UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		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: 0-9827

PHI, Inc.

(Exact name of registrant as specified in its charter)

Louisiana		72-0395707
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2001 SE Evangeline Thruway
Lafayette, Louisiana		70508
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (337) 235-2452

     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: þ No: o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: o No: o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

     

Large accelerated filer: o

Accelerated filer: þ

Non-accelerated filer: o (Do not check if a smaller reporting company)

Smaller reporting company: o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No: þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at October 29, 2010
Voting Common Stock		2,852,616 shares
Non-Voting Common Stock		12,458,992 shares

 

 

PHI, INC.

Index — Form 10-Q

Part I — Financial Information
Item 1.		Financial Statements — Unaudited
		Condensed Consolidated Balance Sheets — September 30, 2010 and December 31, 2009			3
		Condensed Consolidated Statements of Operations — Quarter and Nine months ended September 30, 2010 and 2009			4
		Condensed Consolidated Statements of Shareholders' Equity — Nine months ended September 30, 2010 and 2009			5
		Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2010 and 2009			6
		Notes to Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			36
Item 4.		Controls and Procedures			36
Part II — Other Information
Item 1.		Legal Proceedings			37
Item 1.A.		Risk Factors			37
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3.		Defaults Upon Senior Securities			38
Item 4.		(Removed and Reserved)			38
Item 5.		Other Information			38
Item 6.		Exhibits			39
		Signatures			40
EX-4.3
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1.		FINANCIAL STATEMENTS

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)

		September 30,				December 31,
		2010				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	31,543			$	2,501
Short-term investments			153,588				75,138
Accounts receivable — net
Trade			95,702				90,518
Other			6,352				3,885
Inventories of spare parts — net			59,356				61,501
Other current assets			14,451				11,018
Income taxes receivable			473				740
Total current assets			361,465				245,301
Other			37,643				11,669
Property and equipment — net			546,183				548,536
Total assets		$	945,291			$	805,506
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of Senior Notes due 2013		$	10,510			$	—
Accounts payable			19,022				14,935
Accrued liabilities			32,508				23,342
Total current liabilities			62,040				38,277
Long-term debt			318,287				218,305
Deferred income taxes			81,467				73,409
Other long-term liabilities			9,414				10,067
Total liabilities			409,168				340,058
Commitments and contingencies (Note 3)
Shareholders’ Equity:
Voting common stock			285				285
Non-voting common stock			1,246				1,246
Additional paid-in capital			291,403				291,403
Accumulated other comprehensive loss			(20	)			(13	)
Retained earnings			181,169				172,527
Total shareholders’ equity			474,083				465,448
Total liabilities and shareholders’ equity		$	945,291			$	805,506

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of dollars and shares, except per share data)
(Unaudited)

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Operating revenues, net		$	135,669			$	124,183			$	396,875			$	364,456
Gain on dispositions of assets, net			98				7				221				172
Other, principally interest income			22				53				58				181
			135,789				124,243				397,154				364,809
Expenses:
Direct expenses			115,812				100,972				336,120				308,011
Selling, general and administrative expenses			7,688				7,706				22,091				23,748
Interest expense			4,208				3,976				12,387				11,894
Loss on debt restructuring			9,521				—				9,521				—
			137,229				112,654				380,119				343,653
(Loss) earnings before income taxes			(1,440	)			11,589				17,035				21,156
Income tax expense			1,003				4,636				8,393				8,462
Net (loss) earnings		$	(2,443	)		$	6,953			$	8,642			$	12,694
Weighted average shares outstanding:
Basic			15,312				15,312				15,312				15,306
Diluted			15,312				15,312				15,312				15,306
Net (loss) earnings per share:
Basic		$	(0.16	)		$	0.45			$	0.56			$	0.83
Diluted		$	(0.16	)		$	0.45			$	0.56			$	0.83

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Thousands of dollars and shares)
(Unaudited)

																						Accumulated								Total
		Voting								Non-Voting								Additional				Other Com-								Share-
		Common Stock								Common Stock								Paid-in				prehensive				Retained				Holders’
		Shares				Amount				Shares				Amount				Capital				Income (Loss)				Earnings				Equity
Balance at December 31, 2009			2,853			$	285				12,459			$	1,246			$	291,403			$	(13	)		$	172,527			$	465,448
Net earnings			—				—				—				—				—				—				8,642				8,642
Changes in pension plan assets and benefit obligations			—				—				—				—				—				(7	)			—				(7	)
Total comprehensive income, net of income taxes																															8,635
Balance at September 30, 2010			2,853			$	285				12,459			$	1,246			$	291,403			$	(20	)		$	181,169			$	474,083

