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

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 July 30, 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 — June 30, 2010 and December 31, 2009			3
Condensed Consolidated Statements of Operations — Quarter and Six Months ended June 30, 2010 and 2009			4
Condensed Consolidated Statements of Shareholders’ Equity — Six months ended June 30, 2010 and 2009			5
Condensed Consolidated Statements of Cash Flows — Six Months ended June 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			20
Item 3. Quantitative and Qualitative Disclosures about Market Risk			32
Item 4. Controls and Procedures			32
Part II — Other Information
Item 1. Legal Proceedings			33
Item 1.A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3. Defaults Upon Senior Securities			34
Item 4. (Removed and Reserved)			34
Item 5. Other Information			34
Item 6. Exhibits			34
Signatures			35
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)

		June 30,				December 31,
		2010				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	2,684			$	2,501
Short-term investments			76,141				75,138
Accounts receivable — net
Trade			100,069				90,518
Other			4,087				3,885
Inventories of spare parts — net			59,548				61,501
Other current assets			12,892				11,018
Income taxes receivable			610				740
Total current assets			256,031				245,301
Other			9,378				11,669
Property and equipment — net			567,998				548,536
Total assets		$	833,407			$	805,506
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	15,947			$	14,935
Accrued liabilities			26,574				23,342
Total current liabilities			42,521				38,277
Long-term debt			224,787				218,305
Deferred income taxes			80,508				73,409
Other long-term liabilities			9,071				10,067
Total liabilities			356,887				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			(26	)			(13	)
Retained earnings			183,612				172,527
Total shareholders’ equity			476,520				465,448
Total liabilities and shareholders’ equity		$	833,407			$	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								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Operating revenues, net		$	139,597			$	123,321			$	261,206			$	240,273
Gain (loss) on dispositions of assets, net			117				(107	)			123				165
Other, principally interest income			5				65				36				128
			139,719				123,279				261,365				240,566
Expenses:
Direct expenses			116,101				104,912				220,308				207,039
Selling, general and administrative expenses			7,678				8,218				14,403				16,042
Interest expense			4,183				4,039				8,179				7,918
			127,962				117,169				242,890				230,999
Earnings before income taxes			11,757				6,110				18,475				9,567
Income tax expense			4,703				2,444				7,390				3,826
Net earnings		$	7,054			$	3,666			$	11,085			$	5,741
Weighted average shares outstanding:
Basic			15,312				15,303				15,312				15,302
Diluted			15,312				15,307				15,312				15,305
Net earnings per share:
Basic		$	0.46			$	0.24			$	0.72			$	0.38
Diluted		$	0.46			$	0.24			$	0.72			$	0.38

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			—				—				—				—				—				—				11,085				11,085
Changes in pension plan assets and benefit obligations			—				—				—				—				—				(13	)			—				(13	)
Total comprehensive income, net of income taxes																															11,072
Balance at June 30, 2010			2,853			$	285				12,459			$	1,246			$	291,403			$	(26	)		$	183,612			$	476,520

																						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			—				—				—				—				—				—				5,741				5,741
Changes in pension plan assets and benefit obligations			—				—				—				—				—				(59	)			—				(59	)
Total comprehensive income, net of income taxes																															5,682
Stock options exercised			—				—				10				1				141				—				—				142
Balance at June 30, 2009			2,853			$	285				12,459			$	1,246			$	291,403			$	(14	)		$	165,300			$	458,220

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)

		Six Months Ended
		June 30,
		2010				2009
Operating activities:
Net earnings		$	11,085			$	5,741
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			13,442				13,901
Deferred income taxes			7,099				3,463
Gain on asset dispositions, net			(123	)			(165	)
Other			577				464
Changes in operating assets and liabilities			(4,607	)			(3,336	)
Net cash provided by operating activities			27,473				20,068
Investing activities:
Purchase of property and equipment			(33,932	)			(27,693	)
Proceeds from asset dispositions			1,164				8,897
Purchase of short-term investments			(1,004	)			(31,639	)
Proceeds from sale of short-term investments			—				14,687
Deposits on aircraft			—				7,600
Net cash used in investing activities			(33,772	)			(28,148	)
Financing activities:
Proceeds from line of credit			32,000				10,350
Payment on line of credit			(25,518	)			—
Net cash provided by financing activities			6,482				10,350
Increase in cash and cash equivalents			183				2,270
Cash and cash equivalents, beginning of period			2,501				1,159
Cash and cash equivalents, end of period		$	2,684			$	3,429
Supplemental Disclosures Cash Flow Information
Interest paid		$	7,422			$	7,424
Income taxes paid		$	607			$	763
Accrued payables related to purchase of property and equipment		$	21			$	237

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General

The accompanying unaudited condensed consolidated financial statements include the accounts of PHI, Inc. and subsidiaries (“PHI” or the “Company”). In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly the financial results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and the accompanying notes.

