UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the quarterly period ended | SeptemberJune 30, 20172018 | |
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[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| | | | |
For the transition period from | | to | | |
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Commission file number: | 001-35349 | |
Phillips 66
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 45-3779385 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
2331 CityWest Blvd., Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
281-293-6600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
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Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] |
Smaller reporting company [ ] 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 [X]
The registrant had 506,740,487464,262,410 shares of common stock, $.01$0.01 par value, outstanding as of SeptemberJune 30, 2017.2018.
PHILLIPS 66
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
|
| |
Consolidated Statement of Income | Phillips 66 |
| | | Millions of Dollars | Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
Revenues and Other Income | | | | | | | |
Sales and other operating revenues* | $ | 25,627 |
| 21,624 |
| | 72,608 |
| 60,882 |
| $ | 28,980 |
| 24,087 |
| | 52,575 |
| 46,981 |
|
Equity in earnings of affiliates | 530 |
| 391 |
| | 1,357 |
| 1,159 |
| 743 |
| 462 |
| | 1,167 |
| 827 |
|
Net gain on dispositions | — |
| 3 |
| | 15 |
| 9 |
| — |
| 14 |
| | 17 |
| 15 |
|
Other income | 49 |
| 24 |
| | 519 |
| 59 |
| 13 |
| 18 |
| | 23 |
| 470 |
|
Total Revenues and Other Income | 26,206 |
| 22,042 |
| | 74,499 |
| 62,109 |
| 29,736 |
| 24,581 |
| | 53,782 |
| 48,293 |
|
| | | | | | | |
Costs and Expenses | | | | | | | |
Purchased crude oil and products | 19,463 |
| 15,961 |
| | 55,495 |
| 44,089 |
| 25,747 |
| 18,353 |
| | 46,885 |
| 36,032 |
|
Operating expenses | 1,134 |
| 1,061 |
| | 3,541 |
| 3,078 |
| 1,143 |
| 1,137 |
| | 2,389 |
| 2,407 |
|
Selling, general and administrative expenses | 435 |
| 411 |
| | 1,258 |
| 1,218 |
| 432 |
| 439 |
| | 818 |
| 823 |
|
Depreciation and amortization | 337 |
| 293 |
| | 972 |
| 863 |
| 337 |
| 320 |
| | 673 |
| 635 |
|
Impairments | 1 |
| 2 |
| | 18 |
| 4 |
| 6 |
| 15 |
| | 6 |
| 17 |
|
Taxes other than income taxes* | 3,456 |
| 3,424 |
| | 9,968 |
| 10,479 |
| 109 |
| 3,356 |
| | 219 |
| 6,512 |
|
Accretion on discounted liabilities | 5 |
| 5 |
| | 16 |
| 15 |
| 6 |
| 6 |
| | 12 |
| 11 |
|
Interest and debt expense | 112 |
| 81 |
| | 324 |
| 250 |
| 135 |
| 107 |
| | 258 |
| 212 |
|
Foreign currency transaction (gains) losses | 7 |
| (9 | ) | | 6 |
| (16 | ) | |
Foreign currency transaction gains | | (14 | ) | — |
| | (30 | ) | (1 | ) |
Total Costs and Expenses | 24,950 |
| 21,229 |
| | 71,598 |
| 59,980 |
| 27,901 |
| 23,733 |
| | 51,230 |
| 46,648 |
|
Income before income taxes | 1,256 |
| 813 |
| | 2,901 |
| 2,129 |
| 1,835 |
| 848 |
|
| 2,552 |
| 1,645 |
|
Provision for income taxes | 407 |
| 277 |
| | 908 |
| 679 |
| |
Income tax expense | | 431 |
| 267 |
| | 563 |
| 501 |
|
Net Income | 849 |
| 536 |
| | 1,993 |
| 1,450 |
| 1,404 |
| 581 |
| | 1,989 |
| 1,144 |
|
Less: net income attributable to noncontrolling interests | 26 |
| 25 |
| | 85 |
| 58 |
| 65 |
| 31 |
| | 126 |
| 59 |
|
Net Income Attributable to Phillips 66 | $ | 823 |
| 511 |
| | 1,908 |
| 1,392 |
| $ | 1,339 |
| 550 |
| | 1,863 |
| 1,085 |
|
| | | | | | | |
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars) | | | | | | | |
Basic | $ | 1.60 |
| 0.97 |
| | 3.68 |
| 2.62 |
| $ | 2.86 |
| 1.06 |
| | 3.89 |
| 2.08 |
|
Diluted | 1.60 |
| 0.96 |
| | 3.66 |
| 2.61 |
| 2.84 |
| 1.06 |
| | 3.87 |
| 2.07 |
|
| | | | | | | |
Dividends Paid Per Share of Common Stock (dollars) | $ | 0.70 |
| 0.63 |
| | 2.03 |
| 1.82 |
| $ | 0.80 |
| 0.70 |
| | 1.50 |
| 1.33 |
|
| | | | | | | |
Weighted-Average Common Shares Outstanding (thousands) | | | | | | | |
Basic | 512,923 |
| 525,991 |
| | 517,420 |
| 528,650 |
| 468,331 |
| 517,785 |
| | 477,647 |
| 519,706 |
|
Diluted | 515,960 |
| 528,798 |
| | 520,516 |
| 531,650 |
| 471,638 |
| 520,160 |
| | 480,995 |
| 522,329 |
|
* Includes excise taxes on petroleum products sales: | $ | 3,376 |
| 3,357 |
| | 9,664 |
| 10,225 |
| |
* Includes excise taxes on sales of petroleum products for periods prior to the adoption of Accounting Standards Update No. 2014-09 on January 1, 2018: | | | $ | 3,252 |
| | | 6,288 |
|
See Notes to Consolidated Financial Statements. | | | | | | | |
|
| |
Consolidated Statement of Comprehensive Income | Phillips 66 |
| | | Millions of Dollars | Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | |
Net Income | $ | 849 |
| 536 |
| | 1,993 |
| 1,450 |
| $ | 1,404 |
| 581 |
| | 1,989 |
| 1,144 |
|
Other comprehensive income (loss) | | | | | | | | |
Defined benefit plans | | | | | | | | |
Actuarial loss arising during the period | — |
| (28 | ) | | — |
| (28 | ) | |
Amortization to net income of net actuarial loss and settlements | 45 |
| 23 |
| | 145 |
| 70 |
| |
Curtailment gain | — |
| 31 |
| | — |
| 31 |
| |
Amortization to net income of net actuarial loss, prior service credit and settlements | | 21 |
| 77 |
| | 43 |
| 100 |
|
Plans sponsored by equity affiliates | 2 |
| 2 |
| | 8 |
| 11 |
| 3 |
| 3 |
| | 9 |
| 6 |
|
Income taxes on defined benefit plans | (17 | ) | (9 | ) | | (56 | ) | (29 | ) | (5 | ) | (30 | ) | | (12 | ) | (39 | ) |
Defined benefit plans, net of tax | 30 |
| 19 |
| | 97 |
| 55 |
| 19 |
| 50 |
| | 40 |
| 67 |
|
Foreign currency translation adjustments | 94 |
| (61 | ) | | 222 |
| (183 | ) | (201 | ) | 102 |
| | (110 | ) | 128 |
|
Income taxes on foreign currency translation adjustments | 1 |
| (1 | ) | | (8 | ) | (4 | ) | 4 |
| (7 | ) | | 1 |
| (9 | ) |
Foreign currency translation adjustments, net of tax | 95 |
| (62 | ) | | 214 |
| (187 | ) | (197 | ) | 95 |
| | (109 | ) | 119 |
|
Cash flow hedges | — |
| 4 |
| | — |
| (12 | ) | 2 |
| (3 | ) | | 8 |
| — |
|
Income taxes on hedging activities | — |
| (1 | ) | | — |
| 5 |
| — |
| 1 |
| | (2 | ) | — |
|
Hedging activities, net of tax | — |
| 3 |
| | — |
| (7 | ) | 2 |
| (2 | ) | | 6 |
| — |
|
Other Comprehensive Income (Loss), Net of Tax | 125 |
| (40 | ) | | 311 |
| (139 | ) | (176 | ) | 143 |
| | (63 | ) | 186 |
|
Comprehensive Income | 974 |
| 496 |
| | 2,304 |
| 1,311 |
| 1,228 |
| 724 |
| | 1,926 |
| 1,330 |
|
Less: comprehensive income attributable to noncontrolling interests | 26 |
| 25 |
| | 85 |
| 58 |
| 65 |
| 31 |
| | 126 |
| 59 |
|
Comprehensive Income Attributable to Phillips 66 | $ | 948 |
| 471 |
| | 2,219 |
| 1,253 |
| $ | 1,163 |
| 693 |
| | 1,800 |
| 1,271 |
|
See Notes to Consolidated Financial Statements.
|
| |
Consolidated Balance Sheet | Phillips 66 |
| | | Millions of Dollars | Millions of Dollars |
| September 30 2017 |
| | December 31 2016 |
| June 30 2018 |
| | December 31 2017 |
|
Assets | | | | | | |
Cash and cash equivalents | $ | 1,547 |
| | 2,711 |
| $ | 1,884 |
| | 3,119 |
|
Accounts and notes receivable (net of allowances of $31 million in 2017 and $34 million in 2016) | 5,421 |
| | 5,485 |
| |
Accounts and notes receivable (net of allowances of $22 million in 2018 and $29 million in 2017) | | 6,006 |
| | 6,424 |
|
Accounts and notes receivable—related parties | 934 |
| | 912 |
| 1,167 |
| | 1,082 |
|
Inventories | 4,455 |
| | 3,150 |
| 4,901 |
| | 3,395 |
|
Prepaid expenses and other current assets | 578 |
| | 422 |
| 621 |
| | 370 |
|
Total Current Assets | 12,935 |
| | 12,680 |
| 14,579 |
| | 14,390 |
|
Investments and long-term receivables | 13,899 |
| | 13,534 |
| 14,177 |
| | 13,941 |
|
Net properties, plants and equipment | 21,303 |
| | 20,855 |
| 21,465 |
| | 21,460 |
|
Goodwill | 3,270 |
| | 3,270 |
| 3,270 |
| | 3,270 |
|
Intangibles | 884 |
| | 888 |
| 866 |
| | 876 |
|
Other assets | 421 |
| | 426 |
| 469 |
| | 434 |
|
Total Assets | $ | 52,712 |
| | 51,653 |
| $ | 54,826 |
| | 54,371 |
|
| | | | | | |
Liabilities | | | | | | |
Accounts payable | $ | 6,404 |
| | 6,395 |
| $ | 8,437 |
| | 7,242 |
|
Accounts payable—related parties | 867 |
| | 666 |
| 899 |
| | 785 |
|
Short-term debt | 706 |
| | 550 |
| 341 |
| | 41 |
|
Accrued income and other taxes | 901 |
| | 805 |
| 1,133 |
| | 1,002 |
|
Employee benefit obligations | 482 |
| | 527 |
| 461 |
| | 582 |
|
Other accruals | 545 |
| | 520 |
| 461 |
| | 455 |
|
Total Current Liabilities | 9,905 |
| | 9,463 |
| 11,732 |
| | 10,107 |
|
Long-term debt | 9,495 |
| | 9,588 |
| 11,023 |
| | 10,069 |
|
Asset retirement obligations and accrued environmental costs | 629 |
| | 655 |
| 646 |
| | 641 |
|
Deferred income taxes | 7,605 |
| | 6,743 |
| 5,191 |
| | 5,008 |
|
Employee benefit obligations | 877 |
| | 1,216 |
| 885 |
| | 884 |
|
Other liabilities and deferred credits | 242 |
| | 263 |
| 389 |
| | 234 |
|
Total Liabilities | 28,753 |
| | 27,928 |
| 29,866 |
| | 26,943 |
|
| | | | | | |
Equity | | | | | | |
Common stock (2,500,000,000 shares authorized at $.01 par value) Issued (2017—643,419,792 shares; 2016—641,593,854 shares) | | | | |
Common stock (2,500,000,000 shares authorized at $0.01 par value) Issued (2018—645,214,810 shares; 2017—643,835,464 shares) | | | | |
Par value | 6 |
| | 6 |
| 6 |
| | 6 |
|
Capital in excess of par | 19,652 |
| | 19,559 |
| 19,831 |
| | 19,768 |
|
Treasury stock (at cost: 2017—136,679,305 shares; 2016—122,827,264 shares) | (9,915 | ) | | (8,788 | ) | |
Treasury stock (at cost: 2018—180,952,400 shares; 2017—141,565,145 shares) | | (14,121 | ) | | (10,378 | ) |
Retained earnings | 13,464 |
| | 12,608 |
| 17,500 |
| | 16,306 |
|
Accumulated other comprehensive loss | (684 | ) | | (995 | ) | (680 | ) | | (617 | ) |
Total Stockholders’ Equity | 22,523 |
| | 22,390 |
| 22,536 |
| | 25,085 |
|
Noncontrolling interests | 1,436 |
| | 1,335 |
| 2,424 |
| | 2,343 |
|
Total Equity | 23,959 |
| | 23,725 |
| 24,960 |
| | 27,428 |
|
Total Liabilities and Equity | $ | 52,712 |
| | 51,653 |
| $ | 54,826 |
| | 54,371 |
|
See Notes to Consolidated Financial Statements.
|
| |
Consolidated Statement of Cash Flows | Phillips 66 |
| | | Millions of Dollars | Millions of Dollars |
| Nine Months Ended September 30 | Six Months Ended June 30 |
| 2017 |
| | 2016 |
| 2018 |
| | 2017 |
|
Cash Flows From Operating Activities | | | | | | |
Net income | $ | 1,993 |
| | 1,450 |
| $ | 1,989 |
| | 1,144 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | |
Depreciation and amortization | 972 |
| | 863 |
| 673 |
| | 635 |
|
Impairments | 18 |
| | 4 |
| 6 |
| | 17 |
|
Accretion on discounted liabilities | 16 |
| | 15 |
| 12 |
| | 11 |
|
Deferred taxes | 784 |
| | 467 |
| |
Deferred income taxes | | 129 |
| | 757 |
|
Undistributed equity earnings | (543 | ) | | (772 | ) | (14 | ) | | (252 | ) |
Net gain on dispositions | (15 | ) | | (9 | ) | (17 | ) | | (15 | ) |
Gain on consolidation of business | (423 | ) | | — |
| — |
| | (423 | ) |
Other | (234 | ) | | (192 | ) | 197 |
| | 98 |
|
Working capital adjustments | | | | | | |
Decrease (increase) in accounts and notes receivable | (33 | ) | | 185 |
| 304 |
| | 724 |
|
Decrease (increase) in inventories | (1,228 | ) | | (510 | ) | (1,537 | ) | | (1,047 | ) |
Decrease (increase) in prepaid expenses and other current assets | (106 | ) | | (453 | ) | (257 | ) | | 17 |
|
Increase (decrease) in accounts payable | 464 |
| | 1,025 |
| 1,311 |
| | (308 | ) |
Increase (decrease) in taxes and other accruals | 52 |
| | 223 |
| 56 |
| | (42 | ) |
Net Cash Provided by Operating Activities | 1,717 |
| | 2,296 |
| 2,852 |
| | 1,316 |
|
| | | | | | |
Cash Flows From Investing Activities | | | | | | |
Capital expenditures and investments | (1,295 | ) | | (2,031 | ) | (866 | ) | | (928 | ) |
Proceeds from asset dispositions* | 65 |
| | 159 |
| 29 |
| | 51 |
|
Advances/loans—related parties | (9 | ) | | (266 | ) | |
Collection of advances/loans—related parties | 325 |
| | 107 |
| — |
| | 325 |
|
Restricted cash received from consolidation of business | 318 |
| | — |
| — |
| | 318 |
|
Other | (80 | ) | | (132 | ) | 16 |
| | (61 | ) |
Net Cash Used in Investing Activities | (676 | ) | | (2,163 | ) | (821 | ) | | (295 | ) |
| | | | | | |
Cash Flows From Financing Activities | | | | | | |
Issuance of debt | 3,083 |
| | 400 |
| 1,509 |
| | 2,603 |
|
Repayment of debt | (3,161 | ) | | (418 | ) | (260 | ) | | (2,910 | ) |
Issuance of common stock | 23 |
| | 14 |
| 30 |
| | 6 |
|
Repurchase of common stock | (1,127 | ) | | (812 | ) | (3,743 | ) | | (666 | ) |
Dividends paid on common stock | (1,042 | ) | | (954 | ) | (699 | ) | | (686 | ) |
Distributions to noncontrolling interests | (83 | ) | | (45 | ) | (96 | ) | | (54 | ) |
Net proceeds from issuance of Phillips 66 Partners LP common units | 171 |
| | 972 |
| 67 |
| | 171 |
|
Other | (66 | ) | | (38 | ) | (58 | ) | | (54 | ) |
Net Cash Used in Financing Activities | (2,202 | ) | | (881 | ) | (3,250 | ) | | (1,590 | ) |
| | | | | | |
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | (3 | ) | | 11 |
| (16 | ) | | 19 |
|
| | | | | | |
Net Change in Cash, Cash Equivalents and Restricted Cash | (1,164 | ) | | (737 | ) | (1,235 | ) | | (550 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 2,711 |
| | 3,074 |
| 3,119 |
| | 2,711 |
|
Cash, Cash Equivalents and Restricted Cash at End of Period | $ | 1,547 |
| | 2,337 |
| $ | 1,884 |
| | 2,161 |
|
* Includes return of investments in equity affiliates and working capital true-ups on dispositions.affiliates.
See Notes to Consolidated Financial Statements.
|
| |
Consolidated Statement of Changes in Equity | Phillips 66 |
| | | Millions of Dollars | Millions of Dollars |
| Attributable to Phillips 66 | | | Attributable to Phillips 66 | | |
| Common Stock | | | Common Stock | | |
| Par Value |
| Capital in Excess of Par |
| Treasury Stock |
| Retained Earnings |
| Accum. Other Comprehensive Income (Loss) |
| Noncontrolling Interests |
| Total |
| Par Value |
| Capital in Excess of Par |
| Treasury Stock |
| Retained Earnings |
| Accum. Other Comprehensive Loss |
| Noncontrolling Interests |
| Total |
|
| | | | | | |
December 31, 2015 | $ | 6 |
| 19,145 |
| (7,746 | ) | 12,348 |
| (653 | ) | 838 |
| 23,938 |
| |
December 31, 2016 | | $ | 6 |
| 19,559 |
| (8,788 | ) | 12,608 |
| (995 | ) | 1,335 |
| 23,725 |
|
Net income | — |
| — |
| — |
| 1,392 |
| — |
| 58 |
| 1,450 |
| — |
| — |
| — |
| 1,085 |
| — |
| 59 |
| 1,144 |
|
Other comprehensive loss | — |
| — |
| — |
| — |
| (139 | ) | — |
| (139 | ) | |
Cash dividends paid on common stock | — |
| — |
| — |
| (954 | ) | — |
| — |
| (954 | ) | |
Other comprehensive income | | — |
| — |
| — |
| — |
| 186 |
| — |
| 186 |
|
Dividends paid on common stock | | — |
| — |
| — |
| (686 | ) | — |
| — |
| (686 | ) |
Repurchase of common stock | — |
| — |
| (812 | ) | — |
| — |
| — |
| (812 | ) | — |
| — |
| (666 | ) | — |
| — |
| — |
| (666 | ) |
Benefit plan activity | — |
| 66 |
| — |
| (11 | ) | — |
| — |
| 55 |
| — |
| 20 |
| — |
| (6 | ) | — |
| — |
| 14 |
|
Issuance of Phillips 66 Partners LP common units | — |
| 263 |
| — |
| — |
| — |
| 555 |
| 818 |
| — |
| 45 |
| — |
| — |
| — |
| 98 |
| 143 |
|
Distributions to noncontrolling interests and other | — |
| — |
| — |
| — |
| — |
| (45 | ) | (45 | ) | |
September 30, 2016 | $ | 6 |
| 19,474 |
| (8,558 | ) | 12,775 |
| (792 | ) | 1,406 |
| 24,311 |
| |
Distributions to noncontrolling interests | | — |
| — |
| — |
| — |
| — |
| (54 | ) | (54 | ) |
June 30, 2017 | | $ | 6 |
| 19,624 |
| (9,454 | ) | 13,001 |
| (809 | ) | 1,438 |
| 23,806 |
|
| | | | |
December 31, 2016 | $ | 6 |
| 19,559 |
| (8,788 | ) | 12,608 |
| (995 | ) | 1,335 |
| 23,725 |
| |
December 31, 2017 | | $ | 6 |
| 19,768 |
| (10,378 | ) | 16,306 |
| (617 | ) | 2,343 |
| 27,428 |
|
Cumulative effect of accounting changes | | — |
| — |
| — |
| 36 |
| — |
| 13 |
| 49 |
|
Net income | — |
| — |
| — |
| 1,908 |
| — |
| 85 |
| 1,993 |
| — |
| — |
| — |
| 1,863 |
| — |
| 126 |
| 1,989 |
|
Other comprehensive income | — |
| — |
| — |
| — |
| 311 |
| — |
| 311 |
| |
Cash dividends paid on common stock | — |
| — |
| — |
| (1,042 | ) | — |
| — |
| (1,042 | ) | |
Other comprehensive loss | | — |
| — |
| — |
| — |
| (63 | ) | — |
| (63 | ) |
Dividends paid on common stock | | — |
| — |
| — |
| (699 | ) | — |
| — |
| (699 | ) |
Repurchase of common stock | — |
| — |
| (1,127 | ) | — |
| — |
| — |
| (1,127 | ) | — |
| — |
| (3,743 | ) | — |
| — |
| — |
| (3,743 | ) |
Benefit plan activity | — |
| 48 |
| — |
| (10 | ) | — |
| — |
| 38 |
| — |
| 41 |
| — |
| (6 | ) | — |
| — |
| 35 |
|
Issuance of Phillips 66 Partners LP common units | — |
| 45 |
| — |
| — |
| — |
| 99 |
| 144 |
| — |
| 22 |
| — |
| — |
| — |
| 38 |
| 60 |
|
Distributions to noncontrolling interests and other | — |
| — |
| — |
| — |
| — |
| (83 | ) | (83 | ) | |
September 30, 2017 | $ | 6 |
| 19,652 |
| (9,915 | ) | 13,464 |
| (684 | ) | 1,436 |
| 23,959 |
| |
Distributions to noncontrolling interests | | — |
| — |
| — |
| — |
| — |
| (96 | ) | (96 | ) |
June 30, 2018 | | $ | 6 |
| 19,831 |
| (14,121 | ) | 17,500 |
| (680 | ) | 2,424 |
| 24,960 |
|
| | | Shares in Thousands | Shares in Thousands |
| Common Stock Issued |
| Treasury Stock |
| Common Stock Issued |
| Treasury Stock |
|
December 31, 2015 | 639,336 |
| 109,926 |
| |
Repurchase of common stock | — |
| 10,141 |
| |
Shares issued—share-based compensation | 1,581 |
| — |
| |
September 30, 2016 | 640,917 |
| 120,067 |
| |
| | |
December 31, 2016 | 641,594 |
| 122,827 |
| 641,594 |
| 122,827 |
|
Repurchase of common stock | — |
| 13,852 |
| — |
| 8,391 |
|
Shares issued—share-based compensation | 1,826 |
| — |
| 1,135 |
| — |
|
September 30, 2017 | 643,420 |
| 136,679 |
| |
June 30, 2017 | | 642,729 |
| 131,218 |
|
| | |
December 31, 2017 | | 643,835 |
| 141,565 |
|
Repurchase of common stock | | — |
| 39,387 |
|
Shares issued—share-based compensation | | 1,380 |
| — |
|
June 30, 2018 | | 645,215 |
| 180,952 |
|
See Notes to Consolidated Financial Statements.
|
| |
Notes to Consolidated Financial Statements | Phillips 66 |
Note 1—Interim Financial Information
The interim financial information presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements and notes included in our 20162017 Annual Report on Form 10-K. The results of operations for the three-three and nine-month periodssix months ended SeptemberJune 30, 2017,2018, are not necessarily indicative of the results to be expected for the full year. Certain prior period financial information has been recast to reflect the current year’s presentation.
Note 2—Changes in Accounting Principles
Effective January 1, 2017,2018, we early adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2017-04, “Intangibles—Goodwill2017-05, “Other Income—Gains and Other (Topic 350): SimplifyingLosses from the Test for Goodwill Impairment,Derecognition of Nonfinancial Assets (Subtopic 610-20),” which eliminatesclarifies the second step from the goodwill impairment test. Under the revised test, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment chargescope and accounting for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amountsale or transfer of goodwill allocatednonfinancial assets and in substance nonfinancial assets to that reporting unit.noncustomers, including partial sales. This ASU is applied prospectivelyeliminated the use of carryover basis for most nonmonetary exchanges, including contributions of assets to goodwill impairment tests performedequity-method joint ventures, and could result in the entity recognizing a gain or loss on the sale or after January 1, 2017.transfer of nonfinancial assets. At the time of adoption, there was no impact on our consolidated financial statements from adopting this ASU.