																						Accumulated								Total
		Voting								Non-Voting								Additional				Other Com-								Share-
		Common Stock								Common Stock								Paid-in				prehensive				Retained				Holders’
		Shares				Amount				Shares				Amount				Capital				Income (Loss)				Earnings				Equity
Balance at December 31, 2008			2,853			$	285				12,449			$	1,245			$	291,262			$	45			$	159,559			$	452,396
Net earnings			—				—				—				—				—				—				12,694				12,694
Changes in pension plan assets and benefit obligations			—				—				—				—				—				(60	)			—				(60	)
Total comprehensive income, net of income taxes																															12,634
Stock options exercised			—				—				10				1				141				—				—				142
Balance at September 30, 2009			2,853			$	285				12,459			$	1,246			$	291,403			$	(15	)		$	172,253			$	465,172

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)

		Nine Months Ended
		September 30,
		2010				2009
Operating activities:
Net earnings		$	8,642			$	12,694
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			20,587				20,778
Deferred income taxes			8,058				8,040
Gain on asset dispositions, net			(221	)			(172	)
Other			747				697
Loss on debt restructuring			9,521				—
Changes in operating assets and liabilities			4,169				(1,581	)
Net cash provided by operating activities			51,503				40,456
Investing activities:
Purchase of property and equipment			(39,739	)			(31,777	)
Proceeds from asset dispositions			1,171				8,897
Purchase of short-term investments			(102,710	)			(46,490	)
Proceeds from sale of short-term investments			24,260				14,687
(Payment) refund on deposits on aircraft			(3,660	)			9,600
Net cash used in investing activities			(120,678	)			(45,083	)
Financing activities:
Proceeds from issuance of Senior Notes due 2018			300,000				—
Premium and costs to retire debt early			(7,293	)			—
Repayment of Senior Notes due 2013			(189,490	)			—
Debt issuance costs			(4,982	)			—
Payments on line of credit			(37,518	)			(3,000	)
Proceeds from line of credit			37,500				10,350
Net cash provided by financing activities			98,217				7,350
Increase in cash and cash equivalents			29,042				2,723
Cash and cash equivalents, beginning of period			2,501				1,159
Cash and cash equivalents, end of period		$	31,543			$	3,882
Supplemental Disclosures of Cash Flow Information
Interest paid		$	13,863			$	7,600
Income taxes paid		$	614			$	770
Accrued payables related to purchase of property and equipment		$	1,065			$	273

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

under the independent provider model and, to a lesser extent, under the hospital-based model. Under the independent provider model, we have no contracts and no fixed revenue stream, and compete for transport referrals on a daily basis with other independent operators in the area. Under the hospital-based model, we contract directly with the hospital to provide their transportation services, with the contracts typically awarded on a competitive bid basis. For the quarters ended September 30, 2010 and 2009, approximately 33% and 35% of our total operating revenues were generated by our Air Medical operations, respectively. For the nine months ended September 30, 2010 and 2009, approximately 30% and 34% of our total operating revenues were generated by our Air Medical operations, respectively.

As an independent provider, we bill for our services on the basis of a flat rate plus a variable charge per loaded mile, regardless of aircraft model. Revenues are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care when the services are provided. Contractual allowances and uncompensated care are estimated based on historical collection experience by payor category. The main payor categories are Medicaid, Medicare, Insurance, and Self-Pay. Payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute a historical payment analysis of accounts paid in full, by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. The allowance for contractual discounts was $42.2 million and $37.5 million as of September 30, 2010 and September 30, 2009, respectively. The allowance for uncompensated care was $36.0 million and $27.6 million as of September 30, 2010 and September 30, 2009, respectively.

