10. SEGMENT INFORMATION

PHI is primarily a provider of helicopter transport services, including helicopter maintenance and repair services. We report our financial results through the three reportable segments further described below.

A segment’s operating profit or loss is its operating revenues less its direct expenses and selling, general and administrative expenses. Each segment has a portion of our total selling, general and administrative expenses that is charged directly to the segment and a small portion that is allocated to that segment. Direct charges represent the vast majority of segment selling, general and administrative expenses. Allocated selling, general and administrative expenses are based primarily on total segment costs as a percentage of total operating costs.

Oil and Gas Segment. Our Oil and Gas segment, headquartered in Lafayette, Louisiana, provides helicopter services primarily for the major integrated and independent oil and gas production companies transporting personnel or equipment to offshore platforms in the Gulf of Mexico. Our customers include Shell Oil Company, BP America Production Company, ExxonMobil Production Company, and ConocoPhillips Company, with whom we have worked for 30 or more years, and ENI Petroleum, with whom we have worked for more than 15 years. At March 31, 2017, we had available for use 131 aircraft in this segment.

Operating revenue from our Oil and Gas segment is derived mainly from contracts that include a fixed monthly rate for a particular model of aircraft, plus a variable payments based on the amount of flight time. Operating costs for the Oil and Gas segment are primarily aircraft operation costs, including costs for pilots and maintenance personnel. We typically operate under fixed-term contracts with our customers, a substantial portion of which are competitively bid. Our fixed-term contracts have terms of one to seven years (subject to provisions permitting early termination by the customers), with payment in U.S. dollars. For the quarters ended March 31, 2017 and 2016, respectively, approximately 53% and 54% of our total operating revenues were generated by our Oil and Gas segment, with approximately 90% and 93% of these revenues from fixed-term customer contracts. The remaining 10% and 7% of these revenues were attributable to work in the spot market and ad hoc flights for contracted customers.

Air Medical Segment. The operations of our Air Medical segment are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment.

We provide Air Medical transportation services for hospitals and emergency service agencies throughout the U.S. As of March 31, 2017, we operated approximately 104 aircraft in 18 states at 72 separate locations.

Our Air Medical segment operates primarily under the independent provider model and, to a lesser extent, under the traditional provider model. Under the independent provider 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, with the contracts typically awarded through competitive bidding. For the quarters ended March 31, 2017 and 2016, approximately 41% and 43% of our total operating revenues were generated by our Air Medical segment, respectively.

As an independent provider, we bill for our services on the basis of a flat rate plus a variable charge per 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. As further described in Note 3, revenues are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care at the time the services are provided. Contractual allowances and uncompensated care are estimated based on historical collection experience by payor category (consisting mainly of insurance, Medicaid, Medicare, and self-pay). Estimates regarding the payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute a historical payment analysis of accounts fully closed, by category.

Provisions for contractual discounts and estimated uncompensated care for our Air Medical segment (expressed as a percentage of gross segment billings) were as follows:


	Revenue
	Quarter Ended
	March 31,
	2017			2016
Gross Air Medical segment billings		100	%		100	%
Provision for contractual discounts		70	%		71	%
Provision for uncompensated care		4	%		3	%

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

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

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


	Quarter Ended
	March 31,
	2017			2016
Insurance		70	%		66	%
Medicare		20	%		19	%
Medicaid		10	%		15	%
Self-Pay		0	%		0	%

We also have a limited number of contracts with hospitals under which we receive a fixed fee component for aircraft availability and a variable fee component for flight time. Most of our contracts with hospitals contain provisions permitting early termination by the hospital, typically with 180 days’ notice for any reason and generally with penalty. Several of these contracts are issued or renewed based on competitive bidding. These contracts generated approximately 19% and 31% of the segment’s revenues for the quarters ended March 31, 2017 and 2016, respectively.

Technical Services Segment. Our Technical Services segment provides helicopter repair and overhaul services for flight operations customers that own their aircraft. Costs associated with these services are primarily labor, and customers are generally billed at a percentage above our service costs. We also periodically provide flight services to governmental customers under this segment, including our agreement to operate six aircraft for the National Science Foundation in Antarctica, typically in the first and fourth quarters each year. Also included in this segment is our proprietary Helipass operations, which provides software as a service to certain of our Oil and Gas customers for the purpose of passenger check-in and compliance verification.

For the three month periods ended March 31, 2017 and 2016, approximately 6% and 3%, respectively, of our total operating revenues were generated by our Technical Services segment.

Summarized financial information concerning our reportable operating segments for the quarters ended March 31, 2017 and 2016 is as follows:


	Quarter Ended
	March 31,
	2017			2016
	(Thousands of dollars)
Segment operating revenues
Oil and Gas	$	71,731		$	88,437
Air Medical		55,338			70,060
Technical Services		7,549			5,519

Total operating revenues		134,618			164,016

Segment direct expenses ⁽¹⁾
Oil and Gas ⁽²⁾		81,728			91,916
Air Medical		50,842			57,044
Technical Services		4,946			3,594

Total segment direct expenses		137,516			152,554

Segment selling, general and administrative expenses
Oil and Gas		1,720			1,528
Air Medical		2,881			2,595
Technical Services		338			224

Total selling, general and administrative expenses		4,939			4,347

Total direct and selling, general and administrative expenses		142,455			156,901

Net segment (loss) profit
Oil and Gas		(11,717	)		(5,007	)
Air Medical		1,615			10,421
Technical Services		2,265			1,701

Total net segment (loss) profit		(7,837	)		7,115

Other, net ⁽³⁾		1,064			256
Unallocated selling, general and administrative costs ⁽¹⁾		(8,105	)		(7,326	)
Interest expense		(8,195	)		(7,533	)

Loss before income taxes	$	(23,073	)	$	(7,488	)

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


	Depreciation and Amortization Expense
	Quarter Ended
	March 31,
	2017		2016
	(Thousands of dollars)
Segment Direct Expense:
Oil and Gas	$	9,862	$	9,918
Air Medical		5,477		4,256
Technical Services		146		128

Total	$	15,485	$	14,302

Unallocated SG&A	$	1,360	$	2,671

(2)	Includes Equity in loss of unconsolidated affiliate.

(3)	Consists of gains on disposition of property and equipment and other income – net.