Effective January 1, 2017,2018, we early adopted ASU No. 2016-18, “Statement2017-01, “Business Combinations (Topic 805): Clarifying the Definition of Cash Flows (Topic 230): Restricted Cash.a Business,” The new updatewhich clarifies the classificationdefinition of a business with the objective of adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendment provides a screen for determining when a transaction involves an acquisition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset, or a group of similar identifiable assets, then the screen is met and presentationthe transaction is not considered an acquisition of changes in restricted cash. Thea business. If the screen is not met, the amendment requires that to be considered a statementbusiness, the operation must include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The guidance may reduce the number of cash flows explainfuture transactions accounted for as business acquisitions. At the change duringtime of adoption, there was no impact on our consolidated financial statements from adopting this ASU.
Effective January 1, 2018, we adopted ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other Than Inventory.” This ASU requires the period inincome tax consequences of an intra-entity transfer of an asset, other than inventory, to be recognized when the totaltransfer occurs. At the time of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Adoption ofadoption, this ASU on a retrospective basis did not have a material impact on our consolidated financial statements. See Note 17—Restricted Cash for more information.
Effective January 1, 2017,2018, we early adopted ASU No. 2016-15, “Statement2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Cash Flows (Topic 230): Classification of Certain Cash ReceiptsFinancial Assets and Cash Payments.Financial Liabilities.” The new update clarifies how certain cash receipts and cash payments should be presented and classifiedmajority of this ASU’s provisions amend only the presentation or disclosures of financial instruments; however, one provision could also affect net income. Equity investments carried under the cost method or the lower of cost or fair value method of accounting, in accordance with previous generally accepted accounting principles in the statementUnited States (GAAP), will have to be carried at fair value with changes in fair value recorded in net income. For equity investments that do not have readily determinable fair values, a company may elect to carry such investments at cost less impairments, if any, adjusted up or down for price changes in similar financial instruments issued by the investee, when and if observed. At the time of cash flows. In addition, ASU No. 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. Adoption ofadoption, this ASU on a retrospective basis did not have a material impact on our consolidated financial statements.
Effective January 1, 2017,2018, we adopted ASU 2016-09, “Compensation—Stock CompensationNo. 2014-09, “Revenue from Contracts with Customers (Topic 718): Improvements606),” using the modified retrospective transition method applied to Employee Share-Based Payment Accounting,” which simplifies several aspectsall contracts. Under the new revenue recognition guidance, recognition of revenue involves a multiple step approach including (i) identifying the accounting for share-based payment award transactions, including accounting forcontract, (ii) identifying the separate performance obligations, (iii) determining the transaction price, (iv) allocating the price to the performance obligations and (v) recognizing the revenue as the obligations are satisfied. Additional disclosures are required to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
We recorded noncash cumulative effect adjustments to our opening total equity balance as of January 1, 2018, to increase retained earnings by $35 million, net of $11 million of income taxes, and classificationnoncontrolling interests by $13 million. These adjustments primarily reflected amounts recorded by our equity-method investees related to contracts that contain tier-pricing and minimum volume commitments with recovery provisions. One of excess tax benefitsour Midstream segment equity-method investees will adopt this ASU in 2019, and we do not expect their adoption to have a material impact on our consolidated financial statements.
In addition, prospectively from January 1, 2018, our presentation of excise taxes on sales of petroleum products changed to a net basis from a gross basis. As a result, the “Sales and other operating revenues” and “Taxes other than income taxes” lines on our consolidated statement of cash flows, forfeituresincome for the three and minimum statutory tax withholding requirements. Adoption of this ASUsix months ended June 30, 2018, are not presented on a prospectivecomparable basis did not materially impactto the three and six months ended June 30, 2017. See Note 3—Sales and Other Operating Revenues, for more information on our financial position, resultspresentation of operations, or cash flows. We account for forfeituresexcise taxes on sales of awards when they occur and excess tax benefits, which were previously reported in cash flows from financing activities, are now reported in cash flows from operating activities on a prospective basis.petroleum products.
Note 3—Variable Interest Entities (VIEs)Sales and Other Operating Revenues
Consolidated VIEs
In 2013, we formed Phillips 66 Partners LP, a master limited partnership, to own, operate, develop and acquireOur revenues are primarily fee-basedassociated with sales of crude oil, refined petroleum product and natural gas liquids (NGL) pipelines, refined petroleum and terminals, as well aschemical products, and other midstream assets. We consolidate Phillips 66 Partners, asitems. Each gallon, or other unit of measure of product, is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. The transaction prices of our contracts with customers are either fixed or variable, with variable pricing based upon various market indices. For our contracts that include variable consideration, we determinedutilize the variable consideration allocation exception, whereby the variable consideration is only allocated to the performance obligations that Phillips 66 Partnersare satisfied during the period. The related revenue is recognized at a VIEpoint in time when control passes to the customer, which is when title and wethe risk of ownership passes to the customer and physical delivery of goods occurs, either immediately or within a fixed delivery schedule that is reasonable and customary in the industry.
Effective for reporting periods ending after our adoption of ASU No. 2014-09 on January 1, 2018, excise taxes on sales of petroleum products charged to our customers are presented net of excise taxes on sales of petroleum products owed to governmental authorities in the primary beneficiary. As general partner“Taxes other than income taxes” line on our consolidated statement of Phillips 66 Partners, we haveincome. For reporting periods ending prior to January 1, 2018, excise taxes on sales of petroleum products charged to our customers are presented in the ability“Sales and other operating revenues” line on our consolidated statement of income, and excise taxes on sales of petroleum products owed to control its financial interests, as wellgovernmental authorities are presented in the “Taxes other than income taxes” line on our consolidated statement of income. See Note 2—Changes in Accounting Principles, for more information regarding our adoption of this ASU.
Revenues associated with pipeline transportation services are recognized at a point in time when the volumes are delivered based on contractual rates. Revenues associated with terminaling and storage services are recognized over time as the ability to direct the activities that most significantly impact its economic performance. See Note 21—Phillips 66 Partners LP, for additional information.services are performed based on throughput volume or capacity utilization at contractual rates.
Our products and services are billed and payments are received typically on a monthly basis, which may vary based upon the product or service offered.
Disaggregated Revenues
The most significant assets of Phillips 66 Partners that are available to settle only its obligations, along with its most significant liabilities for which its creditors do not have recourse to Phillips 66’s general credit, were:following tables present our sales and other operating revenues disaggregated by product line and services and geographic location:
|
| | | | | | |
| Millions of Dollars |
| September 30 2017 |
| | December 31 2016 |
|
| | | |
Equity investments* | $ | 1,265 |
| | 1,142 |
|
Net properties, plants and equipment | 2,675 |
| | 2,675 |
|
Long-term debt | 2,273 |
| | 2,396 |
|
* Included in “Investments and long-term receivables” on the Phillips 66 consolidated balance sheet. |
| | | | | | |
| Millions of Dollars |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2018 |
| | 2018 |
|
Product Line and Services | | | |
Refined products | $ | 23,011 |
| | 41,791 |
|
Crude oil resales | 4,381 |
| | 7,569 |
|
NGL | 1,548 |
| | 2,969 |
|
Services and other | 40 |
| | 246 |
|
Consolidated sales and other operating revenues by product line and services | $ | 28,980 |
|
| 52,575 |
|
| | | |
Geographic Location | | | |
United States | $ | 22,902 |
| | 41,413 |
|
United Kingdom | 2,289 |
| | 4,538 |
|
Germany | 1,108 |
| | 2,039 |
|
Other foreign countries | 2,681 |
| | 4,585 |
|
Consolidated sales and other operating revenues by geographic location | $ | 28,980 |
|
| 52,575 |
|
Non-consolidated VIEsContract-Related Assets and Liabilities
At June 30, 2018, and January 1, 2018, receivables from contracts with customers were $5.9 billion and $6.2 billion, respectively. Significant non-customer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.
Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At June 30, 2018, and January 1, 2018, our asset balances related to such payments were $220 million and $208 million, respectively.
Our contract liabilities represent advances from our customers prior to product or service delivery. At June 30, 2018, and January 1, 2018, contract liabilities were not material.
Remaining Performance Obligations
Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We holddo not disclose remaining performance obligations for these contracts as the expected duration is one year or less or because the variable interestsconsideration has been allocated entirely to an unsatisfied performance obligation. We also have certain contracts in VIEsour Midstream segment that have not been consolidated because we are not consideredinclude minimum volume commitments with fixed pricing, most of which expire by 2021. The remaining performance obligations related to these minimum volume commitment contracts were immaterial at June 30, 2018.
Note 4—Inventories
Inventories consisted of the primary beneficiary.following:
|
| | | | | | |
| Millions of Dollars |
| June 30 2018 |
| | December 31 2017 |
|
| | | |
Crude oil and petroleum products | $ | 4,608 |
| | 3,106 |
|
Materials and supplies | 293 |
| | 289 |
|
| $ | 4,901 |
| | 3,395 |
|
Inventories valued on the last-in, first-out (LIFO) basis totaled $4,494 million and $2,980 million at June 30, 2018, and December 31, 2017, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $6.0 billion and $4.3 billion at June 30, 2018, and December 31, 2017, respectively.
Note 5—Business Combinations
Merey Sweeny, L.P. (MSLP) is a limited partnership that owns a delayed coker and related facilities at the Sweeny Refinery. UnderIn February 2017, we began accounting for MSLP as a consolidated subsidiary because the agreements that governed the relationships between the former co-venturers in MSLP,exercise of a call right triggered by certain defaults by the co-venturer, Petróleos de Venezuela S.A. (PDVSA), with respect to supply of crude oil to the Sweeny Refinery triggered the right to acquire PDVSA’s 50 percent ownership interest in MSLP. The call right was exercised in August 2009. The exercise of the call right was challenged, and the dispute was arbitrated in our favor and subsequently litigated. Through February 7, 2017, we determined MSLP was a VIE and used the equity method of accounting because the exercise of the call right remained subject to legal challenge. As discussed more fully in Note 5—Business Combinations, the exercise of the call right ceased to be subject to legal challenge in February 2017. At that point, we no longer considered MSLP a VIE and began consolidating the entity as a wholly owned subsidiary.
We have a 25 percent ownership interest in both Dakota Access, LLC (DAPL) and Energy Transfer Crude Oil Company, LLC (ETCO), which collectively own the Bakken Pipeline. These entities did not have sufficient equity at risk to fully fund the construction of all assets requiredchallenge. The purchase price for principal operations, and thus represented VIEs until operations commenced. On June 1, 2017, these entities commenced operations and were no longer considered VIEs. We use the equity method of accounting for these investments.
Note 4—Inventories
Inventories consisted of the following:
|
| | | | | | |
| Millions of Dollars |
| September 30 2017 |
| | December 31 2016 |
|
| | | |
Crude oil and petroleum products | $ | 4,172 |
| | 2,883 |
|
Materials and supplies | 283 |
| | 267 |
|
| $ | 4,455 |
| | 3,150 |
|
Inventories valued on the last-in, first-out (LIFO) basis totaled $4,059 million and $2,772 million at September 30, 2017, and December 31, 2016, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $3.8 billion and $3.3 billion at September 30, 2017, and December 31, 2016, respectively.
Certain planned reductions in inventory that are not expected to be replaced by the end of the year cause liquidations of LIFO inventory values. LIFO inventory liquidations during the three- and nine-month periods ended September 30, 2017, were not material. Excluding the disposition of the Whitegate Refinery, LIFO liquidations during the three- and nine-month periods ended September 30, 2016, decreased net income by approximately $13 million and $71 million, respectively.
In conjunction with the Whitegate Refinery disposition, the refinery’s LIFO inventory values were liquidated causing a decrease in net income of $62 million during the three- and nine-month periods ended September 30, 2016. This LIFO liquidation impact was included in the gain recognized on the disposition.
Note 5—Business Combinations
MSLP owns a delayed coker and related facilities at the Sweeny Refinery, and its results are included in our Refining segment. Prior to August 28, 2009, MSLP was owned 50/50 by ConocoPhillips and PDVSA. Under the agreements that governed the relationships between the partners, certain defaults by PDVSA with respect to supply of crude oil to the Sweeny Refinery triggered the right, exercised in August 2009, to acquire itsPDVSA’s 50 percent ownership interest in MSLP for a purchase pricewas determined by a contractual formula. AsBecause the distributions PDVSA received from MSLP exceeded the amounts it contributed to MSLP, the contractual formula required no cash consideration for the acquisition. The exercise was challenged, and the dispute was arbitrated in our favor and subsequently litigated. While the dispute was being arbitrated and litigated, we continued to use the equity method of accounting for our 50 percent interest in MSLP. When the exercise of the call right ceased to be subject to legal challenge on February 7, 2017, we deemed that the acquisition was complete and began accounting for MSLP as a wholly owned consolidated subsidiary.
Based on a third-party appraisal of the fair value of MSLP’s net assets, utilizing discounted cash flows and replacement costs, the acquisition of PDVSA’s 50 percent interest resulted in our recordingthe recognition of a pre-tax gain of $423 million induring the first quarter ofthree months ended March 31, 2017. This gain was included in the “Other income” line on our consolidated statement of income. The fair value of our original equity interest in MSLP immediately prior to the deemed acquisition was $145 million. As a result of the transaction, we recorded $318 million of restricted cash, $250 million of properties, plants and equipment (PP&E) and $238 million of debt, as well as a net $93 million for the elimination of our equity investment in MSLP and net intercompany payables. Our acquisition accounting was finalized duringin the first quarter of 2017.
In November 2016,The results of MSLP were included in our Refining segment until October 2017, when we contributed our 100 percent interest in MSLP to Phillips 66 Partners acquired NGL logistics assets locatedLP (Phillips 66 Partners), which is included in southeast Louisiana, consisting of approximately 500 miles of pipelines and storage caverns connecting multiple fractionation facilities, refineries and a petrochemical facility. The acquisition provided an opportunity for fee-based growth in the Louisiana market within our Midstream segment. The acquisition was included in the “Capital expenditures and investments” line on our consolidated statement of cash flows. At the acquisition date, we recorded $183 million of PP&E and $3 million of goodwill. Our acquisition accounting was finalized during the first quarter of 2017, with no change to the provisional amounts recorded in 2016.
Note 6—Assets Held for Sale or Sold
In June 2017, we entered into an agreement to sell vacant land. In our segment disclosures, the property is included in Corporate and Other. We classified the property as held for sale and transferred $50 million of PP&E to the “Prepaid expenses and other current assets” line on our consolidated balance sheet. We expect to close the sale in the first quarter of 2018, following a contractual inspection period. The net sales proceeds are expected to approximate the carrying value of the land.
In September 2016, we completed the sale of the Whitegate Refinery and related marketing assets, which were included primarily in our Refining segment. The net carrying value of the assets at the time of their disposition was $135 million, which consisted of $127 million of inventory, other working capital, and PP&E; and $8 million of allocated goodwill. An immaterial gain was recognized in 2016 on the disposition.
Note 7—Investments, Loans and Long-Term Receivables
Equity Investments
Summarized 100 percent financial information for Chevron Phillips Chemical Company LLC (CPChem) was as follows:
| | | Millions of Dollars | Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | |
Revenues | $ | 2,287 |
| 2,186 |
| | 7,196 |
| 6,526 |
| |
Revenues and other income | | $ | 3,188 |
| 2,370 |
| | 5,936 |
| 4,909 |
|
Income before income taxes | 345 |
| 372 |
| | 1,469 |
| 1,400 |
| 667 |
| 603 |
| | 1,267 |
| 1,124 |
|
Net income | 331 |
| 355 |
| | 1,424 |
| 1,343 |
| 650 |
| 590 |
| | 1,235 |
| 1,093 |
|
Gray Oak Pipeline, LLC
Phillips 66 Partners has a 75 percent ownership interest in Gray Oak Pipeline, LLC (Gray Oak), an entity formed to develop and construct the Gray Oak Pipeline system which, upon completion, will provide crude oil transportation from the Permian Basin and Eagle Ford to destinations in the Corpus Christi and Sweeny/Freeport markets on the Texas Gulf Coast. The pipeline is expected to be placed in service by the end of 2019.
Gray Oak is considered a variable interest entity (VIE) because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. Phillips 66 Partners has determined it is not the primary beneficiary because it and its co-venturer jointly direct the activities of Gray Oak that most significantly impact economic performance. At June 30, 2018, Phillips 66 Partners’ maximum exposure to loss was $28 million, which represented the aggregate book value of its equity investment in Gray Oak.
Rockies Express Pipeline LLC
In July 2018, Rockies Express Pipeline LLC (REX) repaid $550 million of its debt, reducing its total debt to approximately $2.0 billion. REX funded the repayment through member cash contributions. Our 25 percent share was approximately $138 million, which we contributed to REX in July 2018.
Related Party Loans and Advances
InDuring the first quarter ofthree months ended March 31, 2017, we received payment of the $250 million outstanding principal balance at December 31, 2016, of our sponsor loans to the DAPLDakota Access, LLC and ETCOEnergy Transfer Crude Oil Company, LLC joint ventures. We also received payment of the $75 million outstanding principal balance of the partner loan we made to WRB Refining LP (WRB). in 2016. These cash inflows, totaling $325 million, are included in the “Collections“Collection of advances/loans—related parties” line on our consolidated statement of cash flows.
Note 8—7—Properties, Plants and Equipment
Our gross investment in PP&E and the associated accumulated depreciation and amortization (Accum. D&A) balances were as follows:
|
| | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| September 30, 2017 | | December 31, 2016 |
| Gross PP&E |
| | Accum. D&A |
| | Net PP&E |
| | Gross PP&E |
| | Accum. D&A |
| | Net PP&E |
|
| | | | | | | | | | | |
Midstream | $ | 8,491 |
| | 1,775 |
| | 6,716 |
| | 8,179 |
| | 1,579 |
| | 6,600 |
|
Chemicals | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Refining | 22,143 |
| | 8,805 |
| | 13,338 |
| | 21,152 |
| | 8,197 |
| | 12,955 |
|
Marketing and Specialties | 1,610 |
| | 889 |
| | 721 |
| | 1,451 |
| | 776 |
| | 675 |
|
Corporate and Other | 1,104 |
| | 576 |
| | 528 |
| | 1,207 |
| | 582 |
| | 625 |
|
| $ | 33,348 |
| | 12,045 |
| | 21,303 |
| | 31,989 |
| | 11,134 |
| | 20,855 |
|
|
| | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| June 30, 2018 | | December 31, 2017 |
| Gross PP&E |
| | Accum. D&A |
| | Net PP&E |
| | Gross PP&E |
| | Accum. D&A |
| | Net PP&E |
|
| | | | | | | | | | | |
Midstream | $ | 9,158 |
| | 2,004 |
| | 7,154 |
| | 8,849 |
| | 1,853 |
| | 6,996 |
|
Chemicals | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Refining | 22,406 |
| | 9,356 |
| | 13,050 |
| | 22,144 |
| | 8,987 |
| | 13,157 |
|
Marketing and Specialties | 1,639 |
| | 920 |
| | 719 |
| | 1,658 |
| | 909 |
| | 749 |
|
Corporate and Other | 1,125 |
| | 583 |
| | 542 |
| | 1,091 |
| | 533 |
| | 558 |
|
| $ | 34,328 |
| | 12,863 |
| | 21,465 |
| | 33,742 |
| | 12,282 |
| | 21,460 |
|
Note 9—8—Earnings Per Share
The numerator of basic earnings per share (EPS) is net income attributable to Phillips 66, reduced by noncancelable dividends paid on unvested share-based employee awards during the vesting period (participating securities). The denominator of basic EPS is the sum of the daily weighted-average number of common shares outstanding during the periods presented and fully vested stock and unit awards that have not yet been issued as common stock. The numerator of diluted EPS is also based on net income attributable to Phillips 66, which is reduced only by dividend equivalents paid on participating securities for which the dividends are more dilutive than the participation of the awards in the earnings of the periods presented. To the extent unvested stock, unit or option awards and vested unexercised stock options are dilutive, they are included with the weighted-average common shares outstanding in the denominator. Treasury stock is excluded from the denominator in both basic and diluted EPS.
| | | Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Basic |
| Diluted |
| | Basic |
| Diluted |
| | Basic |
| Diluted |
| | Basic |
| Diluted |
| Basic |
| Diluted |
| | Basic |
| Diluted |
| | Basic |
| Diluted |
| | Basic |
| Diluted |
|
Amounts attributed to Phillips 66 Common Stockholders (millions): | | | | | | | | | | | | | | | | |
Net income attributable to Phillips 66 | $ | 823 |
| 823 |
| | 511 |
| 511 |
| | 1,908 |
| 1,908 |
| | 1,392 |
| 1,392 |
| $ | 1,339 |
| 1,339 |
| | 550 |
| 550 |
| | 1,863 |
| 1,863 |
| | 1,085 |
| 1,085 |
|
Income allocated to participating securities | (1 | ) | — |
| | (2 | ) | (1 | ) | | (4 | ) | (1 | ) | | (5 | ) | (3 | ) | (1 | ) | — |
| | (2 | ) | (1 | ) | | (3 | ) | — |
| | (3 | ) | (2 | ) |
Net income available to common stockholders | $ | 822 |
| 823 |
|
| 509 |
| 510 |
| | 1,904 |
| 1,907 |
|
| 1,387 |
| 1,389 |
| $ | 1,338 |
| 1,339 |
|
| 548 |
| 549 |
| | 1,860 |
| 1,863 |
|
| 1,082 |
| 1,083 |
|
| | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding (thousands): | 509,147 |
| 512,923 |
| | 521,815 |
| 525,991 |
| | 513,583 |
| 517,420 |
| | 524,365 |
| 528,650 |
| 465,052 |
| 468,331 |
| | 514,092 |
| 517,785 |
| | 474,267 |
| 477,647 |
| | 515,838 |
| 519,706 |
|
Effect of stock-based compensation | 3,776 |
| 3,037 |
| | 4,176 |
| 2,807 |
| | 3,837 |
| 3,096 |
| | 4,285 |
| 3,000 |
| |
Effect of share-based compensation | | 3,279 |
| 3,307 |
| | 3,693 |
| 2,375 |
| | 3,380 |
| 3,348 |
| | 3,868 |
| 2,623 |
|
Weighted-average common shares outstanding—EPS | 512,923 |
| 515,960 |
| | 525,991 |
| 528,798 |
| | 517,420 |
| 520,516 |
| | 528,650 |
| 531,650 |
| 468,331 |
| 471,638 |
| | 517,785 |
| 520,160 |
| | 477,647 |
| 480,995 |
| | 519,706 |
| 522,329 |
|
| | | | | | | | | | | | | | | | |
Earnings Per Share of Common Stock (dollars) | $ | 1.60 |
| 1.60 |
| | 0.97 |
| 0.96 |
| | 3.68 |
| 3.66 |
| | 2.62 |
| 2.61 |
| $ | 2.86 |
| 2.84 |
| | 1.06 |
| 1.06 |
| | 3.89 |
| 3.87 |
| | 2.08 |
| 2.07 |
|
Note 10—9—Debt
At September 30, 2017, no amount had been directly drawn under our $5 billion revolving credit facility; however, we had $200 million of short-term commercial paper outstanding and $51 million of issued letters of credit that were supported by this facility. In addition, at September 30, 2017, there was $87 million outstanding under Phillips 66 Partners’ $750 million revolving credit facility. As a result, we had $5.4 billion of total committed capacity available under our credit facilities at September 30, 2017.
Debt Repayments
In May 2017, we repaid $1,500 million of 2.95% Senior Notes upon maturity with the funding from the April 2017 debt issuances discussed below.
Also in May 2017, we repaid $135 million of MSLP 8.85% Senior Notes due in 2019. This debt was recorded as a result of the consolidation of MSLP in February 2017. See Note 5—Business Combinations for additional information regarding MSLP.
Debt Issuances
In April 2017,March 2018, Phillips 66 completedclosed on a privatepublic offering of $600$1,500 million aggregate principal amount of unsecured notes consisting of $300of:
$500 million of floating-rate Senior Notes due 2019 and $300 million of Notes due 2020.2021. Interest on these notes is a floating rate equal to the three-month LIBORLondon Interbank Offered Rate (LIBOR) plus 0.65%0.60% per annum for the 2019 Notes and three-month LIBOR plus 0.75% per annum for the 2020 Notes. Interest on both series of notes is payable quarterly in arrears on January 15, April 15, JulyFebruary 26, May 26, August 26 and November 26, beginning on May 29, 2018.
$800 million of 3.900% Senior Notes due 2028. Interest on these notes is payable semiannually on March 15 and OctoberSeptember 15 commencing in July 2017. The 2019of each year, beginning on September 15, 2018.
An additional $200 million of our 4.875% Senior Notes maturedue 2044. Interest on Aprilthese notes is payable semiannually on May 15 2019, and the 2020 Notes matureNovember 15 of each year, beginning on AprilMay 15, 2020. The2018.
These notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary.
Also in April 2017, Phillips 66 entered into term loan facilities with an aggregate borrowing amount of $900 million, consisting of a $450 million 364-day facility and a $450 million three-year facility. Interest on the term loans is a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by our long-term credit ratings.
Phillips 66 used the net proceeds from the issuance of thethese notes together with the proceeds from the term loans, and cash on-handon hand to repay its outstanding 2.95% Senior Notes upon maturity in May 2017, for capital expenditurescommercial paper borrowings during the three months ended March 31, 2018, and for general corporate purposes. The commercial paper borrowings during the three months ended March 31, 2018, were primarily used to repurchase shares of our common stock; see Note 16—Treasury Stock for additional information.
