UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2019

☐	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: ☒ No: ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes: ☒ No: ☐

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

Large accelerated filer:		☐	Accelerated filer:	☒		Smaller reporting company:	☒
Non-accelerated filer:		☐				Emerging Growth Company:	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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: ☒

Securities registered pursuant to Section 12(b) of the Act: None

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 August 1, 2019
Voting Common Stock		2,905,757 shares
Non-Voting Common Stock		12,919,681 shares

PHI, INC.

Index – Form 10-Q

Part I – Financial Information
Item 1.	Financial Statements – Unaudited
	Condensed Consolidated Balance Sheets – June 30, 2019 and December 31, 2018	5
	Condensed Consolidated Statements of Operations – Quarter and Six Months ended June 30, 2019 and 2018	6
	Condensed Consolidated Statements of Comprehensive Loss – Quarter and Six Months ended June 30, 2019 and 2018	7
	Condensed Consolidated Statements of Shareholders’ Equity – Quarter and Six Months ended June 30, 2019 and 2018	8
	Condensed Consolidated Statements of Cash Flows – Six Months ended June 30, 2019 and 2018	10

	Notes to Condensed Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53

Item 4.	Controls and Procedures	54

Part II – Other Information

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	57

Item 6.	Exhibits	57

	Signatures	58

Special Note Regarding Pending Bankruptcy Proceedings

On March 14, 2019, PHI, Inc. and its four principal U.S. subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) in the United States Bankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”). On August 2, 2019, the Bankruptcy Court issued an order confirming the Debtors’ plan of reorganization. Subject to the conditions described herein, the Debtors currently plan to emerge from bankruptcy by the end of August 2019.

Special Note Regarding Forward-Looking Statements

All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q (the “Quarterly Report”) and other periodic reports filed by PHI, Inc. (the “Company,” “PHI,” “we” or “our”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other written or oral statements made by it or on its behalf, are “forward-looking” statements, as defined by (and subject to the “safe harbor” protections under) the federal securities laws. When used herein, the words “anticipates,” “expects,” “believes,” “seeks,” “hopes,” “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 as of the date such statements are made about future events, many of which are beyond our control. These forward-looking statements, and the assumptions on which they are based, (i) are not guarantees of future events, (ii) are inherently speculative and (iii) are subject to significant risk and uncertainties. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect. All of our forward-looking statements are qualified in their entirety by reference to our discussion of certain important factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward-looking statements. Factors that could cause our results to differ materially from the expectations expressed in such forward-looking statements include but are not limited to the following:

•

our ability to consummate our plan or reorganization, either on the terms and schedule currently contemplated or at all;

•

our ability to develop and implement successful business strategies, including our ability to attain the goals stated in our plan of reorganization;

•

our ability to implement operational improvement efficiencies;

•

our ability to comply with the financial covenants contained in certain of our financing arrangements;

•

our ability to access the credit markets on favorable terms, whether caused by changes in our financial position, lower debt credit ratings, unstable markets or otherwise;

•

the impact of current or future governmental regulations, including but not limited to the impact of new and pending regulation of healthcare, aviation safety and export controls;

•

illiquidity in the trading of our securities, including limitations caused by the delisting of our common stock from Nasdaq and the subsequent trading of our securities in the over-the-counter market;

•

reduction in demand for our services due to volatility of oil and gas prices and the level of domestic and overseas exploration and production activity, which depends on several factors outside of our control;

•

our dependence on a small number of customers for a significant amount of our revenue and our significant credit exposure within the oil and gas industry;

•

the adverse impact of customers electing to terminate or reduce our services;

•

any failure to maintain our strong safety record;

•

our ability to secure favorable customer contracts or otherwise remain able to profitably deploy our existing fleet of aircraft;

•

the availability of adequate insurance;

•

adverse changes in the value of our aircraft or our ability to sell them in the secondary markets;

•

political, economic, payment, regulatory and other risks and uncertainties associated with our international operations, some of which are conducted in challenging business environments;

•

the effects of competition and changes in technology;

•

the special risks of our air medical operations, including collections risks and potential medical malpractice claims;

•

weather conditions and seasonal factors, including tropical storms;

•

our ability to timely realize the anticipated benefits of our December 29, 2017 acquisition of additional offshore operations;

•

the hazards associated with operating in an inherently risky business, including the possibility that regulators could ground our aircraft for extended periods of time or indefinitely;

•

our ability to timely collect our receivables in full;

•

our ability to receive timely delivery of ordered aircraft and parts from a limited number of suppliers, and the availability of working capital, loans or lease financing to acquire such assets;

•

changes in fuel prices;

•

our ability to attract and retain key personnel and to avoid work stoppages or other labor problems, which as indicated above may be impacted by the Chapter 11 Cases;

•

changes in our operating plans or strategies, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market conditions or otherwise;

•

environmental and litigation risks;

•

the effects of more general factors, such as changes in interest rates, operating costs, tax rates, or general economic or geopolitical conditions;

•

and other risks referenced in (i) Item 1A of Part II or elsewhere in this report, (ii) Item 1A or elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2018 or (iii) other of our filings with the U.S. Securities and Exchange Commission ("SEC").

Additional factors or risks that we currently deem immaterial, that are not presently known to us, that arise in the future or that are not specific to us could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. PHI undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Further, we may make changes to our business strategies and plans (including our capital spending plans) at any time and without notice, based on any changes in the above-listed factors, our assumptions or otherwise, any of which could or will affect our results.

PART I – FINANCIAL INFORMATION

Item1. FINANCIAL STATEMENTS

PHI, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars, except share data)

(Unaudited)

	June 30, 2019			December 31, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	21,882		$	50,874
Short-term investments		76,141			14,232
Accounts receivable – net
Trade		174,499			168,459
Other		8,845			14,006
Inventories of spare parts – net		54,242			56,698
Prepaid expenses		13,072			11,419
Income taxes receivable		509			950
Total current assets		349,190			316,638
Property and equipment – net		885,669			902,485
Right of use assets		144,944			—
Restricted cash and investments		19,739			19,781
Other assets		20,937			18,378
Deferred income taxes		5,137			4,944
Total assets	$	1,425,616		$	1,262,226
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Senior Notes issued March 17, 2014, net of debt issuance cost of $260	$	—		$	499,740
Accounts payable		70,615			50,289
Accrued and other current liabilities		38,483			45,292
Current portion of operating lease liabilities		27,535			—
Current maturities of long term debt		1,750			—
Total current liabilities		138,383			595,321
Long-term debt:
Term loan issued March 13, 2019, net of debt issuance costs of $5,254		62,996			—
Related party term loan issued September 28, 2018, net of debt issuance costs of $546 and $765, respectively		129,454			129,235
Deferred income taxes		51,964			59,178
Other long-term liabilities		3,673			5,059
Long-term operating lease liabilities		118,167			—
Total liabilities not subject to compromise		504,637			788,793
Liabilities subject to compromise		513,125			—
Total liabilities		1,017,762			788,793
Commitments and contingencies (Note 11)
Shareholders’ Equity:
Voting common stock – par value of $0.10; 12,500,000 shares authorized, 2,905,757 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		291			291
Non-voting common stock – par value of $0.10; 37,500,000 shares authorized, 12,919,681 issued and outstanding at June 30, 2019 and December 31, 2018, respectively		1,291			1,291
Additional paid-in capital		316,143			314,316
Accumulated other comprehensive income (loss)		(4,040	)		(3,952	)
Retained earnings		94,169			161,487
Total shareholders’ equity		407,854			473,433
Total liabilities and shareholders’ equity	$	1,425,616		$	1,262,226

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

PHI, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Thousands of dollars and shares, except per share data)

(Unaudited)

