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.

     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 30, 2009
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, 2009 and December 31, 2008			3
		Condensed Consolidated Statements of Operations — Quarter and Nine months ended September 30, 2009 and 2008			4
		Condensed Consolidated Statements of Shareholders’ Equity — Nine months ended September 30, 2009 and 2008			5
		Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2009 and 2008			6
		Notes to Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
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			33
Item 3.		Defaults Upon Senior Securities			33
Item 4.		Submission of Matters to a Vote of Security Holders			33
Item 5.		Other Information			33
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)

		September 30,				December 31,
		2009				2008
ASSETS
Current Assets:
Cash		$	3,882			$	1,159
Short-term investments			73,925				42,121
Accounts receivable — net
Trade			103,575				104,912
Other			6,578				6,510
Inventories of spare parts — net			61,645				58,249
Other current assets			11,207				10,687
Income taxes receivable			628				982
Total current assets			261,440				224,620
Other			13,733				23,988
Property and equipment — net			532,079				528,574
Total assets		$	807,252			$	777,182
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	15,845			$	25,449
Accrued liabilities			36,401				25,193
Total current liabilities			52,246				50,642
Long-term debt			210,350				203,000
Deferred income taxes			73,215				65,175
Other long-term liabilities			6,269				5,969
Commitments and contingencies (Note 3)
Shareholders’ Equity:
Voting common stock			285				285
Non-voting common stock			1,246				1,245
Additional paid-in capital			291,403				291,262
Accumulated other comprehensive (loss) income			(15	)			45
Retained earnings			172,253				159,559
Total shareholders’ equity			465,172				452,396
Total liabilities and shareholders’ equity		$	807,252			$	777,182

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, except per share data)
(Unaudited)

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Operating revenues, net		$	124,183			$	135,460			$	364,456			$	382,716
Gain on dispositions of assets, net			7				249				172				4,453
Other, principally interest income			53				29				181				532
			124,243				135,738				364,809				387,701
Expenses:
Direct expenses			100,972				110,370				308,011				318,353
Selling, general and administrative expenses			7,706				8,368				23,748				23,291
Interest expense			3,976				3,840				11,894				11,528
			112,654				122,578				343,653				353,172
Earnings before income taxes			11,589				13,160				21,156				34,529
Income tax expense			4,636				5,263				8,462				13,811
Net earnings		$	6,953			$	7,897			$	12,694			$	20,718
Weighted average shares outstanding:
Basic			15,312				15,277				15,306				15,277
Diluted			15,312				15,282				15,306				15,281
Net earnings per share:
Basic		$	0.45			$	0.52			$	0.83			$	1.36
Diluted		$	0.45			$	0.52			$	0.83			$	1.36

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, 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																															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

																						Accumulated								Total
		Voting								Non-Voting								Additional				Other Com-								Share-
		Common Stock								Common Stock								Paid-in				prehensive				Retained				Holders’
		Shares				Amount				Shares				Amount				Capital				Income				Earnings				Equity
Balance at December 31, 2007			2,853			$	285				12,439			$	1,244			$	291,035			$	61			$	136,044			$	428,669
Net earnings			—				—				—				—				—				—				20,718				20,718
Changes in pension plan assets and benefit obligations			—				—				—				—				—				25				—				25
Total comprehensive income																															20,743
Stock options exercised			—				—				10				1				227				—				—				228
Balance at September 30, 2008			2,853			$	285				12,449			$	1,245			$	291,262			$	86			$	156,762			$	449,640

     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,
		2009				2008
Operating activities:
Net earnings		$	12,694			$	20,718
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			20,778				19,941
Deferred income taxes			8,040				13,102
Gain on asset dispositions, net			(172	)			(4,453	)
Other			697				689
Changes in operating assets and liabilities			(1,581	)			(19,582	)
Net cash provided by operating activities			40,456				30,415
Investing activities:
Purchase of property and equipment			(31,777	)			(55,737	)
Proceeds from asset dispositions			8,897				9,033
Purchase of short-term investments			(46,490	)			(27,722	)
Proceeds from sale of short-term investments			14,687				54,750
Refund (payment) of deposits on aircraft			9,600				(11,546	)
Net cash used in investing activities			(45,083	)			(31,222	)
Financing activities:
Proceeds from line of credit			10,350				3,800
Payment on line of credit			(3,000	)			(3,800	)
Proceeds from exercise of stock options			—				228
Net cash provided by financing activities			7,350				228
Increase (decrease) in cash and cash equivalents			2,723				(579	)
Cash, beginning of period			1,159				1,425
Cash, end of period		$	3,882			$	846
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	7,600			$	7,239
Income taxes paid		$	770			$	234
Accrued payables related to purchase of property and equipment		$	273			$	791