Subsequent EventsDebt Repayments
In October 2017, as part of a contribution of assets toJune 2018, Phillips 66 Partners, Phillips 66 Partners assumedrepaid $250 million of the $450 million of term loans outstanding under the 364-dayits three-year term loan facility originally issued in April 2017, and repaid those loans shortly thereafter. In addition, Phillips 66 Partners issued $500 million aggregate principal amount of 3.75% Senior Notes due 2028 and $150 million aggregate principal amount of 4.68% Senior Notes due 2045. Interest on the 3.75% Senior Notes due 2028 is payable semiannually in arrears on March 1 and September 1 of each year, commencing on March 1, 2018. The 4.68% Senior Notes due 2045 are an additional issuance of existing Phillips 66 Partners’ 4.68% Senior Notes, and interest is payable semiannually in arrears on February 15 and August 15 of each year.2020.
Also in October 2017, we repaidDebt Reclassifications
During the $200three months ended June 30, 2018, Phillips 66’s $300 million of floating-rate notes due 2019 were reclassified from long-term to short-term commercial paper outstanding at September 30, 2017.debt.
Note 11—10—Guarantees
At SeptemberJune 30, 2017,2018, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation wasis immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence.
Guarantees of Joint Venture Debt
In December 2016, as part of the restructuring within DCP Midstream, LLC (DCP Midstream), we issued a guarantee, effective January 1, 2017, into support ofthe debt DCP Midstream’s debtMidstream issued induring the first quarter ofthree months ended March 31, 2017. At SeptemberJune 30, 2017,2018, the maximum potential amount of future payments to third parties under the guarantee wasis estimated to be $175$125 million. Payment would be required if DCP Midstream defaults on this debt obligation, which matures in December 2019.
At SeptemberJune 30, 2017,2018, we had other guarantees outstanding for our portion of certain joint venture debt obligations,
which have remaining terms of up to 8seven years. The maximum potential amount of future payments to third parties under these guarantees iswas approximately $135$131 million. Payment would be required if a joint venture defaults on its debt obligations.
Other Guarantees
In 2016,Under the operating lease commencedagreement on our headquarters facility in Houston, Texas. Under this lease agreement,Texas, we have a residual value guarantee with a maximum future exposure of $554 million. The operating lease has a term of five yearsends in June 2021 and provides us the option, at the end of the lease term, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale.
We also have residual value guarantees associated with railcar and airplane leases with maximum future exposures totaling $349 million. At year-end 2016,$291 million, which have remaining terms of up to five years. For one of our railcar leases, we estimated a total residual value deficiency of $56 million based on an outsidea third-party appraisal of the railcars’ expected fair value at the end of their lease terms, we estimated aterm in May 2019. The total residual value deficiency is our estimate of $94 millionthe amount we will owe to the lessor at the end of the lease term and is recognized $28 million as expense in 2016.over the remaining lease term. During the first ninesix months of 2017,ended June 30, 2018, we recognized an additional $35$12 million of expense related to the residual value deficiency. At SeptemberJune 30, 2017,2018, the remaining unrecognized residual value deficiency was $31$24 million. This deficiency will be recognized on a straight-line basis through May 2019.
Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnification. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses and employee claims, as well as real estate indemnity against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. At June 30, 2018, the maximum amount of future payments is generally unlimited. The carrying amount recorded for indemnifications at September 30, 2017, was $201$187 million.
We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information to support that the liability was essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. IncludedAt June 30, 2018, environmental accruals for known contaminations of $111 million were included in the recorded carrying amount were $109 million of environmentalfor indemnifications. These accruals for known contamination that were primarily included in the “Asset retirement obligations and accrued environmental costs” line on our consolidated balance sheet at September 30, 2017.sheet. For additional information about environmental liabilities, see Note 12—11—Contingencies and Commitments.
Indemnification and Release Agreement
In 2012, in connection with our separation from ConocoPhillips (the Separation), we entered into the Indemnification and Release Agreement. This agreement governs the treatment between ConocoPhillips and us of matters relating to indemnification, insurance, litigation responsibility and management, and litigation document sharing and cooperation arising in connection with the Separation. Generally, the agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of ConocoPhillips’ business with ConocoPhillips. The agreement also establishes procedures for handling claims subject to indemnification and related matters.
Note 12—11—Contingencies and Commitments
A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.
Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.
Environmental
We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using all information available at the time. We measure estimates and base contingent liabilities on currently available facts, existing technology and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring contingent environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.
Although liability of those potentially responsible for environmental remediation costs is generally joint and several for federal sites and frequently so for state sites, we are usually only one of many companies alleged to have liability at a particular site. Due to such joint and several liabilities, we could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit, although some of the indemnifications are subject to dollar and time limits.
We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and thethese costs can be reasonably estimated. At SeptemberJune 30, 2017,2018, our total environmental accrual was $458$465 million, compared with $496$458 million at December 31, 2016.2017. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.
Legal Proceedings
Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required.
Other Contingencies
We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized.
At SeptemberJune 30, 2017,2018, we had performance obligations secured by letters of credit and bank guarantees of $574$729 million (of which $51 million was issued under the provisions of our revolving credit facility, and the remainder was issued as direct bank letters of credit and bank guarantees) related to various purchase and other commitments incident to the ordinary conduct of business.
Note 13—12—Derivatives and Financial Instruments
Derivative Instruments
We use financial and commodity-based derivative contracts to manage exposures to fluctuations in commodity prices, interest rates and foreign currency exchange rates, or to capture market opportunities. Because we do not apply hedge accounting for commodity derivative contracts, all realized orand unrealized gains and losses from commodity derivative contracts are recognized in our consolidated statement of income. Gains and losses from derivative contracts held for trading not directly related to our physical business are reported net in the “Other income” line on our consolidated statement of income. Cash flows from all our derivative activity for the periods presented appear in the operating section on our consolidated statement of cash flows.
Purchase and sales contracts with firm minimum notional volumes for commodities that are readily convertible to cash are recorded on theour consolidated balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception, whereby the contracts are recorded on an accrual basis. We generally apply the normal purchases and normal sales exception to eligible crude oil, refined product,products, NGL, natural gas and power commodity contracts to purchase or sell quantities we expect to use or sell in the normal course of business. All other derivative instruments are recorded at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 14—13—Fair Value Measurements.
Commodity Derivative Contracts—We sell into or receive supply from the worldwide crude oil, refined products, NGL, natural gas and electric power markets, exposing our revenues, purchases, cost of operating activities and cash flows to fluctuations in the prices for these commodities. Generally, our policy is to remain exposed to the market prices of commodities; however, we use futures, forwards, swaps and options in various markets to balance physical systems, meet customer needs, manage price exposures on specific transactions, and do a limited, immaterial amount of trading not directly related to our physical business, all of which may reduce our exposure to fluctuations in market prices. We also use the market knowledge gained from these activities to capture market opportunities such as moving physical commodities to more profitable locations, storing commodities to capture seasonal or time premiums, and blending commodities to capture quality upgrades.
The following table indicates the consolidated balance sheet line items that include the fair values of commodity derivative assets and liabilities. The balances in the following table are presented on a gross basis, before the effects of counterparty and collateral netting. However, we have elected to present our commodity derivative assets and liabilities with the same counterparty on a net basis on theour consolidated balance sheet when the right of setoff exists.
| | | Millions of Dollars | Millions of Dollars |
| September 30, 2017 | June 30, 2018 | | December 31, 2017 |
| Commodity Derivatives | | Effect of Collateral Netting |
| Net Carrying Value Presented on the Balance Sheet |
| Commodity Derivatives | Effect of Collateral Netting |
| Net Carrying Value Presented on the Balance Sheet |
| | Commodity Derivatives | Effect of Collateral Netting |
| Net Carrying Value Presented on the Balance Sheet |
|
| Assets |
| | Liabilities |
| Assets |
| Liabilities |
| | Assets |
| Liabilities |
|
| | | | | | | | | |
Assets | | | | | | | | | |
Prepaid expenses and other current assets | $ | 30 |
| | — |
| | — |
| 30 |
| $ | 544 |
| (485 | ) | (28 | ) | 31 |
| | 43 |
| (19 | ) | — |
| 24 |
|
Other assets | 5 |
| | (3 | ) | | — |
| 2 |
| 4 |
| (2 | ) | — |
| 2 |
| | 7 |
| (3 | ) | — |
| 4 |
|
Liabilities |
|
| |
|
| |
| | | | |
Other accruals | 933 |
| | (1,141 | ) | | 168 |
| (40 | ) | 720 |
| (870 | ) | 112 |
| (38 | ) | | 699 |
| (746 | ) | 21 |
| (26 | ) |
Other liabilities and deferred credits | 2 |
| | (4 | ) | | — |
| (2 | ) | 11 |
| (12 | ) | — |
| (1 | ) | | — |
| (1 | ) | — |
| (1 | ) |
Total | $ | 970 |
| | (1,148 | ) | | 168 |
| (10 | ) | $ | 1,279 |
| (1,369 | ) | 84 |
| (6 | ) | | 749 |
| (769 | ) | 21 |
| 1 |
|
|
| | | | | | | | | | | |
| Millions of Dollars |
| December 31, 2016 |
| Commodity Derivatives | | Effect of Collateral Netting |
| Net Carrying Value Presented on the Balance Sheet |
|
| Assets |
| | Liabilities |
|
| | | | | | |
Assets | | | | | | |
Prepaid expenses and other current assets | $ | 267 |
| | (154 | ) | | — |
| 113 |
|
Other assets | 5 |
| | (1 | ) | | — |
| 4 |
|
Liabilities |
|
| |
|
| |
|
|
Other accruals | 474 |
| | (612 | ) | | 73 |
| (65 | ) |
Other liabilities and deferred credits | — |
| | (1 | ) | | — |
| (1 | ) |
Total | $ | 746 |
| | (768 | ) | | 73 |
| 51 |
|
At SeptemberJune 30, 2017,2018, and December 31, 2016,2017, there was no material cash collateral received or paid that was not offset on theour consolidated balance sheet.
The realized and unrealized gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of income, were:
| | | Millions of Dollars | Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | |
Sales and other operating revenues | $ | (256 | ) | (6 | ) | | (101 | ) | (274 | ) | $ | (137 | ) | 87 |
| | (129 | ) | 155 |
|
Other income | 33 |
| 8 |
| | 46 |
| 24 |
| (15 | ) | 4 |
| | (20 | ) | 13 |
|
Purchased crude oil and products | (111 | ) | 36 |
| | 16 |
| (89 | ) | (141 | ) | 82 |
| | (173 | ) | 127 |
|
Net gain (loss) from commodity derivative activity | $ | (334 | ) | 38 |
| | (39 | ) | (339 | ) | $ | (293 | ) | 173 |
| | (322 | ) | 295 |
|
The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from non-derivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was approximatelyat least 98 percent at SeptemberJune 30, 2017,2018, and December 31, 2016.2017.
| | | Open Position Long/(Short) | Open Position Long / (Short) |
| September 30 2017 |
| | December 31 2016 |
| June 30 2018 |
| | December 31 2017 |
|
Commodity | | | | | | |
Crude oil, refined products and NGL (millions of barrels) | (35 | ) | | (18 | ) | (32 | ) | | (11 | ) |
Interest Rate Derivative Contracts—In 2016, we entered into interest rate swaps to hedge the variability of anticipated lease payments on our new headquarters. These monthly lease payments will vary based on monthly changes in the one-month LIBOR and changes, if any, in the Company’sour credit rating over the five-year term of the lease. The pay-fixed, receive-floating interest rate swaps have an aggregate notional value of $650 million and end onin April 25, 2021. They qualify for, and areWe have designated these swaps as cash-flow hedges.
The aggregate net fair value of these swaps, which is included in the “Other accruals”“Prepaid expenses and other current assets” and “Other assets” lines on our consolidated balance sheet, amounted to $8totaled $22 million and $14 million at both SeptemberJune 30, 2017,2018, and December 31, 2016.2017, respectively.
We report the effective portion of the mark-to-market gaingains or losslosses on our interest rate swaps designated and qualifying as a cash flow hedging instrumenthighly effective cash-flow hedges as a component of other comprehensive income (loss), and reclassify such gains and losses into earnings in the same period during which the hedged forecasted transaction affects earnings. Gains and losses due to ineffectiveness are recognized in general and administrative expenses. We did not recognize any material hedge ineffectiveness gain or loss in the consolidated income statement for the three- and nine-month periods ended September 30, 2017 and 2016. Net realized gains and losses from settlements of the swaps were immaterial for the three-three and nine-month periodssix months ended SeptemberJune 30, 20172018 and 2016.2017.
We currently estimate that pre-tax gains of less than $1$6 million will be reclassified from accumulated other comprehensive income (loss)loss into general and administrative expenses during the next twelve months as the hedged transactions settle; however, the actual amounts that will be reclassified will vary based on changes in interest rates.
Credit Risk
Financial instruments potentially exposed to concentrations of credit risk consist primarily of over-the-counter (OTC) derivative contracts and trade receivables.
The credit risk from our OTC derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements until settled. However, we are exposed to the credit risk of those exchange brokers for receivables arising from daily margin cash calls, as well as for cash deposited to meet initial margin requirements.
Our trade receivables result primarily from the sale of products from, or related to, our refinery operations and reflect a broad national and international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of 30 days or less. We continually monitor this exposure and the creditworthiness of the counterparties and recognize bad debt expense based on historical write-off experience or specific counterparty collectability. Generally, we do not require collateral to limit the exposure to loss; however, we will sometimes use letters of credit, prepayments or master netting arrangements to mitigate credit risk with counterparties that both buy from and sell to us, as these agreements permit the amounts owed by us or owed to others to be offset against amounts due to us.
Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if our credit ratings fall below investment grade. Cash is the primary collateral in all contracts; however, many contracts also permit us to post letters of credit as collateral.
The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were not materialimmaterial at SeptemberJune 30, 2017, or2018, and December 31, 2016.2017.
Note 14—13—Fair Value Measurements
Recurring Fair ValuesValue Measurements
We carry certain assets and liabilities at fair value, which we measure at the reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability), and disclose the quality of these fair values based on the valuation inputs used in these measurements under the following hierarchy:
Level 1: Fair value measured with unadjusted quoted prices from an active market for identical assets or liabilities.
Level 2: Fair value measured either with: (1) adjusted quoted prices from an active market for similar assets or liabilities; or (2) other valuation inputs that are directly or indirectly observable.
Level 3: Fair value measured with unobservable inputs that are significant to the measurement.
We classify the fair value of an asset or liability based on the lowest levelsignificance of input significantits observable or unobservable inputs to itsthe measurement. However, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable. For the nine-month periodsix months ended SeptemberJune 30, 2017,2018, derivative assets with an aggregate value of $110$81 million and derivative liabilities with an aggregate value of $112$83 million were transferred intoto Level 1 from Level 2, as measured from the beginning of the reporting period. The measurements were reclassified within the fair value hierarchy due to the availability of unadjusted quoted prices from an active market.
We used the following methods and assumptions to estimate the fair value of financial instruments:
Cash and cash equivalents—The carrying amount reported on theour consolidated balance sheet approximates fair value.
Accounts and notes receivable—The carrying amount reported on theour consolidated balance sheet approximates fair value.
Derivative instruments—We fair value our exchange-traded contracts based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange or other exchanges, and classify them as Level 1 in the fair value hierarchy. When exchange-cleared contracts lack sufficient liquidity, or are valued using either adjusted exchange-provided prices or non-exchange quotes, we classify those contracts as Level 2.
OTC financial swaps and physical commodity forward purchase and sales contracts are generally valued using forward quotes provided by brokers and price index developers, such as Platts and Oil Price Information Service. We corroborate these quotes with market data and classify the resulting fair values as Level 2. When forward market prices are not available, we estimate fair value using the forward price of a similar commodity, adjusted for the difference in quality or location. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, OTC swaps and physical commodity purchase and sales contracts are valued using internally developed methodologies that consider historical relationships among various commodities that result in management’s best estimate of fair value. We classify these contracts as Level 3. Financial OTC and physical commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to
which these inputs are observable in the forward markets determines whether the options are classified as Level 2 or 3. We use a mid-market pricing convention (the mid-point between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
We determine the fair value of our interest rate swaps based on observed market valuations for interest rate swaps that have notionals,notional values, terms and pay and reset frequencies similar to ours.
Rabbi trust assets—TheThese deferred compensation investments are measured at fair value using unadjusted quoted prices available from national securities exchanges;exchanges and are therefore these assets are categorized as Level 1 in the fair value hierarchy.
Debt—The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on observable quotes.market prices.
The following tables display the fair value hierarchy for our material financial assets and liabilities either accounted for or disclosed at fair value on a recurring basis. These values are determined by treating each contract as the fundamental unit of account; therefore, derivative assets and liabilities with the same counterparty are shown on a gross basis in the hierarchy sections of these tables, before the effects of counterparty and collateral netting. These tables also show that our Level 3 activity was not material.immaterial.
We have master netting agreements for all of our exchange-cleared derivative instruments, the majority of our OTC derivative instruments and certain physical commodity forward contracts (primarily pipeline crude oil deliveries). The following tables show the impact of these contractsagreements in the column “Effect of Counterparty Netting.”
The carrying values and fair values by hierarchy of our material financial instruments and commodity forward contracts, either carried or disclosed at fair value, including any effects of netting derivative assets with liabilities and netting collateral due to right of setoff or master netting agreements, were:
| | | Millions of Dollars | Millions of Dollars |
| September 30, 2017 | June 30, 2018 |
| Fair Value Hierarchy | | Total Fair Value of Gross Assets & Liabilities |
| Effect of Counterparty Netting |
| Effect of Collateral Netting |
| Difference in Carrying Value and Fair Value |
| Net Carrying Value Presented on the Balance Sheet |
| Fair Value Hierarchy | | Total Fair Value of Gross Assets & Liabilities |
| Effect of Counterparty Netting |
| Effect of Collateral Netting |
| Difference in Carrying Value and Fair Value |
| Net Carrying Value Presented on the Balance Sheet |
|
| Level 1 |
| | Level 2 |
| | Level 3 |
| Level 1 |
| | Level 2 |
| | Level 3 |
|
Commodity Derivative Assets | | | | | | | | | | | | | | |
Exchange-cleared instruments | $ | 487 |
| | 452 |
| | — |
| | 939 |
| (938 | ) | — |
| — |
| 1 |
| $ | 425 |
| | 836 |
| | — |
| | 1,261 |
| (1,218 | ) | (28 | ) | — |
| 15 |
|
OTC instruments | — |
| | 1 |
| | — |
| | 1 |
| — |
| — |
| — |
| 1 |
| — |
| | 1 |
| | — |
| | 1 |
| — |
| — |
| — |
| 1 |
|
Physical forward contracts | — |
| | 30 |
| | — |
| | 30 |
| — |
| — |
| — |
| 30 |
| — |
| | 16 |
| | 1 |
| | 17 |
| — |
| — |
| — |
| 17 |
|
Interest rate derivatives | — |
| | 8 |
| | — |
| | 8 |
| — |
| — |
| — |
| 8 |
| — |
| | 22 |
| | — |
| | 22 |
| — |
| — |
| — |
| 22 |
|
Rabbi trust assets | 111 |
| | — |
| | — |
| | 111 |
| N/A |
| N/A |
| — |
| 111 |
| 118 |
| | — |
| | — |
| | 118 |
| N/A |
| N/A |
| — |
| 118 |
|
| $ | 598 |
| | 491 |
| | — |
| | 1,089 |
| (938 | ) | — |
| — |
| 151 |
| $ | 543 |
| | 875 |
| | 1 |
| | 1,419 |
| (1,218 | ) | (28 | ) | — |
| 173 |
|
| | | | | | | | | | | | | | |
Commodity Derivative Liabilities | | | | | | | | | | | | | | |
Exchange-cleared instruments | $ | 630 |
| | 476 |
| | — |
| | 1,106 |
| (938 | ) | (168 | ) | — |
| — |
| $ | 433 |
| | 909 |
| | — |
| | 1,342 |
| (1,218 | ) | (112 | ) | — |
| 12 |
|
OTC instruments | — |
| | 1 |
| | — |
| | 1 |
| — |
| — |
| — |
| 1 |
| |
Physical forward contracts | — |
| | 30 |
| | 11 |
| | 41 |
| — |
| — |
| — |
| 41 |
| — |
| | 26 |
| | 1 |
| | 27 |
| — |
| — |
| — |
| 27 |
|
Floating-rate debt | 100 |
| | 1,587 |
| | — |
| | 1,687 |
| N/A |
| N/A |
| — |
| 1,687 |
| — |
| | 1,400 |
| | — |
| | 1,400 |
| N/A |
| N/A |
| — |
| 1,400 |
|
Fixed-rate debt, excluding capital leases | — |
| | 9,110 |
| | — |
| | 9,110 |
| N/A |
| N/A |
| (787 | ) | 8,323 |
| — |
| | 10,046 |
| | — |
| | 10,046 |
| N/A |
| N/A |
| (276 | ) | 9,770 |
|
| $ | 730 |
| | 11,204 |
| | 11 |
| | 11,945 |
| (938 | ) | (168 | ) | (787 | ) | 10,052 |
| $ | 433 |
| | 12,381 |
| | 1 |
| | 12,815 |
| (1,218 | ) | (112 | ) | (276 | ) | 11,209 |
|
| | | Millions of Dollars | Millions of Dollars |
| December 31, 2016 | December 31, 2017 |
| Fair Value Hierarchy | | Total Fair Value of Gross Assets & Liabilities |
| Effect of Counterparty Netting |
| Effect of Collateral Netting |
| Difference in Carrying Value and Fair Value |
| Net Carrying Value Presented on the Balance Sheet |
| Fair Value Hierarchy | | Total Fair Value of Gross Assets & Liabilities |
| Effect of Counterparty Netting |
| Effect of Collateral Netting |
| Difference in Carrying Value and Fair Value |
| Net Carrying Value Presented on the Balance Sheet |
|
| Level 1 |
| | Level 2 |
| | Level 3 |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| |
Commodity Derivative Assets | | | | | | | | | | | | | | |
Exchange-cleared instruments | $ | 273 |
| | 371 |
| | — |
| | 644 |
| (628 | ) | — |
| — |
| 16 |
| $ | 333 |
| | 395 |
| | — |
| | 728 |
| (721 | ) | — |
| — |
| 7 |
|
OTC instruments | — |
| | 6 |
| | — |
| | 6 |
| (1 | ) | — |
| — |
| 5 |
| |
Physical forward contracts | — |
| | 94 |
| | 2 |
| | 96 |
| — |
| — |
| — |
| 96 |
| — |
| | 20 |
| | 1 |
| | 21 |
| — |
| — |
| — |
| 21 |
|
Interest rate derivatives | — |
| | 8 |
| | — |
| | 8 |
| — |
| — |
| — |
| 8 |
| — |
| | 14 |
| | — |
| | 14 |
| — |
| — |
| — |
| 14 |
|
Rabbi trust assets | 97 |
| | — |
| | — |
| | 97 |
| N/A |
| N/A |
| — |
| 97 |
| 112 |
| | — |
| | — |
| | 112 |
| N/A |
| N/A |
| — |
| 112 |
|
| $ | 370 |
| | 479 |
| | 2 |
| | 851 |
| (629 | ) | — |
| — |
| 222 |
| $ | 445 |
| | 429 |
| | 1 |
| | 875 |
| (721 | ) | — |
| — |
| 154 |
|
| | | | | | | | | | | | | | |
Commodity Derivative Liabilities | | | | | | | | | | | | | | |
Exchange-cleared instruments | $ | 249 |
| | 452 |
| | — |
| | 701 |
| (628 | ) | (73 | ) | — |
| — |
| $ | 369 |
| | 373 |
| | — |
| | 742 |
| (721 | ) | (21 | ) | — |
| — |
|
OTC instruments | — |
| | 1 |
| | — |
| | 1 |
| (1 | ) | — |
| — |
| — |
| |
Physical forward contracts | — |
| | 61 |
| | 5 |
| | 66 |
| — |
| — |
| — |
| 66 |
| — |
| | 23 |
| | 4 |
| | 27 |
| — |
| — |
| — |
| 27 |
|
Floating-rate debt | 50 |
| | 210 |
| | — |
| | 260 |
| N/A |
| N/A |
| — |
| 260 |
| — |
| | 1,150 |
| | — |
| | 1,150 |
| N/A |
| N/A |
| — |
| 1,150 |
|
Fixed-rate debt, excluding capital leases | — |
| | 10,260 |
| | — |
| | 10,260 |
| N/A |
| N/A |
| (570 | ) | 9,690 |
| — |
| | 9,746 |
| | — |
| | 9,746 |
| N/A |
| N/A |
| (978 | ) | 8,768 |
|
| $ | 299 |
| | 10,984 |
| | 5 |
| | 11,288 |
| (629 | ) | (73 | ) | (570 | ) | 10,016 |
| $ | 369 |
| | 11,292 |
| | 4 |
| | 11,665 |
| (721 | ) | (21 | ) | (978 | ) | 9,945 |
|
The rabbi trust assets appear on our consolidated balance sheetare recorded in the “Investments and long-term receivables” line whileand the floating-rate and fixed-rate debt appearare recorded in the “Short-term debt” and “Long-term debt” lines.lines on our consolidated balance sheet. For information
regarding the location of our commodity derivative assets and liabilities on our consolidated balance sheet, see the first table in Note 13—12—Derivatives and Financial Instruments.