The Company’s financial results, particularly as they relate to the Company’s Oil and Gas operations, are influenced by seasonal fluctuations as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Therefore, the results of operations for interim periods are not necessarily indicative of the operating results that may be expected for a full fiscal year.

2. Segment Information

PHI is primarily a provider of helicopter services, including helicopter maintenance and repair services. We used a combination of factors to identify reportable segments as required by Accounting Standards Codification (“ASC”) 280, “Segment Reporting.” The overriding determination of our segments is based on how the chief operating decision-maker of our Company evaluates our results of operations. The underlying factors include customer bases, types of service, operational management, physical locations, and underlying economic characteristics of the types of work we perform.

A segment’s operating profit is its operating revenues less its direct expenses and selling, general and administrative expenses. Each segment has a portion of selling, general and administrative expenses that are charged directly to the segment and a portion that is allocated. Direct charges represent the vast majority of the segment’s selling, general and administrative expenses. Allocated selling, general and administrative expenses are based primarily on total segment direct expenses as a percentage of total direct expenses. Unallocated overhead consists primarily of corporate selling, general, and administrative expenses that we do not allocate to the reportable segments.

Oil and Gas Segment. Our Oil and Gas segment, headquartered in Lafayette, Louisiana, provides helicopter services primarily for the major oil and gas production companies transporting personnel and/or equipment to offshore platforms in the Gulf of Mexico and the Democratic Republic of Congo. We currently operate 164 aircraft in this segment.

Operating revenue from the Oil and Gas segment is derived mainly from contracts that include a fixed monthly rate for a particular model of aircraft, plus a variable rate for flight time. Operating costs for the Oil and Gas operations are primarily aircraft operations costs, including costs for pilots and maintenance personnel. Our Oil and Gas operations generated approximately 68% and 64% of our total operating revenue for the quarter ended June 30, 2010 and 2009, respectively, and approximately 69% and 64% of our total operating revenue for the six months ended June 30, 2010 and 2009, respectively.

Air Medical Segment. Air Medical operations are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in a disproportionate share of selling, general and administrative expenses compared to the Company’s other reportable segments.

We provide air medical transportation services for hospitals and emergency service agencies in 18 states using approximately 85 aircraft at 64 separate locations. Our Air Medical segment operates primarily

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. Our Air Medical operations are headquartered in Phoenix, Arizona. For the quarter ended June 30, 2010 and 2009, approximately 31% and 35% of our total operating revenues were generated by our Air Medical operations, respectively. For the six months ended June 30, 2010 and 2009, approximately 29% 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 $40.1 million and $36.6 million as of June 30, 2010 and June 30, 2009, respectively. The allowance for uncompensated care was $29.9 million and $21.9 million as of June 30, 2010 and June 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								Six Months Ended								Ended
		June 30,								June 30,								December 31,
		2010				2009				2010				2009				2009
Gross billings			100	%			100	%			100	%			100	%			100	%
Provision for contractual discounts			53	%			53	%			54	%			53	%			52	%
Provision for uncompensated care			10	%			10	%			9	%			9	%			11	%

Net reimbursement per transport from commercial payors generally increase 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								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Medicaid			15	%			13	%			16	%			13	%
Medicare			21	%			16	%			21	%			18	%
Insurance			63	%			67	%			62	%			66	%
Self-Pay			1	%			4	%			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 16% and 15% of the segment’s revenues for the quarters ended June 30, 2010 and 2009, respectively, and

approximately 17% and 15% of the segment’s revenues for the six months ended June 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 six aircraft for the National Science Foundation in Antarctica under this segment.

Approximately 1% of our total operating revenues for the quarter ended June 30, 2010, and approximately 2% of our total operating revenues for the quarter ended June, 30, 2009 and six months ended June 30, 2010 and June 30, 2009 were generated by our Technical Services operations.