	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Operating revenues, net	$	165,172		$	169,243		$	317,062		$	329,607
Expenses:
Direct expenses		153,514			155,083			310,390			311,309
Selling, general and administrative expenses		17,591			14,485			42,458			29,944
Total operating expenses		171,105			169,568			352,848			341,253
(Gain) loss on disposal of assets		(95	)		(171	)		(44	)		708
Equity in income of unconsolidated affiliate		(1,039	)		(81	)		(2,400	)		(45	)
Operating loss		(4,799	)		(73	)		(33,342	)		(12,309	)
Interest expense		3,927			8,340			12,093			16,537
Reorganization items, net		26,503			—			28,103			—
Other income, net		(333	)		364			(293	)		1,404
		30,097			8,704			39,903			17,941
Loss before income taxes		(34,896	)		(8,777	)		(73,245	)		(30,250	)
Income tax (benefit) expense		(2,819	)		(1,684	)		(5,927	)		(6,175	)
Net loss	$	(32,077	)	$	(7,093	)	$	(67,318	)	$	(24,075	)
Weighted average shares outstanding:
Basic		15,825			15,806			15,825			15,806
Diluted		15,825			15,806			15,825			15,806
Net loss per share:
Basic	$	(2.03	)	$	(0.45	)	$	(4.25	)	$	(1.52	)
Diluted	$	(2.03	)	$	(0.45	)	$	(4.25	)	$	(1.52	)

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

PHI, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Thousands of dollars)

(Unaudited)

	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Net loss	$	(32,077	)	$	(7,093	)	$	(67,318	)	$	(24,075	)
Unrealized (loss) gain on short-term investments		—			(107	)		—			363
Currency translation adjustments		(928	)		160			(121	)		627
Changes in pension plan assets and benefit obligations		—			7			—			(1	)
Tax effect of the above-listed adjustments		25			100			33			(85	)
Total comprehensive loss	$	(32,980	)	$	(6,933	)	$	(67,406	)	$	(23,171	)

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

PHI, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Thousands of dollars and shares)

(Unaudited)

	Voting Common Stock				Non-Voting Common Stock					Additional			Accumulated Other Com-
	Shares		Amount		Shares			Amount		Paid-in Capital			prehensive (Loss) Income			Retained Earnings			Shareholders' Equity
Balance at March 31, 2018		2,906		291		12,905			1,290		309,672			464			286,018		$	597,735
Net loss		—		—		—			—		—			—			(7,092	)		(7,092	)
Unrealized gain on short-term investments		—		—		—			—		—			(4	)		—			(4	)
Changes in pension plan assets and benefit obligations		—		—		—			—		—			4			—			4
Amortization of unearned stock-based compensation		—		—		—			—		813			—			—			813
Cash payment of Performance Based stock units		—		—		—			—		—			—			—			—
Currency translation adjustment		—		—		—			—		—			160			—			160
Issuance of non-voting common stock (upon vesting of restricted stock units)		—		—		(2	)		1		(2	)		—			—			(1	)
Cancellation of restricted non-voting stock units for tax withholdings on vested shares		—		—		3			—		(50	)		—			—			(50	)
Balance at June 30, 2018		2,906	$	291		12,906		$	1,291	$	310,433		$	624		$	278,926		$	591,565

	Voting Common Stock				Non-Voting Common Stock				Additional		Accumulated Other Com-
	Shares		Amount		Shares		Amount		Paid-in Capital		prehensive (Loss) Income			Retained Earnings			Shareholders' Equity
Balance at March 31, 2019		2,906	$	291		12,919	$	1,291	$	314,818	$	(3,138	)	$	126,246		$	439,508
Net loss		—		—		—		—		—		—			(32,077	)		(32,077	)
Amortization of unearned stock-based compensation		—		—		—		—		1,325		—			—			1,325
Cash payment of Performance Based stock units																		—
Currency translation adjustment		—		—		—		—		—		(902	)		—			(902	)
Balance at June 30, 2019		2,906	$	291		12,919	$	1,291	$	316,143	$	(4,040	)	$	94,169		$	407,854

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

PHI, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Thousands of dollars and shares)

(Unaudited)

	Voting Common Stock				Non-Voting Common Stock				Additional			Accumulated Other Com-
	Shares		Amount		Shares		Amount		Paid-in Capital			prehensive (Loss) Income			Retained Earnings			Shareholders' Equity
Balance at January 1, 2018		2,906	$	291		12,897	$	1,289	$	308,353		$	(280	)	$	303,001		$	612,654
Net loss		—		—		—		—		—			—			(24,075	)		(24,075	)
Unrealized gain on short-term investments		—		—		—		—		—			278			—			278
Changes in pension plan assets and benefit obligations		—		—		—		—		—			(1	)		—			(1	)
Amortization of unearned stock-based compensation		—		—		—		—		2,132			—			—			2,132
Currency translation adjustment		—		—		—		—		—			627			—			627
Issuance of non-voting common stock (upon vesting of restricted stock units)		—		—		9		2		(2	)		—			—			—
Cancellation of restricted non-voting stock units for tax withholdings on vested shares		—		—		—		—		(50	)		—			—			(50	)
Balance at June 30, 2018		2,906	$	291		12,906	$	1,291	$	310,433		$	624		$	278,926		$	591,565

	Voting Common Stock				Non-Voting Common Stock				Additional			Accumulated Other Com-
	Shares		Amount		Shares		Amount		Paid-in Capital			prehensive (Loss) Income			Retained Earnings			Shareholders' Equity
Balance at January 1, 2019		2,906	$	291		12,919	$	1,291	$	314,316		$	(3,952	)	$	161,487		$	473,433
Net loss		—		—		—		—		—			—			(67,318	)		(67,318	)
Amortization of unearned stock-based compensation		—		—		—		—		2,640			—			—			2,640
Cash payment of Performance Based stock units										(813	)								(813	)
Currency translation adjustment		—		—		—		—		—			(88	)		—			(88	)
Balance at June 30, 2019		2,906	$	291		12,919	$	1,291	$	316,143		$	(4,040	)	$	94,169		$	407,854

PHI, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

	Six Months Ended June 30,
	2019			2018
Operating activities:
Net loss	$	(67,318	)	$	(24,075	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		38,775			38,598
Deferred income taxes		(7,407	)		(7,446	)
(Gain) loss on asset dispositions		(44	)		708
Equity in (income) loss of unconsolidated affiliate, net		(2,400	)		(45	)
Inventory valuation reserves		1,416			3,308
Changes in operating assets and liabilities		13,301			(5,638	)
Net cash (used in) provided by operating activities		(23,677	)		5,410
Investing activities:
Purchase of property and equipment		(8,970	)		(18,098	)
Proceeds from asset dispositions		1,235			1,453
Purchase of short-term investments		(183,421	)		(260,996	)
Proceeds from sale of short-term investments		121,512			264,918
Payment of deposit on aircraft		(50	)		—
Refund of deposit on aircraft		503			—
Loan to unconsolidated affiliate		—			(274	)
Net cash used in investing activities		(69,191	)		(12,997	)
Financing activities:
Debt issuance cost		(5,668	)		—
Proceeds from line of credit		—			34,295
Payments on line of credit		—			(29,575	)
Repurchase of common stock					(51	)
Proceeds from Term Loan		70,000			—
Net cash provided by financing activities		64,332			4,669
Effect of exchange rate changes on cash		(483	)		—
Decrease in cash, cash equivalents and restricted cash		(29,019	)		(2,918	)
Cash, cash equivalents and restricted cash at the beginning of period		58,564			8,770
Cash, cash equivalents and restricted cash at end of period	$	29,545		$	5,852
Supplemental Disclosures Cash Flow Information
Cash paid during the period for:
Reorganization items, net	$	6,204		$	—
Interest	$	3,599		$	15,755
Income taxes	$	1,688		$	813
Noncash investing activities:
Other current liabilities and accrued payables related to purchase of property and equipment	$	96		$	272

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 and the accompanying notes should be read in conjunction with the consolidated financial statements and the accompanying notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Our financial results, particularly as they relate to our Oil and Gas segment, are influenced by seasonal fluctuations as discussed in our Annual Report on Form 10-K for the year ended December 31, 2018. 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.

Going Concern - The financial statements accompanying this Quarterly Report have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”), which contemplates our continuation as a going concern. As discussed further in Note 2 below, our operations are currently subject to the jurisdiction of the Bankruptcy Code.

The accompanying interim Unaudited Condensed Consolidated Financial Statements have been prepared assuming that PHI will continue as a going concern and contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our ability to successfully implement our plan of reorganization approved by the Bankruptcy Court on August 2, 2019, among other factors. The risks and uncertainties surrounding our Chapter 11 proceedings raise substantial doubt as to our ability to continue as a going concern.