Nonrecurring Fair Value Measurements
See Note 5—Business Combinations for information on the remeasurement of our investment in MSLP to fair value. During the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, there were no other material nonrecurring fair value remeasurements of assets subsequent to their initial recognition.
Note 15—Employee Benefit14—Pension and Postretirement Plans
Pension and Postretirement Plans
The components of net periodic benefit cost for the three-three and nine-month periodssix months ended SeptemberJune 30, 20172018 and 2016,2017, were as follows:
| | | Millions of Dollars | Millions of Dollars |
| Pension Benefits | | Other Benefits | Pension Benefits | | Other Benefits |
| 2017 | | 2016 | | 2017 |
| | 2016 |
| 2018 | | 2017 | | 2018 |
| | 2017 |
|
| U.S. |
| | Int’l. |
| | U.S. |
| | Int’l. |
| | | | | U.S. |
| | Int’l. |
| | U.S. |
| | Int’l. |
| | | | |
Components of Net Periodic Benefit Cost | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30 | | | | | | | | | | | | |
Three Months Ended June 30 | | | | | | | | | | | | |
Service cost | $ | 33 |
| | 8 |
| | 32 |
| | 8 |
| | 1 |
| | 1 |
| $ | 34 |
| | 10 |
| | 33 |
| | 9 |
| | 2 |
| | 2 |
|
Interest cost | 27 |
| | 7 |
| | 29 |
| | 7 |
| | 2 |
| | 2 |
| 26 |
| | 8 |
| | 27 |
| | 7 |
| | 2 |
| | 2 |
|
Expected return on plan assets | (37 | ) | | (11 | ) | | (32 | ) | | (9 | ) | | — |
| | — |
| (43 | ) | | (12 | ) | | (36 | ) | | (9 | ) | | — |
| | — |
|
Amortization of prior service cost | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| |
Amortization of prior service credit | | — |
| | (1 | ) | | — |
| | (1 | ) | | (1 | ) | | (1 | ) |
Recognized net actuarial loss | 17 |
| | 6 |
| | 18 |
| | 4 |
| | — |
| | — |
| 15 |
| | 5 |
| | 18 |
| | 6 |
| | — |
| | — |
|
Settlements | 21 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| 3 |
| | — |
| | 54 |
| | — |
| | — |
| | — |
|
Net periodic benefit cost | $ | 62 |
|
| 10 |
|
| 50 |
|
| 10 |
|
| 3 |
|
| 3 |
| |
Net periodic benefit cost* | | $ | 35 |
|
| 10 |
|
| 96 |
|
| 12 |
|
| 3 |
|
| 3 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30 | | | | | | | | | | | | |
Six Months Ended June 30 | | | | | | | | | | | | |
Service cost | $ | 99 |
| | 25 |
| | 96 |
| | 26 |
| | 4 |
| | 5 |
| $ | 68 |
| | 17 |
| | 66 |
| | 17 |
| | 3 |
| | 3 |
|
Interest cost | 81 |
| | 20 |
| | 87 |
| | 22 |
| | 6 |
| | 6 |
| 52 |
| | 15 |
| | 54 |
| | 13 |
| | 4 |
| | 4 |
|
Expected return on plan assets | (110 | ) | | (30 | ) | | (96 | ) | | (29 | ) | | — |
| | — |
| (85 | ) | | (24 | ) | | (73 | ) | | (19 | ) | | — |
| | — |
|
Amortization of prior service cost (credit) | 2 |
| | (1 | ) | | 2 |
| | (1 | ) | | (1 | ) | | (1 | ) | — |
| | (1 | ) | | 1 |
| | (1 | ) | | (1 | ) | | (1 | ) |
Recognized net actuarial loss | 52 |
| | 18 |
| | 54 |
| | 11 |
| | — |
| | — |
| 30 |
| | 10 |
| | 35 |
| | 12 |
| | — |
| | — |
|
Settlements | 76 |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| 5 |
| | — |
| | 55 |
| | — |
| | — |
| | — |
|
Net periodic benefit cost | $ | 200 |
| | 32 |
| | 148 |
| | 29 |
| | 9 |
| | 10 |
| |
Net periodic benefit cost* | | $ | 70 |
| | 17 |
| | 138 |
| | 22 |
| | 6 |
| | 6 |
|
* Included in the “Operating expenses” and “Selling, general and administrative expenses” lines on our consolidated statement of income.
During the first ninesix months of 2017,ended June 30, 2018, we contributed $432$17 million to our U.S. employee benefit plans and $26$18 million to our international employee benefit plans. The contributions were included in the “Other” line within the operating activities section on our consolidated statement of cash flows. We currently expect to make additional contributions of approximately $6$140 million to our U.S. employee benefit plans and $9$20 million to our international employee benefit plans during the remainder of 2017.2018.
For our U.S. pension plans, lump-sum benefit payments have exceeded the sum of service and interest costs for the year. As a result, we have recognized a proportionate share of prior actuarial losses, or pension settlement expense, totaling $76 million for the nine months ended September 30, 2017.
In conjunction with the Whitegate Refinery disposition, the fair market value of plan assets was updated and the pension benefit obligation was remeasured for the Ireland Pension Plan at August 31, 2016. At the measurement date, the pension liability had a net decrease of $3 million, which resulted in an increase to other comprehensive income, due to the
following two components: 1) a curtailment gain (decrease in projected benefit obligation) of $31 million, as all future benefit accruals were eliminated from projected benefit obligation, and 2) an actuarial loss (increase in projected benefit obligation) of $28 million, which was primarily related to a decline in the discount rate from 2.3 percent at December 31, 2015, to 1.3 percent at August 31, 2016.
Note 16—15—Accumulated Other Comprehensive Income (Loss)Loss
The following table depicts changesChanges in accumulated other comprehensive income (loss) bythe balances of each component as well as detail on reclassifications out of accumulated other comprehensive income (loss):
loss were as follows:
|
| | | | | | | | | | | | |
| Millions of Dollars |
| Defined Benefit Plans |
| | Foreign Currency Translation |
| | Hedging |
| | Accumulated Other Comprehensive Income (Loss) |
|
| | | | | | | |
December 31, 2015 | $ | (662 | ) | | 11 |
| | (2 | ) | | (653 | ) |
Other comprehensive income (loss) before reclassifications | 10 |
| | (187 | ) | | (7 | ) | | (184 | ) |
Amounts reclassified from accumulated other comprehensive income (loss)* | | | | | | | |
Amortization of defined benefit plan items** | | | | | | | |
Actuarial losses and settlements | 45 |
| | — |
| | — |
| | 45 |
|
Net current period other comprehensive income (loss) | 55 |
| | (187 | ) | | (7 | ) | | (139 | ) |
September 30, 2016 | $ | (607 | ) | | (176 | ) | | (9 | ) | | (792 | ) |
| | | | | | | |
December 31, 2016 | $ | (713 | ) | | (285 | ) | | 3 |
| | (995 | ) |
Other comprehensive income before reclassifications | 5 |
| | 214 |
| | — |
| | 219 |
|
Amounts reclassified from accumulated other comprehensive income (loss)* | | | | | | |
|
|
Amortization of defined benefit plan items** | | | | | | | |
Actuarial losses and settlements | 92 |
| | — |
| | — |
| | 92 |
|
Net current period other comprehensive income | 97 |
| | 214 |
| | — |
| | 311 |
|
September 30, 2017 | $ | (616 | ) | | (71 | ) | | 3 |
| | (684 | ) |
|
| | | | | | | | | | | | |
| Millions of Dollars |
| Defined Benefit Plans |
| | Foreign Currency Translation |
| | Hedging |
| | Accumulated Other Comprehensive Loss |
|
| | | | | | | |
December 31, 2016 | $ | (713 | ) | | (285 | ) | | 3 |
| | (995 | ) |
Other comprehensive income before reclassifications | 3 |
| | 119 |
| | — |
| | 122 |
|
Amounts reclassified from accumulated other comprehensive loss* | | | | | | | |
Amortization of defined benefit plan items** | | | | | | | |
Net actuarial loss, prior service credit and settlements | 64 |
| | — |
| | — |
| | 64 |
|
Net current period other comprehensive income | 67 |
| | 119 |
| | — |
| | 186 |
|
June 30, 2017 | $ | (646 | ) | | (166 | ) | | 3 |
| | (809 | ) |
| | | | | | | |
December 31, 2017 | $ | (598 | ) | | (26 | ) | | 7 |
| | (617 | ) |
Other comprehensive income before reclassifications | 7 |
| | (99 | ) | | 6 |
| | (86 | ) |
Amounts reclassified from accumulated other comprehensive loss* | | | | | | |
|
|
Foreign currency translation | — |
| | (10 | ) | | — |
| | (10 | ) |
Amortization of defined benefit plan items** | | | | | | | |
Net actuarial loss, prior service credit and settlements | 33 |
| | — |
| | — |
| | 33 |
|
Net current period other comprehensive income | 40 |
| | (109 | ) | | 6 |
| | (63 | ) |
June 30, 2018 | $ | (558 | ) | | (135 | ) | | 13 |
| | (680 | ) |
* There were no significant reclassifications related to hedging in either period presented or foreign currency translation or hedging.in the prior year period.
** These accumulated other comprehensive income (loss) components are includedIncluded in the computation of net periodic benefit cost (see cost. See Note 15—Employee Benefit14—Pension and Postretirement Plans,, for additional information).information.
Note 16—Treasury Stock
In February 2018, we entered into a Stock Purchase and Sale Agreement (Purchase Agreement) with Berkshire Hathaway Inc. and National Indemnity Company, a wholly owned subsidiary of Berkshire Hathaway, to repurchase 35 million shares of Phillips 66 common stock for an aggregate purchase price of $3,280 million. Pursuant to the Purchase Agreement, the purchase price per share of $93.725 was based on the volume-weighted-average price of our common stock on the New York Stock Exchange on February 13, 2018. The transaction closed in February 2018. We funded the repurchase with cash of $1,880 million and borrowings of $1,400 million under our commercial paper program. These borrowings were subsequently refinanced through a public offering of senior notes in March 2018. This specific share repurchase transaction was separately authorized by our Board of Directors and therefore does not impact previously announced authorizations to repurchase shares of Phillips 66 common stock under our share repurchase program, which total up to $12.0 billion. See Note 9—Debt, for additional information regarding our borrowing activity during the six months ended June 30, 2018.
Note 17—Restricted Cash
At SeptemberJune 30, 2017,2018, and December 31, 2016,2017, the company did not have any restricted cash. The restrictions on the cash acquired in February 2017, as a result of the consolidation of MSLP, were fully removed in the second quarter ofMay 2017 when MSLP’s outstanding debt that contained lender restrictions on the use of cash was paid in full. See Note 5—Business Combinations and Note 10—Debt, for additional information regarding MSLP.
Note 18—Related Party Transactions
Significant transactions with related parties were:
| | | Millions of Dollars | Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | |
Operating revenues and other income (a) | $ | 638 |
| 588 |
| | 1,778 |
| 1,544 |
| $ | 944 |
| 569 |
| | 1,762 |
| 1,140 |
|
Purchases (b) | 2,557 |
| 2,118 |
| | 6,932 |
| 5,769 |
| 3,313 |
| 2,231 |
| | 5,867 |
| 4,375 |
|
Operating expenses and selling, general and administrative expenses (c) | 13 |
| 31 |
| | 52 |
| 92 |
| 16 |
| 13 |
| | 32 |
| 39 |
|
As discussed more fully in Note 5—Business Combinations, in February 2017, we began accounting for MSLP as a wholly owned consolidated subsidiary. Accordingly, the table above only includes processing fees paid to MSLP through the consolidation date.
| |
(a) | We sold NGL and other petrochemical feedstocks, along with solvents, to CPChem, and we sold gas oil and hydrogen feedstocks to Excel Paralubes (Excel). We sold, and refined products to our OnCue Holdings, LLC joint venture.LLC. We also sold certain feedstocks and intermediate products to WRB and also acted as agent for WRB in supplying crude oil and other feedstocks for a fee. In addition, we charged several of our affiliates, including CPChem, for the use of common facilities, such as steam generators, waste and water treaters and warehouse facilities. |
| |
(b) | We purchased crude oil and refined products from WRB. WeWRB and also acted as agent for WRB in distributing asphalt and solvents for a fee.solvents. We also purchased natural gas and NGL from DCP Midstream and CPChem, as well as other feedstocks from various affiliates, for use in our refinery and fractionation processes. In addition, we purchased base oils and fuel products from Excel for use in our refining and specialty businesses. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline equity companies for transporting crude oil, finished refined products and NGL. We purchased base oils and fuel products from Excel for use in our refining and specialty businesses. |
| |
(c) | We paid utility and processing fees to various affiliates. |
Note 19—Segment Disclosures and Related Information
Our operating segments are:
| |
1) | Midstream—Gathers, processes, transportsProvides crude oil and marketsrefined products transportation, terminaling and processing services, as well as natural gas;gas, NGL and transports, stores, fractionatesliquefied petroleum gas (LPG) transportation, storage, processing and markets NGLmarketing services, mainly in the United States. In addition, this segment transports crude oil and other feedstocks to our refineries and other locations, delivers refined and specialty products to market, and provides terminaling and storage services for crude oil and petroleum products. The segment also stores, refrigerates and exports liquefied petroleum gas primarily to Asia. The Midstream segment includes our master limited partnership, Phillips 66 Partners, LP, as well as our 50 percent equity investment in DCP Midstream. |
| |
2) | Chemicals—Consists of our 50 percent equity investment in CPChem, which manufactures and markets petrochemicals and plastics on a worldwide basis. |
| |
3) | Refining—Purchases, sells and refinesRefines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 13 refineries mainly in the United States and Europe. |
| |
4) | Marketing and Specialties—Purchases for resale and markets refined petroleum products, (such as gasolines, distillates and aviation fuels), mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products, (such as base oils and lubricants), as well as power generation operations. |
Corporate and Other includes general corporate overhead, interest expense, our investments in new technologies and various other corporate activities. Corporate assets include all cash and cash equivalents.
We evaluateDuring the fourth quarter of 2017, the segment performance based on netmeasure used by our chief executive officer to assess performance and allocate resources was changed from “net income attributable to Phillips 66.66” to “net income.” This change reflects the recognition that management does not differentiate between those earnings attributable to Phillips 66 and those attributable to noncontrolling interests when making operating and resource allocation decisions impacting segment performance. Prior period segment information has been recast to conform to the current presentation. Intersegment sales are at prices that we believe approximate market.
Analysis of Results by Operating Segment
| | | Millions of Dollars | Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
Sales and Other Operating Revenues | | | | | | | | |
Midstream | | | | | | | | |
Total sales | $ | 1,433 |
| 934 |
| | 4,467 |
| 2,784 |
| $ | 1,996 |
| 1,375 |
| | 3,947 |
| 3,034 |
|
Intersegment eliminations | (433 | ) | (296 | ) | | (1,260 | ) | (866 | ) | (498 | ) | (389 | ) | | (1,031 | ) | (827 | ) |
Total Midstream | 1,000 |
| 638 |
| | 3,207 |
| 1,918 |
| 1,498 |
| 986 |
| | 2,916 |
| 2,207 |
|
Chemicals | 2 |
| 1 |
| | 4 |
| 3 |
| 2 |
| 1 |
| | 3 |
| 2 |
|
Refining | | | | | | | | |
Total sales | 16,499 |
| 13,465 |
| | 46,014 |
| 37,242 |
| 22,126 |
| 15,223 |
| | 39,758 |
| 29,515 |
|
Intersegment eliminations | (10,461 | ) | (9,035 | ) | | (28,641 | ) | (24,840 | ) | (13,605 | ) | (9,510 | ) | | (24,220 | ) | (18,180 | ) |
Total Refining | 6,038 |
| 4,430 |
| | 17,373 |
| 12,402 |
| 8,521 |
| 5,713 |
| | 15,538 |
| 11,335 |
|
Marketing and Specialties | | | | | | | | |
Total sales | 18,887 |
| 16,799 |
| | 52,903 |
| 47,327 |
| 19,522 |
| 17,650 |
| | 35,139 |
| 34,016 |
|
Intersegment eliminations | (306 | ) | (252 | ) | | (900 | ) | (792 | ) | (571 | ) | (270 | ) | | (1,035 | ) | (594 | ) |
Total Marketing and Specialties | 18,581 |
| 16,547 |
| | 52,003 |
| 46,535 |
| 18,951 |
| 17,380 |
| | 34,104 |
| 33,422 |
|
Corporate and Other | 6 |
| 8 |
| | 21 |
| 24 |
| 8 |
| 7 |
| | 14 |
| 15 |
|
Consolidated sales and other operating revenues | $ | 25,627 |
| 21,624 |
| | 72,608 |
| 60,882 |
| $ | 28,980 |
| 24,087 |
| | 52,575 |
| 46,981 |
|
| | | | | | | | |
Net Income (Loss) Attributable to Phillips 66 | | | | | |
Net Income (Loss) | | | | | |
Midstream | $ | 85 |
| 75 |
| | 221 |
| 179 |
| $ | 202 |
| 96 |
| | 435 |
| 208 |
|
Chemicals | 121 |
| 101 |
| | 498 |
| 447 |
| 262 |
| 196 |
| | 494 |
| 377 |
|
Refining | 550 |
| 177 |
| | 1,033 |
| 412 |
| 910 |
| 224 |
| | 1,001 |
| 483 |
|
Marketing and Specialties | 208 |
| 267 |
| | 563 |
| 701 |
| 237 |
| 214 |
| | 421 |
| 355 |
|
Corporate and Other | (141 | ) | (109 | ) | | (407 | ) | (347 | ) | (207 | ) | (149 | ) | | (362 | ) | (279 | ) |
Consolidated net income attributable to Phillips 66 | $ | 823 |
| 511 |
| | 1,908 |
| 1,392 |
| |
Consolidated net income | | $ | 1,404 |
| 581 |
| | 1,989 |
| 1,144 |
|
| | | Millions of Dollars | Millions of Dollars |
| September 30 2017 |
| | December 31 2016 |
| June 30 2018 |
| | December 31 2017 |
|
Total Assets | | | | | | |
Midstream | $ | 12,904 |
| | 12,832 |
| $ | 13,624 |
| | 13,231 |
|
Chemicals | 6,211 |
| | 5,802 |
| 6,440 |
| | 6,226 |
|
Refining | 23,949 |
| | 22,825 |
| 24,862 |
| | 23,820 |
|
Marketing and Specialties | 7,118 |
| | 6,227 |
| 7,136 |
| | 7,103 |
|
Corporate and Other | 2,530 |
| | 3,967 |
| 2,764 |
| | 3,991 |
|
Consolidated total assets | $ | 52,712 |
| | 51,653 |
| $ | 54,826 |
| | 54,371 |
|
Note 20—Income Taxes
Our effective income tax rates for the third quarterthree and the first ninesix months of 2017ended June 30, 2018, were 3223 percent and 3122 percent, respectively, compared with 3431 percent and 3230 percent for the corresponding periods of 2016.
2017. The decrease in the effective tax rate for the third quarter of 2017 was primarily attributable to the relative impactenactment of foreign operations that are subject to a lowerthe U.S. Tax Cuts and Jobs Act (the Tax Act) in December 2017, which reduced the U.S. federal corporate income tax rate and excess tax benefits associated with share-based compensation.
from 35 percent to 21 percent beginning January 1, 2018. The effective income tax rate varies from the federal statutory income tax rate of 3521 percent primarily as a resultdue to state income tax expense and adjustments to the provisional income tax benefit related to the Tax Act, partially offset by the impact of our foreign operations excess tax benefits associated with share-based compensation, and the impact of income attributable to noncontrolling interests, partially offset by stateinterests.
During the three and six months ended June 30, 2018, adjustments to the provisional income tax expense.benefit recorded in December 2017 from the enactment of the Tax Act totaled $19 million and $29 million, respectively. The adjustments to date were primarily due to the issuance of additional guidance related to the calculation of the one-time deemed repatriation tax on foreign-sourced earnings that were previously tax deferred. We have not yet completed our accounting for the income tax effects of the Tax Act, but have made reasonable estimates of those effects on our existing deferred income tax balances and the one-time deemed repatriation tax. The final financial statement impact of the Tax Act may differ from our previously recorded estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, and changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the provisional impacts. The Securities and Exchange Commission (SEC) has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related income tax impacts.
Note 21—Phillips 66 Partners LP
In 2013, we formed Phillips 66 Partners, is a publicly traded master limited partnership, formed to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum productproducts and NGL pipelines, and terminals as well asand other midstream assets. Headquartered in Houston, Texas, Phillips 66 Partners’ assetsoperations currently consist of crude oil, refined petroleum products and NGL transportation, processing, terminaling and storage systems, as well as crude oil and NGL processing facilities. Phillips 66 Partners conducts its operations through both wholly owned and joint-venture operations. The majority of Phillips 66 Partners’ wholly owned assets are associated with, and integral to the operation of, nine of Phillips 66’s owned or joint-venture refineries.assets.
We consolidate Phillips 66 Partners because we determined it is a VIE of which we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as a variable interest entity for financial reporting purposes. See Note 3—Variable Interest Entities (VIEs) for additional information on why we consolidatewell as the partnership.ability to direct the activities that most significantly impact its economic performance. As a result of this consolidation, the public common and perpetual convertible preferred unitholders’ ownership interestinterests in Phillips 66 Partners isare reflected as a noncontrolling interestinterests in our financial statements. At SeptemberJune 30, 2017,2018, we owned a 5755 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, while the public owned a 4143 percent limited partner interest.interest and 13.8 million perpetual convertible preferred units.
In June 2016,The most significant assets of Phillips 66 Partners beganthat are available to settle only its obligations, along with its most significant liabilities for which its creditors do not have recourse to Phillips 66’s general credit, were:
|
| | | | | | |
| Millions of Dollars |
| June 30 2018 |
| | December 31 2017 |
|
| | | |
Cash and cash equivalents | $ | 151 |
| | 185 |
|
Equity investments* | 2,104 |
| | 1,932 |
|
Net properties, plants and equipment | 2,948 |
| | 2,918 |
|
Long-term debt | 2,921 |
| | 2,920 |
|
* Included in “Investments and long-term receivables” line on the Phillips 66 consolidated balance sheet.
2018 Financing Activities
Phillips 66 Partners’ initial $250 million continuous offering of common units, or at-the-market (ATM) program, was completed during the three months ended June 30, 2018. At that time, Phillips 66 Partners commenced issuing common units under a continuous offering program, which allows for the issuance of up to an aggregate ofits second $250 million of Phillips 66 Partners’ common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the time of the offerings (such continuous offering program, or at-the-market program, is referred to as the ATM program).program. For the ninethree and six months ended SeptemberJune 30, 2017,2018, on a settlement-date basis, Phillips 66 Partners hashad issued 3,323,576an aggregate of 1,152,119 and 1,340,934 common units, respectively, under the ATM programs, which generated net proceeds of $58 million and $67 million, respectively. Since inception through June 30, 2018, Phillips 66 Partners had issued an aggregate of 5,059,802 common units under the ATM program,programs, which generated net proceeds of $171$259 million. From inception through September 30, 2017, Phillips 66 Partners has issued an aggregate of 3,669,728 common units under the ATM program, which generated net proceeds of $190 million.
Subsequent Events
On September 19, 2017, we entered into an agreement to contribute to Phillips 66 Partners our 25 percent interests in DAPL and ETCO and our 100 percent interest in MSLP. The transaction closed on October 6, 2017. Total consideration paid to us by Phillips 66 Partners was $1.65 billion, which included $372 million in cash at closing, the assumption of $588 million of promissory notes payable to us, the assumption of $450 million of term loans payable to a third party, and the issuance to us of common and general partner units with a fair value of $240 million. Shortly after closing, Phillips 66 Partners repaid the $588 million of promissory notes payable to us, resulting in total cash received by us for the transaction of $960 million. Phillips 66 Partners financed the consideration paid, in October 2017, with the proceeds from the private placement of $750 million of perpetual convertible preferred units and $300 million of common units, as well as a portion of the proceeds from a public offering of $650 million of Senior Notes. See Note 10—Debt for additional information on the Senior Notes.
After giving effect to the contribution and financing transactions discussed above, we own a 55 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, with the public owning a 43 percent limited partner interest.
