The total issue of 13.8 million shares
will be redeemed at par, or $25 per share, plus accrued dividends
of $.2006 per share.
The company has given notice of the redemption to the New York
Stock Exchange, and as a result of such notice, trading in the
preferred stock will cease as of the close of business Eastern
Standard Time on December 12, 1997, when the transfer books are
closed. Upon redemption, former holders of the preferred stock
will no longer have rights as stockholders other than the right
to receive redemption proceeds. The preferred stock will cease
to be outstanding, and the company will no longer be a reporting
company under the Securities Exchange Act of 1934. The stock
redemption will be funded through additional borrowings from
Phillips.
OUTLOOK
Prices are expected to remain volatile during the fourth quarter
of 1997 due to seasonal factors. Fourth quarter 1997 operating
expenses are expected to be slightly higher than the same period
in 1996, in part due to acquisitions.
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.
11
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.
12
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
27 Financial Data Schedule
Reports on From 8-K
- -------------------
During the three months ended September 30, 1997, the company did
not file any reports on Form 8-K.
13
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)
November 6, 1997
14