PHI INC (Form: 10-Q, Received: 11/08/2013 16:11:14)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2013

¨	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: x No: ¨

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: x No: ¨

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: ¨ No: x

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 31, 2013
Voting Common Stock		2,905,757 shares
Non-Voting Common Stock		12,567,879 shares

PHI, INC.

Index – Form 10-Q


Part I – Financial Information

Item 1.	Financial Statements – Unaudited
	Condensed Consolidated Balance Sheets – September 30, 2013 and December 31, 2012	3
	Condensed Consolidated Statements of Operations – Quarter and Nine Months ended September 30, 2013 and 2012	4
	Condensed Consolidated Statements of Comprehensive Income – Quarter and Nine Months ended September 30, 2013 and 2012	5
	Condensed Consolidated Statements of Shareholders’ Equity – Nine Months ended September 30, 2013 and 2012	6
	Condensed Consolidated Statements of Cash Flows – Nine Months ended September 30, 2013 and 2012	7
	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	37

Part II – Other Information

Item 1.	Legal Proceedings	38

Item 1.A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	38

Item 4.	Mine Safety Disclosures	38

Item 5.	Other Information	38

Item 6.	Exhibits	39

	Signatures	40

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars except share data)


	September 30,			December 31,
	2013			2012
	(unaudited)
ASSETS
Current Assets:
Cash	$	1,896		$	2,849
Short-term investments		77,238			50,601
Accounts receivable – net
Trade		174,288			137,179
Other		4,219			3,974
Inventories of spare parts – net		69,684			66,074
Prepaid expenses		9,984			10,137
Work in progress		77,921			77,764
Deferred income taxes		11,966			11,967
Income taxes receivable		1,623			1,613
Other current assets		—			988

Total current assets		428,819			363,146
Property and equipment – net		782,247			749,501
Restricted investments		14,685			14,685
Other assets		13,414			20,562

Total assets	$	1,239,165		$	1,147,894

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	27,871		$	26,308
Accrued and other current liabilities		134,713			117,162

Total current liabilities		162,584			143,470
Long-term debt		388,265			386,755
Deferred income taxes		131,581			105,418
Other long-term liabilities		14,340			12,636
Commitments and contingencies (Note 9)
Shareholders’ Equity:
Voting common stock – par value of $0.10; 12,500,000 shares authorized, 2,905,757 and 2,852,616 shared issued and outstanding at September 30, 2013 and December 31, 2012, respectively		291			285
Non-voting common stock – par value of $0.10; 25,000,000 shares authorized, 12,567,879 and 12,458,992 issued and outstanding at September 30, 2013 and December 31, 2012, respectively		1,257			1,246
Additional paid-in capital		296,206			295,582
Accumulated other comprehensive loss		(43	)		(51	)
Retained earnings		244,684			202,553

Total shareholders’ equity		542,395			499,615

Total liabilities and shareholders’ equity	$	1,239,165		$	1,147,894

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,
	2013			2012			2013			2012
Operating revenues, net	$	200,762		$	170,857		$	575,273		$	469,462
Expenses:
Direct expenses		160,731			141,706			468,428			394,496
Selling, general and administrative expenses		9,785			9,784			28,075			28,292

Total operating expenses		170,516			151,490			496,503			422,788
(Gain) loss on disposal of assets, net		(1,399	)		701			(16,075	)		11
Impairment of assets		—			—			421			—
Equity in (income) loss of unconsolidated affiliate		(172	)		—			911			—

Operating income		31,817			18,666			93,513			46,663
Interest expense		7,768			7,488			22,434			22,128
Other income, net		(163	)		(262	)		(388	)		(625	)

		7,605			7,226			22,046			21,503

Earnings before income taxes		24,212			11,440			71,467			25,160
Income tax expense		10,435			5,056			29,336			10,544

Net earnings	$	13,777		$	6,384		$	42,131		$	14,616

Weighted average shares outstanding:
Basic		15,474			15,312			15,474			15,312
Diluted		15,639			15,522			15,617			15,481
Net earnings per share:
Basic	$	0.89		$	0.42		$	2.72		$	0.96
Diluted	$	0.88		$	0.41		$	2.70		$	0.94

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

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)


	Quarter Ended					Nine Months Ended
	September 30,					September 30,
	2013		2012			2013			2012
Net earnings	$	13,777	$	6,384		$	42,131		$	14,616
Unrealized gain (loss) on short-term investments		37		(18	)		14			49
Changes in pension plan assets and benefit obligations		—		(2	)		(6	)		(14	)

Total comprehensive income	$	13,814	$	6,364		$	42,139		$	14,651

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, 2011		2,853		$	285			12,459		$	1,246		$	291,403		$	(93	)	$	184,496	$	477,337
Net earnings		—			—			—			—			—			—			14,616		14,616
Unrealized gain on short-term											—
investments		—			—			—			—			—			49			—		49
Changes in pension plan assets and benefit obligations		—			—			—			—			—			(14	)		—		(14	)
Issuance of restricted stock units		—			—			—			—			4,868			—			—		4,868

Balance at September 30, 2012		2,853		$	285			12,459		$	1,246		$	296,271		$	(58	)	$	199,112	$	496,856


																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, 2012		2,853		$	285			12,565		$	1,246		$	295,582		$	(51	)	$	202,553	$	499,615
Net earnings		—			—			—			—			—			—			42,131		42,131
Unrealized loss on short-term investments		—			—			—			—			—			14			—		14
Changes in pension plan assets and benefit obligations		—			—			—			—			—			(6	)		—		(6	)
Amortization of unearned stock-based compensation		—			—			—			—			1,677			—			—		1,677
Issuance of non-voting common stock (upon vesting of restricted stock units)		—			—			4			17			—			—			—		17
Cancellation of restricted non-voting stock units for tax withholdings on vested shares		—			—			(1	)		(6	)		(59	)		—			—		(65	)
Issuance of voting common stock
(upon vesting of restricted stock units)		84			9			—			—			—			—			—		9
Cancellation of restricted voting stock units for tax withholdings on vested shares		(31	)		(3	)		—			—			(994	)		—			—		(997	)

Balance at September 30, 2013		2,906		$	291			12,568		$	1,257		$	296,206		$	(43	)	$	244,684	$	542,395

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,
	2013			2012
Operating activities:
Net earnings	$	42,131		$	14,616
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		31,424			25,536
Deferred income taxes		26,158			10,566
Equity in loss of unconsolidated affiliate		911			—
(Gain) loss on asset dispositions		(16,075	)		11
Impairment of assets		421			—
Other		655			3,725
Changes in operating assets and liabilities		(17,520	)		(28,418	)

Net cash provided by operating activities		68,105			26,036

Investing activities:
Purchase of property and equipment		(86,092	)		(83,187	)
Proceeds from asset dispositions		39,822			9,702
Purchase of short-term investments		(314,519	)		(167,952	)
Proceeds from sale of short-term investments		287,043			194,957
Deposits returned on aircraft		6,908			5,369
Deposits paid on aircraft		(2,693	)		(11,176	)

Net cash used in investing activities		(69,531	)		(52,287	)

Financing activities:
Proceeds from line of credit		101,273			91,863
Payments on line of credit		(99,763	)		(68,915	)
Repurchase of common stock for payroll tax withholding requirements		(1,037	)		—

Net cash provided by financing activities		473			22,948

Decrease in cash		(953	)		(3,303	)
Cash, beginning of period		2,849			5,091

Cash, end of period	$	1,896		$	1,788

Supplemental Disclosures Cash Flow Information
Cash paid during the period for:
Interest	$	15,112		$	15,078

Income taxes	$	229		$	563

Noncash investing activities:
Other current liabilities and accrued payables related to purchase of property and equipment	$	102		$	330

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include the accounts of PHI, Inc. and its subsidiaries (“PHI” or the “Company” or “we” or “our”). 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, 2012 and the accompanying notes.

The Company’s financial results, particularly as they relate to the Company’s Oil and Gas segment, are influenced by seasonal fluctuations as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. For this and other reasons, 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. INVESTMENTS

We classify all of our short-term investments as available-for-sale. We carry these at fair value and report unrealized gains and losses, net of taxes, in Accumulated other comprehensive income (loss) until realized. These gains and losses are reflected as a separate component of shareholders’ equity in our Condensed Consolidated Balance Sheets and our Condensed Consolidated Statements of Shareholders’ Equity. Cost, gains, and losses are determined using the specific identification method.

Investments consisted of the following as of September 30, 2013:


			Unrealized		Unrealized			Fair
	Cost Basis		Gains		Losses			Value
	(Thousands of dollars)
Investments:
Money Market Mutual Funds	$	22,554	$	—	$	—		$	22,554
Commercial Paper		11,846		1		(2	)		11,845
Corporate bonds and notes		57,510		30		(16	)		57,524

Subtotal		91,910		31		(18	)		91,923
Deferred compensation plan assets included in other assets		1,990		—		—			1,990

Total	$	93,900	$	31	$	(18	)	$	93,913

Investments consisted of the following as of December 31, 2012:


			Unrealized		Unrealized			Fair
	Cost Basis		Gains		Losses			Value
	(Thousands of dollars)
Investments:
Money Market Mutual Funds	$	29,816	$	—	$	—		$	29,816
Commercial Paper		5,494		1		(2	)		5,493
Corporate bonds and notes		29,986		2		(11	)		29,977

Subtotal		65,296		3		(13	)		65,286
Deferred compensation plan assets included in other assets		2,687		—		—			2,687

Total	$	67,983	$	3	$	(13	)	$	67,973

$14.7 million of our investments are long-term and included on the balance sheet as Restricted investments, as they are securing outstanding letters of credit with maturities beyond one year.

The following table presents the cost and fair value of our debt investments based on maturities as of:


	September 30, 2013				December 31, 2012
	Amortized		Fair		Amortized		Fair
	Costs		Value		Costs		Value
	(Thousands of dollars)
Due in one year or less	$	31,887	$	31,889	$	35,480	$	35,470
Due within two years		37,469		37,480		—		—

Total	$	69,356	$	69,369	$	35,480	$	35,470

The following table presents the average coupon rate percentage and the average days to maturity of our debt investments as of:


	September 30, 2013				December 31, 2012
	Average		Average		Average		Average
	Coupon Rate (%)		Days To Maturity		Coupon Rate (%)		Days To Maturity
Commercial Paper		0.139		62		0.305		138
Corporate bonds and notes		2.311		418		2.965		112

The following table presents the fair value and unrealized losses related to our investments that have been in a continuous unrealized loss position for less than twelve months as of:


	September 30, 2013					December 31, 2012
			Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses
	(Thousands of dollars)
Commercial Paper	$	5,846	$	(2	)	$	2,494	$	(2	)
Corporate bonds and notes		30,670		(16	)		16,771		(11	)

Total	$	36,516	$	(18	)	$	19,265	$	(13	)

The following table presents the fair value and unrealized losses related to our investments that have been in a continuous unrealized loss position for twelve months or more as of:


	September 30, 2013				December 31, 2012
			Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses
	(Thousands of dollars)
Corporate bonds and notes	$	—	$	—	$	2,004	$	(.4	)

	$	—	$	—	$	2,004	$	(.4	)

From time to time over the periods covered in our financial statements included herein, our investments have experienced net unrealized losses. We consider these declines in market value to be due to market conditions, and we do not plan to sell these investments prior to maturity. For these reasons, we do not consider any of our investments to be other than temporarily impaired at September 30, 2013 or December 31, 2012. The assessment of whether an investment in a debt security has suffered an other-than-temporary impairment is based on whether the Company has the intent to sell or more likely than not will be required to sell the debt security before recovery of its amortized costs. Further, if the Company does not expect to recover the entire amortized cost basis of the debt security, an other-than-temporary impairment is considered to have occurred and it is measured by the present value of cash flows expected to be collected less the amortized cost basis (credit loss). We have determined that we did not have any other-than-temporary impairments relating to credit losses on debt securities for the quarter and nine months ended September 30, 2013.

3. REVENUE RECOGNITION AND 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, 2013 and December 31, 2012.

Revenues related to emergency flights generated by our Air Medical segment are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care when the services are provided. The allowance for contractual discounts was $67.4 million and $54.6 million as of September 30, 2013 and December 31, 2012, respectively. The allowance for uncompensated care was $55.5 million and $48.0 million as of September 30, 2013 and December 31, 2012, respectively.

Included in the allowance for uncompensated care listed above is the value of services to patients who are unable to pay when it is determined that they qualify for charity care. The value of these services was $2.1 million and $1.8 million for the quarters ended September 30, 2013 and 2012, respectively. The estimated cost of providing charity services was $1.0 million and $0.5 million for the quarters ended September 30, 2013 and 2012, respectively. The value of these services was $6.5 million and $4.0 million for the nine months ended September 30, 2013 and 2012, respectively. The estimated cost of providing charity services was $2.5 million and $1.4 million for the nine months ended September 30, 2013 and 2012, respectively. The estimated costs of providing charity services are based on a calculation that applies a ratio of costs to the charges for uncompensated charity care. The ratio of costs to charges is based on the Air Medical segment’s total expenses divided by gross patient service revenue.

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


	September 30,			December 31,
	2013			2012
Allowance for Contractual Discounts		39	%		38	%
Allowance for Uncompensated Care		32	%		33	%

Our contract in the Middle East requires us to provide multiple services, including helicopter leasing, flight services for helicopter emergency medical service operations, aircraft maintenance, provision of spare parts, insurance coverage for the customer-owned aircraft, training services, and base construction. All services are delivered and earned monthly over a three-year contractual period which began on September 29, 2012. The customer may terminate the contract prior to the end of the contract term by giving ninety days advance notice and paying an early termination fee of $13.5 million. Each of the major services mentioned above qualify as separate units of accounting under the accounting guidance for such arrangements. The selling price for each specific service was determined based upon third-party evidence and estimates.