Note 22—New Accounting Standards
In February 2017,2018, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from the Derecognition of Nonfinancial Assets (Subtopic 610-20).Accumulated Other Comprehensive Income.” This ASU clarifies the scope and accountingallows for the sale or transfer of nonfinancial assets anddeferred income tax effects stranded in substance nonfinancial assetsaccumulated other comprehensive income (AOCI) resulting from the Tax Act enacted in December 2017 to noncustomers, including partial sales.be reclassed from AOCI to retained earnings. This ASU will eliminate the use of carryover basisis effective for most nonmonetary exchanges, including contributions of assets to equity method joint ventures. These amendments could result in the entity recognizing a gain or loss on the sale or transfer of nonfinancial assets. Public entities should apply the guidance in ASU No. 2017-05 to annualfiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, including interim periods within those periods.2018, with early adoption permitted. We are currently evaluating the provisionsimpact of this ASU No. 2017-05.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendment provides a screen for determining when a transaction involves an acquisition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset, or a group of similar identifiable assets, then the transaction is not considered an acquisition of a business. If the screen is not met, then the amendment requires that to be considered a business, the operation must include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The guidance may reduce the number of transactions accounted for as business acquisitions. Public business entities should apply the guidance in ASU No. 2017-01 to annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The amendments should be applied prospectively, and no disclosures are required at the effective date. We are currently evaluating the provisions of ASU No. 2017-01.on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The new standard amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which may result in earlier recognition of losses. Public business entities should apply the guidance in ASU No. 2016-13 for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption will be permitted for annual periods beginning after December 15, 2018. We are currently evaluating the provisions of ASU No. 2016-13 and assessing the impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” In theThe new standard the FASB modified its determination of whetherestablishes a contract isright-of-use (ROU) model that requires a lessee to record a ROU asset and a lease rather than whether a lease is a capital or operating lease under the previous accounting principles generally accepted in the United States (GAAP). A contract represents a lease if a transfer of control occurs over an identified property, plant or equipment for a period of time in exchange for consideration. Control over the use of the identified asset includes the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct its use. The FASB continued to maintain two classifications of leases—financing and operating—which are substantially similar to capital and operating leases in the previous lease guidance. Under the new standard, recognition of assets and liabilities arising from operating leases will require recognitionliability on the balance sheet. The effect ofsheet for all leases with terms longer than 12 months. Leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of comprehensive income and the statement of cash flows will be largely unchanged. Lessor accounting will also be largely unchanged. Additional disclosuresstatement. Similarly, lessors will be required for financing andto classify leases as sales-type, finance or operating, leaseswith classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and lessees.rewards, as well as substantive control have been transferred through a lease contract. Public business entities should apply the guidance in ASU No. 2016-02 for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. Entities are required to adopt the ASU using a modified retrospective approach, subject to certain optional practical expedients, and apply the provisions of ASU No. 2016-02 to leasing arrangements existing at or entered into after the earliest comparative period presented in the financial statements. We are currently evaluating the provisions of ASU No. 2016-02 and assessing its impact on our financial statements. As part of our assessment to-date, we have formed an implementation team, commenced identificationselected a software package, and completed software design and configuration within a test environment. Furthermore, we have loaded a majority of our lease population into the software and are evaluatingcommenced both software and lease software packages.
In January 2016,data testing. We expect the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” to meet its objective of providing more decision-useful information about financial instruments. The majority of this ASU’s provisions amend only the presentation or disclosures of financial instruments; however, one provision will also affect net income. Equity investments carried under the cost method or lower of cost or fair value method of accounting, in accordance with current GAAP, will have to
be carried at fair value upon adoption of ASU No. 2016-01,2016-02 will materially gross up our consolidated balance sheet with changes in fair value recorded in net income. For equity investments that dothe recognition of the ROU assets and operating lease liabilities. The impact to our consolidated statements of income and cash flows is not have readily determinable fair values, a company may electexpected to carry such investments at cost less impairments, if any, adjusted up or downbe material. The new standard will also require additional disclosures for price changes in similar financial instruments issued by the investee, whenfinancing and if observed. Public business entities should apply the guidance in ASU No. 2016-01 for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption prohibited. We are currently evaluating the provisions of ASU No. 2016-01. Our initial review indicates that ASU No. 2016-01 will have a limited impact on our financial statements.operating leases.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU and other related updates issued are intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets and expand disclosure requirements. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. As part of our assessment work to-date, we have formed an implementation work team, completed training on the new ASU’s revenue recognition model and are continuing our contract review and documentation. Our expectation is to adopt the standard on January 1, 2018, using the modified retrospective application. In addition, we expect to present revenue net of sales-based taxes collected from our customers, resulting in no impact to earnings. Sales-based taxes include excise taxes on petroleum product sales as noted on our consolidated statement of income. Our evaluation of the new ASU is ongoing, which includes understanding the impact of adoption on earnings from equity method investments. Based on our analysis to-date, we have not identified any other material impact on our financial statements other than disclosures.
Note 23—Condensed Consolidating Financial Information
Phillips 66 has $6 billion of senior notes outstanding, the payment obligations of which are fully and unconditionally guaranteed by Phillips 66 Company, a 100-percent-owned100-percent-owned subsidiary. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:
Phillips 66 and Phillips 66 Company (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
All other nonguarantor subsidiaries.
The consolidating adjustments necessary to present Phillips 66’s results on a consolidated basis.
This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.
| | | Millions of Dollars | Millions of Dollars |
| Three Months Ended September 30, 2017 | Three Months Ended June 30, 2018 |
Statement of Income | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
| Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Revenues and Other Income | | | | |
Sales and other operating revenues | $ | — |
| 18,941 |
| 6,686 |
| — |
| 25,627 |
| $ | — |
| 22,561 |
| 6,419 |
| — |
| 28,980 |
|
Equity in earnings of affiliates | 880 |
| 608 |
| 172 |
| (1,130 | ) | 530 |
| 1,427 |
| 864 |
| 185 |
| (1,733 | ) | 743 |
|
Net gain (loss) on dispositions | — |
| 1 |
| (1 | ) | — |
| — |
| |
Other income | — |
| 34 |
| 15 |
| — |
| 49 |
| — |
| 3 |
| 10 |
| — |
| 13 |
|
Intercompany revenues | — |
| 522 |
| 3,805 |
| (4,327 | ) | — |
| — |
| 786 |
| 4,136 |
| (4,922 | ) | — |
|
Total Revenues and Other Income | 880 |
| 20,106 |
| 10,677 |
| (5,457 | ) | 26,206 |
| 1,427 |
| 24,214 |
| 10,750 |
| (6,655 | ) | 29,736 |
|
| | | | |
Costs and Expenses | | | | |
Purchased crude oil and products | — |
| 15,981 |
| 7,744 |
| (4,262 | ) | 19,463 |
| — |
| 20,855 |
| 9,717 |
| (4,825 | ) | 25,747 |
|
Operating expenses | — |
| 857 |
| 285 |
| (8 | ) | 1,134 |
| — |
| 847 |
| 312 |
| (16 | ) | 1,143 |
|
Selling, general and administrative expenses | 2 |
| 338 |
| 98 |
| (3 | ) | 435 |
| 1 |
| 339 |
| 94 |
| (2 | ) | 432 |
|
Depreciation and amortization | — |
| 225 |
| 112 |
| — |
| 337 |
| — |
| 229 |
| 108 |
| — |
| 337 |
|
Impairments | — |
| — |
| 1 |
| — |
| 1 |
| — |
| 1 |
| 5 |
| — |
| 6 |
|
Taxes other than income taxes | — |
| 1,464 |
| 1,992 |
| — |
| 3,456 |
| — |
| 82 |
| 27 |
| — |
| 109 |
|
Accretion on discounted liabilities | — |
| 3 |
| 2 |
| — |
| 5 |
| — |
| 4 |
| 2 |
| — |
| 6 |
|
Interest and debt expense | 86 |
| 20 |
| 60 |
| (54 | ) | 112 |
| 111 |
| 42 |
| 61 |
| (79 | ) | 135 |
|
Foreign currency transaction losses | — |
| — |
| 7 |
| — |
| 7 |
| |
Foreign currency transaction gains | | — |
| — |
| (14 | ) | — |
| (14 | ) |
Total Costs and Expenses | 88 |
| 18,888 |
| 10,301 |
| (4,327 | ) | 24,950 |
| 112 |
| 22,399 |
| 10,312 |
| (4,922 | ) | 27,901 |
|
Income before income taxes | 792 |
| 1,218 |
| 376 |
| (1,130 | ) | 1,256 |
| 1,315 |
| 1,815 |
| 438 |
| (1,733 | ) | 1,835 |
|
Provision (benefit) for income taxes | (31 | ) | 338 |
| 100 |
| — |
| 407 |
| |
Income tax expense (benefit) | | (24 | ) | 388 |
| 67 |
| — |
| 431 |
|
Net Income | 823 |
| 880 |
| 276 |
| (1,130 | ) | 849 |
| 1,339 |
| 1,427 |
| 371 |
| (1,733 | ) | 1,404 |
|
Less: net income attributable to noncontrolling interests | — |
| — |
| 26 |
| — |
| 26 |
| — |
| — |
| 65 |
| — |
| 65 |
|
Net Income Attributable to Phillips 66 | $ | 823 |
| 880 |
| 250 |
| (1,130 | ) | 823 |
| $ | 1,339 |
| 1,427 |
| 306 |
| (1,733 | ) | 1,339 |
|
| | | | |
Comprehensive Income | $ | 948 |
| 1,005 |
| 362 |
| (1,341 | ) | 974 |
| $ | 1,163 |
| 1,251 |
| 188 |
| (1,374 | ) | 1,228 |
|
| | | Millions of Dollars | Millions of Dollars |
| Three Months Ended September 30, 2016 | Three Months Ended June 30, 2017 |
Statement of Income | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
| Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Revenues and Other Income | | | | |
Sales and other operating revenues | $ | — |
| 15,264 |
| 6,360 |
| — |
| 21,624 |
| $ | — |
| 17,653 |
| 6,434 |
| — |
| 24,087 |
|
Equity in earnings of affiliates | 571 |
| 521 |
| 108 |
| (809 | ) | 391 |
| 608 |
| 585 |
| 121 |
| (852 | ) | 462 |
|
Net gain (loss) on dispositions | — |
| (11 | ) | 14 |
| — |
| 3 |
| |
Net gain on dispositions | | — |
| (1 | ) | 15 |
| — |
| 14 |
|
Other income | — |
| 10 |
| 14 |
| — |
| 24 |
| — |
| 9 |
| 9 |
| — |
| 18 |
|
Intercompany revenues | — |
| 173 |
| 2,685 |
| (2,858 | ) | — |
| — |
| 222 |
| 2,942 |
| (3,164 | ) | — |
|
Total Revenues and Other Income | 571 |
| 15,957 |
| 9,181 |
| (3,667 | ) | 22,042 |
| 608 |
| 18,468 |
| 9,521 |
| (4,016 | ) | 24,581 |
|
| | | | |
Costs and Expenses | | | | |
Purchased crude oil and products | — |
| 12,377 |
| 6,388 |
| (2,804 | ) | 15,961 |
| — |
| 14,757 |
| 6,685 |
| (3,089 | ) | 18,353 |
|
Operating expenses | — |
| 864 |
| 206 |
| (9 | ) | 1,061 |
| — |
| 891 |
| 266 |
| (20 | ) | 1,137 |
|
Selling, general and administrative expenses | 1 |
| 314 |
| 99 |
| (3 | ) | 411 |
| 1 |
| 335 |
| 106 |
| (3 | ) | 439 |
|
Depreciation and amortization | — |
| 206 |
| 87 |
| — |
| 293 |
| — |
| 218 |
| 102 |
| — |
| 320 |
|
Impairments | — |
| 1 |
| 1 |
| — |
| 2 |
| — |
| 15 |
| — |
| — |
| 15 |
|
Taxes other than income taxes | — |
| 1,390 |
| 2,034 |
| — |
| 3,424 |
| — |
| 1,451 |
| 1,905 |
| — |
| 3,356 |
|
Accretion on discounted liabilities | — |
| 3 |
| 2 |
| — |
| 5 |
| — |
| 5 |
| 1 |
| — |
| 6 |
|
Interest and debt expense | 91 |
| 6 |
| 26 |
| (42 | ) | 81 |
| 87 |
| 14 |
| 58 |
| (52 | ) | 107 |
|
Foreign currency transaction gains | — |
| — |
| (9 | ) | — |
| (9 | ) | |
Total Costs and Expenses | 92 |
| 15,161 |
| 8,834 |
| (2,858 | ) | 21,229 |
| 88 |
| 17,686 |
| 9,123 |
| (3,164 | ) | 23,733 |
|
Income before income taxes | 479 |
| 796 |
| 347 |
| (809 | ) | 813 |
| 520 |
| 782 |
| 398 |
| (852 | ) | 848 |
|
Provision (benefit) for income taxes | (32 | ) | 225 |
| 84 |
| — |
| 277 |
| |
Income tax expense (benefit) | | (30 | ) | 174 |
| 123 |
| — |
| 267 |
|
Net Income | 511 |
| 571 |
| 263 |
| (809 | ) | 536 |
| 550 |
| 608 |
| 275 |
| (852 | ) | 581 |
|
Less: net income attributable to noncontrolling interests | — |
| — |
| 25 |
| — |
| 25 |
| — |
| — |
| 31 |
| — |
| 31 |
|
Net Income Attributable to Phillips 66 | $ | 511 |
| 571 |
| 238 |
| (809 | ) | 511 |
| $ | 550 |
| 608 |
| 244 |
| (852 | ) | 550 |
|
| | | | |
Comprehensive Income | $ | 471 |
| 531 |
| 207 |
| (713 | ) | 496 |
| $ | 693 |
| 751 |
| 372 |
| (1,092 | ) | 724 |
|
|
| | | | | | | | | | | |
| Millions of Dollars |
| Six Months Ended June 30, 2018 |
Statement of Income | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Revenues and Other Income | | | | | |
Sales and other operating revenues | $ | — |
| 40,837 |
| 11,738 |
| — |
| 52,575 |
|
Equity in earnings of affiliates | 2,027 |
| 1,478 |
| 380 |
| (2,718 | ) | 1,167 |
|
Net gain on dispositions | — |
| 7 |
| 10 |
| — |
| 17 |
|
Other income | — |
| 2 |
| 21 |
| — |
| 23 |
|
Intercompany revenues | — |
| 1,365 |
| 7,015 |
| (8,380 | ) | — |
|
Total Revenues and Other Income | 2,027 |
| 43,689 |
| 19,164 |
| (11,098 | ) | 53,782 |
|
| | | | | |
Costs and Expenses | | | | | |
Purchased crude oil and products | — |
| 38,068 |
| 17,018 |
| (8,201 | ) | 46,885 |
|
Operating expenses | — |
| 1,825 |
| 595 |
| (31 | ) | 2,389 |
|
Selling, general and administrative expenses | 4 |
| 628 |
| 191 |
| (5 | ) | 818 |
|
Depreciation and amortization | — |
| 459 |
| 214 |
| — |
| 673 |
|
Impairments | — |
| 1 |
| 5 |
| — |
| 6 |
|
Taxes other than income taxes | — |
| 164 |
| 55 |
| — |
| 219 |
|
Accretion on discounted liabilities | — |
| 9 |
| 3 |
| — |
| 12 |
|
Interest and debt expense | 204 |
| 72 |
| 125 |
| (143 | ) | 258 |
|
Foreign currency transaction gains | — |
| — |
| (30 | ) | — |
| (30 | ) |
Total Costs and Expenses | 208 |
| 41,226 |
| 18,176 |
| (8,380 | ) | 51,230 |
|
Income before income taxes | 1,819 |
| 2,463 |
| 988 |
| (2,718 | ) | 2,552 |
|
Income tax expense (benefit) | (44 | ) | 436 |
| 171 |
| — |
| 563 |
|
Net Income | 1,863 |
| 2,027 |
| 817 |
| (2,718 | ) | 1,989 |
|
Less: net income attributable to noncontrolling interests | — |
| — |
| 126 |
| — |
| 126 |
|
Net Income Attributable to Phillips 66 | $ | 1,863 |
| 2,027 |
| 691 |
| (2,718 | ) | 1,863 |
|
| | | | | |
Comprehensive Income | $ | 1,800 |
| 1,964 |
| 722 |
| (2,560 | ) | 1,926 |
|
|
| | | | | | | | | | | |
| Millions of Dollars |
| Six Months Ended June 30, 2017 |
Statement of Income | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Revenues and Other Income | | | | | |
Sales and other operating revenues | $ | — |
| 33,903 |
| 13,078 |
| — |
| 46,981 |
|
Equity in earnings of affiliates | 1,203 |
| 1,069 |
| 236 |
| (1,681 | ) | 827 |
|
Net gain on dispositions | — |
| — |
| 15 |
| — |
| 15 |
|
Other income | — |
| 435 |
| 35 |
| — |
| 470 |
|
Intercompany revenues | — |
| 650 |
| 5,849 |
| (6,499 | ) | — |
|
Total Revenues and Other Income | 1,203 |
| 36,057 |
| 19,213 |
| (8,180 | ) | 48,293 |
|
| | | | | |
Costs and Expenses | | | | | |
Purchased crude oil and products | — |
| 28,641 |
| 13,745 |
| (6,354 | ) | 36,032 |
|
Operating expenses | — |
| 1,922 |
| 521 |
| (36 | ) | 2,407 |
|
Selling, general and administrative expenses | 4 |
| 624 |
| 200 |
| (5 | ) | 823 |
|
Depreciation and amortization | — |
| 432 |
| 203 |
| — |
| 635 |
|
Impairments | — |
| 17 |
| — |
| — |
| 17 |
|
Taxes other than income taxes | — |
| 2,823 |
| 3,689 |
| — |
| 6,512 |
|
Accretion on discounted liabilities | — |
| 9 |
| 2 |
| — |
| 11 |
|
Interest and debt expense | 177 |
| 26 |
| 113 |
| (104 | ) | 212 |
|
Foreign currency transaction gains | — |
| — |
| (1 | ) | — |
| (1 | ) |
Total Costs and Expenses | 181 |
| 34,494 |
| 18,472 |
| (6,499 | ) | 46,648 |
|
Income before income taxes | 1,022 |
| 1,563 |
| 741 |
| (1,681 | ) | 1,645 |
|
Income tax expense (benefit) | (63 | ) | 360 |
| 204 |
| — |
| 501 |
|
Net Income | 1,085 |
| 1,203 |
| 537 |
| (1,681 | ) | 1,144 |
|
Less: net income attributable to noncontrolling interests | — |
| — |
| 59 |
| — |
| 59 |
|
Net Income Attributable to Phillips 66 | $ | 1,085 |
| 1,203 |
| 478 |
| (1,681 | ) | 1,085 |
|
| | | | | |
Comprehensive Income | $ | 1,271 |
| 1,389 |
| 662 |
| (1,992 | ) | 1,330 |
|
|
| | | | | | | | | | | |
| Millions of Dollars |
| June 30, 2018 |
Balance Sheet | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Assets | | | | | |
Cash and cash equivalents | $ | — |
| 793 |
| 1,091 |
| — |
| 1,884 |
|
Accounts and notes receivable | 11 |
| 5,260 |
| 4,452 |
| (2,550 | ) | 7,173 |
|
Inventories | — |
| 3,150 |
| 1,751 |
| — |
| 4,901 |
|
Prepaid expenses and other current assets | 1 |
| 435 |
| 185 |
| — |
| 621 |
|
Total Current Assets | 12 |
| 9,638 |
| 7,479 |
| (2,550 | ) | 14,579 |
|
Investments and long-term receivables | 31,037 |
| 22,537 |
| 9,709 |
| (49,106 | ) | 14,177 |
|
Net properties, plants and equipment | — |
| 13,050 |
| 8,415 |
| — |
| 21,465 |
|
Goodwill | — |
| 2,853 |
| 417 |
| — |
| 3,270 |
|
Intangibles | — |
| 718 |
| 148 |
| — |
| 866 |
|
Other assets | 11 |
| 295 |
| 165 |
| (2 | ) | 469 |
|
Total Assets | $ | 31,060 |
| 49,091 |
| 26,333 |
| (51,658 | ) | 54,826 |
|
| | | | | |
Liabilities and Equity | | | | | |
Accounts payable | $ | — |
| 7,865 |
| 4,021 |
| (2,550 | ) | 9,336 |
|
Short-term debt | 300 |
| 11 |
| 30 |
| — |
| 341 |
|
Accrued income and other taxes | — |
| 517 |
| 616 |
| — |
| 1,133 |
|
Employee benefit obligations | — |
| 417 |
| 44 |
| — |
| 461 |
|
Other accruals | 69 |
| 264 |
| 128 |
| — |
| 461 |
|
Total Current Liabilities | 369 |
| 9,074 |
| 4,839 |
| (2,550 | ) | 11,732 |
|
Long-term debt | 7,925 |
| 58 |
| 3,040 |
| — |
| 11,023 |
|
Asset retirement obligations and accrued environmental costs | — |
| 472 |
| 174 |
| — |
| 646 |
|
Deferred income taxes | — |
| 3,470 |
| 1,723 |
| (2 | ) | 5,191 |
|
Employee benefit obligations | — |
| 658 |
| 227 |
| — |
| 885 |
|
Other liabilities and deferred credits | 201 |
| 4,453 |
| 3,902 |
| (8,167 | ) | 389 |
|
Total Liabilities | 8,495 |
| 18,185 |
| 13,905 |
| (10,719 | ) | 29,866 |
|
Common stock | 5,716 |
| 24,952 |
| 9,374 |
| (34,326 | ) | 5,716 |
|
Retained earnings | 17,529 |
| 6,634 |
| 930 |
| (7,593 | ) | 17,500 |
|
Accumulated other comprehensive loss | (680 | ) | (680 | ) | (300 | ) | 980 |
| (680 | ) |
Noncontrolling interests | — |
| — |
| 2,424 |
| — |
| 2,424 |
|
Total Liabilities and Equity | $ | 31,060 |
| 49,091 |
| 26,333 |
| (51,658 | ) | 54,826 |
|
|
| | | | | | | | | | | |
| Millions of Dollars |
| Nine Months Ended September 30, 2017 |
Statement of Income | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Revenues and Other Income | | | | | |
Sales and other operating revenues | $ | — |
| 52,844 |
| 19,764 |
| — |
| 72,608 |
|
Equity in earnings of affiliates | 2,083 |
| 1,677 |
| 408 |
| (2,811 | ) | 1,357 |
|
Net gain on dispositions | — |
| 1 |
| 14 |
| — |
| 15 |
|
Other income | — |
| 469 |
| 50 |
| — |
| 519 |
|
Intercompany revenues | — |
| 1,172 |
| 9,654 |
| (10,826 | ) | — |
|
Total Revenues and Other Income | 2,083 |
| 56,163 |
| 29,890 |
| (13,637 | ) | 74,499 |
|
| | | | | |
Costs and Expenses | | | | | |
Purchased crude oil and products | — |
| 44,622 |
| 21,489 |
| (10,616 | ) | 55,495 |
|
Operating expenses | — |
| 2,779 |
| 806 |
| (44 | ) | 3,541 |
|
Selling, general and administrative expenses | 6 |
| 962 |
| 298 |
| (8 | ) | 1,258 |
|
Depreciation and amortization | — |
| 657 |
| 315 |
| — |
| 972 |
|
Impairments | — |
| 17 |
| 1 |
| — |
| 18 |
|
Taxes other than income taxes | — |
| 4,287 |
| 5,681 |
| — |
| 9,968 |
|
Accretion on discounted liabilities | — |
| 12 |
| 4 |
| — |
| 16 |
|
Interest and debt expense | 263 |
| 46 |
| 173 |
| (158 | ) | 324 |
|
Foreign currency transaction losses | — |
| — |
| 6 |
| — |
| 6 |
|
Total Costs and Expenses | 269 |
| 53,382 |
| 28,773 |
| (10,826 | ) | 71,598 |
|
Income before income taxes | 1,814 |
| 2,781 |
| 1,117 |
| (2,811 | ) | 2,901 |
|
Provision (benefit) for income taxes | (94 | ) | 698 |
| 304 |
| — |
| 908 |
|
Net Income | 1,908 |
| 2,083 |
| 813 |
| (2,811 | ) | 1,993 |
|
Less: net income attributable to noncontrolling interests | — |
| — |
| 85 |
| — |
| 85 |
|
Net Income Attributable to Phillips 66 | $ | 1,908 |
| 2,083 |
| 728 |
| (2,811 | ) | 1,908 |
|
| | | | | |
Comprehensive Income | $ | 2,219 |
| 2,394 |
| 1,024 |
| (3,333 | ) | 2,304 |
|
|
| | | | | | | | | | | |
| Millions of Dollars |
| December 31, 2017 |