Provisions for contractual discounts and estimated uncompensated care for Air Medical operations as a percentage of gross billings are as follows:

		Revenue
																		Twelve Months
		Quarter Ended								Nine months Ended								Ended
		September 30,								September 30,								December 31,
		2010				2009				2010				2009				2009
Gross billings			100	%			100	%			100	%			100	%			100	%
Provision for contractual discounts			50	%			51	%			52	%			53	%			52	%
Provision for uncompensated care			13	%			12	%			11	%			10	%			11	%

Net reimbursement per transport from commercial payors generally increases when a rate increase is implemented. Net reimbursement from certain commercial payors, as well as Medicare and Medicaid, do not increase proportionately with rate increases.

Net revenue attributable to Medicaid, Medicare, Insurance and Self Pay as a percentage of net Air Medical revenues are as follows:

		Quarter Ended								Nine months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Medicaid			15	%			10	%			16	%			12	%
Medicare			22	%			18	%			21	%			18	%
Insurance			62	%			70	%			62	%			67	%
Self-Pay			1	%			2	%			1	%			3	%

We also have a limited number of contracts with hospitals under which we receive a fixed monthly rate for aircraft availability and an hourly rate for flight time. Those contracts generated approximately 14% and 15% of the segment’s revenues for the quarters ended September 30, 2010 and 2009, respectively, and approximately 16% and 15% of the segment’s revenues for the nine months ended September 30, 2010 and 2009, respectively.

Technical Services Segment. The Technical Services segment provides helicopter repair and overhaul services for customer owned aircraft. Costs associated with these services are primarily labor, and customers are generally billed at a percentage above cost. We currently operate five aircraft for the National Science Foundation in Antarctica under this segment.

Approximately 1% of our total operating revenues for the quarters ended September 30, 2010 and September, 30, 2009 were generated by our Technical Services operations. Approximately 2% of our total operating revenues were generated by our Technical Services operations for the nine months ended September 30, 2010 and 2009.

Summarized financial information concerning our reportable operating segments for the quarters and nine months ended September 30, 2010 and 2009 is as follows:

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Thousands of dollars)								(Thousands of dollars)
Segment operating revenues
Oil and Gas		$	89,797			$	79,216			$	269,471			$	233,011
Air Medical			44,254				43,321				120,924				125,042
Technical Services			1,618				1,646				6,480				6,403
Total operating revenues			135,669				124,183				396,875				364,456
Segment direct expenses (1)
Oil and Gas			75,679				65,690				221,777				191,937
Air Medical			38,689				34,023				108,700				111,521
Technical Services			1,444				1,259				5,643				4,553
Total direct expenses			115,812				100,972				336,120				308,011
Segment selling, general and administrative expenses
Oil and Gas			139				285				563				991
Air Medical			954				1,795				3,253				4,903
Technical Services			5				24				19				41
Total selling, general and administrative expenses			1,098				2,104				3,835				5,935
Total direct and selling, general and administrative expenses			116,910				103,076				339,955				313,946
Net segment profit
Oil and Gas			13,979				13,241				47,131				40,083
Air Medical			4,611				7,503				8,971				8,618
Technical Services			169				363				818				1,809
Total			18,759				21,107				56,920				50,510
Other, net (2)			120				60				279				353
Unallocated selling, general and administrative costs (1)			(6,590	)			(5,602	)			(18,256	)			(17,813	)
Interest expense			(4,208	)			(3,976	)			(12,387	)			(11,894	)
Loss on debt restructuring			(9,521	)			—				(9,521	)			—
(Loss) earnings before income taxes		$	(1,440	)		$	11,589			$	17,035			$	21,156

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Oil and Gas		$	4,712			$	4,142			$	13,278			$	12,492
Air Medical			1,990				1,985				5,901				5,939
Technical Services			8				14				144				125
Total		$	6,710			$	6,141			$	19,323			$	18,556
Unallocated SG&A		$	435			$	736			$	1,264			$	2,222

3. Commitments and Contingencies

Environmental Matters — We have recorded an aggregate estimated probable liability of $0.2 million as of September 30, 2010 and December 31, 2009 for environmental response costs. The Company has conducted environmental surveys of its former Lafayette facility located at the Lafayette Regional Airport, which it vacated in 2001, and has determined that limited soil and groundwater contamination exists at the facility. The Company has installed groundwater monitoring wells at the facility and periodically monitors and reports on the contamination to the Louisiana Department of Environmental Quality (“LDEQ”). The Company previously submitted a Risk Evaluation/Corrective Action Plan (“RECAP”) Standard Site Assessment Report to the LDEQ fully delineating the extent and type of contamination and updated the Report to include additional analytical data in April 2006. LDEQ reviewed the Assessment Report and requested an Action Plan from the Company. That Plan has been approved by LDEQ and the estimated resulting cost of remediation has been determined to be just over $0.1 million that will likely be incurred over the next two years. Based upon the May 2003 Site Assessment Report, the April 2006 update and ongoing monitoring, the company believes the ultimate remediation costs for the former Lafayette facility will not be material to its consolidated financial position, results of operations, or cash flows.