Under the absolute priority scheme established by the Bankruptcy Code, unless our creditors agree otherwise, all of our pre-petition liabilities and post-petition liabilities must be satisfied in full before the holders of our existing common stock may receive any distribution or retain any property under a plan of reorganization. Although Note 2 describes the general terms of our confirmed plan of reorganization, the ultimate recovery to creditors and shareholders will not be fully determined unless and until we can fully implement such plan. The accompanying Unaudited Condensed Consolidated Financial Statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the filing of the Chapter 11 Cases. See Note 2 for additional information.

Supplemental Cash Flow Information - The following table sets forth the Company’s reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Statement of Cash Flows (in thousands):

	June 30,		December 31,		June 30,		December 31,
	2019		2018		2018		2017
Cash and Cash Equivalents	$	21,882	$	50,874	$	5,852	$	8,770
Restricted Cash		7,663		7,690		—		—
Total Cash, Cash Equivalents and Restricted Cash	$	29,545	$	58,564	$	5,852	$	8,770

Recently adopted accounting principles

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASC 842). ASC 842 replaces the existing guidance on leasing transactions in ASC 840 and requires lessees to recognize on the balance sheet a lease liability and a right-of-use asset for all leases. ASC 842 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The Company adopted the new standard effective January 1, 2019.

The Company elected the transition methodology provided by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, whereby it applied the requirements of ASC 842 on a prospective basis as of the adoption date of January 1, 2019, without retrospectively adjusting prior periods. The Company elected to adopt the package of practical expedients provided by ASC 842 that allows prior determinations of whether existing contracts are, or contain, leases and the classification of existing leases to continue without reassessment. The Company elected to keep leases with an initial term of 12 months or less off of the balance sheet. The Company intends to recognize those lease payments in the consolidated statement of operations on a straight-line basis over the lease term. The Company also elected to combined lease and non-lease components in the computations of lease obligations and right-of-use assets. During our evaluation of ASU 2016-02, we concluded that certain of our helicopter service contracts contain a lease component. Our typical helicopter service contracts qualify for a practical expedient, which is available to lessors under certain circumstances, to combine the lease and non-lease components and account for the combined component in accordance with the accounting treatment for the predominant component. We have applied this practical expedient and intend to combine the lease and service components of our revenue contracts and continue to account for the combined component under Topic 606, Revenue from Contracts with Customers.

The Company completed the implementation of an information technology system to track and account for its leases and updated its accounting policies to support the accounting for leases under ASC 842. The Company completed its lease inventory and determined its most significant leases involve aircraft and facilities. For additional information, see Note 13.

2. BANKRUPTCY FILING

Initiation of Chapter 11 Proceedings

On March 14, 2019 (the "Petition Date"), PHI and four of its domestic subsidiaries (collectively, the "Debtors") filed voluntary petitions (the "Chapter 11 Cases") in the United States Bankruptcy Court for the Northern District of Texas (the "Bankruptcy Court") for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). The Chapter 11 Cases are being jointly administered under the caption "In re PHI, Inc., et al., Case No. 19-30923."

Shortly following the Petition Date, the Bankruptcy Court entered certain orders facilitating the Debtors' operational transition into Chapter 11. These orders authorized the Debtors to, among other things, pay employee wages and benefits, and pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date.

The Debtors are currently operating their businesses and managing their properties as "debtors in possession" in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Certain subsidiaries of PHI (collectively, the "Non-Filing Entities") are not part of the Chapter 11 Cases. The Non-Filing Entities will continue to operate their businesses in the normal course and their results are included in our interim Unaudited Condensed Consolidated Financial Statements.

Significant Bankruptcy Court Actions

Development of Reorganization Plan. On April 1, 2019, the Debtors filed with the Bankruptcy Court their initial plan of reorganization under the Bankruptcy Code. Following such filing, the Debtors remained in discussions with various stakeholders in an attempt to obtain additional input about maximizing the value of the enterprise. Following mediation in late May 2019, on June 5, 2019, the Company entered into a settlement plan term sheet (the “Term Sheet”) with the Official Committee of Unsecured Creditors (the “UCC”) and certain other key stakeholders that resolved the UCC’s key objections and motions, subject to satisfaction of certain conditions contained within the Term Sheet.

Among other things, the Term Sheet provides that, upon our emergence from bankruptcy, our current secured lenders will be repaid and our current unsecured creditors will, subject to various exceptions and limitations, receive equity in a newly-reorganized parent company issuer. The Term Sheet further provides that, contingent upon the effectiveness of the Company’s plan of reorganization, Mr. Al A. Gonsoulin, who currently serves as the Company’s Chairman and Chief Executive Officer, will retire from all positions held with the Company and its subsidiaries, including as a member of the Board of Directors, effective upon the date of the Company’s emergence from the Chapter 11 Cases (the “Emergence Date”). The Term Sheet further provides that Mr. Lance F. Bospflug, who currently serves as President, Chief Operating Officer and a director of the Company, will be appointed to succeed Mr. Gonsoulin as Chief Executive Officer of the Company on the Emergence Date and will continue to serve as a member of the Board.

On June 13, 2019, the Debtors filed their second amended joint plan of organization and related disclosure statement, which, among other things, reflected restructuring terms agreed upon in the Term Sheet. On June 18, 2019, the Debtors entered into a term sheet reflecting a settlement with the Official Committee of Equity Security Holders. Subject to certain exceptions, this settlement contemplates issuing to our current equity holders three-year warrants entitling the holders to acquire under certain specified terms and conditions up to an aggregate of 5% of the reorganized parent’s equity interests issued and outstanding as of our emergence from bankruptcy, subject to dilution in connection with future equity issuances. On June 18, 2019, the Debtors filed their third amended joint plan of reorganization (the “Third Amended Plan”) and related disclosure statement (the “Disclosure Statement”). On June 19, 2019, the Bankruptcy Court approved the Disclosure Statement and authorized the Debtors to commence solicitation of approval of the Plan under the Bankruptcy Code.

Equity Commitment Agreement. In connection with the Chapter 11 Cases, on July 11, 2019, the Debtors entered into an Equity Commitment Agreement (the “Commitment Agreement”) with certain of the Company’s unsecured creditors (each a “Commitment Party” and collectively, the “Commitment Parties”). The Commitment Agreement is a component of the settlement plan agreed upon between the Company and certain creditors under the Term Sheet.

Subject to the terms and conditions of the Commitment Agreement, the Commitment Parties have agreed, in the aggregate, to provide up to $75 million cash (the “Equity Commitment”) in exchange for shares of common stock in the reorganized parent company. Under the Commitment Agreement, the shares would be issued at a discount of 25% to the value assigned to such shares in the Plan (as defined below). In addition, each of the Commitment Parties would be paid their pro rata share of an overall commitment fee of $15 million. The commitment fee would be paid on the Emergence Date in the form of additional shares of common stock of the reorganized parent company. Under the Commitment Agreement, the Company also agreed to enter into a registration rights agreement with certain Commitment Parties entitling such Commitment Parties under certain circumstances to request that the Company register their equity securities in the Company for sale under the rules of the U.S. Securities and Exchange Commission (the “SEC”).

The Commitment Agreement prohibits the Company from soliciting alternative financing or restructuring proposals, although the Company’s board of directors (the “Board”) can respond to an unsolicited alternative proposal if doing so would be required by its fiduciary duties.

The obligations of each Commitment Party to consummate the transactions contemplated by the Commitment Agreement are subject to specified conditions including, but not limited to, the Debtors’ compliance in all material respects with the terms of the Plan, the absence of a material adverse change in our business, our attainment of certain specified funding and liquidity thresholds, and the absence at the closing of any material breach of the representations, warranties and covenants made by the Debtors in the Commitment Agreement.

The Commitment Agreement may be terminated in a number of circumstances. We will be required to pay (i) a $3.75 million termination fee if we terminate the Commitment Agreement in connection with the Board’s exercise of its fiduciary duties and certain other conditions are met, including entering into an agreement to effect an alternative transaction within 12 months, or (ii) a higher termination fee if the Commitment Parties terminate the Commitment Agreement in certain other limited circumstances.