Balance Sheet | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Assets | | | | | |
Cash and cash equivalents | $ | — |
| 1,411 |
| 1,708 |
| — |
| 3,119 |
|
Accounts and notes receivable | 10 |
| 5,317 |
| 4,476 |
| (2,297 | ) | 7,506 |
|
Inventories | — |
| 2,386 |
| 1,009 |
| — |
| 3,395 |
|
Prepaid expenses and other current assets | 2 |
| 276 |
| 92 |
| — |
| 370 |
|
Total Current Assets | 12 |
| 9,390 |
| 7,285 |
| (2,297 | ) | 14,390 |
|
Investments and long-term receivables | 32,125 |
| 23,483 |
| 9,959 |
| (51,626 | ) | 13,941 |
|
Net properties, plants and equipment | — |
| 13,117 |
| 8,343 |
| — |
| 21,460 |
|
Goodwill | — |
| 2,853 |
| 417 |
| — |
| 3,270 |
|
Intangibles | — |
| 722 |
| 154 |
| — |
| 876 |
|
Other assets | 12 |
| 266 |
| 158 |
| (2 | ) | 434 |
|
Total Assets | $ | 32,149 |
| 49,831 |
| 26,316 |
| (53,925 | ) | 54,371 |
|
| | | | | |
Liabilities and Equity | | | | | |
Accounts payable | $ | — |
| 7,272 |
| 3,052 |
| (2,297 | ) | 8,027 |
|
Short-term debt | — |
| 9 |
| 32 |
| — |
| 41 |
|
Accrued income and other taxes | — |
| 451 |
| 551 |
| — |
| 1,002 |
|
Employee benefit obligations | — |
| 513 |
| 69 |
| — |
| 582 |
|
Other accruals | 55 |
| 298 |
| 102 |
| — |
| 455 |
|
Total Current Liabilities | 55 |
| 8,543 |
| 3,806 |
| (2,297 | ) | 10,107 |
|
Long-term debt | 6,972 |
| 50 |
| 3,047 |
| — |
| 10,069 |
|
Asset retirement obligations and accrued environmental costs | — |
| 467 |
| 174 |
| — |
| 641 |
|
Deferred income taxes | — |
| 3,349 |
| 1,661 |
| (2 | ) | 5,008 |
|
Employee benefit obligations | — |
| 639 |
| 245 |
| — |
| 884 |
|
Other liabilities and deferred credits | 8 |
| 4,700 |
| 3,814 |
| (8,288 | ) | 234 |
|
Total Liabilities | 7,035 |
| 17,748 |
| 12,747 |
| (10,587 | ) | 26,943 |
|
Common stock | 9,396 |
| 24,952 |
| 10,125 |
| (35,077 | ) | 9,396 |
|
Retained earnings | 16,335 |
| 7,748 |
| 1,306 |
| (9,083 | ) | 16,306 |
|
Accumulated other comprehensive loss | (617 | ) | (617 | ) | (205 | ) | 822 |
| (617 | ) |
Noncontrolling interests | — |
| — |
| 2,343 |
| — |
| 2,343 |
|
Total Liabilities and Equity | $ | 32,149 |
| 49,831 |
| 26,316 |
| (53,925 | ) | 54,371 |
|
|
| | | | | | | | | | | |
| Millions of Dollars |
| Nine Months Ended September 30, 2016 |
Statement of Income | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Revenues and Other Income | | | | | |
Sales and other operating revenues | $ | — |
| 42,199 |
| 18,683 |
| — |
| 60,882 |
|
Equity in earnings of affiliates | 1,574 |
| 1,406 |
| 268 |
| (2,089 | ) | 1,159 |
|
Net gain (loss) on dispositions | — |
| (11 | ) | 20 |
| — |
| 9 |
|
Other income | — |
| 34 |
| 25 |
| — |
| 59 |
|
Intercompany revenues | — |
| 570 |
| 6,398 |
| (6,968 | ) | — |
|
Total Revenues and Other Income | 1,574 |
| 44,198 |
| 25,394 |
| (9,057 | ) | 62,109 |
|
| | | | | |
Costs and Expenses | | | | | |
Purchased crude oil and products | — |
| 33,844 |
| 17,047 |
| (6,802 | ) | 44,089 |
|
Operating expenses | — |
| 2,477 |
| 628 |
| (27 | ) | 3,078 |
|
Selling, general and administrative expenses | 5 |
| 914 |
| 307 |
| (8 | ) | 1,218 |
|
Depreciation and amortization | — |
| 609 |
| 254 |
| — |
| 863 |
|
Impairments | — |
| 1 |
| 3 |
| — |
| 4 |
|
Taxes other than income taxes | — |
| 4,131 |
| 6,348 |
| — |
| 10,479 |
|
Accretion on discounted liabilities | — |
| 11 |
| 4 |
| — |
| 15 |
|
Interest and debt expense | 275 |
| 23 |
| 83 |
| (131 | ) | 250 |
|
Foreign currency transaction gains | — |
| — |
| (16 | ) | — |
| (16 | ) |
Total Costs and Expenses | 280 |
| 42,010 |
| 24,658 |
| (6,968 | ) | 59,980 |
|
Income before income taxes | 1,294 |
| 2,188 |
| 736 |
| (2,089 | ) | 2,129 |
|
Provision (benefit) for income taxes | (98 | ) | 614 |
| 163 |
| — |
| 679 |
|
Net Income | 1,392 |
| 1,574 |
| 573 |
| (2,089 | ) | 1,450 |
|
Less: net income attributable to noncontrolling interests | — |
| — |
| 58 |
| — |
| 58 |
|
Net Income Attributable to Phillips 66 | $ | 1,392 |
| 1,574 |
| 515 |
| (2,089 | ) | 1,392 |
|
| | | | | |
Comprehensive Income | $ | 1,253 |
| 1,435 |
| 398 |
| (1,775 | ) | 1,311 |
|
|
| | | | | | | | | | | |
| Millions of Dollars |
| September 30, 2017 |
Balance Sheet | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Assets | | | | | |
Cash and cash equivalents | $ | — |
| 308 |
| 1,239 |
| — |
| 1,547 |
|
Accounts and notes receivable | 10 |
| 4,596 |
| 4,584 |
| (2,835 | ) | 6,355 |
|
Inventories | — |
| 3,174 |
| 1,281 |
| — |
| 4,455 |
|
Prepaid expenses and other current assets | — |
| 435 |
| 143 |
| — |
| 578 |
|
Total Current Assets | 10 |
| 8,513 |
| 7,247 |
| (2,835 | ) | 12,935 |
|
Investments and long-term receivables | 30,418 |
| 22,699 |
| 9,195 |
| (48,413 | ) | 13,899 |
|
Net properties, plants and equipment | — |
| 13,052 |
| 8,251 |
| — |
| 21,303 |
|
Goodwill | — |
| 2,853 |
| 417 |
| — |
| 3,270 |
|
Intangibles | — |
| 724 |
| 160 |
| — |
| 884 |
|
Other assets | 14 |
| 252 |
| 158 |
| (3 | ) | 421 |
|
Total Assets | $ | 30,442 |
| 48,093 |
| 25,428 |
| (51,251 | ) | 52,712 |
|
| | | | | |
Liabilities and Equity | | | | | |
Accounts payable | $ | — |
| 6,828 |
| 3,278 |
| (2,835 | ) | 7,271 |
|
Short-term debt | 649 |
| 9 |
| 48 |
| — |
| 706 |
|
Accrued income and other taxes | — |
| 373 |
| 528 |
| — |
| 901 |
|
Employee benefit obligations | — |
| 419 |
| 63 |
| — |
| 482 |
|
Other accruals | 128 |
| 305 |
| 112 |
| — |
| 545 |
|
Total Current Liabilities | 777 |
| 7,934 |
| 4,029 |
| (2,835 | ) | 9,905 |
|
Long-term debt | 6,970 |
| 49 |
| 2,476 |
| — |
| 9,495 |
|
Asset retirement obligations and accrued environmental costs | — |
| 462 |
| 167 |
| — |
| 629 |
|
Deferred income taxes | — |
| 5,034 |
| 2,574 |
| (3 | ) | 7,605 |
|
Employee benefit obligations | — |
| 593 |
| 284 |
| — |
| 877 |
|
Other liabilities and deferred credits | 143 |
| 3,994 |
| 4,064 |
| (7,959 | ) | 242 |
|
Total Liabilities | 7,890 |
| 18,066 |
| 13,594 |
| (10,797 | ) | 28,753 |
|
Common stock | 9,743 |
| 25,403 |
| 10,416 |
| (35,819 | ) | 9,743 |
|
Retained earnings | 13,493 |
| 5,308 |
| 249 |
| (5,586 | ) | 13,464 |
|
Accumulated other comprehensive loss | (684 | ) | (684 | ) | (267 | ) | 951 |
| (684 | ) |
Noncontrolling interests | — |
| — |
| 1,436 |
| — |
| 1,436 |
|
Total Liabilities and Equity | $ | 30,442 |
| 48,093 |
| 25,428 |
| (51,251 | ) | 52,712 |
|
|
| | | | | | | | | | | |
| Millions of Dollars |
| December 31, 2016 |
Balance Sheet | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Assets | | | | | |
Cash and cash equivalents | $ | — |
| 854 |
| 1,857 |
| — |
| 2,711 |
|
Accounts and notes receivable | 13 |
| 4,336 |
| 3,276 |
| (1,228 | ) | 6,397 |
|
Inventories | — |
| 2,198 |
| 952 |
| — |
| 3,150 |
|
Prepaid expenses and other current assets | 2 |
| 317 |
| 103 |
| — |
| 422 |
|
Total Current Assets | 15 |
| 7,705 |
| 6,188 |
| (1,228 | ) | 12,680 |
|
Investments and long-term receivables | 31,165 |
| 22,733 |
| 8,588 |
| (48,952 | ) | 13,534 |
|
Net properties, plants and equipment | — |
| 13,044 |
| 7,811 |
| — |
| 20,855 |
|
Goodwill | — |
| 2,853 |
| 417 |
| — |
| 3,270 |
|
Intangibles | — |
| 719 |
| 169 |
| — |
| 888 |
|
Other assets | 15 |
| 245 |
| 168 |
| (2 | ) | 426 |
|
Total Assets | $ | 31,195 |
| 47,299 |
| 23,341 |
| (50,182 | ) | 51,653 |
|
| | | | | |
Liabilities and Equity | | | | | |
Accounts payable | $ | — |
| 5,626 |
| 2,663 |
| (1,228 | ) | 7,061 |
|
Short-term debt | 500 |
| 30 |
| 20 |
| — |
| 550 |
|
Accrued income and other taxes | — |
| 348 |
| 457 |
| — |
| 805 |
|
Employee benefit obligations | — |
| 475 |
| 52 |
| — |
| 527 |
|
Other accruals | 59 |
| 371 |
| 90 |
| — |
| 520 |
|
Total Current Liabilities | 559 |
| 6,850 |
| 3,282 |
| (1,228 | ) | 9,463 |
|
Long-term debt | 6,920 |
| 150 |
| 2,518 |
| — |
| 9,588 |
|
Asset retirement obligations and accrued environmental costs | — |
| 501 |
| 154 |
| — |
| 655 |
|
Deferred income taxes | — |
| 4,391 |
| 2,354 |
| (2 | ) | 6,743 |
|
Employee benefit obligations | — |
| 948 |
| 268 |
| — |
| 1,216 |
|
Other liabilities and deferred credits | 1,297 |
| 3,337 |
| 4,060 |
| (8,431 | ) | 263 |
|
Total Liabilities | 8,776 |
| 16,177 |
| 12,636 |
| (9,661 | ) | 27,928 |
|
Common stock | 10,777 |
| 25,403 |
| 10,117 |
| (35,520 | ) | 10,777 |
|
Retained earnings | 12,637 |
| 6,714 |
| (269 | ) | (6,474 | ) | 12,608 |
|
Accumulated other comprehensive loss | (995 | ) | (995 | ) | (478 | ) | 1,473 |
| (995 | ) |
Noncontrolling interests | — |
| — |
| 1,335 |
| — |
| 1,335 |
|
Total Liabilities and Equity | $ | 31,195 |
| 47,299 |
| 23,341 |
| (50,182 | ) | 51,653 |
|
| | | Millions of Dollars | Millions of Dollars |
| Nine Months Ended September 30, 2017 | Six Months Ended June 30, 2018 |
Statement of Cash Flows | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
| Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Cash Flows From Operating Activities | | | | |
Net Cash Provided by Operating Activities | $ | 1,919 |
| 601 |
| 1,566 |
| (2,369 | ) | 1,717 |
| $ | 3,080 |
| 2,523 |
| 1,203 |
| (3,954 | ) | 2,852 |
|
| | | | |
Cash Flows From Investing Activities | | | | |
Capital expenditures and investments* | — |
| (842 | ) | (593 | ) | 140 |
| (1,295 | ) | — |
| (374 | ) | (492 | ) | — |
| (866 | ) |
Proceeds from asset dispositions** | — |
| 2 |
| 63 |
| — |
| 65 |
| — |
| 326 |
| 28 |
| (325 | ) | 29 |
|
Intercompany lending activities | 93 |
| 1,655 |
| (1,748 | ) | — |
| — |
| 131 |
| 121 |
| (252 | ) | — |
| — |
|
Advances/loans—related parties | — |
| (9 | ) | — |
| — |
| (9 | ) | |
Collection of advances/loans—related parties | — |
| 75 |
| 250 |
| — |
| 325 |
| |
Restricted cash received from consolidation of business | — |
| — |
| 318 |
| — |
| 318 |
| |
Other | — |
| (73 | ) | (7 | ) | — |
| (80 | ) | — |
| (33 | ) | 49 |
| — |
| 16 |
|
Net Cash Provided by (Used in) Investing Activities | 93 |
| 808 |
| (1,717 | ) | 140 |
| (676 | ) | 131 |
| 40 |
| (667 | ) | (325 | ) | (821 | ) |
| | | | |
Cash Flows From Financing Activities | | | | |
Issuance of debt | 1,700 |
| — |
| 1,383 |
| — |
| 3,083 |
| 1,509 |
| — |
| — |
| — |
| 1,509 |
|
Repayment of debt | (1,500 | ) | (16 | ) | (1,645 | ) | — |
| (3,161 | ) | (250 | ) | (7 | ) | (3 | ) | — |
| (260 | ) |
Issuance of common stock | 23 |
| — |
| — |
| — |
| 23 |
| 30 |
| — |
| — |
| — |
| 30 |
|
Repurchase of common stock | (1,127 | ) | — |
| — |
| — |
| (1,127 | ) | (3,743 | ) | — |
| — |
| — |
| (3,743 | ) |
Dividends paid on common stock | (1,042 | ) | (1,939 | ) | (430 | ) | 2,369 |
| (1,042 | ) | (699 | ) | (3,174 | ) | (780 | ) | 3,954 |
| (699 | ) |
Distributions to noncontrolling interests | — |
| — |
| (83 | ) | — |
| (83 | ) | — |
| — |
| (96 | ) | — |
| (96 | ) |
Net proceeds from issuance of Phillips 66 Partners LP common units | — |
| — |
| 171 |
| — |
| 171 |
| — |
| — |
| 67 |
| — |
| 67 |
|
Other* | (66 | ) | — |
| 140 |
| (140 | ) | (66 | ) | (58 | ) | — |
| (325 | ) | 325 |
| (58 | ) |
Net Cash Used in Financing Activities | (2,012 | ) | (1,955 | ) | (464 | ) | 2,229 |
| (2,202 | ) | (3,211 | ) | (3,181 | ) | (1,137 | ) | 4,279 |
| (3,250 | ) |
| | | | |
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | — |
| — |
| (3 | ) | — |
| (3 | ) | — |
| — |
| (16 | ) | — |
| (16 | ) |
| | | | |
Net Change in Cash, Cash Equivalents and Restricted Cash | — |
| (546 | ) | (618 | ) | — |
| (1,164 | ) | — |
| (618 | ) | (617 | ) | — |
| (1,235 | ) |
Cash, cash equivalents and restricted cash at beginning of period | — |
| 854 |
| 1,857 |
| — |
| 2,711 |
| — |
| 1,411 |
| 1,708 |
| — |
| 3,119 |
|
Cash, Cash Equivalents and Restricted Cash at End of Period | $ | — |
| 308 |
| 1,239 |
| — |
| 1,547 |
| $ | — |
| 793 |
| 1,091 |
| — |
| 1,884 |
|
* Includes intercompany capital contributions.
** Includes return of investments in equity affiliates.
| | | Millions of Dollars | Millions of Dollars |
| Nine Months Ended September 30, 2016 | Six Months Ended June 30, 2017 |
Statement of Cash Flows | Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
| Phillips 66 |
| Phillips 66 Company |
| All Other Subsidiaries |
| Consolidating Adjustments |
| Total Consolidated |
|
Cash Flows From Operating Activities | | | | |
Net Cash Provided by Operating Activities | $ | 3,111 |
| 1,790 |
| 1,174 |
| (3,779 | ) | 2,296 |
| $ | 1,143 |
| 701 |
| 1,104 |
| (1,632 | ) | 1,316 |
|
| | | | |
Cash Flows From Investing Activities | | | | |
Capital expenditures and investments* | — |
| (1,025 | ) | (1,044 | ) | 38 |
| (2,031 | ) | — |
| (675 | ) | (393 | ) | 140 |
| (928 | ) |
Proceeds from asset dispositions** | — |
| — |
| 159 |
| — |
| 159 |
| — |
| 2 |
| 49 |
| — |
| 51 |
|
Intercompany lending activities | (1,303 | ) | 2,692 |
| (1,389 | ) | — |
| — |
| 256 |
| 855 |
| (1,111 | ) | — |
| — |
|
Advances/loans—related parties | — |
| (75 | ) | (191 | ) | — |
| (266 | ) | |
Collection of advances/loans—related parties | — |
| — |
| 107 |
| — |
| 107 |
| — |
| 75 |
| 250 |
| — |
| 325 |
|
Restricted cash received from consolidation of business | | — |
| — |
| 318 |
| — |
| 318 |
|
Other | — |
| 30 |
| (162 | ) | — |
| (132 | ) | — |
| (59 | ) | (2 | ) | — |
| (61 | ) |
Net Cash Provided by (Used in) Investing Activities | (1,303 | ) | 1,622 |
| (2,520 | ) | 38 |
| (2,163 | ) | 256 |
| 198 |
| (889 | ) | 140 |
| (295 | ) |
| | | | |
Cash Flows From Financing Activities | | | | |
Issuance of debt | — |
| — |
| 400 |
| — |
| 400 |
| 1,500 |
| — |
| 1,103 |
| — |
| 2,603 |
|
Repayment of debt | — |
| (21 | ) | (397 | ) | — |
| (418 | ) | (1,500 | ) | (10 | ) | (1,400 | ) | — |
| (2,910 | ) |
Issuance of common stock | 14 |
| — |
| — |
| — |
| 14 |
| 6 |
| — |
| — |
| — |
| 6 |
|
Repurchase of common stock | (812 | ) | — |
| — |
| — |
| (812 | ) | (666 | ) | — |
| — |
| — |
| (666 | ) |
Dividends paid on common stock | (954 | ) | (3,099 | ) | (680 | ) | 3,779 |
| (954 | ) | (686 | ) | (1,202 | ) | (430 | ) | 1,632 |
| (686 | ) |
Distributions to noncontrolling interests | — |
| — |
| (45 | ) | — |
| (45 | ) | — |
| — |
| (54 | ) | — |
| (54 | ) |
Net proceeds from issuance of Phillips 66 Partners LP common units | — |
| — |
| 972 |
| — |
| 972 |
| — |
| — |
| 171 |
| — |
| 171 |
|
Other* | (56 | ) | 18 |
| 38 |
| (38 | ) | (38 | ) | (53 | ) | — |
| 139 |
| (140 | ) | (54 | ) |
Net Cash Provided by (Used in) Financing Activities | (1,808 | ) | (3,102 | ) | 288 |
| 3,741 |
| (881 | ) | |
Net Cash Used in Financing Activities | | (1,399 | ) | (1,212 | ) | (471 | ) | 1,492 |
| (1,590 | ) |
| | | | |
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash | — |
| — |
| 11 |
| — |
| 11 |
| — |
| — |
| 19 |
| — |
| 19 |
|
| | | | |
Net Change in Cash, Cash Equivalents and Restricted Cash | — |
| 310 |
| (1,047 | ) | — |
| (737 | ) | — |
| (313 | ) | (237 | ) | — |
| (550 | ) |
Cash, cash equivalents and restricted cash at beginning of period | — |
| 575 |
| 2,499 |
| — |
| 3,074 |
| — |
| 854 |
| 1,857 |
| — |
| 2,711 |
|
Cash, Cash Equivalents and Restricted Cash at End of Period | $ | — |
| 885 |
| 1,452 |
| — |
| 2,337 |
| $ | — |
| 541 |
| 1,620 |
| — |
| 2,161 |
|
* Includes intercompany capital contributions.
** Includes return of investments in equity affiliates and working capital true-ups on dispositions.affiliates.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated, “the company,” “we,” “our,” “us” and “Phillips 66” are used in this report to refer to the businesses of Phillips 66 and its consolidated subsidiaries. Unless the context requires otherwise, references to “DCP Midstream” include the consolidated operations of DCP Midstream, LLC, including DCP Midstream, LP, (formerly named DCP Midstream Partners, LP), the master limited partnership formed by DCP Midstream, LLC.
Management’s Discussion and Analysis is the company’s analysis of its financial performance, its financial condition, and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”
The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to net income (loss) attributable to Phillips 66.
BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW
Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. At SeptemberJune 30, 2017,2018, we had total assets of $53$54.8 billion. Our common stock trades on the New York Stock Exchange under the symbol PSX.
Executive Overview
In the thirdsecond quarter of 2017,2018, we reported earnings of $823 million$1.3 billion and generated cash from operating activities of $401 million. Cash from operations for the quarter reflected contributions to our employee benefit plans of $426 million.$2.4 billion. We used available cash to fund capital expenditures and investments of $367$538 million, pay dividends of $356$372 million, repay term loans of $250 million and repurchase $461$230 millionof our common stock. We ended the thirdsecond quarter of 20172018 with $1.5$1.9 billion of cash and cash equivalents and approximately $5.4$5.8 billion of total committed capacity available under our credit facilities.
Business Environment
Crude oil prices were relatively flat in the third quarter of 2017 compared with the second quarter of 2017, but significantly higher compared with the third quarter of 2016. At the end of the third quarter, Hurricane Harvey and Hurricane Irma combined to drive price volatility by reducing production of crude oil, natural gas and refined products. The U.S. crude oil benchmark price, West Texas Intermediate (WTI), stayed relatively flat, moving fromincreased to an average of $48.24$67.99 per barrel induring the second quarter of 2017 to $48.162018, compared with an average of $62.88 per barrel induring the thirdfirst quarter of 2017. The WTI discount to the international benchmark, Brent, expanded from2018. During the second quarter of 2017 average of $1.592018, the WTI discount versus the international benchmark Dated Brent expanded $2.48 per barrel to $3.92 per barrel incompared with the thirdfirst quarter of 2017,2018. The expansion of the discount was driven by refinery and transportation and storage system outages onuncertainty surrounding increased production expected by the U.S. Gulf Coast, as well as Organization of the Petroleum Exporting Countries (OPEC) production cuts. The continual low-commodity-price environment, along withand certain non-OPEC countries, and inventories not being reduced as expected at the weather-related supply disruptions,Cushing, Oklahoma, trading hub. During the second quarter of 2018, commodity prices had both favorable and unfavorable impacts on our businesses that vary by segment.
Earnings in theThe Midstream segment, which includes our 50 percent equity investment in DCP Midstream, LLC (DCP Midstream),contains fee-based operations that are closelynot directly exposed to commodity price risk, as well as operations that are directly linked to natural gas liquids (NGL) prices, natural gas prices and crude oil prices. Higher NGLAverage natural gas prices decreased in the third quarter of 2017, compared with both the second quarter of 2017 and third2018, compared with the first quarter of 2016, resulted from lower inventories2018, due to higher export volumes. Averagefewer heating days in the second quarter. In January 2018, natural gas prices improvedgained momentum due to colder than average temperatures, which increased residential and commercial heating demand. Additionally, U.S. natural gas production has been at record highs due to increased dry gas production and associated gains in the third quarter of 2017 compared with the third quarter of 2016, benefitinggas production from lower inventory, and decreased compared withtight oil developments. NGL prices were higher in the second quarter of 2017.2018, compared with the first quarter of 2018, due to higher global crude oil prices and increased Asian demand for imports.
The Chemicals segment consists of our 50 percent equity investment in Chevron Phillips Chemical Company LLC (CPChem). The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on supply and demand, as well as cost factors. During the second quarter of 2018, the chemicals and plastics industry continued to benefit from feedstock cost advantages associated with manufacturing ethylene in regions of the world with significant NGL production. The price of crude oil is rising faster than NGL prices and thus the petrochemicals industry continues to experience lower ethylene cash costs in regions of the world where ethylene feedstocks aremanufacturing is based on NGL rather than crude-oil-derivedcrude oil-derived feedstocks. In particular, companies with North American light NGL-basedethane-based crackers integrated through ethylene derivatives have benefited from lower-priced feedstocks, primarily ethane. Due to weather-related issues, a numberfeedstock price advantage and have captured a higher polyethylene chain margin than crackers in most other regions of crackers were offline or running at reduced rates during the quarter. The ethylene-to-polyethylene chain margins in the third quarter of 2017 declined compared with the second quarter of 2017 and the third quarter of 2016 due to higher NGL feedstock costs.world.
The results of ourOur Refining segment results are driven by several factors, including refining margins, cost control, refinery throughput, feedstock costs, product yields and turnaround activity. Industry crack spread indicators, the difference between market prices for refined products and crude oil, are used to estimate refining margins. TheDuring the second quarter of 2018, the U.S. Gulf Coast 3:2:1 crack spread (three barrels of crude oil producing two barrels of gasoline and one barrel of diesel) rose significantly inincreased compared with the thirdfirst quarter of 2017, compared with2018 due to higher gasoline and distillate cracks caused by the start of the summer driving season. Northwest Europe crack spreads on average increased in the second quarter of 2017 and third2018, compared with the first quarter of 2016,2018 due primarily to weather-related disruptions.higher demand.