Legal Matters — The Company is named as a defendant in various legal actions that have arisen in the ordinary course of business and have not been finally adjudicated. In the opinion of management, the amount of the ultimate liability with respect to these actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

As previously reported, the Company has been involved in Federal Court litigation in the Western District of Louisiana and the Fifth Circuit Court of Appeals with the Office and Professional Employees International Union (“OPEIU”), the union representing the Company’s domestic pilots. This litigation involves claims of bad faith bargaining, compensation of striking pilots both at the time of the strike and upon their return to work under both the Railway Labor Act (“RLA”) and Louisiana state law, and the terms of employment for the Company’s pilots since the strike ended including non-payment of retention bonuses. After approximately two years of bargaining between the Company and OPEIU for a second collective bargaining agreement, including negotiations mediated by the National Mediation Board, both parties entered a self-help period as defined by the applicable labor law, the RLA. At that time the pilots commenced a strike in September 2006 and immediately prior to that strike the Company implemented its own terms and conditions of employment for the pilots. The strike ended in November 2006 and a court-approved return to work process began in January 2007 for those pilots who had not already returned to work or left the Company’s employment. This process was essentially completed in April 2007. The Company’s pilots continue to work under the terms and conditions of employment determined by the Company since the strike began. By Order dated July 9, 2010, the Court dismissed both the Company’s and OPEIU’s claims that the other had violated the RLA by bargaining in bad faith before exercising self-help. By Order dated July 30, 2010, the Court dismissed all claims that the Company violated the RLA in the manner in which it returned pilots to work following the strike. Also, the Court dismissed all but claims by 47 pilots under Louisiana state law. On August 27, 2010, the OPEIU and the individual pilot plaintiffs filed a notice of appeal with the Fifth Circuit Court of Appeals. Then, by Order entered September 27, 2010, the district court dismissed the Louisiana-law claims of the remaining 47 individual pilots. On October 22, 2010, the unions and the individual pilots filed a second notice of appeal to the Fifth Circuit Court of Appeals, by which they appeal the district court’s dismissal of all their RLA and Louisiana-law wage payment claims against PHI. On November 5, 2010, PHI filed a cross-appeal of the district court’s dismissal of PHI’s bad-faith bargaining claim against the unions. On December 31, 2009, the OPEIU filed another case against the Company in the Western District of Louisiana in which the OPEIU asserts that its acceptance in 2009 of the terms and conditions of employment for the Company’s pilots initially implemented by the Company prior to the strike has created a binding collective bargaining agreement and that the Company has inappropriately made unilateral revisions to those terms including failing to pay a retention bonus. That case has been stayed by the Court pending resolution of the other

litigation between the parties. Management does not expect the outcome of this litigation to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Superior Offshore International Inc. v. Bristow Group Inc., ERA Helicopters, LLC, Seacor Holdings Inc., ERA Group Inc., ERA Aviation, Inc., and PHI, Inc., Civil Action No. 1:09-cv-00438 on the docket of the United States District Court for the District of Delaware. This purported class action was filed on June 12, 2009, on behalf of a class defined to include all direct purchasers of offshore helicopter services in the Gulf of Mexico from the defendants at any time from January 1, 2001 through December 31, 2005. The suit alleged that the defendants acted jointly to fix, maintain, or stabilize prices for offshore helicopter services during the above time frame in violation of the federal antitrust laws. The plaintiff sought unspecified treble damages, injunctive relief, costs, and attorneys’ fees. On September 14, 2010, the Court granted defendants’ motion to dismiss (filed on September 4, 2009) and dismissed the complaint. Plaintiff’s motions for reconsideration and leave to amend its complaint are pending.