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 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, 2008 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, 2008. 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.

Subsequent Events — The Company evaluated events of which its management was aware subsequent to September 30, 2009, through the date that this quarterly report was issued, November 9, 2009.

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”, previously Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information”. 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 income 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.

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.

Oil and Gas Segment. Our Oil and Gas segment 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 158 aircraft in this segment.

Operating revenue from the Oil and Gas segment is derived mainly from fixed-term contracts that include a fixed monthly rate for a particular model of aircraft, plus a variable rate for flight time. Most of our fixed-term contracts permit early termination by the customer generally without penalty. Operating costs for the Oil and Gas operations are primarily aircraft operations costs, including costs for pilots and

maintenance personnel. Approximately 64% of our total operating revenue was generated by our Oil and Gas operations for the quarter and nine months ended September 30, 2009 and 2008.

Air Medical Segment. Our Air Medical segment provides transport services as an independent provider of emergency medical services and, to a lesser extent, under contract with certain hospitals. We operate at 50 locations in nine states as an independent provider and 15 locations in eight states under contract with hospitals, with 87 aircraft that are specially outfitted to accommodate emergency patients, medical personnel and emergency medical equipment. For the quarter ended September 30, 2009 and September 30, 2008, approximately 35% of our total operating revenues were generated by our Air Medical operations. For the nine months ended September 30, 2009, approximately 34% of our total operating revenues were generated by our Air Medical operations, compared to 35% for the nine months ended September 30, 2008.

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.

Provisions for contractual discounts and estimated uncompensated care for Air Medical operations are as follows:

		Revenue
		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Gross billings			100	%			100	%			100	%			100	%
Provision for contractual discounts			51	%			46	%			53	%			47	%
Provision for uncompensated care			12	%			12	%			10	%			11	%

Net reimbursement per transport from commercial payors generally do 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.

Amounts 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,
		2009				2008				2009				2008
Medicaid			10	%			11	%			12	%			11	%
Medicare			18	%			17	%			18	%			17	%
Insurance			70	%			67	%			67	%			67	%
Self-Pay			2	%			5	%			3	%			5	%

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 15% and 11% of the segment’s revenues for the quarter ended September 30, 2009 and 2008, and 15% and 12% for the nine months ended September 30, 2009 and 2008, 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. This segment also conducts flight operations unrelated to the other segments. We currently operate four aircraft for the National Science Foundation in Antarctica under this segment.

Approximately 1% of our total operating revenues for the quarter ended September 30, 2009 and September 30, 2008 were generated by our Technical Services operations. For the nine months ended September 30, 2009, approximately 2% of our total operating revenues were generated by our Technical Services operations, compared to 1% for the nine months ended September 30, 2008.

Summarized financial information concerning our reportable operating segments for the quarter and nine months ended September 30, 2009 and 2008 is as follows:

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Thousands of dollars)								(Thousands of dollars)
Segment operating revenues, net
Oil and Gas		$	79,216			$	86,689			$	233,011			$	243,352
Air Medical			43,321				47,534				125,042				133,105
Technical Services			1,646				1,237				6,403				6,259
Total operating revenues, net			124,183				135,460				364,456				382,716
Segment direct expenses (1)
Oil and Gas			65,690				68,074				191,937				192,157
Air Medical			34,023				41,125				111,521				121,494
Technical Services			1,259				1,171				4,553				4,702
Total direct expenses			100,972				110,370				308,011				318,353
Segment selling, general and administrative expenses
Oil and Gas			285				321				991				976
Air Medical			1,795				2,045				4,903				6,237
Technical Services			24				15				41				49
Total selling, general and administrative expenses			2,104				2,381				5,935				7,262
Total direct and selling, general and administrative expenses			103,076				112,751				313,946				325,615
Net segment profit
Oil and Gas			13,241				18,294				40,083				50,219
Air Medical			7,503				4,364				8,618				5,374
Technical Services			363				51				1,809				1,508
Total			21,107				22,709				50,510				57,101
Other, net (2)			60				278				353				4,985
Unallocated selling, general and administrative costs (1)			(5,602	)			(5,987	)			(17,813	)			(16,029	)
Interest expense			(3,976	)			(3,840	)			(11,894	)			(11,528	)
Earnings before income taxes		$	11,589			$	13,160			$	21,156			$	34,529

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Thousands of dollars)								(Thousands of dollars)
Oil and Gas		$	4,142			$	3,915			$	12,492			$	11,394
Air Medical			1,985				2,054				5,939				6,097
Technical Services			14				16				125				135
Total		$	6,141			$	5,985			$	18,556			$	17,626
Unallocated SG&A		$	736			$	770			$	2,222			$	2,315

3. Commitments and Contingencies

Environmental Matters — We have recorded an aggregate estimated liability of $0.2 million as of September 30, 2009 and December 31, 2008 for environmental remediation costs that are probable and estimable. 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 Louisiana 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 is reviewing the assessment report. Once LDEQ completes its review and reports on whether all contamination has been fully defined, a risk evaluation in accordance with RECAP will be submitted and evaluated by LDEQ. At that point, LDEQ will establish what cleanup standards must be met at the site. When the process is complete, the Company will be in a position to develop an appropriate remediation plan and determine the resulting cost of remediation. The Company has not recorded any estimated liability for remediation and contamination and, based upon the May 2003 Site Assessment Report, the April 2006 update and ongoing monitoring, it 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 is 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 under the 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. A trial date on strike-related matters has been postponed from June 29, 2009 until July 6, 2010. 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 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 leases. Several leases contain fair value purchase options.

At September 30, 2009, we had approximately $226.1 million in aggregate commitments under operating leases of which approximately $7.9 million is payable through December 31, 2009, and a total of $31.7 million is payable over the twelve months ending September 30, 2010. The total lease commitments include $209.7 million for aircraft and $19.1 million for facility lease commitments, primarily for our facilities in Lafayette, Louisiana.

Purchase Commitments — At September 30, 2009, we had an order for two additional transport category aircraft at an approximate cost of $43.5 million with delivery dates in late 2009. These aircraft are planned for service in the Oil and Gas segment. Approximately $3.0 million of deposits on aircraft purchase commitments are included in other assets at September 30, 2009.

4. Long-term Debt

The $200 million 7.125% Senior Notes mature April 15, 2013, and interest is payable semi-annually on April 15 and October 15. The notes contain restrictive covenants, including limitations on indebtedness, liens, dividends, repurchases of capital stock and other payments affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales, and mergers and consolidations and sales of assets. At September 30, 2009, the market value of the notes was approximately $188.5 million, based on quoted market indicators. We were in compliance with the covenants applicable to these notes as of September 30, 2009.

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. As of September 30, 2009, we had $10.4 million in borrowings and $5.1 million in letters of credit outstanding under the facility. The interest rate is the prime rate plus 100 basis points. The interest rate through September 30, 2009 was 3.25%. Other terms are substantially similar to the prior facility. The new facility includes covenants related to working capital and funded debt to net worth identical to the previous credit agreement, and the consolidated net worth covenant was increased from $400 million to $425 million. As of September 30, 2009, we were in compliance with these covenants.

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, 2009 and December 31, 2008.

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 $37.5 million and $37.6 million as of September 30, 2009 and December 31, 2008, respectively. The allowance for uncompensated care was $27.6 million and $20.8 million as of September 30, 2009 and December 31, 2008, respectively.

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

		September 30,				December 31,
		2009				2008
Gross Accounts Receivable			100	%			100	%
Allowance for Contractual Discounts			36	%			35	%
Allowance for Uncompensated Care			26	%			20	%

We have also established valuation reserves related to obsolete and excess inventory. The inventory valuation reserves were $8.0 million and $7.9 million at September 30, 2009 and December 31, 2008, respectively.