We have also established valuation reserves related to obsolete and slow-moving spare parts inventory. The inventory valuation reserves were $11.9 million and $12.4 million at September 30, 2013 and December 31, 2012, respectively.

4. FAIR VALUE MEASUREMENTS

Accounting standards require that assets and liabilities carried at fair value will 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 investments and financial instruments by the above pricing levels as of the valuation dates listed:


	Total		September 30, 2013
	Total		(Level 1)		(Level 2)
Investments:
Money Market Mutual Funds	$	22,554	$	22,554	$	—
Commercial Paper		11,845		—		11,845
Corporate bonds and notes		57,524		—		57,524

		91,923		22,554		69,369
Deferred compensation plan assets		1,990		1,990		—

Total	$	93,913	$	24,544	$	69,369


	Total		December 31, 2012
	Total		(Level 1)		(Level 2)
Investments:
Money Market Mutual Funds	$	29,816	$	29,816	$	—
Commercial Paper		5,493		—		5,493
Corporate bonds and notes		29,977		—		29,977

		65,286		29,816		35,470
Deferred compensation plan assets		2,687		2,687		—

Total	$	67,973	$	32,503	$	35,470

We hold our short-term investments in an investment fund consisting of investment grade money market instruments of governmental and private issuers, which are classified as short-term investments. Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets. These items are traded with sufficient frequency and volume to provide pricing on an ongoing basis. The fair values of the shares of these funds are based on observable market prices, and therefore, have been categorized in Level 1 in the fair value hierarchy. Level 2 inputs reflect quoted prices for identical assets or liabilities that are not active. These items may not be traded daily; examples include corporate bonds and U.S. government agencies. There have been no transfers between Level 1 and Level 2 investments. We hold no Level 3 investments. Investments included in other assets, which relate to the liability for the Officers’ Deferred Compensation Plan, consist mainly of multiple investment funds that are highly liquid and diversified.

Cash, accounts receivable, accounts payable and accrued liabilities, and our revolving credit facility all had fair values approximating their carrying amounts at September 30, 2013 and December 31, 2012. Our determination of the estimated fair value of our Senior Notes and our revolving credit facility is derived using Level 2 inputs, including quoted market indications of similar publicly-traded debt. The fair value of our Senior Notes, based on quoted market prices, was $313.5 million and $320.3 million at September 30, 2013 and December 31, 2012, respectively.

5. LONG-TERM DEBT

The components of long-term debt as of are as follows:


	September 30,		December 31,
	2013		2012
	(Thousands of dollars)
Senior Notes issued September 23, 2010, interest only payable semi-annually at 8.625%, maturing October 15, 2018	$	300,000	$	300,000
Revolving Credit Facility due September 1, 2015 with a group of commercial banks, interest payable at variable rates		88,265		86,755

Total long-term debt	$	388,265	$	386,755

Revolving Credit Facility – On September 18, 2013, we restated and amended our revolving credit facility to (a) increase our borrowing capacity to $150 million, (b) reduce the interest rate on borrowed funds to LIBOR plus 225 basis points, or prime rate, at our option, (c) remove the prior borrowing base limitation, and (d) extend the maturity date to September 1, 2015.

Other – We maintain a separate letter of credit facility that had $14.7 million in letters of credit outstanding at September 30, 2013 and December 31, 2012.

Cash paid to fund interest expense was $0.8 million for the quarter ended September 30, 2013 and $0.8 million for the quarter ended September 30, 2012. Cash paid to fund interest expense was $15.1 million for the nine months ended September 30, 2013 and $15.1 million for the nine months ended September 30, 2012.

6. EARNINGS PER SHARE

The components of basic and diluted earnings per share for the quarter and nine months ended September 30, 2013 and 2012 are as follows:


	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(Thousands of dollars)
Weighted average outstanding shares of common stock, basic		15,474		15,312		15,474		15,312
Dilutive effect of restricted stock units		165		210		143		169

Weighted average outstanding shares of common stock, diluted		15,639		15,522		15,617		15,481

7. STOCK-BASED COMPENSATION

We recognize the cost of employee compensation received in the form of equity instruments based on the grant date fair value of those awards. The table below sets forth the total amount of stock-based compensation expense for the nine months and quarters ended September 30, 2013 and 2012.


	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(Thousands of dollars)
Stock-based compensation expense:
Time-based restricted stock units	$	120	$	1,560	$	342	$	3,024
Performance-based restricted stock units		558		112		1,335		112

Total stock-based compensation expense	$	678	$	1,672	$	1,677	$	3,136

During the quarter ended September 30, 2013, we awarded 3,857 time-based restricted stock units and 935 performance-based restricted stock units to managerial employees.

During the nine months ended September 30, 2013, we awarded 5,075 time-based restricted stock units and 124,982 performance-based restricted stock units to managerial employees.

8. ASSET DISPOSALS AND IMPAIRMENTS

Asset disposal and impairments – During the third quarter of 2013, we sold one light aircraft previously utilized in our Oil and Gas segment and miscellaneous equipment with a carrying value of $1.2 million. Cash proceeds totaled $2.6 million, resulting in a gain on the sale of these assets of $1.4 million. During the nine months ended September 30, 2013, we sold, in addition to these above-described properties, two heavy previously utilized in our Oil and Gas segment. The carrying value prior to the sale was $20.6 million. These assets were sold for $37.0 million, resulting in a gain of $16.4 million recorded in the second quarter of 2013. These aircraft no longer met our strategic needs. In addition, we sold an airframe to a charitable organization, which resulted in a loss of $1.7 million.

We also recorded an impairment loss in the nine months ended September 30, 2013 for two medium aircraft in our Air Medical segment. The carrying value of these aircraft was $0.8 million. Following a market analysis, it was determined that the current market value for these aircraft was $0.4 million. As a result, we recorded an impairment loss of $0.4 million.

9. COMMITMENTS AND CONTINGENCIES

Commitments – In the third quarter of 2013, we entered into a contract to purchase six new light helicopters for our Air Medical segment with deliveries scheduled for the third and fourth quarters of 2013. Three aircraft were delivered in the third quarter and the remaining three are scheduled for delivery in the fourth quarter. The aggregate acquisition cost of the remaining three aircraft is $7.6 million.

In the first quarter of 2013, we agreed to purchase two customer-owned light helicopters for our Air Medical segment, to be completed in the fourth quarter of 2013. The aggregate acquisition cost is $3.6 million.

Total aircraft deposits of $7.5 million were included in Other Assets as of September 30, 2013. This amount represents deposits required under aircraft purchase contracts.

As of September 30, 2013, we had options to purchase aircraft under lease becoming exercisable in 2013 through 2019. The aggregate option purchase prices are $14.9 million in 2013, $103.0 million in 2014, $67.8 million in 2016, $55.2 million in 2017, $84.9 million in 2018, and $19.5 million in 2019. Subject to market conditions and available cash, we currently intend to exercise these options as they become exercisable.

Environmental Matters – We have recorded an aggregate estimated probable liability of $0.2 million as of September 30, 2013 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 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 a Corrective Action Plan from the Company. LDEQ approved the Corrective Action Plan (“CAP”) for the remediation of the former PHI plant location on August 23, 2010. All Louisiana Department of Natural Resources approvals were received and the project began on May 16, 2011. Initial work took three weeks. Groundwater sampling that was performed during December 2011, March 2012, and September 2012 was evaluated to determine the effectiveness of remediation performed to date and whether additional remediation will be necessary. Based upon that review, a second round of sampling in one of the two source areas was performed during the fourth quarter of 2012. Based upon the May 2003 Site Assessment Report, the April 2006 update, ongoing monitoring, and the August 2010 CAP, the Company believes the (i) total cost for this project will remain substantially below the current environmental reserve and (ii) 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 liability with respect to these actions will not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

On December 31, 2009, the Office and Professional Employees International Union (“OPEIU”), the union representing the Company’s domestic pilots, sued the Company in United States District Court for the Western District of Louisiana asserting that its acceptance in 2009 of the terms and conditions of employment for the Company’s pilots initially implemented by the Company prior to a 2006 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. The Court administratively stayed this case pending the completion of appellate briefing in two other litigations between the parties that have since been resolved in the Company’s favor. By Order dated April 26, 2012, the District Court invited PHI to file a motion to dismiss the OPEIU’s claims. PHI filed such a motion to dismiss the OPEIU’s claims on May 11, 2012, and the Court dismissed all claims against PHI without prejudice for lack of jurisdiction to award the equitable relief sought in the complaint, entering a final judgment on October 15, 2012. The OPEIU appealed this decision to the U.S Court of Appeals for the Fifth Circuit. By order dated August 8, 2013, the court of appeals affirmed the trial court’s order dismissing all claims against PHI. The Union did not seek rehearing from the appellate court. The time in which the Union could seek a writ of certiorari from the United States Supreme Court expired on November 6, 2013. PHI has not been served with a petition as of this date. If no such petition has been filed by November 6, 2013, then the matter is concluded in PHI’s favor.

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. All aircraft leases contain purchase options exercisable at certain dates in the lease agreements.

At September 30, 2013, we had approximately $284.3 million in aggregate commitments under operating leases of which approximately $11.7 million is payable through December 31, 2013. The total lease commitments include $266.3 million for aircraft and $18.0 million for facility lease commitments.

10. SEGMENT INFORMATION

PHI is primarily a provider of helicopter services, including helicopter maintenance and repair services. We use a combination of factors to identify reportable segments as required by Accounting Standards Codification 280, “Segment Reporting.” The overriding determination of our segments is based on how our Chief Executive Officer 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 integrated and independent oil and gas production companies transporting personnel and/or equipment to offshore platforms in the Gulf of Mexico. Our customers include Shell Oil Company, BP America Production Company, ExxonMobil Production Co., and ConocoPhillips Company, with whom we have worked for 30 or more years, and ENI Petroleum, with whom we have worked for more than 15 years. We currently operate 169 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 segment are primarily aircraft operations costs, including costs for pilots and maintenance personnel. Total fuel cost is included in direct expense and any reimbursement of a portion of these costs above a contracted per-gallon amount is included in revenue. For the quarters ended September 30, 2013 and 2012, approximately 63% and 67%, respectively, of our total operating revenues were generated by our Oil and Gas segment. Our Oil and Gas segment generated approximately 63% and 67% of our total operating revenue for the nine months ended September 30, 2013 and 2012, respectively.

Air Medical Segment. Our 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.

As of September 30, 2013, 102 aircraft were assigned to our Air Medical segment. We currently operate approximately 87 aircraft domestically, providing air medical transportation services for hospitals and emergency service agencies in 18 states at 71 separate locations. We also provide air medical transportation services for a customer in the Middle East. For this program, we currently intend, based on present conditions, to deploy eight aircraft at six locations once all aircraft are operational, which we expect to occur in the fourth quarter of 2013. 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. For the quarters ended September 30, 2013 and 2012, approximately 36% and 32% of our total operating revenues were generated by our Air Medical segment, respectively. For the nine months ended September 30, 2013 and 2012, approximately 36% and 32% of our total operating revenues were generated by our Air Medical segment, 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 Insurance, Medicare, Medicaid, and Self-Pay. Estimates regarding the 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 fully closed, 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 $67.4 million and $57.1 million as of September 30, 2013 and September 30, 2012, respectively. The allowance for uncompensated care was $55.5 million and $51.3 million as of September 30, 2013 and September 30, 2012, respectively.

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


	Revenue
	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Provision for contractual discounts		62	%		50	%		60	%		56	%
Provision for uncompensated care		8	%		17	%		9	%		11	%

These percentages are affected by rate increases and changes in the number of transports by payor mix.

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, does not increase proportionately with rate increases.

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


	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Insurance		75	%		66	%		73	%		68	%
Medicare		17	%		25	%		18	%		22	%
Medicaid		7	%		8	%		8	%		9	%
Self-Pay		1	%		1	%		1	%		1	%

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 38% and 18% of the segment’s revenues for the quarters ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 2012, these contracts generated approximately 38% and 19% of the segment’s revenues. The increase is primarily due to the expansion of operations under our 2012 contract in the Middle East, which is also structured as a hospital contract, but had minimal revenue in the third quarter 2012.

Technical Services Segment. Our 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.

Approximately 1% of our total operating revenues for the quarters and nine months ended September 30, 2013 and September 30, 2012 were generated by our Technical Services segment.

Summarized financial information concerning our reportable operating segments for the quarters and nine months ended September 30, 2013 and 2012 is as follows:


	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(Thousands of dollars)						(Thousands of dollars)
Segment operating revenues
Oil and Gas	$	125,931		$	114,949		$	359,732		$	312,322
Air Medical		73,188			54,004			209,434			150,557
Technical Services		1,643			1,904			6,107			6,583

Total operating revenues, net		200,762			170,857			575,273			469,462

Segment direct expenses ⁽¹⁾
Oil and Gas ⁽²⁾		99,919			94,563			290,616			263,829
Air Medical		58,924			45,308			173,296			125,311
Technical Services		1,716			1,835			5,427			5,356

Total direct expenses		160,559			141,706			469,339			394,496

Segment selling, general and administrative expenses
Oil and Gas		1,036			1,002			2,976			2,810
Air Medical ⁽³⁾		2,461			1,698			6,210			5,073
Technical Services		—			—			—			1

Total selling, general and administrative expenses		3,497			2,700			9,186			7,884

Total direct and selling, general and administrative expenses		164,056			144,406			478,525			402,380

Net segment profit (loss)
Oil and Gas		24,976			19,384			66,140			45,683
Air Medical		11,803			6,998			29,928			20,173
Technical Services		(73	)		69			680			1,226

Total		36,706			26,451			96,748			67,082

Other, net ⁽⁴⁾		1,561			(439	)		16,041			614
Unallocated selling, general and administrative costs ⁽¹⁾		(6,424	)		(7,084	)		(19,025	)		(20,408	)
Interest expense		(7,631	)		(7,488	)		(22,297	)		(22,128	)

Earnings before income taxes	$	24,212		$	11,440		$	71,467		$	25,160

(1)	Included in direct expenses and unallocated selling, general, and administrative costs are the depreciation and amortization expense amounts below:


	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Oil and Gas	$	6,403	$	6,018	$	19,707	$	17,545
Air Medical		2,873		2,453		8,376		7,118
Technical Services		50		14		81		58

Total	$	9,326	$	8,485	$	28,164	$	24,721

Unallocated SG&A	$	1,235	$	270	$	3,260	$	815

(2)	Includes Equity in loss of unconsolidated affiliate.