Operating Leases — We lease certain aircraft, facilities, and equipment used in our operations. The related lease agreements, which include both non-cancelable and month-to-month terms, generally provide for fixed monthly rentals, and certain real estate leases also include renewal options. We generally pay all insurance, taxes, and maintenance expenses associated with these leases. Some of the facility leases contain renewal options. Aircraft leases contain purchase options exercisable at certain dates in the lease agreements.

At September 30, 2010, we had approximately $207.0 million in aggregate commitments under operating leases of which approximately $8.2 million is payable through December 31, 2010, and a total of $33.2 million is payable over the twelve months ending September 30, 2011. The total lease commitments include $190.7 million for aircraft and $16.3 million for facility lease commitments, primarily for our facilities in Lafayette, Louisiana.

As of September 30, 2010, we had options to purchase aircraft under lease becoming exercisable in 2010 through 2014 for the following aggregate purchase prices, respectively: $25.3 million, $54.3 million, $51.0 million, $38.8 million and $114.4 million. Subject to market conditions, we intend to exercise these options as they become exercisable, and intend to finance some of these acquisition costs with the net proceeds of our 8.625% Senior Notes. On October 1, 2010, we exercised the options exercisable in 2010, acquiring two heavy aircraft for $25.3 million, funded with the proceeds of the 8.625% Senior Notes.

In the second quarter of 2010, we executed a new contract with a customer to provide helicopter transportation services in the Gulf of Mexico through mid-2016. The contract covers 11 aircraft, and requires us to replace, between June 2011 and January 2013 certain of the aircraft currently on contract with 10 Augusta Westland AW139 medium aircraft. In connection with this new contract, we have executed a contract to acquire 10 new AW139s, which are scheduled for delivery commencing in late 2010 and continuing through late 2012, and have an aggregate acquisition cost of approximately $127.0 million. We traded in two aircraft in exchange for a credit of approximately $20.3 million towards these acquisition costs. We may finance some of these acquisition costs with net proceeds from our 8.625% Senior Notes, and expect to finance the balance through some combination of cash on hand or cash flows generated from operations, operating leases and borrowings under our revolving credit facility.

4. Long-term Debt

As of September 30, 2010, our total long-term indebtedness was $318.3 million, consisting of $300 million of our 8.625% Senior Notes due 2018 and $18.3 million borrowed under our revolving credit facility due 2012.

Financing activities include the issuance of $300 million of 8.625% Senior Notes on September 23, 2010, that mature in 2018. Net proceeds of $295.5 million were used to repurchase $189.5 million of our $200 million outstanding 7.125% Senior Notes due 2013 pursuant to a tender offer that also settled on September 23, 2010. Our total cost to repurchase those notes was $9.5 million, including the tender offer premium of $7.6 million and $1.9 million of unamortized issuance costs. We called for redemption on October 25, 2010 the remaining $10.5 million of 7.125% Senior Notes outstanding, at a redemption price of 103.563% of their face amount plus accrued interest.

Mr. Al A. Gonsoulin, our Chairman and CEO and the Matzke Family Trust, of which Richard Matzke, one of our directors, is trustee, purchased $2 million and $1 million of the Notes respectively.

The 8.625% Senior Notes are unconditionally guaranteed on a senior basis by our domestic subsidiaries, and are general, unsecured obligations of ours and the subsidiary guarantors. We have the option to redeem some or all of the notes at any time on or after October 15, 2014 at specified redemption prices, and prior to that time pursuant to certain make-whole provisions.

The 8.625% Senior Notes contain restrictive covenants, including limitations on incurring indebtedness, creating liens, selling assets and entering into certain transactions with affiliates. The covenants limit our ability to pay cash dividends on common stock, repurchase or redeem common or preferred equity, prepay subordinated debt and make certain investments. There are no restrictions on dividends from a subsidiary to the parent company, nor any restrictions on dividends from the parent company to a subsidiary. Upon the occurrence of a “Change in Control” (as defined in the indenture governing the notes), each holder of the notes will have the right to require us purchase that holder’s notes for a cash price equal to 101% of their principal amount. Upon the occurrence of an “Event of Default” (as defined in the indenture), the trustee or the holders of the notes may declare all of the outstanding notes to be due and payable immediately. We were in compliance with the covenants applicable to the notes as of September 30, 2010.

In connection with the issuance of the 8.625% Senior Notes, we have entered into a registration rights agreement, pursuant to which we have agreed to offer to exchange the notes for a new issue of substantially identical notes registered under the Securities Act of 1933.