Term Loan Commitments. The Debtors have received binding commitments from lenders to fund on the Emergence Date the full amount of a $225 million first lien senior secured term loan that would mature in five years, subject to the satisfaction of certain conditions summarized herein. This term loan facility is a component of the reorganization plan agreed upon between the Debtors and certain of their creditors in the Term Sheet. The definitive documentation that is expected to govern this term loan facility has not yet been finalized or executed. Accordingly, we cannot assure you that the term loan facility will be completed as contemplated, or at all. For additional information, see Note 6.

Plan Supplementation. On June 23, 2019, the Debtors filed a supplement to their Third Amended Plan (the “Plan Supplement” and, collectively with the Third Amended Plan, the “Plan”) which included various documentation related to the Plan, including a partial list of the directors expected to be named to the new parent company and updated disclosure regarding our equity value. Prior to the hearing to confirm the Plan held on July 30, 2019, the Debtors filed additional documentation, including drafts of organizational documents of the new parent company and additional information about our post-emergence management incentive program.

Plan Confirmation. At a hearing held on July 30, 2019, the Bankruptcy Court confirmed the Plan, and on August 2, 2019, the Bankruptcy Court issued a written order to this effect. Implementation of the Plan is subject to the satisfaction or due waiver of several conditions, including without limitation (i) consummation of the debt and equity transactions contemplated by the Term Sheet and described herein, (ii) the payment in full of our secured lenders, (iii) certain minimum liquidity levels, (iv) the finalization of various documentation, (v) compliance with various regulatory requirements, (vi) the payment of various expenses and (vii) the implementation of the restructuring in a manner consistent with the Plan and certain stipulations contained therein.

Other. The description of our Chapter 11 Cases in this Note 2 and elsewhere in this report does not purport to be complete and is qualified in its entirety by reference to (i) our filings with the Bankruptcy Court, all of which are publicly available in the manner described elsewhere herein, and (ii) the exhibits to this report.

Executive Compensation Plans

In connection with the Chapter 11 Cases, the Compensation Committee of the Board of Directors of the Company has adopted on behalf of the Company a Key Employee Incentive Plan (the "KEIP") and a Key Employee Retention Plan ("KERP"). The KEIP is designed to incentivize seven of the Company's senior executives by providing a total potential cash award pool of approximately $4.2 million for performance at threshold levels, $5.6 million at plan target levels and $7.0 million for performance exceeding plan, target levels. Payouts under the KEIP are contingent upon emergence from Chapter 11, achievement of certain financial targets and achievement of certain safety metrics. The KERP is designed to enhance retention of up to 61 other non-insider employees and provides a total award pool of approximately $3.5 million cash. The Bankruptcy Court has approved both the KEIP and the KERP.

Financial Reporting in Reorganization

Effective on the Petition Date, the Company began to apply accounting standards applicable to reorganizations, which are applicable to companies under Chapter 11 bankruptcy protection. They require the financial statements for periods subsequent to the Petition Date to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as reorganization items, net in the Unaudited Condensed Consolidated Statements of Operations. In addition, the balance sheet must distinguish pre-petition liabilities subject to compromise ("LSTC") of the Debtors from pre-petition liabilities that are not subject to compromise, post-petition liabilities, and liabilities of non-Debtor entities in the accompanying Unaudited Condensed Consolidated Balance Sheets. LSTC are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. Where there is uncertainty about whether a secured claim will be paid or impaired pursuant to the Chapter 11 Cases, the Company has classified the entire amount of the claim as an outstanding liability.

Furthermore, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in- possession, certain claims against the Debtors in existence before the filing of the petitions for relief under the federal bankruptcy laws are stayed while the Debtors continue business operations as debtors in possession. These claims are reflected in the unaudited Condensed Consolidated Balance Sheets at June 30, 2019 as LSTC. Additional LSTC may arise after the filing date resulting from rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtors' assets (secured claims) also are stayed, although the holders of such claims have the right to move the Bankruptcy Court for relief from the stay. The Company's secured claims are secured primarily by liens on certain of the Debtors’ receivables, inventory and spare parts and certain of their specified aircraft.

Liabilities Subject to Compromise

As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities is generally subject to compromise pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors' business and assets. Among other things, the Bankruptcy Court authorized, but did not require, the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes, and certain critical vendors.

Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as LSTC may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, the determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims, or other events. See Note 7 - “Liabilities Subject to Compromise” for a specific discussion on balances subject to compromise.

Process for Implementation of Plan of Reorganization

Although the Plan provides that the Debtors will emerge from bankruptcy as a going concern, there can be no assurance at this time that the Debtors will be able to successfully consummate the Plan or any other alternative restructuring transaction that satisfies the conditions of the Bankruptcy Code and is confirmed by the Bankruptcy Court, or that the Plan will be implemented successfully. These conditions raise substantial doubt about the Company's ability to continue as a going concern.

Reorganization Items, Net

Reorganization items, net represent amounts incurred after the Petition Date as a direct result of the Chapter 11 Cases and are comprised of professional and other bankruptcy-related fees for the period from March 15, 2019 through June 30, 2019. See Note 19.

3. 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 loss, which is a separate component of shareholders’ equity in our Condensed Consolidated Balance Sheets. These unrealized gains and losses are also reflected in our Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Statements of Shareholders’ Equity. We determine cost, gains, and losses using the specific identification method.

Investments consisted of the following as of June 30, 2019:

	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
	(Thousands of dollars)
Investments:
Money market mutual funds	$	88,217	$	—	$	—	$	88,217
Deferred compensation plan assets included in other assets		889		—		—		889
Total	$	89,106	$	—	$	—	$	89,106

Investments consisted of the following as of December 31, 2018:

	Cost Basis		Unrealized Gains		Unrealized Losses		Fair Value
	(Thousands of dollars)
Investments:
Money market mutual funds	$	26,308	$	—	$	—	$	26,308
Deferred compensation plan assets included in other assets		772		—		—		772
Total	$	27,080	$	—	$	—	$	27,080

At June 30, 2019 and December 31, 2018, we classified $12.1 million of our aggregate investments as long-term investments and recorded them in our Condensed Consolidated Balance Sheets as restricted cash and investments, as they are securing outstanding letters of credit with maturities beyond one year.

4. VALUATION ACCOUNTS

We establish the amount of our allowance for doubtful accounts based upon factors relating to the credit risk of specific customers, current market conditions, and other information. Our allowance for doubtful accounts was approximately $6.3 million and $6.1 million at June 30, 2019, and December 31, 2018, respectively.

Revenues related to 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 $140.5 million and $123.8 million as of June 30, 2019 and December 31, 2018, respectively. The allowance for uncompensated care was $45.5 million and $51.9 million as of June 30, 2019 and December 31, 2018, 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 $1.6 million and $1.7 million for the quarters ended June 30, 2019 and 2018, respectively. The value of these services was $3.5 million and $3.3 million for the six months ended June 30, 2019 and 2018, respectively. The estimated cost of providing charity services was $0.3 million and $0.4 million for the quarters ended June 30, 2019 and 2018, respectively. The estimated cost of providing charity services was $0.8 million for the six months ended June 30, 2019 and 2018, 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 our Air Medical segment’s total expenses divided by gross patient service revenue.

The allowance for contractual discounts and estimated uncompensated care (expressed as a percentage of gross segment accounts receivable) as of the dates listed below was as follows:

	June 30, 2019	December 31, 2018
Allowance for Contractual Discounts	55%	51%
Allowance for Uncompensated Care	18%	22%

We have also established valuation reserves related to obsolete and slow-moving spare parts inventory. The inventory valuation reserves were $19.4 million and $17.9 million at June 30, 2019 and December 31, 2018, respectively.

5. 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:

	June 30, 2019
	Total		(Level 1)		(Level 2)
	(Thousands of dollars)
Investments:
Money market mutual funds	$	88,217	$	88,217	$	—
Deferred compensation plan assets		889		889		—
Total	$	89,106	$	89,106	$	—

	December 31, 2018
	Total		(Level 1)		(Level 2)
	(Thousands of dollars)
Investments:
Money market mutual funds	$	26,308	$	26,308	$	—
Deferred compensation plan assets		772		772		—
Total	$	27,080	$	27,080	$	—

We hold our short-term investments in an investment fund consisting of high quality money market instruments of governmental and private issuers, which is classified as a short-term investment. 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 investments in 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 actively traded. These items may not be traded daily; examples include commercial paper, corporate bonds and U.S. government agencies debt. There have been no reclassifications of assets between Level 1 and Level 2 investments during the periods covered by the financial statements included in this report. We hold no Level 2 or Level 3 investments.