(3)	Includes interest expense.

(4)	Consists of gains on disposition of property and equipment and impairments, and other income

11. INVESTMENT IN VARIABLE INTEREST ENTITY

A variable interest entity is an entity that either (a) has insufficient equity to permit the entity to finance its operations without additional subordinated financial support or (b) has equity investors who lack the characteristics of a controlling financial interest. As of September 30, 2013, we had a 49% investment in the common stock of PHI Century Limited (“PHIC”), a Ghanaian entity. We acquired our 49% interest on May 26, 2011, PHIC’s date of incorporation. The purpose of PHIC is to provide oil and gas flight services in Ghana and the West African region. For the nine months ended September 30, 2013, we recorded a loss in equity of unconsolidated affiliate of $0.9 million relative to our 49% equity ownership. In addition, we had $5.6 million of Trade receivables and a $1.0 million note receivable outstanding as of September 30, 2013 from PHIC. The note receivable is included in Other assets on our Condensed Consolidated Balance Sheet. Our investment in the common stock of PHIC is included in Other assets on our Condensed Consolidated Balance Sheet and was $(1.7) million at September 30, 2013. Included in Operating revenues for nine months ended September 30, 2013 is $2.0 million of revenues from services provided to PHIC.

12. OTHER COMPREHENSIVE INCOME

Amounts reclassified from Accumulated other comprehensive income are not material and, therefore, not presented in the Condensed Consolidated Statements of Comprehensive Income.

13. SUBSEQUENT EVENTS

Subsequent to September 30, 2013, we entered into a contract to purchase six new heavy aircraft for our Oil and Gas segment, with deliveries scheduled throughout 2014. In addition, the contract includes an option to purchase six additional heavy aircraft for delivery in 2015 and 2016. We intend to fund these commitments and purchase options through a combination of aircraft leases, cash flow from operations, and borrowings under our credit facility.

14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In September 2010, PHI, Inc. issued $300 million of 8.625% Senior Notes due 2018 that 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 on the following pages sets forth, on a consolidated basis, the balance sheet, statement of operations, statement of comprehensive income, 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 the financial information presented below.

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(Thousands of dollars)

(Unaudited)


	September 30, 2013
	Parent Company Only (issuer)			Guarantor Subsidiaries ⁽¹⁾		Eliminations			Consolidated
ASSETS
Current Assets:
Cash	$	598		$	1,298	$	—		$	1,896
Short-term investments		77,238			—		—			77,238
Accounts receivable – net		86,478			92,029		—			178,507
Intercompany receivable		139,531			—		(139,531	)		—
Inventories of spare parts – net		69,557			127		—			69,684
Prepaid expenses		7,611			2,373		—			9,984
Work in progress		77,921			—		—			77,921
Deferred income taxes		11,966			—		—			11,966
Income taxes receivable		1,392			231		—			1,623

Total current assets		472,292			96,058		(139,531	)		428,819
Investment in subsidiaries		110,101			—		(110,101	)		—
Property and equipment – net		581,580			200,667		—			782,247
Restricted investments		14,685			—		—			14,685
Other assets		13,172			242		—			13,414

Total assets	$	1,191,830		$	296,967	$	(249,632	)	$	1,239,165

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	23,582		$	4,289	$	—		$	27,871
Accrued and other current liabilities		119,946			14,767		—			134,713
Intercompany payable		—			139,531		(139,531	)		—

Total current liabilities		143,528			158,587		(139,531	)		162,584
Long-term debt		388,265			—		—			388,265
Deferred income taxes and other long-term liabilities		117,642			28,279		—			145,921
Shareholders’ Equity:
Common stock and paid-in capital		297,754			2,674		(2,674	)		297,754
Accumulated other comprehensive loss		(43	)		—		—			(43	)
Retained earnings		244,684			107,427		(107,427	)		244,684

Total shareholders’ equity		542,395			110,101		(110,101	)		542,395

Total liabilities and shareholders’ equity	$	1,191,830		$	296,967	$	(249,632	)	$	1,239,165

(1)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

(Thousands of dollars)


	December 31, 2012
	Parent Company Only (issuer)			Guarantor Subsidiaries ⁽¹⁾		Eliminations			Consolidated
ASSETS
Current Assets:
Cash	$	552		$	2,297	$	—		$	2,849
Short-term investments		50,601			—		—			50,601
Accounts receivable – net		80,148			61,005		—			141,153
Intercompany receivable		115,300			—		(115,300	)		—
Inventories of spare parts – net		65,951			123		—			66,074
Prepaid expenses		8,354			1,783		—			10,137
Work in progress		77,764			—		—			77,764
Other current assets		988			—		—			988
Deferred income taxes		11,967			—		—			11,967
Income taxes receivable		1,395			218		—			1,613

Total current assets		413,020			65,426		(115,300	)		363,146
Investment in subsidiaries		96,706			—		(96,706	)		—
Property and equipment, net		559,686			189,815		—			749,501
Restricted investments		14,685			—		—			14,685
Other assets		19,726			836		—			20,562

Total assets	$	1,103,823		$	256,077	$	(212,006	)	$	1,147,894

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	21,188		$	5,120	$	—		$	26,308
Accrued and other current liabilities		105,875			11,287		—			117,162
Intercompany payable		—			115,300		(115,300	)		—

Total current liabilities		127,063			131,707		(115,300	)		143,470
Long-term debt		386,755			—		—			386,755
Deferred income taxes and other long-term liabilities		90,390			27,664		—			118,054
Shareholders’ Equity:
Common stock and paid-in capital		297,113			2,674		(2,674	)		297,113
Accumulated other comprehensive loss		(51	)		—		—			(51	)
Retained earnings		202,553			94,032		(94,032	)		202,553

Total shareholders’ equity		499,615			96,706		(96,706	)		499,615

Total liabilities and shareholders’ equity	$	1,103,823		$	256,077	$	(212,006	)	$	1,147,894

(1)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(Thousands of dollars)

(Unaudited)


	For the quarter ended September 30, 2013
	Parent Company Only			Guarantor Subsidiaries ⁽¹⁾			Eliminations			Consolidated
Operating revenues, net	$	125,160		$	75,602		$	—		$	200,762
Expenses:
Direct expenses		98,669			62,062			—			160,731
Selling, general and administrative expenses		7,365			2,420			—			9,785
Management fees		(3,024	)		3,024			—			—

Total operating expenses		103,010			67,506			—			170,516
Gain on disposal of assets, net		(1,380	)		(19	)		—			(1,399	)
Equity in income of unconsolidated affiliate		(172	)		—			—			(172	)

Operating income		23,702			8,115			—			31,817
Equity in net income of consolidated subsidiaries		(4,787	)		—			4,787			—
Interest expense		7,631			137			—			7,768
Other income, net		(163	)		—			—			(163	)

		2,681			137			4,787			7,605

Earnings before income taxes		21,021			7,978			(4,787	)		24,212
Income tax expense		7,244			3,191			—			10,435

Net earnings	$	13,777		$	4,787		$	(4,787	)	$	13,777


	For the quarter ended September 30, 2012
	Parent Company Only			Guarantor Subsidiaries ⁽¹⁾			Eliminations			Consolidated
Operating revenues, net	$	109,255		$	61,602		$	—		$	170,857
Expenses:
Direct expenses		92,980			48,726			—			141,706
Selling, general and administrative expenses		7,995			1,789			—			9,784
Management fees		(2,464	)		2,464			—			—

Total operating expenses		98,511			52,979			—			151,490
Gain on disposal of assets, net		701			—			—			701

Operating income		10,043			8,623			—			18,666
Equity in net income of consolidated subsidiaries		(5,174	)		—			5,174			—
Interest expense		7,488			—			—			7,488
Other income, net		(262	)		—			—			(262	)

		2,052			—			5,174			7,226

Earnings before income taxes		7,991			8,623			(5,174	)		11,440
Income tax expense		1,607			3,449			—			5,056

Net earnings	$	6,384		$	5,174		$	(5,174	)	$	6,384

(1)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(Thousands of dollars)

(Unaudited)


	For the nine months ended September 30, 2013
	Parent
	Company			Guarantor
	Only			Subsidiaries ⁽¹⁾			Eliminations			Consolidated
Operating revenues, net	$	354,453		$	220,820		$	—		$	575,273
Expenses:
Direct expenses		285,661			182,767			—			468,428
Selling, general and administrative expenses		21,719			6,356			—			28,075
Management fees		(8,833	)		8,833			—			—

Total operating expenses		298,547			197,956			—			496,503
Gain on disposal of assets, net		(16,056	)		(19	)		—			(16,075	)
Impairment of assets		—			421			—			421
Equity in loss of unconsolidated affiliate		911			—			—			911

Operating income		71,051			22,462			—			93,513
Equity in net income of consolidated subsidiaries		(13,395	)		—			13,395			—
Interest expense		22,297			137			—			22,434
Other income, net		(388	)		—			—			(388	)

		8,514			137			13,395			22,046

Earnings before income taxes		62,537			22,325			(13,395	)		71,467
Income tax expense		20,406			8,930			—			29,336

Net earnings	$	42,131		$	13,395		$	(13,395	)	$	42,131


	For the nine months ended September 30, 2012
	Parent
	Company			Guarantor
	Only			Subsidiaries ⁽¹⁾			Eliminations			Consolidated
Operating revenues, net	$	303,623		$	165,839		$	—		$	469,462
Expenses:
Direct expenses		260,796			133,700			—			394,496
Selling, general and administrative expenses		22,942			5,350			—			28,292
Management fees		(6,634	)		6,634			—			—

Total operating expenses		277,104			145,684			—			422,788
Gain on disposal of assets, net		11			—			—			11

Operating income		26,508			20,155			—			46,663
Equity in net income of consolidated subsidiaries		(12,086	)		—			12,086			—
Interest expense		22,116			12			—			22,128
Other income, net		(625	)		—			—			(625	)

		9,405			12			12,086			21,503

Earnings before income taxes		17,103			20,143			(12,086	)		25,160
Income tax expense		2,487			8,057			—			10,544

Net earnings	$	14,616		$	12,086		$	(12,086	)	$	14,616

(1)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)


	For the quarter ended September 30, 2013
	Parent
	Company			Guarantor
	Only			Subsidiaries ⁽¹⁾		Eliminations			Consolidated
Net earnings	$	13,777		$	4,787	$	(4,787	)	$	13,777
Unrealized gain on short-term investments		37			—		—			37
Changes in pension plan assets and benefit obligations		—			—		—			—

	$	13,814		$	4,787	$	(4,787	)	$	13,814


	For the quarter ended September 30, 2012
	Parent
	Company			Guarantor
	Only			Subsidiaries ⁽¹⁾		Eliminations			Consolidated
Net earnings	$	6,384		$	5,174	$	(5,174	)	$	6,384
Unrealized loss on short-term investments		(18	)		—		—			(18	)
Changes in pension plan assets and benefit obligations		(2	)		—		—			(2	)

	$	6,364		$	5,174	$	(5,174	)	$	6,364

(1)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)


	For the nine months ended September 30, 2013
	Parent
	Company			Guarantor
	Only			Subsidiaries ⁽¹⁾		Eliminations			Consolidated
Net earnings	$	42,131		$	13,395	$	(13,395	)	$	42,131
Unrealized gain on short-term investments		14			—		—			14
Changes in pension plan assets and benefit obligations		(6	)		—		—			(6	)

	$	42,139		$	13,395	$	(13,395	)	$	42,139

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)


	For the nine months ended September 30, 2012
	Parent
	Company			Guarantor
	Only			Subsidiaries ⁽¹⁾		Eliminations			Consolidated
Net earnings	$	14,616		$	12,086	$	(12,086	)	$	14,616
Unrealized gain on short-term investments		49			—		—			49
Changes in pension plan assets and benefit obligations		(14	)		—		—			(14	)

	$	14,651		$	12,086	$	(12,086	)	$	14,651

(1)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

PHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)


	For the nine months ended September 30, 2013
	Parent
	Company			Guarantor
	Only (issuer)			Subsidiaries ⁽¹⁾			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	69,104		$	(999	)	$	—	$	68,105
Investing activities:
Purchase of property and equipment		(86,092	)		—			—		(86,092	)
Proceeds from asset dispositions		39,822			—			—		39,822
Purchase of short-term investments		(314,519	)		—			—		(314,519	)
Proceeds from sale of short-term investments		287,043			—			—		287,043
Deposits returned on aircraft		6,908			—			—		6,908
Deposits paid on aircraft		(2,693	)		—			—		(2,693	)

Net cash used in investing activities		(69,531	)		—			—		(69,531	)

Financing activities:
Proceeds from line of credit		101,273			—			—		101,273
Payments on line of credit		(99,763	)		—			—		(99,763	)
Repurchase of common stock for payroll tax withholding requirements		(1,037	)		—			—		(1,037	)

Net cash provided by financing activities		473			—			—		473

Increase (decrease) in cash		46			(999	)		—		(953	)
Cash, beginning of period		552			2,297			—		2,849

Cash, end of period	$	598		$	1,298		$	—	$	1,896


	For the nine months ended September 30, 2012
	Parent
	Company			Guarantor
	Only (issuer)			Subsidiaries ⁽¹⁾			Eliminations		Consolidated
Net cash provided by operating activities	$	25,632		$	404		$	—	$	26,036
Investing activities:
Purchase of property and equipment		(83,187	)		—			—		(83,187	)
Proceeds from asset dispositions		9,702			—			—		9,702
Purchase of short-term investments		(167,952	)		—			—		(167,952	)
Proceeds from sale of short-term investments		194,957			—			—		194,957
Deposits returned on aircraft		5,369			—			—		5,369
Deposits paid on aircraft		(11,176	)		—			—		(11,176	)

Net cash used in investing activities		(52,287	)		—			—		(52,287	)

Financing activities:
Proceeds from line of credit		91,863			—			—		91,863
Payments on line of credit		(68,915	)		—			—		(68,915	)

Net cash provided by financing activities		22,948			—			—		22,948

(Decrease) increase in cash		(3,707	)		404			—		(3,303	)
Cash, beginning of period		4,313			778			—		5,091

Cash, end of period	$	606		$	1,182		$	—	$	1,788

(1)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with (i) the accompanying unaudited condensed consolidated financial statements and the notes thereto and (ii) our Annual Report on Form 10-K for the year ended December 31, 2012, including the audited consolidated financial statements and notes thereto, (the “Notes”), management’s discussion and analysis, and the risk factor disclosures contained therein.