Our senior secured revolving credit facility permits borrowings up to $75 million and contains a borrowing base of 80% of eligible receivables and 50% of the value of parts. The interest rate is the prime rate plus 100 basis points. On September 13, 2010, we entered into an amendment to the revolving credit facility pursuant to which the term was extended for one year from September 1, 2011 to September 1, 2012 and the minimum required consolidated net worth covenant was increased to $450 million from $425 million. We may prepay the revolving credit facility at any time in whole or in part without premium or penalty. All obligations under the revolving credit facility are secured by a perfected first priority security interest in all of our eligible receivables and parts, and are guaranteed by certain of our domestic subsidiaries.

As of September 30, 2010 and December 31, 2009, we had $18.3 million in borrowings, and $5.5 million in letters of credit outstanding, under the facility. During the nine months ended September 30, 2010 and 2009, and the year ended December 31, 2009, the weighted average effective interest rate on amounts borrowed under the facility was 4.25%, 3.36% and 3.58%, respectively.

The credit agreement includes financial covenants related to working capital, funded debt to consolidated net worth, and consolidated net worth, and other covenants including restrictions on additional debt, liens and a change of control. Events of default include a change of control, a default in any other material credit agreement, including the 8.625% Senior Notes, and customary events of default. As of September 30, 2010, we were in compliance with all of the covenants under the revolving credit facility.

We reviewed interest expense for the quarters and nine months ended September 30, 2010 and 2009 that could be capitalized for certain projects and any such amounts were immaterial.

Our $300 million outstanding 8.625% Senior Notes due 2018 bear interest at a fixed rate of 8.625% and therefore changes in market interest rates do not affect our interest payment obligations on the notes. The fair market value of our 8.625% Senior Notes will vary as changes occur to general market interest rates, the remaining maturity of the notes, and our credit worthiness. At September 30, 2010, the market value of the notes was approximately $291.8 million, based on quoted market indications.

5. Valuation Accounts

We have established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, current market conditions, and other information. The allowance for doubtful accounts was approximately $0.1 million at September 30, 2010 and December 31, 2009.

The proceeds from the issuance of the 8.625% Senior Notes will be used to purchase aircraft. Due to the increase in accelerated tax depreciation from the purchased aircraft, the net operating loss for tax purposes will increase in future years. Because of the net operating loss increases, certain foreign tax credits and certain net operating losses available in three states will not be used and will expire due to the time limit on the carry-forward of those credits. This resulted in a charge to tax expense of $1.5 million in the quarter.

Revenues related to emergency flights generated by the Company’s Air Medical segment are recorded net of contractual allowances under agreements with third party payors and uncompensated care when the services are provided. The allowance for contractual discounts was $42.2 million and $32.1 million as of September 30, 2010 and December 31, 2009, respectively. The allowance for uncompensated care was $36.0 million and $28.1 million as of September 30, 2010 and December 31, 2009, respectively.

The allowance for contractual discounts and estimated uncompensated care as a percentage of gross accounts receivable are as follows:

		September 30,				December 31,
		2010				2009
Gross Accounts Receivable			100	%			100	%
Allowance for Contractual Discounts			38	%			34	%
Allowance for Uncompensated Care			32	%			30	%

We have also established valuation reserves related to obsolete and excess inventory. The inventory valuation reserves were $11.6 million and $9.2 million at September 30, 2010 and December 31, 2009, respectively.

6. Employees

Employee Incentive Compensation — Pursuant to our incentive compensation plans, we accrued $1.0 million and $2.3 million for the quarter and nine months ended September 30, 2010. For the quarter ended September 30, 2009, we did not accrue incentive compensation expense. For the nine months ended September 30, 2009, we accrued $0.5 million.

We also have a Safety Incentive Plan related to Occupational Safety and Health Administration recordable incidents, for which we expensed $0.2 million and $0.5 million for the quarter and nine months ended September 30, 2010. We expensed $0.2 million for the quarter ended September 30, 2009 and $0.4 million for the nine months ended September 30, 2009.

On November 5, 2010, the Compensation Committee of the Board of Directors of PHI, Inc. (the “Company”) granted retention awards in the form of restricted stock units under the Company’s Amended and Restated 1995 Incentive Compensation Plan to certain officers and senior managers. The restricted stock units will vest and be payable in non-voting common stock of the Company on January 1, 2013, if the officer continues to be employed by the Company on that date. Vesting will be accelerated upon death, disability, retirement at age 65 or later or upon a change of control of the Company. A total of 162,732 restricted stock units were granted to twelve officers and senior managers with a three-year vesting period.