Cash, accounts receivable, accounts payable and accrued liabilities, and term loan debt all had fair values approximating their carrying amounts at June 30, 2019 and December 31, 2018. We determine the estimated fair value of our 5.25% Senior Notes due 2019 (the "Senior Notes") using Level 2 inputs, including quoted market indications of similar publicly-traded debt. The fair value of our 5.25% Senior Notes due 2019, based on quoted market prices, was $245.0 million and $344.2 million at June 30, 2019 and December 31, 2018, respectively. We provide no assurances, however, that the ultimate recovery of the holders of these notes pursuant to the Chapter 11 Cases will correspond to these fair values as of these prior dates.

6. DEBT

Listed below is information regarding our indebtedness. All indebtedness owed under our Senior Notes as of June 30, 2019 is classified as subject to compromise, and as of December 31, 2018 was classified as short-term debt on our balance sheet. The Thirty-Two, LLC and Blue Torch term loans are classified as long-term debt as of June 30, 2019, except for the amount due within the next twelve months.

	June 30, 2019					December 31, 2018
	Principal			Unamortized Debt Issuance Debt Cost		Principal			Unamortized Debt Issuance Debt Cost
Unsecured	(Thousands of dollars)
Senior Notes issued March 17, 2014, interest only payable semi-annually at 5.25%, matured March 15, 2019	$	500,000		$	—	$	500,000		$	260
Secured
Term Loan - Blue Torch Finance, LLC, interest payable quarterly at LIBOR plus 6%, maturing March 13, 2023		70,000			5,254		—			—
Related Party Term Loan - Thirty Two L.L.C., interest payable quarterly at 6%, due September 28, 2020		130,000			546		130,000			765
Total indebtedness		700,000			5,800		630,000			1,025
Less: Current maturities		(1,750	)		—		(500,000	)		—
	$	698,250		$	5,800	$	130,000		$	1,025

Senior Notes - Subject to the automatic stay of the Bankruptcy Code, our 5.25% Senior Notes (the “Senior Notes”) matured on March 15, 2019. These notes are unconditionally guaranteed on a senior basis by each of PHI, Inc.’s wholly-owned domestic subsidiaries. These notes and related guarantees are the general, unsecured obligations of PHI, Inc. and the guarantors. For more information regarding the impact of our bankruptcy proceedings on the Senior Notes, see Note 2.

Blue Torch Loan Agreement - On March 13, 2019, we entered into a Loan Agreement, dated the same date (the “Blue Torch Agreement”), by and among the Company, as borrower, certain of our subsidiaries as guarantors party thereto, the lenders from time to time party thereto, and Blue Torch Finance, LLC, as administrative agent and collateral agent, for a first lien term loan of up to $70.0 million (the “Blue Torch Loan”). Immediately upon entering into the Blue Torch Agreement, and prior to the filing of the Chapter 11 Cases, we borrowed $70.0 million thereunder, the net proceeds of which (after the payment of transaction expenses and fees thereunder) we have used to continue to fund our working capital and liquidity requirements during the pendency of the Chapter 11 Cases. For additional information regarding our Chapter 11 Cases, see Notes 2 and 7 herein and Notes 1 and 19 to our filed 2018 10-K.

The remaining principal amount of the Blue Torch Loan is due March 13, 2023. At our election, borrowings under the Blue Torch Loan bear interest at either the LIBOR Rate (as defined in the Blue Torch Agreement) plus 6% or the Base Rate (as defined in the Blue Torch Agreement) plus 5%. The Blue Torch Loan is secured by a first lien on 91 aircraft registered and located in Australia, Canada, and the United States (which are currently deployed primarily in our oil and gas and technical services operations), the related spare parts for such aircraft, and certain other non-working capital assets, as well as a second lien on all working capital assets (second in priority to the liens granted under our below-described term loan agreement, dated as of September 28, 2018, with Thirty Two, L.L.C.). The Blue Torch Agreement contains customary pre-payment requirements. In addition, we paid on March 13, 2019 a funding fee, which is subject to forgiveness based on certain future events.

The Blue Torch Agreement contains certain customary negative covenants that, among other things, restrict, subject to certain exceptions, the Company’s and each guarantor’s incurrence of additional indebtedness or liens, mergers, dispositions of assets, investments, restricted payments, modifications to material agreements, sale and leasebacks, transactions with affiliates, fundamental changes, locations of certain aircraft and acquisitions of assets. In addition, the financial covenants under the Blue Torch Agreement require us to maintain certain specified minimum levels of liquidity, fixed charge coverage and appraised collateral values, and certain specified maximum levels of secured leverage, all of which are explained in greater detail of our prior SEC reports. The Blue Torch Agreement also contains customary affirmative covenants and customary representations and warranties. As of the date of the financial statements, included in this report, we believe we were in compliance with these covenants.

The Blue Torch Agreement specifies certain customary events of default, including, among others, certain change of control events. The filings of the Chapter 11 Cases neither constituted an event of default nor accelerated payment of the Company’s indebtedness under the Blue Torch Agreement. As noted in Note 2, we plan to repay the Blue Torch Loan in full upon emergence from bankruptcy, assuming we consummate our Plan on the terms confirmed by order of the Bankruptcy Court on August 2, 2019.

Related Party Term Loan - On September 28, 2018, we entered into a term loan agreement with Thirty Two L.L.C., which provided us with a term loan of $130.0 million maturing on September 28, 2020. This loan bears interest at an annual fixed rate of 6% payable quarterly, with all principal due on maturity. Thirty Two L.L.C., an entity wholly-owned by our current CEO and controlling shareholder, is a related party.

Obligations under the term loan are guaranteed by PHI Air Medical, L.L.C. and PHI Tech Services, Inc., both of which are wholly-owned by us. Our obligations and the guarantors’ obligations are secured primarily by all of their respective inventory, spare parts and accounts receivable located in the U.S.

The related party term loan agreement contains customary restrictive covenants that, subject to certain exceptions and limitations, limit or restrict our ability to, among other things, (i) purchase, retire or redeem any shares of our capital stock; (ii) incur indebtedness; (iii) mortgage or encumber our assets; (iv) make loans to, or guarantee the indebtedness of, any individual or entity; (v) effect a change of control of PHI; (vi) consolidate with or merge into any other corporation, or permit any other corporation to merge into us; (vii) sell or lease all or substantially all of our assets; or (viii) acquire all or a substantial part of the assets or capital stock of another entity. The term loan agreement contains no financial covenants. The term loan agreement contains customary representations and warranties, affirmative covenants and events of default. As noted in Note 2, we plan to repay all of the principal and a portion of the accrued and unpaid interest under the related party term loan in full upon emergence from bankruptcy, assuming we consummate our Plan on the terms confirmed by order of the Bankruptcy Court on August 2, 2019.

Letter of Credit - At June 30, 2019, we had $19.7 million of outstanding letters of credit secured by a like amount of restricted cash, $12.1 million of which secured certain domestic operations or insurance policies and $7.6 million of which guaranteed our performance under an international contract. At December 31, 2018, we had $19.8 million of outstanding letters of credit issued for the same purposes.

Other - PHI, Inc. has cash management arrangements with certain of its principal subsidiaries, in which substantial portions of the subsidiaries’ cash is regularly advanced to PHI, Inc. Although PHI, Inc. periodically repays these advances to fund the subsidiaries’ cash requirements throughout the year, at any given point in time PHI, Inc. may owe a substantial sum to its subsidiaries under these advances, which, in accordance with GAAP, are eliminated in consolidation and therefore not recognized on our consolidated balance sheets. For additional information, see Note 15.