Results for our Marketing and Specialties (M&S) segment depend largely on marketing fuel margins, lubricant margins, and other specialty product margins. While M&S margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are influenced by the trend in spot prices for refined products. Generally speaking, a downward trend of spot prices has a favorable impact on marketing fuel margins, while an upward trend of spot prices has an unfavorable impact on marketing fuel margins.
RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three-three and nine-month periodssix months ended SeptemberJune 30, 20172018, is based on a comparison with the corresponding periods of 20162017.
Basis of Presentation
During the fourth quarter of 2017, the segment performance measure used by our chief executive officer to assess performance and allocate resources was changed from “net income attributable to Phillips 66” to “net income.” Prior period segment information has been recast to conform to the current presentation.
Consolidated Results
A summary of net income (loss) by business segment with a reconciliation to net income attributable to Phillips 66 by business segment follows:
| | | Millions of Dollars | Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | | | | |
Midstream | $ | 85 |
| 75 |
| | 221 |
| 179 |
| $ | 202 |
| 96 |
| | 435 |
| 208 |
|
Chemicals | 121 |
| 101 |
| | 498 |
| 447 |
| 262 |
| 196 |
| | 494 |
| 377 |
|
Refining | 550 |
| 177 |
| | 1,033 |
| 412 |
| 910 |
| 224 |
| | 1,001 |
| 483 |
|
Marketing and Specialties | 208 |
| 267 |
| | 563 |
| 701 |
| 237 |
| 214 |
| | 421 |
| 355 |
|
Corporate and Other | (141 | ) | (109 | ) | | (407 | ) | (347 | ) | (207 | ) | (149 | ) | | (362 | ) | (279 | ) |
Net income | | 1,404 |
| 581 |
|
| 1,989 |
| 1,144 |
|
Less: net income attributable to noncontrolling interests | | 65 |
| 31 |
| | 126 |
| 59 |
|
Net income attributable to Phillips 66 | $ | 823 |
| 511 |
| | 1,908 |
| 1,392 |
| $ | 1,339 |
| 550 |
|
| 1,863 |
| 1,085 |
|
Earnings for Phillips 66Our earnings increased $312$789 million, or 61143 percent, in the thirdsecond quarter of 2017,2018, mainly reflecting:
Higher realized refining margins.
Improved earnings from equity affiliates in our Midstream segment.and Chemicals segments.
Lower income taxes due to the reduction of the U.S. federal corporate income tax rate beginning January 1, 2018, as a result of the U.S. Tax Cuts and Jobs Act (the Tax Act) enacted in December 2017.
These increases were partially offset by:
Higher interest and debt expense.
Higher net income attributable to noncontrolling interests due to contributions of assets to Phillips 66 Partners LP (Phillips 66 Partners) in the fourth quarter of 2017.
Our earnings increased $778 million, or 72 percent, in the six-month period of 2018, mainly reflecting:
Higher realized refining margins.
Improved earnings from equity affiliates in our Midstream and Chemicals segments.
Lower income taxes due to the reduction of the U.S. federal corporate income tax rate beginning January 1, 2018, as a result of the Tax Act enacted in December 2017.
Lower refining turnaround costs.
These increases were partially offset by:
Increased costs due to Hurricane Harvey.
Lower realized marketing margins.
Higher interest and debt expense.
Earnings for Phillips 66 increased $516 million, or 37 percent, in the nine-month period of 2017, mainly reflecting:
Higher realized refining margins.
RecognitionAbsence of a $261 million after-tax gain from the consolidation of Merey Sweeny, L.P. (MSLP).
Improved earnings from equity affiliates in our Midstream and Chemicals segments.
These increases were partially offset by:
2017.
Higher refining turnaround costs.
Lower realized marketing margins.net income attributable to noncontrolling interests due to contributions of assets to Phillips 66 Partners in the fourth quarter of 2017.
Higher interest and debt expense.
See the “Segment Results” section for additional information on our segment results.
Statement of Income Analysis
Sales and other operating revenues for the thirdsecond quarter and nine-monthsix-month period of 2017 both2018 increased 1920 percent and 12 percent, respectively, and purchased crude oil and products increased 2240 percent and 2630 percent, respectively. These increases wererespectively, mainly due to higher prices for petroleum products, crude oil and NGL. The increases in sales and other operating revenues in both periods were partially offset by a change in the presentation of excise taxes on sales of petroleum products resulting from our adoption of Financial Accounting Standard Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” on January 1, 2018. As part of our adoption of this ASU, prospectively from January 1, 2018, our presentation of excise taxes on sales of petroleum products changed to a net basis from a gross basis. As a result, the “Sales and other operating revenues” and “Taxes other than income taxes” lines on our consolidated statement of income for the second quarter and six-month period of 2018 are not presented on a comparable basis to prior year periods. See Note 2—Changes in Accounting Principles and Note 3—Sales and Other Operating Revenues, in the Notes to Consolidated Financial Statements, for further information on our adoption of this ASU and our presentation of excise taxes on sales of petroleum products, respectively.
Equity in earnings of affiliates increased 3661 percent and 41 percent in the thirdsecond quarter and 17 percent in the nine-monthsix-month period of 2017.2018, respectively. These increases were mainly due to increasedimproved equity earnings from WRB Refining LP (WRB), driven by higher refiningrealized margins, and improvedas well as higher equity earnings from equity affiliates in our Midstream segment. Additionally, during the nine-month period of 2017, higher earnings from our investment in CPChem contributed to the increase.and Chemicals segments. See the “Segment Results” section for additional information on Midstream and Chemicals earnings from equity affiliates.information.
Other income increased $460decreased $447 million in the nine-monthsix-month period of 2017.2018. We recognized a noncash, pre-tax gain of $423 million in the first quarter ofFebruary 2017 related to the consolidation of MSLP. See Note 5—Business Combinations, in the Notes to Consolidated Financial Statements, for additional information.
Operating expenses increased 7 percent in the third quarter and 15 percent in the nine-month period of 2017. These increases were mainly due to higher environmental expenses, transportation costs, hurricane-related costs and costs related to our employee benefit plans. In the third quarter, these increases were partially offset by lower refining turnaround costs. Additionally, higher refining turnaround costs contributed to the increase in operating costs during the nine-month period of 2017. See Note 15—Employee Benefit Plans, in the Notes to Consolidated Financial Statements, for more information.
Depreciation and amortization increased 15 percent in the third quarter and 13 percent in the nine-month period of 2017, reflecting higher depreciation from the Freeport LPG Export Terminal, which began operations in late 2016, and an increase in properties, plants and equipment.
Taxes other than income taxes decreased 597 percent in both the nine-monthsecond quarter and six-month period of 2017. This2018. The decrease was mainlyprimarily attributable to lowerthe change in our presentation of excise taxes on sales of petroleum products resulting from our U.K. operations as a resultadoption of ASU No. 2014-09 on January 1, 2018. See the sale of the Whitegate Refinery“Sales and related marketing assets in September 2016.other operating revenues” section above for further discussion.
Interest and debt expense increased 3826 percent and 22 percent in the thirdsecond quarter and 30 percent in the nine-monthsix-month period of 2017. These increases were mainly2018, respectively. The increase was due to higher average debt principal balances, reflecting our issuance of senior notes totaling $1,500 million in March 2018 and Phillips 66 Partners’ issuance of senior notes totaling $650 million in October 2017, as well as lower capitalized interestinterest.
Income tax expense increased 61 percent and 12 percent in the second quarter and six-month period of 2018, respectively, primarily due to the Freeport LPG Export Terminal beginning operations in late 2016.higher income before income taxes. These increases were partially offset by lower interest rates on debt issued in April 2017the reduction of the U.S. federal corporate income tax rate from 35 percent to repay $1,500 million21 percent beginning January 1, 2018, as a result of 2.95% Senior Notes that came due in the second quarter of 2017.
Net income attributable to noncontrolling interest increased $27 million in the nine-month period of 2017, reflecting the contribution of assets to Phillips 66 Partners during 2016.
Tax Act. See Note 20—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our provision for income taxestax expense and effective income tax rates.
Net income attributable to noncontrolling interests increased $34 million and $67 million in the second quarter and six-month period of 2018, respectively, reflecting the contribution of assets to Phillips 66 Partners in 2017.
Segment Results
Midstream
| | | Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| Millions of Dollars | | | | |
Net Income (Loss) Attributable to Phillips 66 | | | | | |
| | Millions of Dollars |
Net Income | | | | | |
Transportation | $ | 97 |
| 63 |
| | 204 |
| 200 |
| $ | 137 |
| 74 |
| | 273 |
| 152 |
|
NGL | (13 | ) | 3 |
| | (14 | ) | (25 | ) | |
NGL and Other | | 50 |
| 9 |
| | 123 |
| 26 |
|
DCP Midstream | 1 |
| 9 |
| | 31 |
| 4 |
| 15 |
| 13 |
| | 39 |
| 30 |
|
Total Midstream | $ | 85 |
| 75 |
| | 221 |
| 179 |
| $ | 202 |
| 96 |
|
| 435 |
| 208 |
|
| | | Thousands of Barrels Daily | Thousands of Barrels Daily |
Transportation Volumes | | | | | | |
Pipelines* | 3,447 |
| 3,495 |
| | 3,449 |
| 3,540 |
| 3,594 |
| 3,430 |
| | 3,501 |
| 3,449 |
|
Terminals | 2,675 |
| 2,417 |
| | 2,552 |
| 2,356 |
| 3,214 |
| 2,581 |
| | 2,942 |
| 2,489 |
|
Operating Statistics | | | | | | |
NGL fractionated** | 177 |
| 173 |
| | 176 |
| 170 |
| 227 |
| 177 |
| | 206 |
| 176 |
|
NGL extracted*** | 378 |
| 403 |
| | 362 |
| 400 |
| |
NGL production*** | | 430 |
| 367 |
| | 405 |
| 354 |
|
* Pipelines represent the sum of volumes transported through each separately tariffed pipeline segment, including our share of equity volumes from Yellowstone Pipe Line Company and Lake Charles Pipe Line Company.
** Excludes DCP Midstream.
*** Includes 100 percent of DCP Midstream’s volumes.
| | | Dollars Per Gallon | Dollars Per Gallon |
Weighted-Average NGL Price* | | | | | | | | | | |
DCP Midstream | $ | 0.62 |
| 0.45 |
| | 0.59 |
| 0.43 |
| $ | 0.76 |
| 0.55 |
| | 0.73 |
| 0.57 |
|
* Based on index prices from the Mont Belvieu and Conway market hubs that are weighted by NGL component and location mix. | |
* Based on index prices from the Mont Belvieu market hub, which are weighted by NGL component mix. | | * Based on index prices from the Mont Belvieu market hub, which are weighted by NGL component mix. |
The Midstream segment gathers, processes, transportsprovides crude oil and marketsrefined products transportation, terminaling and processing services, as well as natural gas;gas, NGL and transports, stores, fractionatesliquefied petroleum gas (LPG) transportation, storage, processing and markets NGLmarketing services, mainly in the United States. In addition, this segment transports crude oil and other feedstocks to our refineries and other locations, delivers refined and specialty products to market, and provides terminaling and storage services for crude oil and petroleum products. The segment also stores, refrigerates, and exports liquefied petroleum gas primarily to Asia. The MidstreamThis segment includes our master limited partnership (MLP), Phillips 66 Partners, LP, as well as our 50 percent equity investment in DCP Midstream.Midstream, which includes the operations of its MLP, DCP Midstream, LP (DCP Partners).
EarningsNet income from the Midstream segment increased $10$106 million in the thirdsecond quarter of 2018 and $42$227 million in the nine-monthsix-month period of 2017.2018.
Net income from our Transportation earningsbusiness increased $34$63 million in the thirdsecond quarter of 2017.2018 and $121 million in the six-month period of 2018. The improved earningsincreased results in both periods were mainly driven by a full quarter of operations ofhigher equity earnings from affiliates, including our joint ventures that own the Bakken Pipeline, which commenced commercial operations onin June 1, 2017, and increased revenue volumes from our consolidated assets.
Net income from our NGL and Other business increased $41 million in the second quarter of 2018 and $97 million in the six-month period of 2018. The increases in both periods were mainly due to higher volumes and equity earnings from affiliates, as well as our sharethe contribution of a settlement payment received by Rockies Express Pipeline LLC (REX) in connection with a breach of contract claim. These items were partially offset by higher earnings attributable to noncontrolling interests, reflecting the impact of transportation asset contributionsMSLP to Phillips 66 Partners in October 2016. Transportation earnings increased $4 million in the nine-month period of 2017, as the Bakken Pipeline and REX Pipeline items noted above were mostly offset by higher earnings attributable to noncontrolling interests and increased maintenance costs.2017.
Results from our NGL business were $16 million lower in the third quarter of 2017, primarily due to higher depreciation from the startup of the Freeport LPG Export Terminal in late 2016 and development expenses associated with new capital projects. NGL results improved $11 million in the nine-month period of 2017. The improved results reflect the Freeport LPG Export Terminal startup in late 2016, as well as improved NGL margins. These items were partially offset by higher earnings attributable to noncontrolling interests, as a result of asset contributions to Phillips 66 Partners.
Earnings from our investment in DCP Midstream decreased $8 million in the third quarter of 2017, primarily reflecting the impact of higher asset impairments in the 2017 period and a gain on an asset sale in the 2016 period. In addition, lower volumes and margins, including the impact of DCP Midstream’s hedging program, contributed to the decrease in earnings. EarningsNet income from our investment in DCP Midstream increased $27$2 million in the nine-monthsecond quarter of 2018 and $9 million in the six-month period of 2017, as2018. The increases in both periods were mainly due to the timing of incentive distribution income allocations from DCP Partners, higher margins more than offsetequity earnings from DCP Midstream’s affiliates and favorable impacts of the impact of lower volumes and the impairments and gain on sale noted above.
Effectivenew U.S. federal corporate income tax rate beginning January 1, 2017, DCP Midstream, LLC and its master limited partnership (then named DCP Midstream Partners, LP, subsequently renamed DCP Midstream, LP on January 11, 2017, and referred to herein as DCP Partners) closed a transaction in which DCP Midstream, LLC contributed subsidiaries owning all of its operating assets and its existing debt to DCP Partners, in exchange for approximately 31.1 million DCP Partners units. Following the transaction, we and our co-venturer retained our 50/50 investment in DCP Midstream, LLC and DCP Midstream, LLC retained its incentive distribution rights in DCP Partners, through its ownership of the general partner of DCP Partners, and held a 38 percent interest in DCP Partners. See the “Equity Affiliates” section of “Significant Sources of Capital” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on this transaction.2018, partially offset by unfavorable hedging results.
See the “Business Environment and Executive Overview” section for information on market factors impacting this quarter’s results.
Chemicals
|
| | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| Millions of Dollars |
| | | | | |
Net Income Attributable to Phillips 66 | $ | 121 |
| 101 |
| | 498 |
| 447 |
|
|
| | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | |
| Millions of Dollars |
| | | | | |
Net Income | $ | 262 |
| 196 |
| | 494 |
| 377 |
|
|
| | | | | | | | | |
| Millions of Pounds |
CPChem Externally Marketed Sales Volumes* | | | | | |
Olefins and Polyolefins (O&P) | 3,842 |
| 4,155 |
| | 11,995 |
| 12,296 |
|
Specialties, Aromatics and Styrenics (SA&S) | 1,095 |
| 1,284 |
| | 3,476 |
| 3,750 |
|
| 4,937 |
| 5,439 |
| | 15,471 |
| 16,046 |
|
* Includes 100 percent of CPChem’s outside sales of produced petrochemical products, as well as commission sales from equity affiliates. |
|
| | | | | | | | | |
| Millions of Pounds |
CPChem Externally Marketed Sales Volumes* | | | | | |
Olefins and Polyolefins | 4,738 |
| 4,137 |
| | 9,165 |
| 8,153 |
|
Specialties, Aromatics and Styrenics | 1,595 |
| 1,175 |
| | 2,608 |
| 2,381 |
|
| 6,333 |
| 5,312 |
|
| 11,773 |
| 10,534 |
|
* Represents 100 percent of CPChem’s outside sales of produced petrochemical products, as well as commission sales from equity affiliates. |
|
| | | | | | |
Olefins and Polyolefins Capacity Utilization (percent)* | 83 | % | 93 | | 90 | 93 |
* Revised to exclude polyethylene pipe operations. Prior periods recast for comparability. |
|
| | | | | | |
Olefins and Polyolefins Capacity Utilization (percent) | 95 | % | 98 | | 96 | 93 |
The Chemicals segment consists of our 50 percent interest in CPChem, which we account for under the equity method. CPChem uses NGL and other feedstocks to produce petrochemicals. These products are then marketed and sold or used as feedstocks to produce plastics and other chemicals. We structure our reporting of CPChem’s operations around two primary business lines:segments: Olefins and Polyolefins (O&P) and Specialties, Aromatics and Styrenics (SA&S).
EarningsNet income from the Chemicals segment increased $20$66 million in the thirdsecond quarter of 2018 and $51$117 million in the nine-monthsix-month period of 2017.2018. The increaseincreases in both 2017 periods primarily reflectsreflect the absencecommencement of an impairmentfull operations at its new U.S. Gulf Coast petrochemicals assets in the second quarter of $177 million due to lower demand and margin factors affecting an equity investment affiliate,2018, which resulted in an $89 million after-tax reduction in ourhigher sales volumes of polyethylene and ethylene, partially offset by lower capitalized interest. Additionally, higher equity earnings from CPChem inCPChem’s affiliates, and the third quarter and nine-month periodfavorable impacts of 2016. This increase was partially offsetthe new U.S. federal corporate income tax rate beginning January 1, 2018, contributed to the increases in both 2017 periods by lower margins and hurricane-related costs. In addition, the nine-month period of 2017 benefited from a gain CPChem recognized on the sale of its K-Resin® SBC business in the first quarter of 2017, and higher outside sales volumes.
As a result of Hurricane Harvey, CPChem’s Cedar Bayou facility in Baytown, Texas, experienced severe flooding, which caused it to shut down operations in the third quarter of 2017. We expect the units at this facility to resume operations, in stages, beginning in November and completing in December 2017. CPChem’s U.S. Gulf Coast Petrochemicals Project, which consists of a world-scale ethane cracker at Cedar Bayou and two polyethylene units at Old Ocean, Texas, was also impacted by the flooding. As a result, we expect construction on the ethane cracker to be completed and commissioning to begin in the first quarter of 2018.periods.
See the “Business Environment and Executive Overview” section for information on market factors impacting this quarter’s results.
Refining
| | | Millions of Dollars | Three Months Ended June 30 | | Six Months Ended June 30 |
| Three Months Ended September 30 | | Nine Months Ended September 30 | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
| | | | |
Net Income Attributable to Phillips 66 | | | | | |
| | Millions of Dollars |
Net Income (Loss) | | | | | |
Atlantic Basin/Europe | $ | 171 |
| 5 |
| | 228 |
| 41 |
| $ | 131 |
| 107 |
| | 58 |
| 57 |
|
Gulf Coast | 67 |
| 30 |
| | 448 |
| 103 |
| 275 |
| 53 |
| | 276 |
| 381 |
|
Central Corridor | 197 |
| 142 |
| | 286 |
| 217 |
| 392 |
| 27 |
| | 595 |
| 89 |
|
West Coast | 115 |
| — |
| | 71 |
| 51 |
| 112 |
| 37 |
| | 72 |
| (44 | ) |
Worldwide | $ | 550 |
| 177 |
| | 1,033 |
| 412 |
| $ | 910 |
| 224 |
| | 1,001 |
| 483 |
|
|
| | | | | | | | | | |
| Dollars Per Barrel |
Net Income (Loss) | | | | | |
Atlantic Basin/Europe | $ | 2.73 |
| 2.07 |
| | 0.67 |
| 0.62 |
|
Gulf Coast | 3.58 |
| 0.73 |
| | 1.89 |
| 2.74 |
|
Central Corridor | 14.96 |
| 1.21 |
| | 11.35 |
| 1.89 |
|
West Coast | 3.18 |
| 1.05 |
| | 1.06 |
| (0.70 | ) |
Worldwide | 4.89 |
| 1.23 |
| | 2.83 |
| 1.42 |
|
| | | | | |
Realized Refining Margins | | | | | |
Atlantic Basin/Europe | $ | 10.42 |
| 7.90 |
| | 8.96 |
| 7.20 |
|
Gulf Coast | 9.93 |
| 6.74 |
| | 8.43 |
| 7.36 |
|
Central Corridor | 17.51 |
| 9.96 |
| | 16.85 |
| 10.25 |
|
West Coast | 12.77 |
| 10.83 |
| | 10.61 |
| 10.44 |
|
Worldwide | 12.28 |
| 8.44 |
| | 10.88 |
| 8.49 |
|
|
| | | | | | | | | |
| Thousands of Barrels Daily |
| Three Months Ended June 30 | | Six Months Ended June 30 |
Operating Statistics | 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
Refining operations* | | | | | |
Atlantic Basin/Europe | | | | | |
Crude oil capacity | 537 |
| 520 |
| | 537 |
| 520 |
|
Crude oil processed | 495 |
| 533 |
| | 457 |
| 450 |
|
Capacity utilization (percent) | 92 | % | 103 |
| | 85 |
| 87 |
|
Refinery production | 532 |
| 575 |
| | 485 |
| 516 |
|
Gulf Coast | | | | | |
Crude oil capacity | 752 |
| 743 |
| | 752 |
| 743 |
|
Crude oil processed | 767 |
| 715 |
| | 732 |
| 691 |
|
Capacity utilization (percent) | 102 | % | 96 |
| | 97 |
| 93 |
|
Refinery production | 850 |
| 801 |
| | 813 |
| 775 |
|
Central Corridor | | | | | |
Crude oil capacity | 493 |
| 493 |
| | 493 |
| 493 |
|
Crude oil processed | 513 |
| 465 |
| | 486 |
| 468 |
|
Capacity utilization (percent) | 104 | % | 94 |
| | 99 |
| 95 |
|
Refinery production | 537 |
| 485 |
| | 508 |
| 489 |
|
West Coast | | | | | |
Crude oil capacity | 364 |
| 360 |
| | 364 |
| 360 |
|
Crude oil processed | 362 |
| 366 |
| | 351 |
| 323 |
|
Capacity utilization (percent) | 100 | % | 102 |
| | 97 |
| 90 |
|
Refinery production | 387 |
| 388 |
| | 378 |
| 347 |
|
Worldwide | | | | | |
Crude oil capacity | 2,146 |
| 2,116 |
| | 2,146 |
| 2,116 |
|
Crude oil processed | 2,137 |
| 2,079 |
| | 2,026 |
| 1,932 |
|
Capacity utilization (percent) | 100 | % | 98 |
| | 94 |
| 91 |
|
Refinery production | 2,306 |
| 2,249 |
|
| 2,184 |
| 2,127 |
|
* Includes our share of equity affiliates. | | | | | |
The following table presents ourRefining segment refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 13 refineries in the United States and Europe.
Net income for the Refining segment increased $686 million in the second quarter of 2018 and $518 million in the six-month period of 2018. The increases in both periods were primarily due to higher realized refining margin per barrel. Realizedmargins mainly driven by improved market crack spreads, configuration benefits and higher feedstock advantage, as well as lower turnaround costs. Additionally, results for the six-month period of 2017 reflect an after-tax gain of $261 million recognized on the consolidation of MSLP in February 2017.
See the “Business Environment and Executive Overview” section for information on market factors impacting this quarter’s results.
Our worldwide refining crude oil capacity utilization rate was 100 percent and 94 percent in the second quarter and six-month period of 2018, respectively, compared with 98 percent and 91 percent in the second quarter and six-month period of 2017, respectively. These increases were primarily attributable to lower planned maintenance and turnaround activity, and improved market conditions in 2018 as compared with 2017. These increases were partially offset by higher unplanned downtime.
Non-GAAP Reconciliations
Our realized refining margins measure the difference between a) sales and other operating revenues derived from the sale of petroleum products manufactured at our refineries and b) purchase costs of feedstocks, primarily crude oil, used to produce the petroleum products. The margins are adjusted to include our proportional share of our joint venture refineries’ realized margins, as calculated above, as well as to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized refining margins are converted to a per-barrel basis by dividing them by total refinery processed inputs (primarily crude oil) measured on a barrel basis, including our share of inputs processed by our joint venture refineries. Our realized refining margin per barrel is intended to be comparable with industry refining margins, which are known as “crack spreads.” As discussed in “Business Environment,” industry crack spreads measure the difference between market prices for refined petroleum products and crude oil. Realized refining margin per barrel calculated on a similar basis as industry crack spreads provides a useful measure of how well we performed relative to benchmark industry margins.