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

		Quarter Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(Thousands of dollars)								(Thousands of dollars)
Segment operating revenues
Oil and Gas		$	94,734			$	78,970			$	179,674			$	153,795
Air Medical			43,101				42,628				76,670				81,721
Technical Services			1,762				1,723				4,862				4,757
Total operating revenues			139,597				123,321				261,206				240,273
Segment direct expenses (1)
Oil and Gas			75,845				64,963				146,098				126,247
Air Medical			38,385				38,620				70,011				77,498
Technical Services			1,871				1,329				4,199				3,294
Total direct expenses			116,101				104,912				220,308				207,039
Segment selling, general and administrative expenses
Oil and Gas			157				319				424				706
Air Medical			1,004				1,619				2,299				3,108
Technical Services			7				3				14				17
Total selling, general and administrative expenses			1,168				1,941				2,737				3,831
Total direct and selling, general and administrative expenses			117,269				106,853				223,045				210,870
Net segment profit
Oil and Gas			18,732				13,688				33,152				26,842
Air Medical			3,712				2,389				4,360				1,115
Technical Services			(116	)			391				649				1,446
Total			22,328				16,468				38,161				29,403
Other, net (2)			122				(42	)			159				293
Unallocated selling, general and administrative costs (1)			(6,510	)			(6,277	)			(11,666	)			(12,211	)
Interest expense			(4,183	)			(4,039	)			(8,179	)			(7,918	)
Earnings before income taxes		$	11,757			$	6,110			$	18,475			$	9,567

		Quarter Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Oil and Gas		$	4,452			$	4,107			$	8,692			$	8,350
Air Medical			1,962				1,969				3,951				3,954
Technical Services			18				11				145				111
Total		$	6,432			$	6,087			$	12,788			$	12,415
Unallocated SG&A		$	321			$	735			$	654			$	1,486

3. Commitments and Contingencies

Environmental Matters — We have recorded an aggregate estimated probable liability of $0.2 million as of June 30, 2010 and December 31, 2009 for environmental monitoring costs. The Company has conducted environmental surveys of its former Lafayette facility, 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. The Company previously submitted a Risk Evaluation/Corrective Action Plan (“RECAP”) Standard Site Assessment Report to the Louisiana Department of Environmental Quality (“LDEQ”) fully delineating the extent and type of contamination and updated the report to include recent analytical data. LDEQ has reviewed the assessment report and has requested an action plan from the Company. When the action plan is complete, the Company will be in a position to estimate the resulting cost of remediation. The Company has not recorded any estimated liability for remediation and contamination. 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 with the Office and Professional Employees International Union (“OPEIU”), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. The pilots commenced a strike in September 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, and this was essentially completed in April 2007. Pilots continue to work basically under the same terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006 as modified consistent with the Company’s ongoing business needs. By Order dated July 9, 2010, the Court dismissed both PHI’s and the Unions’ claims that the other had violated the Railway Labor Act by bargaining in bad faith before exercising self-help in August-September 2006. Then, by Order dated July 30, 2010, the Court dismissed all claims that PHI violated the Railway Labor Act in the manner in which it returned pilots to work following the strike. The parties may yet proceed to trial, on the claims of 47 pilots, that PHI improperly deducted certain sums from their final pre-strike paychecks. Such trial would commence on or about August 25, 2010. In addition, on December 31, 2009, the OPEIU filed another case against the Company in the Western District of Louisiana, previously set for trial on July 5, 2011, asserting that its acceptance in 2009 of PHI’s implementation proposals created a binding collective bargaining agreement, which the Company denies. That case has been stayed by the Court pending resolution of the strike-related litigation. Management does not expect the outcome of these cases 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 alleges 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 seeks unspecified treble damages, injunctive relief, costs, and attorneys’ fees. Defendants’ motion to dismiss filed on September 4, 2009 is pending. The outcome of this matter cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in this matter.

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 aircraft leases, and some of these leases contain renewal and purchase options at fair market value.

At June 30, 2010, we had approximately $215.0 million in aggregate commitments under operating leases of which approximately $16.4 million is payable through December 31, 2010, and a total of $29.8 million is payable over the twelve months ending June 30, 2011. The total lease commitments include $198.0 million for aircraft and $17.0 million for facility lease commitments, primarily for our facilities in Lafayette, Louisiana.

We intend to execute a contract to acquire ten medium aircraft related to a new contract with a customer, which will replace aircraft being used with respect to the current contract. These deliveries will commence late 2010 and continue over the subsequent three years. The approximate acquisition cost of all aircraft is $127.0 million. We intend to fund the acquisition of these aircraft with operating leases.

4. Long-term Debt

As of June 30, 2010, our total long-term indebtedness was $224.8 million, consisting of $200 million of our 7.125% Senior Notes due 2013 and $18.3 million borrowed under our revolving credit facility due 2011.