Forward-Looking Statements

All statements other than statements of historical fact contained in this Form 10-Q and other periodic reports filed by PHI, Inc. (“PHI” or the “Company” or “we” or “our”) under the Securities Exchange Act of 1934 and other written or oral statements made by it or on its behalf, are forward-looking statements. When used herein, the words “anticipates”, “expects”, “believes”, “goals”, “intends”, “plans”, “projects” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are based on a number of judgments and assumptions about future events, many of which are beyond our control. These forward-looking statements, and the assumptions on which they are based, are inherently speculative and are subject to significant risks, uncertainties, and other factors that may cause the Company’s actual results to differ materially from the expectations, beliefs, and estimates expressed or implied in such forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, no assurance can be given that such assumptions will prove correct or even approximately correct. Factors that could cause the Company’s results to differ materially from the expectations expressed or implied in such forward-looking statements include but are not limited to the following: unexpected variances in flight hours, the effect on demand for our services caused by volatility of oil and gas prices and the level of exploration and production activity in the Gulf of Mexico and our other operating areas, the effect on the demand for our services as a result of the 2010 Macondo incident and its aftermath, the effect on our operating costs of volatile fuel prices, the availability of capital required to acquire aircraft, environmental and litigation risks, hurricanes and other adverse weather conditions, the activities of our competitors, changes in government regulation, unionization or work stoppages, operating hazards, risks related to operating in foreign countries, the ability to obtain adequate insurance at an acceptable cost, unanticipated increases or other changes in our future cash requirements, and the ability of the Company to develop and implement successful business strategies. For a more detailed description of risks, see the “Risk Factors” section in Item 1.A. of our annual report on Form 10-K for the year ended December 31, 2012, as updated by our subsequently filed quarterly reports on Form 10-Q (“SEC Filings”). All of our above-described forward-looking statements are expressly qualified in their entirety by the cautionary statements in this paragraph and the Risk Factors disclosures in our SEC Filings. PHI undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

As described further in Note 10, we are primarily a provider of helicopter services, and derive most of our revenue from helicopter transport services provided to the oil and gas industry and medical industry. Our results of operations are principally driven by the following factors:

•

The level of offshore oil and gas exploration and production activities in the areas in which we operate, primarily in the Gulf of Mexico. Operating revenues from our Oil and Gas segment relate substantially to operations in the Gulf of Mexico. Many of the helicopters we have purchased recently are larger aircraft intended to service deepwater activities and the margins we earn on these aircraft are generally higher than on smaller aircraft. As the level of offshore activity increases, demand for our offshore flight services typically increases, directly affecting our revenue and profitability. Also, as deepwater offshore activity increases, the demand for our medium and heavy aircraft usually increases, creating a positive impact on revenue and earnings. Conversely, a reduction in offshore oil and gas activities could negatively impact our aircraft utilization, flight volumes, and overall demand for our aircraft, thereby creating a negative impact on revenue and earnings.

•

Flight volume and patient transports in our Air Medical segment. Our hospital-based programs are typically billed at a fixed monthly contractual rate plus a variable rate for the flight hours. The volume of flight utilization of our aircraft by our customers under these programs has a direct impact on the amount of revenue earned in a period. Hospital-based contracts generated approximately 38%, 22%, 20% and 16% of the segment’s revenues for the nine months ended September 30, 2013, and the years ended December 31, 2012, 2011 and 2010, respectively, and we anticipate that this percentage will continue to increase during 2013 as a result of our implementation of new projects. In our independent provider programs, our revenue is dependent upon the number of patient transports provided in a given period.

•

Payor mix and reimbursement rates in our Air Medical segment. Under our independent provider programs, our revenue recognition, net of allowances, during any particular period is dependent upon the rate at which our various types of customers reimburse us for our services, which we refer to as our “payor mix”. Reimbursement rates vary among payor types and typically the reimbursement rate of commercial insurers is higher than Medicare, Medicaid, and self-pay reimbursement rates. Therefore, a shift during any particular period in the volume of patient transports among the various payor types will have a direct impact on our revenues.

•

Direct expenses. Our business is capital-intensive and highly competitive. Salaries and aircraft maintenance comprise a large portion of our operating expenses. Our aircraft must be maintained to a high standard of quality and undergo periodic and routine maintenance procedures. Higher utilization of our aircraft will result in more frequent maintenance, resulting in higher maintenance costs. In periods of low flight activity, we continue to maintain our aircraft, consequently reducing our margins. In addition, we are also dependent upon pilots, mechanics, and medical crew to operate our business. As demand for these skills increases worldwide, we must maintain competitive wages and we may not be able to recover all of these costs increases through rate increases.

Overview

Outlook - Our Oil and Gas segment continues to improve with additional deepwater drilling activity by our customers, which has increased the demand for our higher-margin medium and heavy aircraft services.

In our Air Medical segment, we have recently commenced the startup of several projects, including the Middle East program, which collectively we believe will continue to have a favorable effect on net segment profit particularly in 2014.

Results of Operations

The following tables present operating revenue, expenses, and earnings, along with certain non-financial operational statistics, for the quarters and nine months ended September 30, 2013 and 2012.


	Quarter Ended						Favorable
	September 30,						(Unfavorable)
	2013			2012
	(Thousands of dollars, except flight hours, patient transports, and aircraft)
Segment operating revenues
Oil and Gas	$	125,931		$	114,949		$	10,982
Air Medical		73,188			54,004			19,184
Technical Services		1,643			1,904			(261	)

Total operating revenues		200,762			170,857			29,905
Segment direct expenses ⁽¹⁾
Oil and Gas		99,919			94,563			(5,356	)
Air Medical		58,924			45,308			(13,616	)
Technical Services		1,716			1,835			119

Total segment direct expenses		160,559			141,706			(18,853	)
Segment selling, general and administrative expenses ⁽²⁾
Oil and Gas		1,036			1,002			(34	)
Air Medical		2,461			1,698			(763	)
Technical Services		—			—			—

Total segment selling, general and administrative expenses		3,497			2,700			(797	)

Total segment expenses		164,056			144,406			(19,650	)

Net segment profit
Oil and Gas		24,976			19,384			5,592
Air Medical		11,803			6,998			4,805
Technical Services		(73	)		69			(142	)

Total net segment profit		36,706			26,451			10,255
Other, net		1,561			(439	)		2,000
Unallocated selling, general and administrative costs		(6,424	)		(7,084	)		660
Interest expense		(7,631	)		(7,488	)		(143	)

Earnings before income taxes		24,212			11,440			12,772
Income tax expense		10,435			5,056			(5,379	)

Net earnings	$	13,777		$	6,384		$	7,393

Flight hours:
Oil and Gas		29,698			31,608			(1,910	)
Air Medical ⁽³⁾		9,472			9,181			291
Technical Services		134			—			134

Total		39,304			40,789			(1,485	)

Air Medical Transports ⁽⁴⁾		4,783			4,986			(203	)

(1)	Segment direct expenses in the Oil and Gas segment include a loss in equity of unconsolidated affiliate of $0.2 million.

(2)	Segment selling, general and administrative expenses in the Air Medical Segment include interest expense of $0.1 million.

(3)	Flight hours include 2,883 flight hours associated with hospital-based contracts, compared to 2,542 flight hours in the prior year quarter.

(4)	Represents individual patient transports for the period.


	Nine Months Ended						Favorable
	September 30,						(Unfavorable)
	2013			2012
	(Thousands of dollars, except flight hours, patient transports, and aircraft)
Segment operating revenues
Oil and Gas	$	359,732		$	312,322		$	47,410
Air Medical		209,434			150,557			58,877
Technical Services		6,107			6,583			(476	)

Total operating revenues		575,273			469,462			105,811
Segment direct expenses ⁽¹⁾
Oil and Gas		290,616			263,829			(26,787	)
Air Medical		173,296			125,311			(47,985	)
Technical Services		5,427			5,356			(71	)

Total segment direct expenses		469,339			394,496			(74,843	)
Segment selling, general and administrative expenses ⁽²⁾
Oil and Gas		2,976			2,810			(166	)
Air Medical		6,210			5,073			(1,137	)
Technical Services		—			1			1

Total segment selling, general and administrative expenses		9,186			7,884			(1,302	)

Total segment expenses		478,525			402,380			(76,145	)
Net segment profit
Oil and Gas		66,140			45,683			20,457
Air Medical		29,928			20,173			9,755
Technical Services		680			1,226			(546	)

Total net segment profit		96,748			67,082			29,666
Other, net		16,041			614			15,427
Unallocated selling, general and administrative costs		(19,025	)		(20,408	)		1,383
Interest expense		(22,297	)		(22,128	)		(169	)

Earnings before income taxes		71,467			25,160			46,307
Income tax expense		29,336			10,544			(18,792	)

Net earnings	$	42,131		$	14,616		$	27,515

Flight hours:
Oil and Gas		85,993			88,155			(2,162	)
Air Medical ⁽³⁾		26,093			26,329			(236	)
Technical Services		653			550			103

Total		112,739			115,034			(2,295	)

Air Medical Transports ⁽⁴⁾		13,596			13,954			(358	)

Aircraft operated at period end:
Oil and Gas ⁽⁵⁾		169			162
Air Medical ⁽⁶⁾		102			97
Technical Services		6			6

Total ^{(5) (6)}		277			265

(1)	Segment direct expenses in the Oil and Gas segment include a loss in equity of unconsolidated affiliate of $0.9 million.

(2)	Segment selling, general and administrative expenses in the Air Medical Segment include interest expense of $0.1 million.

(3)	Flight hours include 7,652 flight hours year to date associated with hospital-based contracts compared to 7,340 in the prior year to date.

(4)	Represents individual patient transports for the period.

(5)	Includes nine aircraft as of September 30, 2013 and 2012 that are customer owned.

(6)	Includes 13 aircraft as of September 30, 2013 and six aircraft as of September 30, 2012 that are customer owned.

Quarter Ended September 30, 2013 compared with Quarter Ended September 30, 2012

Combined Operations

Operating Revenues – Operating revenues for the three months ended September 30, 2013 were $200.8 million, compared to $170.9 million for the three months ended September 30, 2012, an increase of $29.9 million. Oil and Gas segment operating revenues increased $11.0 million for the quarter ended September 30, 2013, related primarily to increased heavy aircraft flight revenues resulting predominately from increased flight hours for these aircraft as well as incremental rate increases implemented over the past year. Operating revenues in the Air Medical segment increased $19.2 million due principally to increased revenues attributable to an expansion of our Middle East operations, as well as increased revenues from our independent provider programs driven by an improvement in our payor mix and rate increases over the prior year.

Total flight hours for the quarter ended September 30, 2013 were 39,304 compared to 40,789 for the quarter ended September 30, 2012. Oil and Gas segment flight hours decreased 1,910 hours, due principally to decreases in light and medium aircraft flight hours, partially offset by an increase in heavy aircraft flight hours. Air Medical segment flight hours increased 291 hours from the quarter ended September 30, 2012, due to increased flight hours in our hospital-based programs. Individual patient transports in the Air Medical segment were 4,783 for the quarter ended September 30, 2013, compared to transports of 4,986 for the quarter ended September 30, 2012, which partially offset the increase in flight hours.

Direct Expenses – Direct operating expense was $160.6 million for the three months ended September 30, 2013, compared to $141.7 million for the three months ended September 30, 2012, an increase of $18.9 million, or 13%. Employee compensation expense increased $7.5 million due to an increase of approximately 166 employees compared to the prior year, coupled with compensation rate increases. Employee compensation expense represented approximately 45% and 46% of total direct expense for the quarters ended September 30, 2013 and 2012, respectively. Costs of goods sold (representing 3% of total direct expense for the third quarter of 2013) increased $4.5 million due to certain costs attributable to our Middle East operations, which are billed to our customer on a cost plus basis. In addition, we experienced increases of $1.4 million in aircraft rent expense (representing 7% of such quarterly expense), increases of $0.6 million in aircraft depreciation, and increases of $1.5 million in property taxes due to additional aircraft added to the fleet. We also experienced increases in aircraft operating costs, including aircraft spare parts costs of $0.9 million (representing 5% of such quarterly expense), aircraft warranty costs of $0.6 million (representing 7% of such quarterly expense), and component repair costs of $2.0 million (representing 5% of such quarterly expense), primarily due to additional aircraft added to the fleet. Pilot training costs also increased $0.9 million.

Selling, General, and Administrative Expenses – Selling, general and administrative expenses were $9.8 million for both the three months ended September 30, 2013 and September 30, 2012.