7. Fair Value Measurements

ASC 820, “Fair Value Measurements and Disclosures”, applies to all assets and liabilities that are being measured and reported on a fair value basis. ASC 820 establishes a framework for measuring fair value in Generally Accepted Accounting Principles, and expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The following table summarizes the valuation of our short-term investments and financial instruments by the above ASC 820 pricing levels as of the valuation dates listed:

		September 30, 2010				December 31, 2009
		Quoted prices in				Quoted prices in
		active markets for				active markets for
		Identical Assets				Identical Assets
		(Level 1)				(Level 1)
		(Thousands of dollars)
Short-term investments		$	153,588			$	75,138
Investments included in other assets			3,419				4,239
Total		$	157,007			$	79,377

We hold our short-term investments in a money market fund consisting mainly of government backed securities, which is classified as a short-term investment. In accordance with ASC 320, “Investments-Debt and Equity Securities,” these short-term investments are classified as available for sale. We have not recorded any unrealized gains or losses associated with short-term investments as the carrying value approximates fair value at September 30, 2010 and December 31, 2009. Investments included in other assets consist mainly of investment funds that are highly liquid and diversified. These investments are amounts related to the liability for the Officers’ Deferred Compensation Plan.

8. Recent Accounting Pronouncements

The FASB issued authoritative accounting guidance that became effective in the first quarter 2010 that revises the manner in which entities evaluate whether consolidation is required for variable interest entities (“VIE”). Under the revised guidance, the primary beneficiary of a VIE is the entity that has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and has the obligation to absorb losses or has the right to residual returns that would potentially be significant to the entity. In conjunction with the adoption of the new guidance, the Company has reviewed various lease arrangements and other agreements and has determined that these do not represent a variable interest. The entities through which leases are executed do not represent VIEs.

9. Shareholders’ Equity

We had an average of 15.3 million common shares outstanding for the quarters and nine months ended September 30, 2010 and 2009.

10. Condensed Consolidating Financial Information

Our 8.625% Senior Notes are fully and unconditionally guaranteed on a joint and several, senior basis by all of our domestic subsidiaries. All of our domestic subsidiaries are 100% owned.

The following supplemental condensed financial information sets forth, on a consolidated basis, the balance sheet, statement of operations, and statement of cash flows information for PHI, Inc. (“Parent Company Only”) and the guarantor subsidiaries. The eliminating entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenues and expenses. The condensed consolidating financial statements have been prepared on the same basis as the consolidated financial statements of PHI, Inc. The equity method is followed by the parent company within these financials.

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
(Unaudited)

		September 30, 2010
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	30,856			$	687			$	—			$	31,543
Short-term investments			153,588				—				—				153,588
Accounts receivable — net			89,220				12,834				—				102,054
Intercompany receivable			—				89,872				(89,872	)			—
Inventories of spare parts — net			59,356				—				—				59,356
Other current assets			14,441				10				—				14,451
Income taxes receivable			473				—				—				473
Total current assets			347,934				103,403				(89,872	)			361,465
Investment in subsidiaries			75,075				—				(75,075	)			—
Other assets			37,286				357				—				37,643
Property and equipment — net			534,921				11,262				—				546,183
Total assets		$	995,216			$	115,022			$	(164,947	)		$	945,291
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of Senior Notes due 2013		$	10,510			$	—			$	—			$	10,510
Accounts payable			15,687				3,335				—				19,022
Accrued liabilities			15,564				16,944				—				32,508
Intercompany payable			89,872				—				(89,872	)			—
Total current liabilities			131,633				20,279				(89,872	)			62,040
Long-term debt			318,287				—				—				318,287
Deferred income taxes and other long-term liabilities			71,213				19,668				—				90,881
Shareholders’ Equity:
Common stock and paid-in capital			292,934				2,674				(2,674	)			292,934
Accumulated other comprehensive loss			(20	)			—				—				(20	)
Retained earnings			181,169				72,401				(72,401	)			181,169
Total shareholders’ equity			474,083				75,075				(75,075	)			474,083
Total liabilities and shareholders’ equity		$	995,216			$	115,022			$	(164,947	)		$	945,291