On April 12, 2006, we completed the sale of $200 million of 7.125% senior notes. Net proceeds from the sale of the senior notes were used to repurchase our outstanding $200 million 9.375% senior notes due 2009 pursuant to a tender offer. The senior notes are due on April 15, 2013, are unconditionally guaranteed on a senior basis by our domestic subsidiaries and interest is payable on the senior notes semi-annually on April 15 and October 15. The senior notes and the guarantees are general, unsecured obligations. We may redeem some or all of these notes at our option at any time on or after April 15, 2010 at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest to the redemption date: if redeemed during the 12-month period beginning April 15, 2010, 103.563%; if redeemed during the 12-month period beginning April 15, 2011, 101.781%; and if redeemed during the 12-month period beginning April 15, 2012, 100%. The indenture governing the senior notes contains restrictive covenants, including limitations on incurring indebtedness, creating liens, selling assets and entering into certain transaction with affiliates. The covenants also 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. Under the indenture, upon the occurrence of a change in control, each holder of the senior notes has the right to require us to purchase that holder’s notes for a cash price equal to 101% of the principal amount of the senior notes to be purchased. At June 30, 2010, the market value of the notes was approximately $190.8 million, based on quoted market indicators. We were in compliance with the covenants applicable to these notes as of June 30, 2010.

Effective August 5, 2009, we executed a new credit agreement with a syndicate of three commercial banks, which replaced the prior facility, providing a $75 million revolving credit facility maturing in September 2011. The interest rate is the prime rate plus 100 basis points at June 30, 2010. As of June 30, 2010, we had $24.8 million in borrowings and $5.5 million in letters of credit outstanding under the facility. The credit agreement includes covenants related to working capital, funded debt to net worth, and consolidated net worth, and other covenants including restrictions on additional debt, encumbrances and a change of control. As of June 30, 2010, we were in compliance with these covenants. The credit agreement is collaterized by accounts receivable and inventory and guaranteed by our domestic subsidiaries. The agreement contains a borrowing base of 80% of eligible receivables and 50% of the

carrying value of parts. We reviewed interest expense for the quarters and six months ended June 30, 2010 and 2009 that could be capitalized for certain projects and any such amounts were immaterial.

On April 1, 2010, we purchased two heavy aircraft previously under lease pursuant to purchase options in the lease contract. This purchase was funded with our revolving line of credit and we drew $24.7 million for the acquisition. In addition, on April 15, 2010 we funded the payment of interest on the Senior Notes with $7.0 million from the revolving credit facility. As of June 30, 2010, the principal amount outstanding under the revolving credit facility was $24.8 million.

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 June 30, 2010 and December 31, 2009.

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 $40.1 million and $32.1 million as of June 30, 2010 and December 31, 2009, respectively. The allowance for uncompensated care was $29.9 million and $28.1 million as of June 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:

		June 30,				December 31,
		2010				2009
Gross Accounts Receivable			100	%			100	%
Allowance for Contractual Discounts			39	%			34	%
Allowance for Uncompensated Care			29	%			30	%

We have also established valuation reserves related to obsolete and excess inventory. The inventory valuation reserves were $11.5 million and $9.2 million at June 30, 2010 and December 31, 2009, respectively.

6. Employees

Employee Incentive Compensation — Pursuant to our incentive compensation plans, we accrued $1.1 million and $1.3 million for the quarter and six months ended June 30, 2010. For the quarter and six months ended June 30, 2009, we accrued $0.3 million and $0.5 million respectively.

We also have a Safety Incentive Plan related to Occupational Safety and Health Administration recordable incidents, for which we expensed $0.1 million and $0.3 million for the quarter and six months ended June 30, 2010. For the quarter and six months ended June 30, 2009, we expensed $0.2 million for both periods.

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:

		June 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		$	76,141			$	75,138
Investments included in other assets			3,197				4,239
Total		$	79,338			$	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 June 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 six months ended June 30, 2010 and 2009.

10. Condensed Consolidating Financial Information

Our 7.125% Senior Notes are fully and unconditionally guaranteed on a joint and several, senior basis by all of our wholly-owned Guarantor Subsidiaries.

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.

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

		June 30, 2010
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	1,718			$	966			$	—			$	2,684
Short-term investments			76,141				—				—				76,141
Accounts receivable — net			94,295				9,861				—				104,156
Intercompany receivable			—				76,990				(76,990	)			—
Inventories of spare parts — net			59,548				—				—				59,548
Other current assets			12,875				17				—				12,892
Income taxes receivable			610				—				—				610
Total current assets			245,187				87,834				(76,990	)			256,031
Investment in subsidiaries			74,186				—				(74,186	)			—
Other assets			9,352				26				—				9,378
Property and equipment — net			556,286				11,712				—				567,998
Total assets		$	885,011			$	99,572			$	(151,176	)		$	833,407
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	15,195			$	752			$	—			$	15,947
Accrued liabilities			21,615				4,959				—				26,574
Intercompany payable			76,990				—				(76,990	)			—
Total current liabilities			113,800				5,711				(76,990	)			42,521
Long-term debt			224,787				—				—				224,787
Deferred income taxes and other long-term liabilities			69,904				19,675				—				89,579
Shareholders’ Equity:
Common stock and paid-in capital			292,934				2,674				(2,674	)			292,934
Accumulated other comprehensive loss			(26	)			—				—				(26	)
Retained earnings			183,612				71,512				(71,512	)			183,612
Total shareholders’ equity			476,520				74,186				(74,186	)			476,520
Total liabilities and shareholders’ equity		$	885,011			$	99,572			$	(151,176	)		$	833,407