Acceleration of Certain Debt Obligations - The commencement of the Chapter 11 Cases constituted an event of default that accelerated the obligations under the indenture governing our 5.25% Senior Notes due 2019 and our term loan agreement with Thirty Two, L.L.C. Any efforts to enforce payment of such financial obligations under such instruments and agreements are automatically stayed as a result of the Chapter 11 Cases and the holders’ rights of enforcement in respect of such financial obligations are subject to the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

Subsequent Event

As described in greater detail in Note 2, we have received binding commitments from lenders to fund on the Emergence Date the full amount of a $225 million first lien senior secured term loan that would mature in five years (the “Exit Term Loan”), subject to the finalization, execution and delivery of definitive documentation and the satisfaction of various other conditions described below in this Note 6. The following description of the terms of the Exit Term Loan is only a summary, does not purport to be complete and is qualified in its entirety by reference to the form of term loan credit agreement that we filed with the SEC as an exhibit to our Current Report on Form 8-K dated July 22, 2019.

Borrower. All borrowings under the Exit Term Loan are expected to be incurred by a new parent holding company (the “Borrower”) to be formed under the Debtors’ plan of reorganization, which is expected to own directly or indirectly all of the outstanding equity interests of the Debtors upon their emergence from the bankruptcy proceedings.

Maturity. The Exit Term Loan would mature five years after the closing of the Exit Term Loan.

Guarantees and Security. The Borrower’s obligations under the Exit Term Loan are expected to be guaranteed, subject to certain exceptions, by all of its existing and future material domestic subsidiaries.

The Exit Term Loan is expected to be secured by a first-priority security interest on substantially all of assets of the Borrower and the guarantors party to the Exit Term Loan, excluding certain assets reserved to potentially collateralize a future asset-backed revolving credit facility.

Use of Proceeds. The borrowings under the Exit Term Loan would be used (i) to pay in full and discharge all of the Company’s indebtedness under debt agreements with Thirty Two, L.L.C. and Blue Torch Finance L.L.C., (ii) to pay various transaction expenses, and (iii) for general corporate purposes.

Interest Rates and Fees. Borrowings under the Exit Term Loan are expected to be subject to a 2.0% original issuance discount.

The Exit Term Loan will bear interest on the unpaid principal amount at a rate equal to, at our option, either:

•

a base rate determined by reference to the highest of (i) the prime rate in effect for such day as determined by Credit Suisse as its prime rate in effect at its principal office in New York City, (ii) the federal funds effective rate plus 0.5% and (iii) one-month LIBOR, adjusted for statutory reserve requirements, plus 1.0%, in each case, plus an applicable margin; or

•

A LIBOR rate determined by reference to the London interbank offered rate for U.S. dollars for the relevant interest period, adjusted for statutory reserve requirements, plus the applicable margin. The LIBOR rate will be subject to a 1.00% floor.

The applicable margin for borrowings under the Exit Term Loan would be 6.0% with respect to the base rate borrowings and 7.0% with respect to LIBOR borrowings.

We will pay customary fees and expenses in connection with obtaining funding commitments, including certain additional fees if the term loan is not funded by the end of August 30, 2019.

Prepayments. Amounts borrowed under the Exit Term Loan would amortize quarterly at an annual rate of 2.50% in the first and second years of the facility, 5.00% in the third year, and 7.50% thereafter, with the balance payable on the maturity date of the Exit Term Loan.

The Borrower would be required to prepay the Exit Term Loan, subject to exceptions and limitations, with:

•

100% of the net cash proceeds from any issuance or incurrence of indebtedness (other than indebtedness to be permitted by the Exit Term Loan);

•

The net cash proceeds of certain asset sales, subject to certain exceptions and limitations; and

•

The net cash proceeds from the sale of our Air Medical segment of the business.

Beginning with the fiscal year ending December 31, 2020, the Borrower will be required to prepay the Exit Term Loan in an amount equal to a certain percentage of its excess cash flow for each fiscal year, which percentage is based on the Borrower’s consolidated net total leverage ratio for the applicable fiscal year.

The Borrower may voluntarily prepay loans outstanding under the Exit Term Loan, in whole or in part, without premium or penalty (except as described below) in minimum amounts to be determined, at any time, subject to customary “breakage” costs with respect to LIBOR rate loans.

The Borrower would be required to pay a “prepayment premium” in connection with certain prepayments of the Exit Term Loan equal to a percentage of the principal amount so prepaid as follows:

•

during the first year following the closing date of the Exit Term Loan – the greater of (x) 1.0% of the principal amount prepaid and (y) the excess of: (i) the present value at such date of prepayment of (A) 2.0% of the principal amount so prepaid plus (B) the aggregate interest that would have accrued on such amount from the date of prepayment through the first anniversary of the closing of the Term Loan Facility, computed using a discount rate equal to the treasury rate plus 50 basis points discounted to the prepayment on a semi-annual basis, over (ii) the principal amount such loans;

•

during the second year following the closing date of the Exit Term Loan – 2.0%;

•

during the third year following the closing date of the Exit Term Loan – 1.0%; and

•

during the fourth year following the closing date of the Exit Term Loan and thereafter – 0%.

Covenants and Events of Default. The Exit Term Loan will contain customary restrictive covenants that, subject to certain exceptions and limitations, will limit or restrict the ability of the Borrower and its restricted subsidiaries (as defined in the Exit Term Loan) to, among other things, (i) purchase, retire or redeem any shares of their capital stock; (ii) incur indebtedness; (iii) mortgage or encumber their assets; (iv) make loans to, or guarantee the indebtedness of, any individual or entity; (v) effect a change of control; (vi) consolidate with or merge into any other corporation, or permit any other corporation to merge into the Borrower or the restricted subsidiaries; (vii) sell or lease all or substantially all of the assets of the Borrower or its restricted subsidiaries; or (viii) acquire all or a substantial part of the assets or capital stock of another entity. The Exit Term Loan will also contain a $20.0 million minimum liquidity financial covenant.

In addition, the Exit Term Loan will contain customary representations and warranties, affirmative covenants and events of default. Upon an event of default, the lenders (as defined in the Exit Term Loan) are entitled, subject to certain limitations, to declare the term loan, any other loans and all other obligations of the Borrower or its subsidiaries to the lenders immediately due and payable and to take all actions permitted to be taken by a secured creditor.

Conditions to Term Loan Facility. The obligations of the initial lenders to provide the Exit Term Loan is subject to certain conditions, including without limitation, the absence at the closing of any material breach of the representations, warranties and covenants made by the Borrower and its restricted subsidiaries.

7. LIABILITIES SUBJECT TO COMPROMISE

As a result of the filing of the Chapter 11 Cases on March 14, 2019, we have classified unsecured pre-petition liabilities that are expected to be impaired pursuant to the Plan as liabilities subject to compromise in our Condensed Consolidated Balance Sheet at June 30, 2019. Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. If there was uncertainty at the time of determination about whether a secured claim was under-secured or would be impaired under the Plan, we reflected the entire amount of the claim as an outstanding liability. The amounts classified at June 30, 2019 as liabilities subject to compromise represent the Company’s estimate as of the filing date of this report of claims as of June 30, 2019 expected to be allowed under the Plan.

The Company’s obligations under the Senior Notes have been affected by the bankruptcy filing. As such, the outstanding balance of these Senior Notes and related accrued pre-petition interest have been classified as liabilities subject to compromise in the condensed consolidated balance sheet as of June 30, 2019.

Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities have been stayed during the pendency of the Chapter 11 Cases. Although payment of pre-petition claims is generally not permitted, the Bankruptcy Court approved the Debtors’ “first day” motions allowing, among other things, the Company to pay prepetition employee wages and benefits without interruption, maintain its insurance programs, utilize its current cash management system, and pay undisputed prepetition obligations owed to its vendors and trade creditors in the ordinary course of business. As a result of this approval, the Company continues to pay certain pre-petition claims in designated categories and subject to certain terms and conditions in the ordinary course of business, and we have not classified these liabilities as subject to compromise in the Condensed Consolidated Balance Sheet as of June 30, 2019. With respect to pre-petition claims, the Company notified all known claimants of the deadline to file a proof of claim with the Court.