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
(Unaudited)

		December 31, 2009
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	1,678			$	823			$	—			$	2,501
Short-term investments			75,138				—				—				75,138
Accounts receivable — net			83,247				11,156				—				94,403
Intercompany receivable			—				71,484				(71,484	)			—
Inventories of spare parts — net			61,501				—				—				61,501
Other current assets			11,001				17				—				11,018
Income taxes receivable			740				—				—				740
Total current assets			233,305				83,480				(71,484	)			245,301
Investment in subsidiaries			71,291				—				(71,291	)			—
Other assets			11,549				120				—				11,669
Property and equipment, net			535,539				12,997				—				548,536
Total assets		$	851,684			$	96,597			$	(142,775	)		$	805,506
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	13,746			$	1,189			$	—			$	14,935
Accrued liabilities			19,028				4,314				—				23,342
Intercompany payable			71,484				—				(71,484	)			—
Total current liabilities			104,258				5,503				(71,484	)			38,277
Long-term debt			218,305				—				—				218,305
Deferred income taxes and other long-term liabilities			63,673				19,803				—				83,476
Shareholders’ Equity:
Common stock and paid-in capital			292,934				2,674				(2,674	)			292,934
Accumulated other comprehensive loss			(13	)			—				—				(13	)
Retained earnings			172,527				68,617				(68,617	)			172,527
Total shareholders’ equity			465,448				71,291				(71,291	)			465,448
Total liabilities and shareholders’ equity		$	851,684			$	96,597			$	(142,775	)		$	805,506

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)

		For the quarter ended September 30, 2010
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
Operating revenues, net		$	120,381			$	15,288			$	—			$	135,669
Management fees			611				—				(611	)			—
Gain on dispositions of assets, net			98				—				—				98
Other, principally interest income			22				—				—				22
			121,112				15,288				(611	)			135,789
Expenses:
Direct expenses			102,934				12,878				—				115,812
Management fees			—				611				(611	)			—
Selling, general and administrative expenses			7,371				317				—				7,688
Equity in net income of consolidated subsidiaries			(889	)			—				889				—
Interest expense			4,208				—				—				4,208
Loss on debt restructuring			9,521				—				—				9,521
			123,145				13,806				278				137,229
(Loss) earnings before income taxes			(2,033	)			1,482				(889	)			(1,440	)
Income tax expense			410				593				—				1,003
Net (loss) earnings		$	(2,443	)		$	889			$	(889	)		$	(2,443	)

		For the quarter ended September 30, 2009
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
Operating revenues, net		$	109,088			$	15,095			$	—			$	124,183
Management fees			603				—				(603	)			—
Gain on dispositions of assets, net			7				—				—				7
Other, principally interest income			53				—				—				53
			109,751				15,095				(603	)			124,243
Expenses:
Direct expenses			88,393				12,579				—				100,972
Management fees			—				603				(603	)			—
Selling, general and administrative expenses			7,193				513				—				7,706
Equity in net income of consolidated subsidiaries			(840	)			—				840				—
Interest expense			3,976				—				—				3,976
			98,722				13,695				237				112,654
Earnings before income taxes			11,029				1,400				(840	)			11,589
Income tax expense			4,076				560				—				4,636
Net earnings		$	6,953			$	840			$	(840	)		$	6,953

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)

		For the nine months ended September 30, 2010
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
Operating revenues, net		$	347,873			$	49,002			$	—			$	396,875
Management fees			1,960				—				(1,960	)			—
Gain on dispositions of assets, net			221				—				—				221
Other, principally interest income			58				—				—				58
			350,112				49,002				(1,960	)			397,154
Expenses:
Direct expenses			296,468				39,652				—				336,120
Management fees			—				1,960				(1,960	)			—
Selling, general and administrative expenses			21,008				1,083				—				22,091
Equity in net income of consolidated subsidiaries			(3,784	)			—				3,784				—
Interest expense			12,387				—				—				12,387
Loss on debt restructuring			9,521				—				—				9,521
			335,600				42,695				1,824				380,119
Earnings before income taxes			14,512				6,307				(3,784	)			17,035
Income tax expense			5,870				2,523				—				8,393
Net earnings		$	8,642			$	3,784			$	(3,784	)		$	8,642