6. Employees

Employee Incentive Compensation — In 2002, we implemented the employee incentive compensation plan for non-executive and non-represented employees. For calendar year 2007, the represented pilots were added to this plan as part of the final implementation proposals made by the Company at the end of the collective bargaining negotiations in August 2006. The plan allows us to pay up to 8.25% of earnings before income taxes upon achieving a specified earnings threshold. During 2004, we implemented the management incentive compensation plan for certain corporate and business unit management employees. The management incentive compensation plan was amended August 5, 2008, to include safety components, in addition to certain earnings targets as provided in the prior plan.

The amount expensed for 2008 under both the employee incentive compensation plan and the management incentive compensation plan was $1.0 million. For the nine months ended September 30, 2009, we expensed an estimated incentive compensation expense of $0.5 million compared to $0.8 million for the nine months ended September 30, 2008.

We also have a Safety Incentive Plan related to Occupational Safety and Health Administration recordable incidents, for which we expensed and paid $0.5 million for 2008. For the nine months ended September 30, 2009, we expensed $0.4 million.

7. Fair Value Measurements

The Company adopted ASC 820, “Fair Value Measurements and Disclosures”, previously SFAS No. 157, “Fair Value Measurements,” beginning in its 2008 fiscal year and there was no material impact to its consolidated financial statements. ASC 820 applies to all assets and liabilities that are being measured and reported on a fair value basis. ASC 820 requires new disclosure that establishes a framework for measuring fair value in Generally Accepted Accounting Principles (“GAAP”), 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, 2009				December 31, 2008
		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		$	73,925			$	42,121
Investments in other assets			3,692				3,297
Total		$	77,617			$	45,418

The Company holds it 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. The Company has not recorded any unrealized gains or losses associated with short-term investments as the carrying value approximates fair value at September 30, 2009 and December 31, 2008. 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

In June 2009, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Codification 105, “Generally Accepted Accounting Principles,” previously SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” This statement, which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

As a result of implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable. In the current quarter financial statements, management provided reference to both new and old guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification.

In December 2008, FASB issued ASC 715 “Compensation-Retirement Benefits,” previously FASB Staff Position (“FSP”) No. SFAS 132(R)-1, which amends SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this standard shall be provided for fiscal years ending after December 15, 2009. Upon initial application, the provisions of this standard are not required for earlier periods that are presented for comparative purposes. Management does not currently expect that implementation of this standard will have an impact on our consolidated financial statements.

9. Shareholders’ Equity

We had an average of 15.3 million common shares outstanding for the quarters and nine months ended September 30, 2009 and 2008.

10. Comprehensive Income

The following table summarizes the components of total comprehensive income (net of taxes):

		Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Thousands of dollars)								(Thousands of dollars)
Net earnings		$	6,953			$	7,897			$	12,694			$	20,718
Changes in pension plan assets and benefit obligations			(1	)			22				(60	)			25
Comprehensive income		$	6,952			$	7,919			$	12,634			$	20,743

11. 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 principal 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)

		September 30, 2009
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
ASSETS
Current Assets:
Cash		$	3,173			$	709			$	—			$	3,882
Short-term investments			73,925				—				—				73,925
Accounts receivable — net			98,480				11,673				—				110,153
Intercompany receivable			—				65,451				(65,451	)			—
Inventories of spare parts — net			61,645				—				—				61,645
Other current assets			11,196				11				—				11,207
Income taxes receivable			628				—				—				628
Total current assets			249,047				77,844				(65,451	)			261,440
Investment in subsidiaries and other			68,951				—				(68,951	)			—
Other assets			13,574				159				—				13,733
Property and equipment-net			515,307				16,772				—				532,079
Total assets		$	846,879			$	94,775			$	(134,402	)		$	807,252
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	15,338			$	507			$	—			$	15,845
Accrued liabilities			30,731				5,670				—				36,401
Intercompany payable			65,451				—				(65,451	)			—
Total current liabilities			111,520				6,177				(65,451	)			52,246
Long-term debt			210,350				—				—				210,350
Deferred income taxes and other long-term liabilities			59,837				19,647				—				79,484
Shareholders’ Equity:
Paid-in capital			292,934				2,674				(2,674	)			292,934
Accumulated other comprehensive loss			(15	)			—				—				(15	)
Retained earnings			172,253				66,277				(66,277	)			172,253
Total shareholders’ equity			465,172				68,951				(68,951	)			465,172
Total liabilities and shareholders’ equity		$	846,879			$	94,775			$	(134,402	)		$	807,252