The Company has been paying and intends to continue to pay post-petition claims in the ordinary course of business. The following table reflects pre-petition liabilities that are subject to compromise included in our Condensed Consolidated Balance Sheet as of June 30, 2019. See Note 6 - “Debt” for further information on our Senior Notes and related balances subject to compromise:

	June 30, 2019
	(Thousands of dollars)
Senior Notes issued March 17, 2014, interest only payable semi-annually at 5.25%, matured March 15, 2019	$	500,000
Accrued interest payable		13,125
Total liabilities subject to compromise	$	513,125

8. EARNINGS PER SHARE

The components of basic and diluted earnings per share for the quarter and six months ended June 30, 2019 and 2018 are as follows:

	Quarter Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(Thousands of dollars)
Weighted average outstanding shares of common stock, basic		15,825		15,806		15,825		15,806
Dilutive effect of unvested restricted stock units		—		—		—		—
Weighted average outstanding shares of common stock, diluted ⁽¹⁾		15,825		15,806		15,825		15,806

⁽¹⁾For the quarter ended June 30, 2019 and 2018, 0 and 425,317 unvested restricted stock units were excluded from the weighted average outstanding shares of common stock, diluted, respectively, as they were anti-dilutive to earnings per share. For the six months ended June 30, 2019 and 2018, 0 and 14,258 unvested restricted stock units were excluded from the weighted average outstanding shares of common stock, diluted, respectively as they were anti-dilutive to earnings per share.

9. 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 quarter and six months ended June 30, 2019 and 2018.

	Quarter Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(Thousands of dollars)
Stock-based compensation expense:
Time-based restricted stock units	$	845	$	435	$	1,685	$	1,077
Performance-based restricted stock units		480		378		955		1,055
Total stock-based compensation expense	$	1,325	$	813	$	2,640	$	2,132

During the quarter and six months ended June 30, 2019, no time-based restricted units or performance units were awarded to managerial employees.

During the quarter and six months ended June 30, 2018, 321,831 time-based restricted units and 448,012 performance-based restricted units were awarded to managerial employees.

On February 20, 2019, the PHI Compensation Committee approved the vesting of the 2017 performance RSUs based on the Company’s financial results exceeding the pre-determined business performance metrics set in 2017 for the two year performance period (January 1, 2017 - December 31, 2018). The PHI Compensation Committee decided to settle these vested RSU awards in cash based upon the closing market price on February 20, 2019, the date of the committee's certification that the performance metrics were met ($2.21 per share). The total amount of cash paid was $0.8 million. On February 20, 2019, the Compensation Committee certified that the performance metrics for performance-based restricted stock units granted in 2016 had not been met, which resulted in the forfeiture of 667,238 of such RSUs.

10. ASSET DISPOSALS

During the first quarter of 2019, there were no sales or disposals of aircraft. During the second quarter of 2019, we disposed of two light aircraft previously utilized in the Technical Services segment. The contract was terminated and these aircraft no longer met our strategic needs. Cash proceeds totaled $1.2 million, resulting in a gain of $0.2 million on the disposal of these assets. This gain was offset partially by a net loss on other assets disposals.

During the first quarter of 2018, we disposed of one light aircraft previously utilized in the Air Medical segment and donated to a charitable organization one aircraft previously used in our Oil and Gas segment. During the second quarter of 2018, we disposed of one medium and one light aircraft previously utilized in the Oil & Gas segment. These aircraft no longer met our strategic needs. Cash proceeds totaled $1.5 million, resulting in a $0.7 million loss on the disposal of these assets.

11. COMMITMENTS AND CONTINGENCIES

Commitments – We currently have no aircraft purchase commitments.

Environmental Matters – We have recorded an estimated liability of $0.15 million as of June 30, 2019 for environmental response costs. Previously, we conducted environmental surveys of our former Lafayette Facility located at the Lafayette Regional Airport, which we vacated in 2001, and determined that limited soil and groundwater contamination exist at two parcels of land at the former facility. An Assessment Report for both parcels was submitted in 2003 (and updated in 2006) to the Louisiana Department of Environmental Quality ("LDEQ") and the Louisiana Department of Natural Resources ("LDNR"). Approvals for the Assessment Report were received from the LDEQ and LDNR in 2010 and 2011, respectively. Since that time, we have performed groundwater sampling of the required groundwater monitor well installations at both parcels and submitted these sampling reports to the LDEQ. Pursuant to an agreement with the LDEQ, we provided groundwater sample results semi-annually to the LDEQ for both parcels from 2005 to 2015. The LDEQ approved a reduction in the sampling program from semi-annual to annual groundwater monitoring in 2015. Based on our working relationship and agreements with the LDEQ, and the results of ongoing former facility parcel monitoring, we believe that ultimate remediation costs for the subject parcels will not be material to our consolidated financial position, operations or cash flows.

Legal Matters – From time to time, we are involved in various legal actions incidental to our business, including actions relating to employee claims, medical malpractice claims, tax issues, grievance hearings before labor regulatory agencies, and miscellaneous third party tort actions. The outcome of these proceedings is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of our presently pending proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on our financial position, results of operations or cash flows.

Notwithstanding the foregoing, any litigation pending against us or any of the Debtors as of the Petition Date and any claims that could be asserted against us or an of the Debtors that arose prior to the Petition Date are automatically stayed as a result of the commencement of the Chapter 11 Cases pursuant to the section 362(2) of the Bankruptcy Code, subject to certain statutory exceptions. These matters will be subject to resolution in accordance with the Bankruptcy Code and applicable orders of the Bankruptcy Court.

12. REVENUE RECOGNITION

In 2014, the Financial Accounting Standard Board ("the FASB") issued ASC 606, Revenue from Contracts with Customers (“ASC 606”), replacing the existing accounting standard and industry specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principle of the new standard is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 became effective on January 1, 2018 and we adopted it using the modified retrospective method applied to open contracts and only to the version of the contracts in effect as of January 1, 2018. There was no impact on the condensed consolidated financial statements and no cumulative effect adjustment was recognized.

In general, under ASC 606, we recognize revenue when a service or good is sold to a customer and a contract exists. At contract inception, we assess the goods and services promised in our contracts with customers and identify all performance obligations for each distinct promise that transfers a good or service (or bundle of goods or services) to the customer. To identify the performance obligations, we consider all goods or services promised in the contract, whether explicitly stated or implied based on customary business practices. Revenue is recognized when control of the identified distinct goods or services has been transferred to the customer, the transaction price has been determined and allocated to the performed performance obligations and we have determined that collection has occurred or is probable of occurring.

Taxes billed to and collected from customers and remitted to governmental authorities are reported as revenue on a net basis in our financial statements. Thus, we exclude taxes billed to the customer and collected on behalf of governmental agencies to be remitted to these agencies from the transaction price in determining the revenue related to contracts with a customer.

Oil & Gas Revenue Recognition - We provide helicopter services to oil and gas customers operating in the Gulf of Mexico and a number of foreign countries. Revenues are recognized when performance obligations are satisfied over time in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled to in exchange for services rendered.

Air Medical Revenue Recognition - We provide helicopter services to hospitals and emergency service providers in several U.S. states, or to individual patients in the U.S. in which case we are paid by either a commercial insurance company, federal or state agency, or the patient. Our Air Medical segment operates primarily under the independent provider model and, to a lesser extent, under the traditional provider model. Revenues related to the independent provider model services are recorded in the period in which we satisfy our performance obligations under contracts by providing our services to our customers based upon established billing rates net of contractual allowances under agreements with third party payors and net of uncompensated care allowances. These amounts are due from patients, third-party payors (including health insurers and government programs), and others and includes variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations. Generally, we bill the patients and third-party payors several days after the services are performed. Revenues generated under the traditional provider model are recognized as performance obligations are satisfied over time in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled in exchange for services rendered.

Oil & Gas Performance Obligations - A performance obligation arises under contracts with customers to render services and is the unit of account under ASC 606. Operating revenue from our Oil and Gas segment is derived mainly from fixed-term contracts with our customers, a substantial portion of which are competitively bid. A small portion of our Oil and Gas segment revenue is derived from providing services on an "ad-hoc" basis. Our fixed-term contracts typically have original terms of one to seven years (subject to provisions permitting early termination on relatively short notice by the customers). We account for services rendered separately if they are distinct and the services are separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered on its own or with other resources that are readily available to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Within this contract type for helicopter services, we determined that each contract has a single distinct performance obligation. These services include a fixed monthly rate for a particular model of aircraft, and flight hour services, which represents the variable component of a typical contract with a customer. Rates for these services vary depending on the type of services provided and can be based on a per flight hour, per day, or per month basis. We also provide services to clients on an “ad hoc” basis, which usually entails a shorter contract notice period and duration. The charges for ad hoc services are based on an hourly rate or a daily or monthly fixed fee plus additional fees for each hour flown. The nature of our variable charges within our flight services contracts are not effective until a customer-initiated flight order and the actual hours flown are determined; therefore, the associated flight revenue generally cannot be reasonably and reliably estimated before hand. A contract’s standalone selling prices are determined based upon the prices that we charge for our services rendered. The majority of our revenue is recognized as performance obligations satisfied over time, by measuring progress towards satisfying the contracted services in a manner that best depicts the transfer of services to the customer, which is generally represented by a period of 30 days or less. We typically invoice customers on a monthly basis with the term between invoicing and when the payment is due typically being between 30 and 60 days.