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 June 30, 2010
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
Operating revenues, net		$	123,442			$	16,155			$	—			$	139,597
Management fees			647				—				(647	)			—
Gain on dispositions of assets, net			117				—				—				117
Other, principally interest income			5				—				—				5
			124,211				16,155				(647	)			139,719
Expenses:
Direct expenses			102,422				13,679				—				116,101
Management fees			—				647				(647	)			—
Selling, general and administrative expenses			7,357				321				—				7,678
Equity in net income of consolidated subsidiaries			(905	)			—				905				—
Interest expense			4,183				—				—				4,183
			113,057				14,647				258				127,962
Earnings before income taxes			11,154				1,508				(905	)			11,757
Income tax expense			4,100				603				—				4,703
Net earnings		$	7,054			$	905			$	(905	)		$	7,054

		For the quarter ended June 30, 2009
		Parent
		Company				Guarantor				Non-Guarantor
		Only				Subsidiaries(1)				Subsidiaries				Eliminations				Consolidated
Operating revenues, net		$	105,519			$	17,796			$	6			$	—			$	123,321
Management fees			712				—				—				(712	)			—
Loss on dispositions of assets, net			(107	)			—				—				—				(107	)
Other, principally interest income			65				—				—				—				65
			106,189				17,796				6				(712	)			123,279
Expenses:																			—
Direct expenses			92,177				12,735				—				—				104,912
Management fees			—				712				—				(712	)			—
Selling, general and administrative expenses			7,786				399				33				—				8,218
Equity in net income of consolidated subsidiaries			(2,354	)			—				—				2,354				—
Interest expense			4,039				—				—				—				4,039
			101,648				13,846				33				1,642				117,169
Earnings before income taxes			4,541				3,950				(27	)			(2,354	)			6,110
Income tax expense			875				1,580				(11	)			—				2,444
Net earnings		$	3,666			$	2,370			$	(16	)		$	(2,354	)		$	3,666

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

		For the six months ended June 30, 2010
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
Operating revenues, net		$	227,492			$	33,714			$	—			$	261,206
Management fees			1,349				—				(1,349	)			—
Gain on dispositions of assets, net			123				—				—				123
Other, principally interest income			36				—				—				36
			229,000				33,714				(1,349	)			261,365
Expenses:
Direct expenses			193,534				26,774				—				220,308
Management fees			—				1,349				(1,349	)			—
Selling, general and administrative expenses			13,637				766				—				14,403
Equity in net income of consolidated subsidiaries			(2,895	)			—				2,895				—
Interest expense			8,179				—				—				8,179
			212,455				28,889				1,546				242,890
Earnings before income taxes			16,545				4,825				(2,895	)			18,475
Income tax expense			5,460				1,930				—				7,390
Net earnings		$	11,085			$	2,895			$	(2,895	)		$	11,085

		For the six months ended June 30, 2009
		Parent
		Company				Guarantor				Non-Guarantor
		Only				Subsidiaries (1)				Subsidiaries				Eliminations				Consolidated
Operating revenues, net		$	205,733			$	34,514			$	26			$	—			$	240,273
Management fees			1,382				—				—				(1,382	)			—
Gain on dispositions of assets, net			165				—				—				—				165
Other, principally interest income			128				—				—				—				128
			207,408				34,514				26				(1,382	)			240,566
Expenses:
Direct expenses			179,756				27,283				—				—				207,039
Management fees			—				1,381				1				(1,382	)			—
Selling, general and administrative expenses			14,997				984				61				—				16,042
Equity in net income of consolidated subsidiaries			(2,898	)			—				—				2,898				—
Interest expense			7,918				—				—				—				7,918
			199,773				29,648				62				1,516				230,999
Earnings before income taxes			7,635				4,866				(36	)			(2,898	)			9,567
Income tax expense			1,894				1,946				(14	)			—				3,826
Net earnings		$	5,741			$	2,920			$	(22	)		$	(2,898	)		$	5,741