Gain on disposal of assets, net – Gains on asset dispositions were $1.4 million for the three months ended September 30, 2013, compared to a loss of $0.7 million for the three months ended September 30, 2012. This increase was primarily due to the sale of one light aircraft that no longer met our strategic needs. See Note 8.

Equity in income/loss of unconsolidated affiliate – Equity in the income of our unconsolidated affiliate attributable to our mid-2012 investment in a Ghanaian entity was $0.2 million and zero for the three months ended September 30, 2013 and 2012, respectively. See Note 11.

Interest Expense – Interest expense was $7.8 million for the three months ended September 30, 2013, compared to $7.5 million for the three months ended September 30, 2012, due principally to increased borrowings on our revolving credit facility.

Other income, net – Other income was $0.2 million for the three months ended September 30, 2013 compared to $0.3 million for the same period in 2012, and represents primarily interest income.

Income Taxes – Income tax expense for the three months ended September 30, 2013 was $10.4 million compared to $5.1 million for the three months ended September 30, 2012. The effective tax rate was 43% and 44% for the three months ended September 30, 2013 and September 30, 2012, respectively. The increase in income tax expense is primarily attributable to the increase in earnings before tax for the three months ended September 30, 2013, compared to the three months ended September 30, 2012.

Net Earnings – Net income for the three months ended September 30, 2013 was $13.8 million compared to net income of $6.4 million for the three months ended September 30, 2012. Earnings before income taxes for the three months ended September 30, 2013 was $24.2 million compared to earnings before income tax of $11.4 million for the same period in 2012. Earnings per diluted share was $0.88 for the current quarter compared to earnings per diluted share of $0.41 for the prior year quarter. We had 15.7 million weighted average diluted common shares outstanding during the three months ended September 30, 2013, compared to 15.5 million weighted average diluted common shares outstanding during the same period in 2012.

Segment Discussion

Oil and Gas – Oil and Gas segment revenues were $126.0 million for the three months ended September 30, 2013, compared to $115.0 million for the three months ended September 30, 2012, an increase of $11.0 million. Flight hours were 29,698 for the current quarter compared to 31,608 for the same quarter in the prior year, a decrease of 1,910 flight hours. The decline in flight hours is attributable to lower demand for our light and medium aircraft, partially offset by increased demand for our heavy aircraft. The increase in revenue is primarily due to increased heavy aircraft flight revenues, primarily attributable to increased flight hours for these aircraft in the Gulf of Mexico, and incremental rate increases implemented over the past year.

The number of aircraft deployed in the segment was 169 at September 30, 2013 and 162 at September 30, 2012. We added a net of seven new aircraft to the Oil and Gas segment since September 30, 2012, consisting of one light, three medium, six heavy, and one fixed wing aircraft. We have sold or disposed of four aircraft in the Oil and Gas segment since September 30, 2012, consisting of two light and two heavy aircraft.

Direct expense in our Oil and Gas segment was $100.0 million for the three months ended September 30, 2013, compared to $94.6 million for the three months ended September 30, 2012, an increase of $5.4 million. Employee compensation expenses increased $0.8 million due to increases in personnel and compensation rate increases. There were increases in aircraft rent expense of $1.1 million, aircraft depreciation of $0.4 million, and property taxes of $1.2 million due to the additional heavy aircraft added to the fleet. We also experienced increases in aircraft operating costs, including higher spare parts costs of $0.8 million, aircraft warranty costs of $0.6 million and component repair costs of $0.6 million primarily due to the additional heavy aircraft added to the fleet. Also reflected in our Oil and Gas segment direct expense is $0.2 million of income resulting from our investment in an unconsolidated Ghanaian entity.

Selling, general and administrative segment expenses were $1.0 million for both the three months ended September 30, 2013 and the three months ended September 30, 2012.

Net Oil and Gas segment profit was $25.0 million for the quarter ended September 30, 2013, compared to segment profit of $19.4 million for the quarter ended September 30, 2012. The increase in segment profit was due to increased revenues, which were only partially offset by increased direct expenses. These revenue increases resulted from the above-described increase in heavy aircraft flight revenues. The Oil and Gas segment revenues are primarily driven by contracted aircraft and flight hours. Costs are primarily fixed based on the number of aircraft operated, with a variable portion that is driven by flight hours.

Air Medical – Air Medical segment revenues were $73.2 million for the three months ended September 30, 2013, compared to $54.0 million for the three months ended September 30, 2012, an increase of $19.2 million, reflecting the addition of our Middle East operations commenced in late 2012. Patient transports were 4,783 for the three months ended September 30, 2013, compared to 4,986 for the same period in the prior year, a decrease of 203 patient transports. Nonetheless, operating revenues in our independent provider programs increased $1.3 million due to improved payor mix, and rate increases implemented over the past year.

The number of aircraft in the segment at September 30, 2013 was 102 compared to 97 at September 30, 2012. Since September 30, 2012, we sold or disposed of two light aircraft in the Air Medical segment. We also added one new fixed wing and seven light aircraft to the Air Medical segment. Changes in customer-owned aircraft and transfers between segments account for the remainder.

Direct expense in our Air Medical segment was $58.9 million for the three months ended September 30, 2013, compared to $45.3 million for the three months ended September 30, 2012, an increase of $13.6 million. Employee compensation expenses increased $7.1 million due to compensation rate increases and additional personnel in the segment. In addition, there was an increase in cost of goods sold of $4.2 million due to certain costs attributable to our Middle East operations which are billed to our customer on a cost plus basis. There were also increases in aircraft rent expense and aircraft depreciation of $0.3 million and $0.2 million, respectively, due to additional aircraft added to the fleet. We also experienced increases in aircraft operating costs, including higher spare parts costs of $0.2 million and component repair costs of $1.3 million. Other direct expense items increased by a net of $0.3 million.

Selling, general and administrative segment expenses were $2.5 million for the three months ended September 30, 2013, compared to $1.7 million for the three months ended September 30, 2012. The $0.8 million increase was primarily due to an increase of $0.2 million in employee compensation expense, due to additional administrative personnel and compensation rate increases, promotional expenses of $0.2 million, and consulting services of $0.1 million.

Net Air Medical segment profit was $11.8 million for the quarter ended September 30, 2013, compared to a segment profit of $7.0 million for the quarter ended September 30, 2012. The increase in profit is primarily attributable to the expansion of our Middle East operations.

Technical Services – Technical Services revenues were $1.6 million for the three months ended September 30, 2013, compared to $1.9 million for the three months ended September 30, 2012. Technical Services segment loss was $0.1 million for the three months ended September 30, 2013, compared to a $1.0 million gain for the three months ended September 30, 2012. Direct expenses increased $0.1 million contributing to the segment loss of $0.1 million.

Technical Services provides maintenance and repairs performed for our existing customers that own their aircraft. These services are generally labor intensive with higher operating margins as compared to other segments. We anticipate that the provision of technical services under our Middle East program will ultimately compress these segment margins, although we do not expect the impact on our consolidated margins to be significant. The Technical Services segment also conducts flight operations for the National Science Foundation in Antarctica, which are typically conducted in the first and fourth quarters each year.

Nine Months Ended September 30, 2013 compared with Nine Months Ended September 30, 2012

Combined Operations

Operating Revenues – Operating revenues for the nine months ended September 30, 2013 were $575.3 million, compared to $469.5 million for the nine months ended September 30, 2012, an increase of $105.8 million. Oil and Gas segment operating revenues increased $47.4 million for the nine months ended September 30, 2013, related primarily to increased heavy aircraft flight revenues resulting predominately from increased flight hours for these aircraft as well as rate increases implemented over the past year. Operating revenues in the Air Medical segment increased $58.9 million due principally to increased revenues attributable to an expansion of our Middle East operations which began operations in late 2012. Operating revenues in our Air Medical independent provider programs also increased due to improved payor mix, and rate increases implemented in the prior and current years, despite a decrease in patient transports.

Total flight hours for the nine months ended September 30, 2013 were 112,739 compared to 115,034 for the nine months ended September 30, 2012. Oil and Gas segment’s flight hours decreased 2,162 hours due principally to decreases in light and medium aircraft flight hours, partially offset by an increase in heavy aircraft flight hours. Air Medical segment flight hours decreased 236 hours for the nine months ended September 30, 2013, due to decreased flight hours in our independent provider programs. Individual patient transports in the Air Medical segment were 13,596 for the nine months ended September 30, 2013, compared to transports of 13,954 for the nine months ended September 30, 2012.

Direct Expenses – Direct operating expense was $469.3 million for the nine months ended September 30, 2013, compared to $394.5 million for the nine months ended September 30, 2012, an increase of $74.8 million, or 19%. Employee compensation expense increased $32.0 million due to an increase of approximately 166 employees compared to the prior year, coupled with compensation rate increases. Employee compensation expense represented approximately 46% of total direct expense for the nine months ended September 30, 2013 and 2012. Costs of goods

sold (representing 3% of total direct expenses for the nine months ended September 30, 2013) increased $16.0 million due to certain costs attributable to our Middle East operations, which are billed to our customer on a cost plus basis. In addition, we experienced increases of $3.8 million in aircraft rent expense (representing 7% of total direct expense), increases of $2.6 million in aircraft depreciation, and increases of $3.2 million in property taxes due to additional aircraft added to the fleet. We also experienced increases in aircraft operating costs, including aircraft spare parts costs of $3.4 million (representing 5% of total direct expense), aircraft warranty costs of $4.6 million (representing 7% of total direct expense), and component repair costs of $1.7 million (representing 4% of total direct expense), primarily due to additional aircraft added to the fleet. Our depreciation expense for other items increased $0.4 million. Pilot training costs also increased $3.4 million. We also experienced a net $3.7 million increase in our other general operating costs, such as contract services and travel expenses.

Selling, General, and Administrative Expenses – Selling, general and administrative expenses were $28.1 million for the nine months ended September 30, 2013, compared to $28.3 million for the nine months ended September 30, 2012. Most of the $0.2 million decrease is due to decreased legal and audit expenses, partially offset by increased data processing and outside services expense.

Gain on disposal of assets, net – Gains on asset dispositions were $16.1 million for the nine months ended September 30, 2013, compared to a loss of less than $0.1 million for the nine months ended September 30, 2012. This increase was primarily due to our sale in the second quarter of 2013 of two heavy aircraft that no longer met our strategic needs. See Note 8.

Impairment of assets – Impairments of assets were $0.4 million for the nine months ended September 30, 2013, compared to no impairments for the nine months ended September 30, 2012. See Note 8.

Equity in loss of unconsolidated affiliate – Equity in the loss of our unconsolidated affiliate attributable to our mid-2012 investment in a Ghanaian entity was $0.9 million and zero for the nine months ended September 30, 2013 and 2012, respectively. See Note 11.

Interest Expense – Interest expense was $22.4 million for the nine months ended September 30, 2013, compared to $22.1 million for the nine months ended September 30, 2012. The increase of $0.3 million is due to increased borrowings on our revolving credit facility, partially offset by lower interest rates.

Other income, net – Other income was $0.4 million for the nine months ended September 30, 2013, compared to $0.6 million for the same period in 2012, and represents primarily interest income.

Income Taxes – Income tax expense for the nine months ended September 30, 2013 was $29.3 million compared to $10.5 million for the nine months ended September 30, 2012. The effective tax rate was 41% and 42% for the nine months ended September 30, 2013 and September 30, 2012, respectively. The increase in income tax expense is primarily attributable to the increase in earnings before tax for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012.

Net Earnings – Net income for the nine months ended September 30, 2013 was $42.1 million compared to net income of $14.6 million for the nine months ended September 30, 2012. Earnings before income taxes for the nine months ended September 30, 2013 was $71.5 million compared to earnings before income tax of $25.2 million for the same period in 2012. Earnings per diluted share was $2.70 for the current nine months compared to earnings per diluted share of $0.94 for the prior year period.

Segment Discussion

Oil and Gas – Oil and Gas segment revenues were $359.7 million for the nine months ended September 30, 2013, compared to $312.3 million for the nine months ended September 30, 2012, an increase of $47.4 million. Flight hours were 85,993 for the current nine months compared to 88,155 for the same period in the prior year, a decrease of 2,162 flight hours. The decline in flight hours is attributable to lower demand for our light and medium aircraft, partially offset by increased demand for our heavy aircraft. The increase in revenue is primarily due to increased heavy aircraft flight revenues, primarily attributable to increased flight hours for these aircraft in the Gulf of Mexico and to incremental rate increases implemented over the past year.

Direct expense in our Oil and Gas segment was $290.6 million for the nine months ended September 30, 2013, compared to $263.8 million for the nine months ended September 30, 2012, an increase of $26.8 million. Employee compensation expenses increased $5.1 million due to increases in personnel and compensation rate increases. There were increases in aircraft rent expense of $2.8 million, aircraft depreciation of $1.9 million, and property taxes of $2.6 million due to the additional heavy aircraft added to the fleet. We also experienced increases in aircraft operating costs, including higher spare parts costs of $3.2 million, aircraft warranty costs of $4.3 million, component repair costs of $1.5 million and fuel expense of $0.8 million primarily due to additional heavy aircraft added to the fleet. Pilot training costs increased $1.4 million compared to the prior year quarter, and other segment depreciation also increased $0.3 million. Also included in our Oil and Gas segment direct expense is a $0.9 million loss resulting from our investment in a Ghanaian entity. Other direct expense items increased by a net amount of $2.0 million.

Selling, general and administrative segment expenses were $3.0 million for the nine months ended September 30, 2013 and $2.8 million for the nine months ended September 30, 2012.

Net Oil and Gas segment profit was $66.1 million for the nine months ended September 30, 2013, compared to segment profit of $45.7 million for the nine months ended September 30, 2012. The increase in segment profit was due to increased revenues, which were only partially offset by increased direct expenses. These revenue increases resulted from the above-described increases in heavy aircraft flight hours and incremental rate increases across all aircraft models implemented over the past year. The Oil and Gas segment revenues are primarily driven by contracted aircraft and flight hours. Costs are primarily fixed based on the number of aircraft operated, with a variable portion that is driven by flight hours.