Air Medical Performance Obligations - Performance obligations are determined based upon the nature of the services provided. Under the independent provider model, we measure the performance obligation from the moment the patient is loaded into the aircraft until it reaches its destination. Under this model, we have no fixed revenue stream and compete for transport referrals on a daily basis with other independent operators in the area. Under the traditional provider model, we contract directly with the customer to provide their transportation services. These contracts are typically awarded or renewed through competitive bidding and typically permit early termination by the customer on relatively short notice. As a traditional provider, we typically bill a fixed monthly rate for aircraft availability and an hourly rate for flight time. For each of these types of helicopter services, we have determined that each has a single distinct performance obligation. Traditional provider models services include fixed monthly rate for a particular model of aircraft, and flight hour services, which represents the variable component of a typical contract with a customer. Rates for these services vary depending on the type of services provided and can be based on a per flight hour, per day, or per month basis. The variable charges within such contracts are not effective until the customer initiates a flight order and the actual hours flown are determined; therefore, the associated revenue generally cannot be reasonably and reliably estimated beforehand. For the traditional provider model, we determine the transaction price based upon standard charges for goods and services provided.

As an independent provider, we bill for our services on the basis of a flat rate plus a variable charge per patient-loaded mile, regardless of aircraft model, and are typically compensated by private insurance, Medicaid or Medicare, or directly by transported patients who self-pay. We recognize revenues for performance obligations satisfied at a point in time, which generally relate to patients receiving air medical services when: (1) services are provided; and (2) we do not believe the patient requires additional services. For the independent provider model, we determine the transaction price based upon gross charges for services provided reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients in accordance with Company policy, and/or implicit price concessions provided to uninsured patients. We determine estimates of contractual adjustments and discounts based upon contractual agreements, our discount policy, and historical experience. We determine our estimate of implicit price concessions based upon our historical collection experience with these classes of patients using a portfolio approach as a practical expedient to account for patient contracts as collective groups, rather than individually. The financial statement effects of using this practical expedient are not materially different from an individual contract approach.

We estimate contractual allowances and uncompensated care based on historical collection experience by payor category. The main payor categories are Medicaid, Medicare, private insurance, and self-pay. Changes in payor mix, reimbursement rates and uncompensated care rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute a historical payment analysis of accounts by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. In our Air Medical Segment, the allowance for contractual discounts against outstanding accounts receivable was $140.5 million, and $123.8 million as of June 30, 2019, and December 31, 2018, respectively, and the allowance for uncompensated care against outstanding accounts receivable was $45.5 million, and $51.9 million as of June 30, 2019 and December 31, 2018, respectively. Included in the allowance for uncompensated care above is the value of services to patients who are unable to pay when it is determined that they qualify as charity care. The value of these services was $1.6 million, and $1.7 million for the quarter ended on June 30, 2019 and 2018, respectively. The value of these services was $3.5 million and $3.3 million for the six months ended June 30, 2019 and 2018, respectively. The estimated cost of providing charity services was $0.3 million and $0.4 million for the quarters ended June 30, 2019 and 2018, respectively. The estimated cost of providing charity services was $0.8 million for the six months ended June 30, 2019 and 2018, 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 independent provider model’s total expenses divided by gross patient service revenue.

In determining the allowance estimates for our Air Medical segment’s billing, receivables and revenue, we utilize the prior twelve months’ payment history and current trends in payor behavior by each separate payor group, which we evaluate on a state by state basis. A percentage of amounts collected compared to the total invoice is determined from this process and applied to the current month’s billings and receivables. If a receivable related to the self-pay category is outstanding twelve months or greater, we record a reserve equal to 100% of the receivable. Receivables related to other payor categories are scrutinized when they are outstanding for nine months or longer and additional allowances are recorded if warranted.

As of June 30, 2019 and December 31, 2018, net receivables related to our (i) Oil and Gas segment were $86.2 million and $74.1 million, (ii) Air Medical segment were $95.8 million and $90.2 million and (iii) Technical Services segment were $1.3 million and $4.1 million, respectively.

We generally have a right to consideration in an amount that corresponds directly with the value to the customer of the entity's performance completed to date and may recognize revenue in the amount to which the entity has a right to invoice. We have elected to use the invoice practical expedient for revenue recognized when performance obligations are satisfied over time. In addition, payment for goods and services rendered is typically due in the subsequent month following satisfaction of our performance obligation. Our contracts typically include termination clauses that allow both parties to terminate existing contracts with a 30 to 180 day notice period.

Our Technical Services segment - provides helicopter flight services and helicopter repair and overhaul services for existing flight operations customers that own their own aircraft. Under this segment, we periodically provide certain services to governmental customers, including our agreement to operate six aircraft for the National Science Foundation in Antarctica. Under this segment, we also offer certain software as a service to our Oil and Gas customers. Revenues are recognized when performance obligations are satisfied in accordance with contractual terms, in an amount that reflects the consideration we expect to be entitled to in exchange for services rendered. For these helicopter services, we determined that each has a single distinct performance obligation.

The following table presents the Company’s revenues by segment disaggregated by type (in thousands):

	For the Quarter Ended June 30,				For the Six Months Ended June 30,
	2019		2018		2019		2018
Service Revenue
Oil & Gas	$	90,023	$	97,068	$	174,969	$	192,702
Air Medical		69,507		67,151		126,153		124,139
Technical Services		5,642		5,024		15,940		12,766
Total Services	$	165,172	$	169,243	$	317,062	$	329,607

Air Medical Revenue
Traditional provider model	$	12,401	$	12,085	$	24,378	$	23,956
Independent provider model		57,106		55,066		101,775		100,183
Total Air Medical Revenues	$	69,507	$	67,151	$	126,153	$	124,139

13. LEASES

The Company adopted ASU 2016-02 standard on a prospective basis on January 1, 2019 and used the effective date as the date of initial application. Therefore, prior period financial information has not been adjusted and continues to be reflected in accordance with the Company’s historical accounting policy. The standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.

The Company elected to adopt the "package of practical expedients" under ASU No. 2018-11, which allows the Company to carry forward its historical assessments of whether existing agreements contain a lease, classification of existing lease agreements, and treatment of initial direct lease costs. The Company also elected to exclude short-term leases (those with terms of 12 months or less) from the balance sheet presentation and accounts for non-lease and lease components as a single lease component for all asset classes.

The adoption of ASU 2016-02 had the effects specified in Note 1.

Accounting Policy for Leases

The Company determines if an arrangement is a lease at inception. All of the Company’s leases are operating leases and are included in ROU assets, accounts payable and operating lease liabilities in the Company's Condensed Consolidated Balance Sheet at June 30, 2019.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligations to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease. The lease term includes options to extend when we are reasonably certain to exercise the option. We are not, however, reasonably certain that we will exercise any of the options to extend and as such, they have not been included in the remaining lease terms.

Overview

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, and these costs are not included in the lease liability and are recognized in the period in which they are incurred.

Total operating lease expense was $11.4 million and $12.1 million for the three months ended June 30, 2019 and 2018, respectively. For the three months ended June 30, 2019, a portion of the total operating lease expense relating to short-term leases was $1.6 million. The operating lease expense was $22.6 million and $23.8 million for the six months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019, a portion of the total operating lease expense relating to short-term was $3.0 million.

Operating leases at June 30, 2019 were as follows (in thousands):

	June 30, 2019
	(Thousands of dollars)
Operating lease right-of-use-assets	$	144,944

PHI INC 10-Q