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

		December 31, 2008
		Parent				Guarantor
		Company				Subsidiaries
		Only(1)				(1) (2)				Eliminations				Consolidated
ASSETS
Current Assets:
Cash		$	559			$	600			$	—			$	1,159
Short-term investments			42,121				—				—				42,121
Accounts receivable — net			97,618				13,804				—				111,422
Intercompany receivable			—				57,722				(57,722	)			—
Inventories of spare parts — net			58,249				—				—				58,249
Other current assets			10,671				16				—				10,687
Income taxes receivable			982				—				—				982
Total current assets			210,200				72,142				(57,722	)			224,620
Investment in subsidiaries and other			65,227				—				(65,227	)			—
Other assets			23,761				227				—				23,988
Property and equipment-net			511,986				16,588				—				528,574
Total assets		$	811,174			$	88,957			$	(122,949	)		$	777,182
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	25,174			$	275			$	—			$	25,449
Accrued liabilities			20,886				4,307				—				25,193
Intercompany payable			57,722				—				(57,722	)			—
Total current liabilities			103,782				4,582				(57,722	)			50,642
Long-term debt			203,000				—				—				203,000
Deferred income taxes and other long-term liabilities			51,996				19,148				—				71,144
Shareholders’ Equity:
Paid-in capital			292,792				2,674				(2,674	)			292,792
Accumulated other comprehensive income			45				—				—				45
Retained earnings			159,559				62,553				(62,553	)			159,559
Total shareholders’ equity			452,396				65,227				(65,227	)			452,396
Total liabilities and shareholders’ equity		$	811,174			$	88,957			$	(122,949	)		$	777,182

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

						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

		For the quarter ended September 30, 2008
		Parent
		Company				Guarantor
		Only(2)				Subsidiaries(1) (2)				Eliminations				Consolidated
Operating revenues, net		$	117,647			$	17,813			$	—			$	135,460
Management fees			712				—				(712	)			—
Gain on disposition of assets, net			249				—				—				249
Other, principally interest income			29				—				—				29
			118,637				17,813				(712	)			135,738
Expenses:
Direct expenses			96,405				13,965				—				110,370
Management fees			—				712				(712	)			—
Selling, general, and administrative expenses			7,421				947				—				8,368
Equity in net income of consolidated subsidiaries			(2,069	)			—				2,069				—
Interest expense			3,840				—				—				3,840
			105,597				15,624				1,357				122,578
Earnings before income taxes			13,040				2,189				(2,069	)			13,160
Income taxes			5,143				120				—				5,263
Net earnings		$	7,897			$	2,069			$	(2,069	)		$	7,897

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

		For the nine months ended September 30, 2009
		Parent
		Company				Guarantor
		Only				Subsidiaries(1)				Eliminations				Consolidated
Operating revenues, net		$	314,821			$	49,635			$	—			$	364,456
Management fees			1,985				—				(1,985	)			—
Gain on dispositions of assets, net			172				—				—				172
Other, principally interest income			181				—				—				181
			317,159				49,635				(1,985	)			364,809
Expenses:
Direct expenses			268,149				39,862				—				308,011
Management fees			—				1,985				(1,985	)			—
Selling, general and administrative expenses			22,190				1,558				—				23,748
Equity in net income of consolidated subsidiaries			(3,738	)			—				3,738				—
Interest expense			11,894				—				—				11,894
			298,495				43,405				1,753				343,653
Earnings before income taxes			18,664				6,230				(3,738	)			21,156
Income tax expense			5,970				2,492				—				8,462
Net earnings		$	12,694			$	3,738			$	(3,738	)		$	12,694