Air Medical – Air Medical segment revenues were $209.4 million for the nine months ended September 30, 2013, compared to $150.6 million for the nine months ended September 30, 2012, an increase of $58.8 million, reflecting the addition of our Middle East operations, commenced in late 2012. Patient transports were 13,596 for the nine months ended September 30, 2013, compared to 13,954 for the same period in the prior year. Nonetheless, operating revenues in the independent provider programs also increased due to improved payor mix, and rate increases implemented over the past year.

Direct expense in our Air Medical segment was $173.3 million for the nine months ended September 30, 2013, compared to $125.3 million for the nine months ended September 30, 2012, an increase of $48.0 million. Employee compensation expenses increased $26.7 million due to compensation rate increases and additional personnel in the segment. In addition, there was an increase in cost of goods sold of $15.7 million due to certain costs attributable to our Middle East operations, which are billed to our customer on a cost plus basis. There were also increases in aircraft rent expense and aircraft depreciation of $1.0 million and $0.6 million, respectively, due to additional aircraft added to the fleet. Pilot training costs also increased $1.7 million. Other direct expense items increased by a net of $2.3 million.

Selling, general and administrative segment expenses were $6.2 million for the nine months ended September 30, 2013, compared to $5.1 million for the nine months ended September 30, 2012. The $1.1 million increase was primarily due to an increase in employee compensation expense due to additional personnel and compensation rate increases.

Net Air Medical segment profit was $30.0 million for the nine months ended September 30, 2013, compared to a segment profit of $20.2 million for the nine months ended September 30, 2012. The increase in profit is primarily attributable to our recently commenced Middle East operations, as well as increased profits from our independent provider programs primarily attributable to rate increases over the prior year and improved payor mix.

Technical Services – Technical Services revenues decreased $0.5 million for the nine months ended September 30, 2013, compared to the same period in 2012, primarily due to lower project activity. Direct expenses increased less than $0.1 million primarily due to labor cost increases on our Antarctica project. Consequently, profit in this segment decreased by $0.5 million, from $1.2 million for the nine months ended September 30, 2012 to $0.7 million for the nine months ended September 30, 2013. For a further description of our Technical Services segment, see the segment discussion above applicable to the third quarter of 2013 and Note 10.

Liquidity and Capital Resources

General

Our ongoing liquidity requirements arise primarily from the funding of working capital needs, the purchase or leasing of aircraft, the maintenance and refurbishment of aircraft, improvement of facilities, and acquisition of equipment and inventory. Our principal sources of liquidity historically have been net cash provided by our operations and borrowings under our revolving credit facility. To the extent we do not use cash, short-term investments or borrowings to finance our aircraft acquisitions, we frequently enter into operating leases to fund these acquisitions.

Cash Flow

Our cash position was $1.9 million at September 30, 2013, compared to $2.8 million at December 31, 2012. Short-term investments were $77.2 million at September 30, 2013, compared to $50.6 million at December 31, 2012. We also had $14.7 million in restricted investments at September 30, 2013 and December 31, 2012, securing outstanding letters of credit.

Operating activities – Net cash provided by operating activities was $68.1 million for the nine months ended September 30, 2013, compared to $26.0 million for the same period in 2012, an increase of $42.1 million. Net cash provided by operating activities (excluding changes in operating assets and liabilities) contributed $85.6 million of cash flow for the nine months ended September 30, 2013, compared to $54.5 million for the same period in 2012, an increase of $31.1 million, primarily due to the increase in earnings.

Investing activities – Net cash used in investing activities was $69.5 million for the nine months ended September 30, 2013, compared to $52.3 million cash used in investing activities for the same period in 2012. Purchases and sales of short-term investments used $27.5 million of cash during the nine months ended September 30, 2013 compared to net cash provided of $27.0 million in the comparable prior year period. Gross proceeds from asset dispositions were $39.8 million for the nine months ended September 30, 2013, compared to $9.7 million for the same period in 2012. Capital expenditures were $86.1 million for the nine months ended September 30, 2013, compared to $83.2 million for the same period in 2012. Capital expenditures for aircraft and aircraft improvements accounted for $80.3 million and $71.0 million of these totals for the nine months ended 2013 and 2012, respectively. We purchased six light aircraft, two medium aircraft pursuant to lease purchase options, one heavy aircraft pursuant to a lease purchase option, and one fixed wing aircraft in 2013. The purchases were financed using existing cash on hand and our revolving credit facility.

Financing activities – Financing activities for the nine months ended September 30, 2013 included net borrowings of $1.5 million on the revolving credit facility, and $1.0 million relating to shares of our non-voting common stock withheld to satisfy withholding tax obligations of employees in connection with the vesting of outstanding restricted stock units. Financing activities for the same period in 2012 included $22.9 million of net borrowings under our revolving credit facility.

Long Term Debt

As of September 30, 2013, our total long-term debt was $388.3 million, consisting of our $300 million of 8.625% Senior Notes due 2018 and $88.3 million outstanding on our revolving credit facility.

On September 18, 2013, we amended and restated our revolving credit facility with Whitney Bank to (a) increase our borrowing capacity to $150 million, (b) reduce the interest rate on borrowed funds to LIBOR plus 225 basis points, or prime rate, at our option, (c) remove the prior borrowing base limitation, and (d) extend the maturity date to September 1, 2015. The amended and restated revolving credit facility includes a $20 million sublimit for the issuance of stand-by letters of credit, and obligates us to pay customary commitment and letter of credit fees. Our obligations under the amended and restated revolving credit facility are guaranteed by three of our subsidiaries, and are secured by our and our guarantors’ inventory, including certain parts and accounts.

The amended and restated revolving credit facility includes usual and customary covenants and events of default for credit facilities of its type. Our ability to borrow under the credit facility is conditioned upon our continued compliance with such covenants, including, among others, (i) covenants that restrict our ability to engage in certain asset sales, mergers or other fundamental changes, to incur liens or to engage in certain other transactions or

activities and (ii) financial covenants that stipulate that PHI will maintain a consolidated working capital ratio of at least 2 to 1, a funded debt to consolidated net worth ratio not greater than 1.5 to 1, a fixed charge coverage ratio of at least 1.1 to 1, and consolidated net worth of at least $450 million (with all such terms or amounts as defined in or determined under the amended and restated revolving credit facility).

At September 30, 2013, we had $75.7 million in borrowings under our $150.0 million amended and restated senior secured revolving credit facility. During the quarter ended September 30, 2013, $85.7 million was the highest loan balance under this facility, with a weighted average balance of $66.9 million. During the quarter ended December 31, 2012, $46.0 million was the highest loan balance, with a weighted average balance of $40.7 million.

For additional information, see Note 5 to the financial statements in this report.

Contractual Obligations

The table below sets out our contractual obligations as of September 30, 2013 related to our operating lease obligations, aircraft purchase commitments, revolving credit facility, and 8.625% Senior Notes due 2018. The operating leases are not recorded as liabilities on our balance sheet. Each contractual obligation included in the table contains various terms, conditions, and covenants that, if violated, accelerate the payment of that obligation under certain specified circumstances. We were in compliance with the covenants applicable to these contractual obligations as of September 30, 2013, and expect to remain in compliance through the year ending December 31, 2013. As of September 30, 2013, we leased 26 aircraft included in the lease obligations below.


			Payment Due by Year
	Total		2013		2014		2015		2016		2017		Beyond 2017
			(Thousands of dollars)
Aircraft purchase commitments ⁽¹⁾	$	10,398	$	10,398	$	—	$	—	$	—	$	—	$	—
Aircraft lease obligations		266,307		10,598		46,648		46,370		39,474		29,783		93,434
Other lease obligations		17,963		1,112		3,766		3,387		2,801		2,032		4,865
Long-term debt		388,265		—		—		88,265		—		—		300,000
Senior notes interest		142,313		12,938		25,875		25,875		25,875		25,875		25,875

	$	825,246	$	35,046	$	76,289	$	163,897	$	68,150	$	57,690	$	424,174

(1)	For information about these aircraft purchase commitments, see Note 9 to the financial statements in this report.

The table above reflects only contractual obligations as of September 30, 2013 and excludes, among other things, (i) commitments made thereafter, including those described in Note 13, (ii) options to purchase assets, including those described in the next paragraph, and (iii) contingent liabilities.

We intend to fund the above contractual obligations and purchase options through a combination of aircraft leases, cash flow from operations, and borrowings under our credit facility.

We have not paid dividends on either class of our common stock since 1999 and do not expect to pay dividends in the foreseeable future.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our earnings are subject to changes in short-term interest rates due to the variable interest rate payable under our revolving credit facility. Based on the $88.3 million in borrowings outstanding at September 30, 2013, a 10% increase (0.320%) in interest rates would reduce our annual pre-tax earnings approximately $0.3 million, but would not change the fair market value of this debt.

Our $300 million of 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 creditworthiness. At September 30, 2013, the market value of the notes was approximately $313.5 million, based on quoted market indications.

Market risk is the risk of changes in the value of financial instruments, or in future net income or cash flows, in response to changing market conditions. The Company holds financial instruments that are exposed to the following significant market risks: the interest rate risk associated with the Company’s investments in money market funds, U.S. Government Agencies, commercial paper, and corporate bonds and notes.

See Note 4 to the financial statements in this report for additional information.

Item 4.

CONTROLS AND PROCEDURES

The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed by us in the reports that we file or furnish under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, including to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, we cannot assure you that our disclosure controls and procedures will detect all errors or fraud.

PART II – OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

For information regarding legal proceedings, see “Legal Matters” in Note 9 to our financial statements included in this report, which is incorporated herein by reference.

Item 1A.

RISK FACTORS

For information regarding certain risks relating to our operations, any of which could negatively affect our business, financial condition, operating results or prospects, see Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2012, as supplemented by our subsequently filed SEC Filings.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.

MINE SAFETY DISCLOSURES

None.

Item 5.

OTHER INFORMATION

None.

Item 6.

EXHIBITS


(a)	Exhibits

	3.1	(i)	Composite Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to PHI’s Report on Form 10-Q filed on August 7, 2008).

		(ii)	Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3(ii) to PHI’s Report on Form 8-K filed March 5, 2013).

	4.1*	Second Amended and Restated Loan Agreement dated as of September 18, 2013, by and among PHI, Inc., PHI Air Medical, L.L.C, successor to Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and International Helicopter Transport, Inc. and Whitney National Bank.

	4.2	Indenture dated as of September 23, 2010 by and among PHI, Inc., the subsidiary guarantors and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to PHI’s Report on Form 8-K filed on September 23, 2010).

	4.3	Form of 8.625% Senior Note due 2018 (incorporated by reference to Exhibit 4.2 to PHI’s Report on Form 8-K filed on September 23, 2010).

	31.1*	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chairman and Chief Executive Officer.

	31.2*	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Trudy McConnaughhay, Chief Financial Officer.

	32.1*	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chairman and Chief Executive Officer.

	32.2*	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Trudy McConnaughhay, Chief Financial Officer.

	101.INS*		XBRL Instance Document

	101.SCH*		XBRL Taxonomy Extension Schema

	101.CAL*		XBRL Taxonomy Extension Calculation Linkbase

	101.DEF*		XBRL Taxonomy Extension Definition Linkbase

	101.LAB*		XBRL Taxonomy Extension Label Linkbase

	101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PHI, Inc.

November 8, 2013	By:	/s/ Al A. Gonsoulin
	Al A. Gonsoulin
	Chairman and Chief Executive Officer

November 8, 2013	By:	/s/ Trudy McConnaughhay
	Trudy McConnaughhay
	Chief Financial Officer

EXHIBIT 4.1

SECOND AMENDED AND RESTATED LOAN AGREEMENT

This SECOND AMENDED AND RESTATED LOAN AGREEMENT (the “Agreement”), dated and effective as of September 18, 2013 (the “Effective Date”), is by and among Whitney Bank, a Louisiana state chartered bank, (“Bank”), PHI, Inc., formerly named Petroleum Helicopters, Inc. (hereinafter referred to as “PHI”), PHI Air Medical, L.L.C., successor to Air Evac Services, Inc., PHI Tech Services, Inc., formerly named Evangeline Airmotive, Inc., and International Helicopter Transport, Inc., (individually, collectively and interchangeably, the “Subsidiary Guarantors”).

WHEREAS, Petroleum Helicopters, Inc., Acadian Composites, LLC, Air Evac Services, Inc., Evangeline Airmotive, Inc., International Helicopter Transport, Inc. and Whitney National Bank previously entered into that certain Loan Agreement dated April 23, 2002 (as amended through the date hereof, the “Original Loan Agreement”);

WHEREAS, PHI, Subsidiary Guarantors and Bank entered into an Amended and Restated Loan Agreement dated as of March 31, 2008, as amended (the “Amended and Restated Loan Agreement”);

WHEREAS, PHI, Subsidiary Guarantors and Bank desire to fully amend and restate the Amended and Restated Loan Agreement to increase the Revolving Line of Credit to an aggregate amount of $150,000,000.00 and to add or modify certain terms and conditions to the Amended and Restated Loan Agreement;

NOW THEREFORE, PHI, Subsidiary Guarantors and Bank do hereby agree and amend and restate the Amended and Restated Loan Agreement in full as follows:

A. THE LOAN OR LOANS. Provided PHI timely performs all obligations in favor of Bank contained in this Agreement and in any other agreement, whether now existing or hereafter arising:

(1) Bank shall make available to PHI a secured revolving line of credit (the “Revolving Line of Credit” or the “Loan”) in the principal amount of ONE HUNDRED FIFTY MILLION AND NO/100 ($150,000,000.00) DOLLARS, that may be drawn upon by PHI on any business day of Bank during the period hereof until and including September 1, 2015 on at least one day’s telephonic notice to Bank. The Revolving Line of Credit shall be evidenced by a commercial note, payable to Bank (the “Note”) and shall contain additional terms and conditions and be identified with this Agreement.

(2) A sublimit of TWENTY MILLION AND NO/100 ($20,000,000.00) DOLLARS is hereby established for the issuance of stand-by letters of credit with a maturity not exceeding that of the Note, which may be issued by Bank or any bank participating in the Revolving Line of Credit upon application by PHI. The aggregate face amount of any such outstanding letters of credit shall reduce the amount that may be borrowed under the Revolving Line of Credit.

B. USE OF PROCEEDS. The proceeds from the Revolving Line of Credit are to be used for the following purposes: refinance existing debt and/or provide for general working capital, fleet expansion and other capital expenditures, and the issuance of letters of credit but limited to the aggregate amounts as provided above. PHI is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U). No proceeds of any advance will be used to purchase or carry any margin stock.

C. REPRESENTATIONS, WARRANTIES AND COVENANTS. PHI represents, warrants and covenants to Bank that as of the date hereof and so long as the Loan shall be outstanding, except for matters that could not reasonably be expected to have a material adverse effect on PHI and its subsidiaries, taken as a whole:

(1)

Organization and Authorization. PHI is a Louisiana corporation which is duly organized, validly existing and in good standing under Louisiana law. The execution, delivery and

performance of this Agreement and all other documents delivered to Bank by PHI and the Subsidiary Guarantors, as applicable, have been duly authorized and do not violate their respective articles of incorporation, bylaws, articles of organization, operating agreements (or other governing documents), material contracts or any applicable law or regulations.

(2)

Compliance with Tax and other Laws.

(a)

PHI and its subsidiaries shall comply with all laws that are applicable to its business activities, including, without limitation, all laws regarding (i) the collection, payment and deposit of employees’ income, unemployment, Social Security, sales and excise taxes; (ii) the filing of returns and payment of taxes; (iii) pension liabilities including ERISA requirements, (iv) environmental protection, and (iv) occupational safety and health.

(b)

PHI and its subsidiaries shall not permit or suffer any violation of any Environmental Law (as defined below) affecting the property it owns or leases, (collectively, the “Property”), and agree that upon discovery, or in the event, of any discharge, spill, injection, escape, emission, disposal, leak or any other-release of hazardous substances on, in, under, onto, or from the Property, which is not authorized by a currently valid permit or other approval issued by the appropriate governmental agencies, promptly notify Bank, and the appropriate governmental agencies, and shall take all steps necessary to promptly clean-up such discharge, spill, injection, escape, emission, disposal, leak or any other release in accordance with the provisions of all applicable Environmental Laws, and shall receive a certification from the Louisiana Department of Environmental Quality or federal Environmental Protection Agency, that the Property and any other property affected has been cleaned-up to the satisfaction of those agencies. The terms “Environmental law” or “Environmental Laws” as used in this Agreement include any and all current and future federal, state and local environmental laws, statutes, rules, regulations and ordinances, as the same shall be amended and modified from time to time, including but not limited to the federal Comprehensive Environmental Response, Compensation and Liability Act, as amended from time to time, the Federal Resource Conservation and Recovery Act, as amended from time to time, and the federal Toxic Substances Control Act, as amended from time to time.

(3)

2010 Indenture. PHI represents, warrants and covenants to the Bank that the terms and conditions of this Agreement do not violate the Indenture, dated as of September 23, 2010, by PHI, as Issuer, the Guarantors Party, as defined therein, and The Bank of New York Mellon Trust Company, N.A., as trustee, governing the senior notes issued thereunder in the aggregate principal amount of up to THREE HUNDRED MILLION and NO/100 ($300,000,000.00) DOLLARS, or any other document executed or to be executed in connection therewith, as all of the foregoing may be amended from time to time (individually and collectively, the “Indenture”).

(4)

Litigation. To the best of PHI’s knowledge, after due inquiry, and except as disclosed in PHI’s most recently filed annual report on Form 10-K or any quarterly or current report filed thereafter on Form 10-Q or Form 8-K, no litigation or governmental proceedings are pending or threatened against PHI or any of its subsidiaries, the results of which might materially affect PHI or such subsidiaries’ financial condition or operations. Other than any liability incident to such litigation or proceedings or provided for or disclosed in the financial statements submitted to Bank, PHI does not have any material contingent liabilities. No subsidiaries have any material contingent liability other than those imposed by the security documents granted by PHI in favor of Bank and the Indenture.

Page 2 of 10

(5)

Pension Plans. Each of PHI and its subsidiaries are in compliance with all statutes and governmental rules and regulations applicable to it, including, without limitation, the Employee Reimbursement Income Security Act of 1974, as amended (“ERISA”). No Termination Event (as defined herein) has occurred with respect to any Plan (as defined herein), and, except for any failure that could not reasonably be expected to cause a material adverse change, each Plan has complied with and been administered in all material respects in accordance with applicable provisions of ERISA and the Internal Revenue Code of 1986, as amended (the “Code”), and no condition exists or event or transaction has occurred in connection with any Plan, maintained by PHI or its subsidiaries, which could result in PHI or its subsidiaries incurring any material liabilities, fine, or penalty. No “accumulated funding deficiency” (as defined in Section 302 of ERISA) has occurred with respect to any Plan and there has been no excise tax imposed with respect to any Plan under Section 4971 of the Code. The present value of all benefits vested under each Plan (based on the assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed the value of the assets of such Plan allocable to such vested benefits in any amount that would reasonably be expected to cause a material adverse change. Based upon GAAP existing as of the effective date of this Agreement and current factual circumstances, PHI has no reason to believe that the annual cost during the term of this Agreement to PHI for postretirement benefits to be provided to the current and former employees of PHI under welfare benefit plans (as defined in Section 3(1) of ERISA) could, in the aggregate, reasonably be expected to cause a material adverse change.

For purposes of this section, the term “Plan” means an employee benefit plan covered by Title IV of ERISA or subject to minimum funding standards under Section 412 of the Code and the term “Termination Event” means (a) the occurrence of a reportable event with respect to a Plan, as described In Section 4043 of ERISA and the regulations issued thereunder (other than a reportable event not subject to the provision for 30-day notice to the PBGC under such regulations); (b) the giving of a notice of intent to terminate a Plan under Section 4041 (c) of ERISA; (c) the institution of proceedings to terminate a Plan by the PBGC; or (d) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan.

(6)

Financial Information. From the date of this Agreement and so long as the Loans shall be outstanding, unless compliance shall have been waived in writing by Bank, PHI shall furnish to Bank:

(a)

promptly after the sending or filing thereof, copies of all reports which PHI sends to any of its public security holders, and copies of all Forms 10-K, and 10-Q (including all exhibits filed therewith) and registration statements and any other filings or statements that PHI files with the Securities and Exchange Commission or any national securities exchange;

(b)

together with all Forms of 10-K and 10-Q, a certificate of the President or Chief Financial Officer of PHI (i) to the effect that no Default with respect to PHI, or event which might mature into a Default with respect to PHI, has occurred and is continuing and (ii) showing the necessary financial calculations to demonstrate compliance with the financial covenants contained in Section C(8) below, as of the end of the relevant reporting period;

(c)

upon the occurrence of a Default, a certificate of the President or Chief Financial Officer of PHI specifying the nature and the period of existence thereof and what action PHI proposes to take with respect thereto;

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(d)

if not previously disclosed in PHI’s most recently filed annual report on Form 10-K or any quarterly or current report filed thereafter on Form 10-Q or Form 8-K, written notice of any and all litigation affecting PHI, directly or indirectly; provided, however, this requirement shall not apply to litigation involving PHI and any other party if such litigation involves, in the aggregate, less than $500,000;

(e)

as soon as available, but in any event within forty-five (45) days after the end of each quarter of the fiscal year of PHI, PHI will provide (x) an accounts receivable aging report (the “Accounts Receivable Report”) for PHI and each of its subsidiaries for their prior quarter’s accounts receivables and (y) a report valuing the Inventory (as hereinafter defined) and the Parts (as hereinafter defined) for PHI and each of its subsidiaries for the prior month (the “Inventory Report”). The Accounts Receivable Report shall show the aging of such accounts receivables and the total amount owed on all accounts receivables. The Inventory Report shall show the current description of its Parts and of its Inventory and aggregate value of its Inventory and of its Parts valued at the lower of (i) the average cost of each item or (ii) its market value; and,

(f)

from time to time, such other information as Bank may reasonably request.

(7)

Insurance. Each of PHI and its subsidiaries shall maintain with financially sound and reputable insurance companies workmen’s compensation insurance, liability insurance and insurance on PHI’s and its subsidiaries property, assets and business at least to such extent and against such hazards and liabilities as is commonly maintained by similar companies and, in addition to the foregoing insurance, such insurance as may be reasonably required by Bank. In the case of property (whether owned by PHI or its subsidiaries) on which Bank has a lien, PHI shall provide Bank with duplicate originals or certificates of such policies of insurance naming Bank as additional mortgagee-loss payee and as additional insured as its interests may appear, and providing that such policies will not be canceled without thirty (30) days’ prior written notice to Bank.

(8)

Financial Covenants and Ratios.

(a)

Current Assets/Current Liabilities Ratio. PHI will not at any time permit the ratio of its consolidated current assets to its consolidated current liabilities to be less than 2.00 to 1.00.

(b)

Funded Debt/Net Worth Ratio. PHI will not at any time permit the ratio of Funded Debt (defined as all indebtedness owed to Bank under this Agreement plus the amount of any capital or operating leases entered into by PHI and/or any of its subsidiaries and any other monetary obligation payable over time) to PHI’s consolidated net worth to be more than 1.50 to 1.00.

(c)

Consolidated Net Worth. PHI shall not at any time permit its consolidated net worth to be less than FOUR HUNDRED FIFTY MILLION and NO/100 ($450,000,000.00) DOLLARS.

(d)

Fixed Charge Coverage Ratio. PHI shall not at any time permit the ratio, calculated quarterly on a trailing twelve month basis over the life of the Revolving Line of Credit, of Cash Flow divided by Fixed Charges to be less than 1.10 to 1.00.

Cash Flow shall mean the consolidated net income of PHI and its subsidiaries during such period plus to the extent deducted in determining net income all provisions for any federal, state, local and/or international income taxes plus all interest, depreciation, amortization and rental or lease expenses (including any

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rent or other payments for capital leases and other leases (in the event such capital leases or other leases are treated differently than operating leases by GAAP)) and all other non-cash items of expense of PHI and its subsidiaries during such period.

Fixed Charges shall mean during such period the sum of (i) the aggregate amount of all principal payments contractually due during such period, including any due during such period on any long term debt of PHI and its subsidiaries, (ii) all interest contractually due during such period on any obligation of PHI and its subsidiaries, (iii) all expenses and rent owed during such period under any lease entered into by PHI and its subsidiaries (including but not limited to capital leases in the event such capital leases are treated differently than operating leases by GAAP), (iv) all capital expenditures incurred by PHI and its subsidiaries during such period to maintain its assets, including all of its aircrafts (excluding all capital expenditures to acquire new aircrafts and those which are acquired as a result of the exercise of a lease purchase option of aircraft contained in any lease by PHI and its subsidiaries), provided however such capital expenditures shall be deemed to be not less than fifty (50%) percent of the consolidated depreciation expenses of PHI and its subsidiaries; and (v) all federal, state, local, municipal and international charges or assessments incurred against the consolidated income, revenue, or assets of PHI and its subsidiaries and shall include all cash income taxes and franchise taxes.

(e)

All accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time in the United States of America, on a consistent basis (“GAAP”). If at any time any change in GAAP would affect the computation of any financial ratio, requirement or provision set forth in the Agreement or any related loan document, and either PHI or Bank shall so request, Bank and PHI shall negotiate in good faith to amend such ratio, requirement or provision to preserve the original intent thereof in light of such change in GAAP; provided that, until such request has been withdrawn or such ratio, requirement or provision so amended, (i) such ratio, requirement or provision shall continue to be computed in accordance with GAAP prior to such change therein and (ii) PHI shall provide to Bank financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio, requirement or provision made before and after giving effect to such change in GAAP.

(9)

Mergers, etc. Without the prior written consent of Bank, PHI shall not consolidate with, or merge into, any other corporation, or permit any other corporation to merge into it, or sell or lease all, or substantially all, of its assets or acquire all or a substantial part of the assets or capital stock of any other partnership, firm or corporation, or enter into any other transaction that would substantially alter the balance sheet of PHI. PHI will not permit any material changes to be made in the character of its business as carried on at the date of this Agreement.

(10)

Stock Redemption. PHI will not purchase, retire or redeem any shares of its capital stock (other than pursuant to executive or employee compensation plans) without the prior written consent of Bank.

(11)

Indebtedness and Liens. Except (i) as contemplated in this Agreement or as otherwise permitted by the Bank in writing, (ii) in connection with credit card agreements with Bank which shall not have outstanding balances in excess of $3,000,000.00, (iii) with respect to the pledge of cash or other liquid assets as security for letters of credits issued by PHI or

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any of its subsidiaries in an aggregate amount not to exceed $25,000,000.00, and (iv) as permitted in the Indenture, neither PHI nor any of its subsidiaries (i) shall create any additional obligations for borrowed money, or (ii) mortgage or encumber any of their assets or suffer any liens or indebtedness to exist on any of their assets.

(12)

Other liabilities. Other than with respect to its subsidiaries, PHI shall not lend to or guarantee, endorse or otherwise become contingently liable in connection with the obligations, stock or dividends of any person, firm or corporation.

(13)

Change of Control. Without the prior written consent of Bank, there shall not be a Change of Control (as defined in the Indenture).

(14)

Additional Documentation. Upon the written request of Bank, PHI shall promptly and duly execute and deliver all such further instruments and documents and take such further action as Bank, may deem reasonably necessary to obtain the full benefits of this Agreement and of the rights and powers granted in this Agreement.

(15)

Notice of Default. PHI shall notify Bank immediately upon becoming aware of the occurrence of any event constituting, or which with the passage of time or the giving of notice, could constitute, a Default.

(16)

Indemnity. PHI shall indemnify, defend and hold Bank and its respective directors, officers, agents, attorneys and employees harmless from and against all claims, demands, causes of action, liabilities, losses, costs and expenses (including, without limitation, costs of suit, reasonable legal fees and fees of expert witnesses) arising from or in connection with (a) the presence in, on or under any property of PHI (including, without limitation, the Property) of any hazardous substance or solid waste, or any releases or discharges (as the terms “release” and “discharge” are defined under any applicable environmental law) of any hazardous substance or solid waste on, under or from such property, (b) any activity carried on or undertaken on or off such property of PHI, whether prior to or during the term of this Agreement, and whether PHI or any predecessor in title to PHI’s property or any officers, employees, agents, contractors or subcontractors of PHI or any predecessor in title to the property of PHI, or any third persons at any time occupying or present on such property, in connection with the handling, use, generation, manufacture, treatment, removal, storage, decontamination, clean-up, transportation or disposal of any hazardous substance or solid waste at any time located or present on or under any of the afore-described property, or (c) any breach of any representation, warranty or covenant under the terms of this Agreement or applicable security agreements. The foregoing indemnity shall further apply to any residual contamination on or under any or all of the afore-described property, or affecting any natural resources, and to any contamination of any property or natural resources arising in connection with the use, handling, storage, transportation or disposal of any hazardous substance or solid waste, and irrespective of whether any of such activities were or will be undertaken in accordance with applicable laws, regulations, codes and ordinances. The indemnity described of this Section shall survive the termination of this Agreement for any reason whatsoever.

COLLATERAL. As security for the payment and performance of the Revolving Line of Credit and all other obligations of PHI owed to Bank, whether now existing or hereafter arising, PHI and the Subsidiary Guarantors will provide to Bank through validly recorded security documents, including but not limited to financing statements, a first priority perfected lien and security interest in favor of Bank in all of PHI’s and the Subsidiary Guarantors’ Inventory (as such term is defined in Article 9 of the Uniform Commercial Code (La. R.S. 10: 9-101 et seq.), as enacted in the State of Louisiana from time to time (“Louisiana Commercial Laws”)), including Parts (as herein defined), and all Accounts (as defined in Louisiana Commercial Laws); provided that the provisions of this Section D will not apply to any Inventory, including Parts of PHI and the Subsidiary Guarantors, located in any jurisdiction outside of the United States of America.

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“Parts” shall mean, until installed in any aviation unit or aircraft, all aircraft engines, propellers, rotors, appliances, tires, airframes, spare parts, radios, and other communication equipment together with all other aircraft appliances, instruments, electronics, mechanisms, appurtenances, accessories, equipment and parts or component parts thereof, of such person wherever maintained, now or hereafter existing, whether acquired by purchase or otherwise and whether held by such person for use in its business or held by such person for sale or lease or to be furnished by such person under contracts of service, and all proceeds thereof and accessories thereto. Parts shall be valued at the lower of (i) the average cost of each item or (ii) its market value. All Parts shall be maintained and records kept as are customary for any replacement or maintenance parts or accessories of any aircraft, aviation unit and/or helicopter.

At the reasonable request of Bank, within thirty (30) days of such request, PHI will cause any of its other subsidiaries, which are not the Subsidiary Guarantors, to execute security agreements in favor of Bank granting a security interest in each of their respective Accounts, Inventory and Parts, in accordance with the above.

E.	EACH EXTENSION OF CREDIT. Each request by PHI for a Loan shall constitute a warranty and representation by PHI to Bank that there exists no Default or any condition, event or act which constitutes, or with notice or lapse of time (or both) would constitute a Default as defined by this Agreement.

F.	GUARANTIES. The Revolving Line of Credit shall be guaranteed by each of the Subsidiary Guarantors.

RATE OF INTEREST AND APPLICABLE FEES. All borrowings made under the Revolving Line of Credit shall accrue interest at either (i) Wall Street Journal Prime or (ii) LIBOR plus two and 25/100 (2.25%) percent. All borrowings under the Revolving Line of Credit may be advanced or repaid at any time upon one day’s notice. PHI shall have the right to determine and change the interest rate on the Revolving Line of Credit by giving Bank at least one day prior notice and PHI shall have the right to change such interest rate only once each month. All advances under the Revolving Line of Credit shall bear interest at the same interest rate and only one interest rate tranche shall be permitted.

“Wall Street Journal Prime” shall mean that rate of interest as recorded by the Wall Street Journal as the prime rate for the United States and designated as such in the “Money Rates” Section of the Wall Street Journal with the rate of interest to change when and as said prime lending rate changes.

“LIBOR” shall mean the London InterBank Offered Rate (“LIBOR”) as set and published by the British Banker’s Association (“BBA”) and in effect on the first day of each calendar month, as obtained by Bank from an intermediary source such as Bloomberg, L.P., who may not necessarily be the rate reporting intermediary Bank selects, which rate is based by the BBA on an average of interbank offered rates for U.S. Dollar deposits in the London market based on quotes from designated banks in the London market for a period equal to one (1) month (rounded upwards, if necessary, to the nearest 1/100 of 1%). The initial rate shall be based on LIBOR for one (1) month as published by the BBA on September 1, 2013 and shall be adjusted thereafter on the first day of each calendar month, beginning October 1, 2013. In the event that the one month LIBOR is no longer available from the BBA, Bank shall select a comparable rate and shall provide notice thereof to PHI.

All interest accruing under the Revolving Line of Credit shall be payable monthly in arrears on the first day of each month. All interest shall be computed on the basis of the actual number of days elapsed over a year composed of 360 days.

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PHI shall pay to Bank an unused fee equal to the daily principal amount undrawn under the Revolving Line of Credit for each calendar quarter multiplied by a rate equal to ¹ ⁄ ₄ of 1.00% (25 basis points) payable quarterly on the first day of the following calendar quarter.

PHI shall pay to Bank an annual fee, payable quarterly, equal to 1 ¹ ⁄ ₂ % (150 basis points) multiplied by the face amount of any outstanding letters of credit issued pursuant to this Agreement payable on the first day of the following calendar quarter.

At the closing of the Loan, PHI shall pay to Bank a Commitment Fee equal to $112,500.00.

H.	PREPAYMENT AND REDUCTION. Any Loan may be prepaid in any amount at any time, and PHI may incrementally reduce or cancel the Revolving Line of Credit at any time without premium or penalty upon giving Bank one day’s notice.

I.	CONDITIONS PRECEDENT TO LOAN. Bank shall have no obligation to advance funds under this Agreement until and unless the following conditions have been satisfied:

(1)

Bank shall have received this Agreement and all collateral documents contemplated by this Agreement in form and substance satisfactory to Bank, including a certificate from the Chief Financial Officer containing a description of assets owned by each of the Subsidiary Guarantors, and certifying that each of the Subsidiary Guarantors is free of liabilities except as disclosed in the Certificate;

(2)

Bank shall have received satisfactory opinions of counsel relating, among other things, to due authorization and enforceability of this Agreement, the Loan and all collateral documents;

(3)

All representations and warranties made by PHI to Bank shall be true and correct as of the date of the funding of any advance under the Loan;

(4)

Except as otherwise provided herein, PHI’s business must be in a condition satisfactory to Bank, the management and ownership of PHI must not have changed and no material adverse change (from that reflected in the last financial statements delivered to, and accepted by, Bank prior to execution of this Agreement) has occurred in the financial condition of PHI; and

(5)

There exists no Default (or event which with notice or lapse of time or both could constitute a Default) under this Agreement or any other agreement between PHI and Bank.

J.	DEFAULT. The occurrence of anyone or more of the following events shall constitute a default (a “Default”) under this Agreement:

(1)

A default under a note evidencing a Loan;

(2)

The failure of PHI to observe or perform promptly when due any covenant, agreement or obligation due to Bank under this Agreement or otherwise;

(3)

The inaccuracy at any time, in any material respect, of any warranty, representation or statement made to Bank by PHI under this Agreement or otherwise;

(4)

the filing by or against PHI of a proceeding for bankruptcy, reorganization, arrangement, or any other relief afforded debtors or affecting the rights of creditors generally under the law of any state or country or under the United states Bankruptcy Code;

Page 8 of 10

(5)

should any default occur and be continuing under the terms and conditions of any other material credit agreement or evidence of indebtedness, including, without limitation, the Indenture, after the expiration of any applicable notice and cure provisions as may be contained therein.

Upon the occurrence of a Default, except for payment of principal at maturity, and such Default continues for a period of fifteen (15) days, after Bank has mailed written notice of such Default to PHI specifying the nature of the Default and the steps necessary to cure the Default (but with no notice or delay required in the event of a Default under paragraphs (1) and (5) of Section (J)), Bank, at its option, may declare all of the Loan and all other obligations of PHI to Bank to be immediately due and payable without further notice.

CONSENT TO PARTICIPATION. Bank may sell all or a portion of its interest in the Loan and the security therefor. Bank shall give PHI notice of any sale of all or a portion of its interests in the Loan, upon which PHI shall perform all of its obligations hereunder in favor of each participant or assignee as though such participant or assignee were a party or parties to this Agreement.

MISCELLANEOUS PROVISIONS. PHI agrees to pay all of the costs, expenses and fees incurred in connection with the Loan, including reasonable attorneys’ fees, appraisal fees, and environmental assessment fees. This Agreement is not assignable by PHI and no parties other than PHI and the Subsidiary Guarantors are entitled to rely on this Agreement. In no event shall PHI or Bank be liable to the other for indirect, special or consequential damages, including the loss of anticipated profits that may arise out of or are in any way connected with the issuance of this Agreement. This Agreement, all promissory notes evidencing the Loan under this Agreement and all documents creating security interests shall be governed by Louisiana law. This Agreement may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. In the event of actual conflict in the terms and provisions of this Agreement and the Note and/or any of the security agreements, the terms and provisions of this Agreement will control

TERRORISM LAWS. PHI and each of its subsidiaries are in compliance, in all material respects, with (i) the Trading with the Enemy Act, as amended, and each of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) and any other enabling legislation or executive order relating thereto, and (ii) the Uniting And Strengthening America By Providing Appropriate Tools Required To Intercept And Obstruct Terrorism (USA Patriot Act of 2001). No part of the proceeds of the Loan will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended. Neither PHI nor any of its subsidiaries, and no individual or entity owning directly or indirectly a controlling interest in PHI, whether now or in the future, is or shall be an individual or entity whose property or interests are presently being or in the future become “blocked” under any of the Terrorism Laws or is or shall otherwise become in violation of any of the Terrorism Laws.

“Terrorism Laws” shall mean Executive Order 13224 issued by the President of the United States of America (66 Fed. Reg. 49079 (2001)), the Terrorism Sanctions Regulations (Title 31 Part 595 of the U.S. Code of Federal Regulations), the Terrorism List Governments Sanctions Regulations (Title 31 Part 596 of the U.S. Code of Federal Regulations), and the Foreign Terrorist Organizations Sanctions Regulations, (Title 31 Part 597 of the U.S. Code of Federal Regulations), and all other present and future federal regulations, policies and any other requirements of any federal Governmental Authority (including, without limitation, the United States Department of Treasury Office of Foreign Assets Control) addressing, relating to, or attempting to eliminate, terrorist acts and acts of war, each as hereafter supplemented, amended or modified from time to time and the present and future rules, regulations and guidance documents promulgated under any of the foregoing.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, this Second Amended and Restated Loan Agreement is executed as of the Effective Date.


PHI, INC.		WHITNEY BANK

By:	/s/ Trudy P. McConnaughhay		By:	/s/ H. Elder Gwin
	Trudy P. McConnaughhay			H. Elder Gwin
	Title: Chief Financial Officer			Title: Vice President

SUBSIDIARY GUARANTORS:

PHI Air Medical, L.L.C.

By:	/s/ Trudy P. McConnaughhay
	Trudy P. McConnaughhay
	Title: Manager

INTERNATIONAL HELICOPTER TRANSPORT, INC.

By:	/s/ Trudy P. McConnaughhay
	Trudy P. McConnaughhay
	Title: Vice-President

PHI TECH SERVICES, INC.

By:	/s/ Trudy P. McConnaughhay
	Trudy P. McConnaughhay
	Title: Vice-President

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Exhibit 31.1

CHIEF EXECUTIVE OFFICER’S

CERTIFICATION UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Al A. Gonsoulin, Chairman and Chief Executive Officer, certify that:

I have reviewed this quarterly report on Form 10-Q of PHI, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2013


By:		/s/ Al A. Gonsoulin
Al A. Gonsoulin
Chairman and Chief Executive Officer

Exhibit 31.2

CHIEF FINANCIAL OFFICER’S

CERTIFICATION UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Trudy McConnaughhay, Chief Financial Officer, certify that:

I have reviewed this quarterly report on Form 10-Q of PHI, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2013


By:		/s/ Trudy McConnaughhay
Trudy McConnaughhay
Chief Financial Officer

Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Al A. Gonsoulin, Chairman and Chief Executive Officer of PHI, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

the Quarterly Report on Form 10-Q for the period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 8, 2013


By:		/s/ Al A. Gonsoulin
		Al A. Gonsoulin
		Chairman and Chief Executive Officer

Exhibit 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Trudy McConnaughhay, Chief Financial Officer of PHI, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 8, 2013


By:		/s/ Trudy McConnaughhay
		Trudy McConnaughhay
		Chief Financial Officer

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