Under thegenerally accepted accounting principles generally accepted in the United States (GAAP), the performance measure most directly comparable to refining margin per barrel is the Refining segment’s “net income attributable to Phillips 66 per barrel.” Refining margin per barrel excludes items that are typically included in a manufacturer’s gross margin, such as depreciation and operating expenses, and other items used to determine net income, such as general and administrative expenses and income taxes. It also includes our proportional share of joint venture refineries’ realized margins and excludes special items. Because refining margin per barrel is calculated in this manner, and because refining margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. See the “Non-GAAP Reconciliations” section below forFollowing are reconciliations of net income attributable to Phillips 66 to realized refining margins.margins:
|
| | | | | | | | | | |
| Dollars Per Barrel |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
Net Income Attributable to Phillips 66 | | | | | |
Atlantic Basin/Europe | $ | 3.27 |
| 0.09 |
| | 1.58 |
| 0.24 |
|
Gulf Coast | 0.95 |
| 0.42 |
| | 2.14 |
| 0.49 |
|
Central Corridor | 8.37 |
| 5.92 |
| | 4.06 |
| 2.98 |
|
West Coast | 3.14 |
| — |
| | 0.71 |
| 0.51 |
|
Worldwide | 3.01 |
| 0.96 |
| | 1.97 |
| 0.74 |
|
| | | | | |
Realized Refining Margins | | | | | |
Atlantic Basin/Europe | $ | 10.02 |
| 5.04 |
| | 8.22 |
| 5.66 |
|
Gulf Coast | 7.26 |
| 5.47 |
| | 7.33 |
| 5.78 |
|
Central Corridor | 14.04 |
| 11.18 |
| | 11.55 |
| 9.10 |
|
West Coast | 12.95 |
| 9.07 |
| | 11.37 |
| 9.91 |
|
Worldwide | 10.49 |
| 7.23 |
| | 9.19 |
| 7.16 |
|
|
| | | | | | | | | | | |
| Millions of Dollars, Except as Indicated |
Realized Refining Margins | Atlantic Basin/ Europe |
| Gulf Coast |
| Central Corridor |
| West Coast |
| Worldwide |
|
| | | | | |
Three Months Ended June 30, 2018 | | | | | |
Net income | $ | 131 |
| 275 |
| 392 |
| 112 |
| 910 |
|
Plus: | | | | | |
Income tax expense | 33 |
| 91 |
| 129 |
| 27 |
| 280 |
|
Taxes other than income taxes | 15 |
| 23 |
| 9 |
| 25 |
| 72 |
|
Depreciation, amortization and impairments | 50 |
| 64 |
| 32 |
| 60 |
| 206 |
|
Selling, general and administrative expenses | 15 |
| 13 |
| 7 |
| 12 |
| 47 |
|
Operating expenses | 225 |
| 292 |
| 124 |
| 228 |
| 869 |
|
Equity in (earnings) losses of affiliates | 3 |
| 3 |
| (220 | ) | — |
| (214 | ) |
Other segment (income) expense, net | — |
| 3 |
| (8 | ) | (14 | ) | (19 | ) |
Proportional share of refining gross margins contributed by equity affiliates | 28 |
| — |
| 381 |
| — |
| 409 |
|
Realized refining margins | $ | 500 |
| 764 |
| 846 |
| 450 |
| 2,560 |
|
| | | | | |
Total processed inputs (thousands of barrels) | 47,978 |
| 76,875 |
| 26,209 |
| 35,195 |
| 186,257 |
|
Adjusted total processed inputs (thousands of barrels)* | 47,978 |
| 76,875 |
| 48,347 |
| 35,195 |
| 208,395 |
|
| | | | | |
Net income per barrel (dollars per barrel)** | $ | 2.73 |
| 3.58 |
| 14.96 |
| 3.18 |
| 4.89 |
|
Realized refining margins (dollars per barrel)*** | 10.42 |
| 9.93 |
| 17.51 |
| 12.77 |
| 12.28 |
|
| | | | | |
Three Months Ended June 30, 2017 | | | | | |
Net income | $ | 107 |
| 53 |
| 27 |
| 37 |
| 224 |
|
Plus: | | | | | |
Income tax expense | 13 |
| 33 |
| 15 |
| 22 |
| 83 |
|
Taxes other than income taxes | 13 |
| 23 |
| 13 |
| 21 |
| 70 |
|
Depreciation, amortization and impairments | 47 |
| 68 |
| 37 |
| 67 |
| 219 |
|
Selling, general and administrative expenses | 15 |
| 14 |
| 8 |
| 12 |
| 49 |
|
Operating expenses | 198 |
| 294 |
| 183 |
| 222 |
| 897 |
|
Equity in (earnings) losses of affiliates | 2 |
| 2 |
| (26 | ) | — |
| (22 | ) |
Other segment (income) expense, net | (3 | ) | 1 |
| 4 |
| 1 |
| 3 |
|
Proportional share of refining gross margins contributed by equity affiliates | 16 |
| — |
| 175 |
| — |
| 191 |
|
Realized refining margins | $ | 408 |
| 488 |
| 436 |
| 382 |
| 1,714 |
|
| | | | | |
Total processed inputs (thousands of barrels) | 51,749 |
| 72,346 |
| 22,331 |
| 35,304 |
| 181,730 |
|
Adjusted total processed inputs (thousands of barrels)* | 51,749 |
| 72,346 |
| 43,718 |
| 35,304 |
| 203,117 |
|
| | | | | |
Net income per barrel (dollars per barrel)** | $ | 2.07 |
| 0.73 |
| 1.21 |
| 1.05 |
| 1.23 |
|
Realized refining margins (dollars per barrel)*** | 7.90 |
| 6.74 |
| 9.96 |
| 10.83 |
| 8.44 |
|
* Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate. |
** Net income divided by total processed inputs. |
*** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding. |
|
| | | | | | | | | | | |
| Millions of Dollars, Except as Indicated |
Realized Refining Margins | Atlantic Basin/ Europe |
| Gulf Coast |
| Central Corridor |
| West Coast |
| Worldwide |
|
| | | | | |
Six Months Ended June 30, 2018 | | | | | |
Net income | $ | 58 |
| 276 |
| 595 |
| 72 |
| 1,001 |
|
Plus: | | | | | |
Income tax expense (benefit) | (2 | ) | 90 |
| 198 |
| 15 |
| 301 |
|
Taxes other than income taxes | 30 |
| 48 |
| 21 |
| 50 |
| 149 |
|
Depreciation, amortization and impairments | 102 |
| 130 |
| 67 |
| 118 |
| 417 |
|
Selling, general and administrative expenses | 28 |
| 23 |
| 14 |
| 23 |
| 88 |
|
Operating expenses | 510 |
| 658 |
| 232 |
| 458 |
| 1,858 |
|
Equity in (earnings) losses of affiliates | 5 |
| 4 |
| (159 | ) | — |
| (150 | ) |
Other segment (income) expense, net | (7 | ) | 2 |
| (12 | ) | (11 | ) | (28 | ) |
Proportional share of refining gross margins contributed by equity affiliates | 57 |
| — |
| 579 |
| — |
| 636 |
|
Realized refining margins | $ | 781 |
| 1,231 |
| 1,535 |
| 725 |
| 4,272 |
|
| | | | | |
Total processed inputs (thousands of barrels) | 87,196 |
| 146,082 |
| 52,445 |
| 68,246 |
| 353,969 |
|
Adjusted total processed inputs (thousands of barrels)* | 87,196 |
| 146,082 |
| 91,112 |
| 68,246 |
| 392,636 |
|
| | | | | |
Net income per barrel (dollars per barrel)** | $ | 0.67 |
| 1.89 |
| 11.35 |
| 1.06 |
| 2.83 |
|
Realized refining margins (dollars per barrel)*** | 8.96 |
| 8.43 |
| 16.85 |
| 10.61 |
| 10.88 |
|
|
| | | | | | | | | | | |
Six Months Ended June 30, 2017 | | | | | |
Net income (loss) | $ | 57 |
| 381 |
| 89 |
| (44 | ) | 483 |
|
Plus: | | | | | |
Income tax expense (benefit) | (35 | ) | 226 |
| 50 |
| (27 | ) | 214 |
|
Taxes other than income taxes | 29 |
| 50 |
| 27 |
| 41 |
| 147 |
|
Depreciation, amortization and impairments | 96 |
| 135 |
| 64 |
| 125 |
| 420 |
|
Selling, general and administrative expenses | 29 |
| 26 |
| 16 |
| 23 |
| 94 |
|
Operating expenses | 455 |
| 632 |
| 319 |
| 535 |
| 1,941 |
|
Equity in (earnings) losses of affiliates | 6 |
| (5 | ) | (17 | ) | — |
| (16 | ) |
Other segment (income) expense, net | (6 | ) | (421 | ) | 6 |
| 2 |
| (419 | ) |
Proportional share of refining gross margins contributed by equity affiliates | 30 |
| 1 |
| 344 |
| — |
| 375 |
|
Realized refining margins | $ | 661 |
| 1,025 |
| 898 |
| 655 |
| 3,239 |
|
| | | | | |
Total processed inputs (thousands of barrels) | 91,865 |
| 139,194 |
| 46,978 |
| 62,718 |
| 340,755 |
|
Adjusted total processed inputs (thousands of barrels)* | 91,865 |
| 139,194 |
| 87,639 |
| 62,718 |
| 381,416 |
|
| | | | | |
Net income (loss) per barrel (dollars per barrel)** | $ | 0.62 |
| 2.74 |
| 1.89 |
| (0.70 | ) | 1.42 |
|
Realized refining margins (dollars per barrel)*** | 7.20 |
| 7.36 |
| 10.25 |
| 10.44 |
| 8.49 |
|
* Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate. |
** Net income (loss) divided by total processed inputs. |
*** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding. |
Marketing and Specialties
|
| | | | | | | | | |
| Thousands of Barrels Daily |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
Operating Statistics | 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
Refining operations* | | | | | |
Atlantic Basin/Europe | | | | | |
Crude oil capacity | 520 |
| 571 |
| | 520 |
| 582 |
|
Crude oil processed | 536 |
| 573 |
| | 479 |
| 581 |
|
Capacity utilization (percent) | 103 | % | 100 |
| | 92 |
| 100 |
|
Refinery production | 574 |
| 611 |
| | 536 |
| 617 |
|
Gulf Coast | | | |
|
|
Crude oil capacity | 743 |
| 743 |
| | 743 |
| 743 |
|
Crude oil processed | 694 |
| 701 |
| | 692 |
| 706 |
|
Capacity utilization (percent) | 93 | % | 94 |
| | 93 |
| 95 |
|
Refinery production | 771 |
| 776 |
| | 774 |
| 783 |
|
Central Corridor | | | |
|
|
Crude oil capacity | 493 |
| 493 |
| | 493 |
| 493 |
|
Crude oil processed | 480 |
| 487 |
| | 472 |
| 486 |
|
Capacity utilization (percent) | 97 | % | 99 |
| | 96 |
| 99 |
|
Refinery production | 503 |
| 510 |
| | 493 |
| 508 |
|
West Coast | | | |
|
|
Crude oil capacity | 360 |
| 360 |
| | 360 |
| 360 |
|
Crude oil processed | 368 |
| 344 |
| | 338 |
| 339 |
|
Capacity utilization (percent) | 102 | % | 96 |
| | 94 |
| 94 |
|
Refinery production | 398 |
| 374 |
| | 364 |
| 365 |
|
Worldwide | | | |
|
|
Crude oil capacity | 2,116 |
| 2,167 |
| | 2,116 |
| 2,178 |
|
Crude oil processed | 2,078 |
| 2,105 |
| | 1,981 |
| 2,112 |
|
Capacity utilization (percent) | 98 | % | 97 |
| | 94 |
| 97 |
|
Refinery production | 2,246 |
| 2,271 |
| | 2,167 |
| 2,273 |
|
* Includes our share of equity affiliates. | | | | | |
|
| | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
| | | | | |
| Millions of Dollars |
Net Income | | | | | |
Marketing and Other | $ | 187 |
| 181 |
| | 326 |
| 305 |
|
Specialties | 50 |
| 33 |
| | 95 |
| 50 |
|
Total Marketing and Specialties | $ | 237 |
| 214 |
| | 421 |
| 355 |
|
|
| | | | | | | | | | |
| Dollars Per Barrel |
Net Income | | | | | |
U.S. | $ | 0.79 |
| 0.75 |
| | 0.72 |
| 0.64 |
|
International | 2.67 |
| 2.31 |
| | 1.99 |
| 1.95 |
|
| | | | | |
Realized Marketing Fuel Margins | | | | | |
U.S. | $ | 1.61 |
| 1.74 |
| | 1.51 |
| 1.61 |
|
International | 5.25 |
| 4.95 |
| | 4.29 |
| 4.33 |
|
|
| | | | | | | | | | |
| Dollars Per Gallon |
U.S. Average Wholesale Prices* | | | | | |
Gasoline | $ | 2.33 |
| 1.85 |
| | 2.19 |
| 1.83 |
|
Distillates | 2.37 |
| 1.71 |
| | 2.25 |
| 1.73 |
|
* On third-party branded petroleum product sales, excluding excise taxes. | | | | | |
|
| | | | | | | | | |
| Thousands of Barrels Daily |
Marketing Petroleum Products Sales Volumes | | | | | |
Gasoline | 1,196 |
| 1,275 |
| | 1,150 |
| 1,215 |
|
Distillates | 1,012 |
| 912 |
| | 946 |
| 874 |
|
Other | 17 |
| 18 |
| | 19 |
| 16 |
|
Total | 2,225 |
| 2,205 |
| | 2,115 |
| 2,105 |
|
The RefiningM&S segment purchases sellsfor resale and refines crude oil and other feedstocks intomarkets refined petroleum products (such as gasoline, distillates and aviation fuels) at 13 refineries,, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products (such as base oils and lubricants), as well as power generation operations.
Earnings for the RefiningThe M&S segment net income increased $373$23 million in the thirdsecond quarter of 2017.2018 and $66 million in the six-month period of 2018. The increase wasincreases in both periods were primarily due to benefits from the retroactive extension of the 2017 biodiesel blender’s tax incentive in early 2018, favorable impacts of the new U.S. federal corporate income tax rate beginning January 1, 2018, and higher realized refining margins resulting from improved market crack spreadsfor specialty products and secondary product margins, partially offset by lower feedstock advantage and clean product differentials. Lower turnaround costs also contributed to the increase in earnings.
Earnings for the Refining segment increased $621 million in the nine-month period of 2017. The increase in earnings was mainly due to higher realized refining margins and a gain recognized on the consolidation of MSLP.services. These increases were partially offset by higher turnaround costs. See Note 5—Business Combinations, in the Notes to Consolidated Financial Statements, for additional information on the consolidation of MSLP.lower U.S. realized marketing margins.
See the “Business Environment and Executive Overview” section for information on marketing fuel margins and other market factors impacting this quarter’s results.
Our worldwide refining crude oil capacity utilization rate was 98 percent and 94 percent in the third quarter and nine-month period of 2017, respectively, compared with 97 percent in both the third quarter and nine-month period of 2016. The increase in the third quarter of 2017 was primarily attributable to improved market conditions, partially offset by hurricane-related downtime. The decrease in the nine-month period of 2017 was primarily due to higher turnaround activities in 2017 as compared with 2016.Non-GAAP Reconciliations
|
| | | | | | | | | | | |
| Millions of Dollars, Except as Indicated |
Realized Refining Margins | Atlantic Basin/Europe |
| Gulf Coast |
| Central Corridor |
| West Coast |
| Worldwide |
|
| | | | | |
Three Months Ended September 30, 2017 | | | | | |
Net income attributable to Phillips 66 | $ | 171 |
| 67 |
| 197 |
| 115 |
| 550 |
|
Plus (Less): | | | | | |
Provision for income taxes | 76 |
| 42 |
| 120 |
| 75 |
| 313 |
|
Taxes other than income taxes | 14 |
| 24 |
| 9 |
| — |
| 47 |
|
Depreciation, amortization and impairments | 47 |
| 68 |
| 32 |
| 58 |
| 205 |
|
Selling, general and administrative expenses | 16 |
| 14 |
| 8 |
| 12 |
| 50 |
|
Operating expenses | 185 |
| 298 |
| 123 |
| 212 |
| 818 |
|
Equity in (earnings) losses of affiliates | 3 |
| (1 | ) | (146 | ) | — |
| (144 | ) |
Other segment (income) expense, net | (2 | ) | — |
| 8 |
| 2 |
| 8 |
|
Proportional share of refining gross margins contributed by equity affiliates | 15 |
| — |
| 290 |
| — |
| 305 |
|
Realized refining margins | $ | 525 |
| 512 |
| 641 |
| 474 |
| 2,152 |
|
| | | | | |
Total processed inputs (thousands of barrels) | 52,306 |
| 70,544 |
| 23,525 |
| 36,635 |
| 183,010 |
|
Adjusted total processed inputs (thousands of barrels)* | 52,306 |
| 70,544 |
| 45,733 |
| 36,635 |
| 205,218 |
|
| | | | | |
Net income attributable to Phillips 66 per barrel (dollars per barrel)** | $ | 3.27 |
| 0.95 |
| 8.37 |
| 3.14 |
| 3.01 |
|
Realized refining margins (dollars per barrel)*** | 10.02 |
| 7.26 |
| 14.04 |
| 12.95 |
| 10.49 |
|
| | | | | |
Three Months Ended September 30, 2016 | | | | | |
Net income attributable to Phillips 66 | $ | 5 |
| 30 |
| 142 |
| — |
| 177 |
|
Plus (Less): | | | | | |
Provision (benefit) for income taxes | (1 | ) | 21 |
| 78 |
| (1 | ) | 97 |
|
Taxes other than income taxes | 13 |
| 12 |
| 7 |
| 20 |
| 52 |
|
Depreciation, amortization and impairments | 46 |
| 58 |
| 26 |
| 58 |
| 188 |
|
Selling, general and administrative expenses | 16 |
| 14 |
| 8 |
| 12 |
| 50 |
|
Operating expenses | 199 |
| 330 |
| 118 |
| 221 |
| 868 |
|
Equity in (earnings) losses of affiliates | 2 |
| (8 | ) | (62 | ) | — |
| (68 | ) |
Other segment (income) expense, net | (12 | ) | — |
| 2 |
| — |
| (10 | ) |
Proportional share of refining gross margins contributed by equity affiliates | 14 |
| 1 |
| 199 |
| — |
| 214 |
|
Special items: | | | | |
|
Pending claims and settlements | — |
| (70 | ) | — |
| — |
| (70 | ) |
Realized refining margins | $ | 282 |
| 388 |
| 518 |
| 310 |
| 1,498 |
|
| | | | |
|
Total processed inputs (thousands of barrels) | 55,854 |
| 70,814 |
| 23,977 |
| 34,251 |
| 184,896 |
|
Adjusted total processed inputs (thousands of barrels)* | 55,854 |
| 70,814 |
| 46,420 |
| 34,251 |
| 207,339 |
|
| | | | | |
Net income attributable to Phillips 66 per barrel (dollars per barrel)** | $ | 0.09 |
| 0.42 |
| 5.92 |
| — |
| 0.96 |
|
Realized refining margins (dollars per barrel)*** | 5.04 |
| 5.47 |
| 11.18 |
| 9.07 |
| 7.23 |
|
* Adjusted total processed inputs include our proportional share of processed inputs of equity affiliates. |
** Net income attributable to Phillips 66 divided by total processed inputs. |
*** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding. |
|
| | | | | | | | | | | |
| Millions of Dollars, Except as Indicated |
Realized Refining Margins | Atlantic Basin/Europe |
| Gulf Coast |
| Central Corridor |
| West Coast |
| Worldwide |
|
| | | | | |
Nine Months Ended September 30, 2017 | | | | | |
Net income attributable to Phillips 66 | $ | 228 |
| 448 |
| 286 |
| 71 |
| 1,033 |
|
Plus (Less): | | | | | |
Provision for income taxes | 41 |
| 268 |
| 170 |
| 48 |
| 527 |
|
Taxes other than income taxes | 43 |
| 74 |
| 36 |
| 41 |
| 194 |
|
Depreciation, amortization and impairments | 143 |
| 203 |
| 96 |
| 183 |
| 625 |
|
Selling, general and administrative expenses | 45 |
| 40 |
| 24 |
| 35 |
| 144 |
|
Operating expenses | 640 |
| 930 |
| 442 |
| 747 |
| 2,759 |
|
Equity in (earnings) losses of affiliates | 9 |
| (6 | ) | (163 | ) | — |
| (160 | ) |
Other segment (income) expense, net | (8 | ) | (421 | ) | 14 |
| 4 |
| (411 | ) |
Proportional share of refining gross margins contributed by equity affiliates | 45 |
| 1 |
| 634 |
| — |
| 680 |
|
Realized refining margins | $ | 1,186 |
| 1,537 |
| 1,539 |
| 1,129 |
| 5,391 |
|
| | | | | |
Total processed inputs (thousands of barrels) | 144,171 |
| 209,738 |
| 70,503 |
| 99,353 |
| 523,765 |
|
Adjusted total processed inputs (thousands of barrels)* | 144,171 |
| 209,738 |
| 133,372 |
| 99,353 |
| 586,634 |
|
| | | | | |
Net income attributable to Phillips 66 per barrel (dollars per barrel)** | $ | 1.58 |
| 2.14 |
| 4.06 |
| 0.71 |
| 1.97 |
|
Realized refining margins (dollars per barrel)*** | 8.22 |
| 7.33 |
| 11.55 |
| 11.37 |
| 9.19 |
|
|
| | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | |
Net income attributable to Phillips 66 | $ | 41 |
| 103 |
| 217 |
| 51 |
| 412 |
|
Plus (Less): | | | | | |
Provision (benefit) for income taxes | (20 | ) | 62 |
| 131 |
| 23 |
| 196 |
|
Taxes other than income taxes | 45 |
| 56 |
| 32 |
| 61 |
| 194 |
|
Depreciation, amortization and impairments | 147 |
| 173 |
| 78 |
| 172 |
| 570 |
|
Selling, general and administrative expenses | 47 |
| 36 |
| 23 |
| 35 |
| 141 |
|
Operating expenses | 627 |
| 905 |
| 336 |
| 650 |
| 2,518 |
|
Equity in (earnings) losses of affiliates | 6 |
| (33 | ) | (112 | ) | — |
| (139 | ) |
Other segment (income) expense, net | (15 | ) | 1 |
| (1 | ) | (4 | ) | (19 | ) |
Proportional share of refining gross margins contributed by equity affiliates | 45 |
| (5 | ) | 550 |
| — |
| 590 |
|
Special items: | | | | | |
Pending claims and settlements | — |
| (70 | ) | — |
| — |
| (70 | ) |
Recognition of deferred logistics commitments | 30 |
| — |
| — |
| — |
| 30 |
|
Realized refining margins | $ | 953 |
| 1,228 |
| 1,254 |
| 988 |
| 4,423 |
|
| | | | | |
Total processed inputs (thousands of barrels) | 168,086 |
| 212,287 |
| 72,838 |
| 99,920 |
| 553,131 |
|
Adjusted total processed inputs (thousands of barrels)* | 168,086 |
| 212,287 |
| 137,833 |
| 99,920 |
| 618,126 |
|
| | | | | |
Net income attributable to Phillips 66 per barrel (dollars per barrel)** | $ | 0.24 |
| 0.49 |
| 2.98 |
| 0.51 |
| 0.74 |
|
Realized refining margins (dollars per barrel)*** | 5.66 |
| 5.78 |
| 9.10 |
| 9.91 |
| 7.16 |
|
* Adjusted total processed inputs include our proportional share of processed inputs of equity affiliates. |
** Net income attributable to Phillips 66 divided by total processed inputs. |
*** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding. |
Marketing and Specialties
|
| | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
Net Income Attributable to Phillips 66 | | | | | |
Marketing and Other | $ | 160 |
| 228 |
| | 465 |
| 589 |
|
Specialties | 48 |
| 39 |
| | 98 |
| 112 |
|
Total Marketing and Specialties | $ | 208 |
| 267 |
| | 563 |
| 701 |
|
The following table presents ourOur realized marketing fuel margin per barrel. Realized marketing fuel margins measure the difference between a) sales and other operating revenues derived from the sale of fuels in our Marketing and SpecialtiesM&S segment and b) purchase costs of those fuels. These margins are converted to a per-barrel basis by dividing them by sales volumes measured on a barrel basis. Marketing fuel margin per barrel demonstrates the value uplift our marketing operations provide by optimizing the placement and ultimate sale of our refineries’ fuel production.
Within the Marketing and SpecialtiesM&S segment, the GAAP performance measure most directly comparable to marketing fuel margin per barrel is the marketing business’ “net income attributable to Phillips 66 per barrel.” Marketing fuel margin per barrel excludes items that are typically included in gross margin, such as depreciation and operating expenses, and other items used to determine net income, such as general and administrative expenses and income taxes. Because marketing fuel margin per barrel excludes these items, and because marketing fuel margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. See the “Non-GAAP Reconciliations” section below forFollowing are reconciliations of net income attributable to Phillips 66 to realized marketing fuel margins.margins:
|
| | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| Dollars Per Barrel |
Net Income Attributable to Phillips 66 | | | | | |
U.S. | $ | 0.65 |
| 0.86 |
| | 0.64 |
| 0.83 |
|
International | 1.79 |
| 2.77 |
| | 1.90 |
| 2.01 |
|
| | | | | |
Realized Marketing Fuel Margins | | | | | |
U.S. | $ | 1.63 |
| 1.88 |
| | 1.62 |
| 1.83 |
|
International | 4.45 |
| 5.19 |
| | 4.37 |
| 4.16 |
|
|
| | | | | | | | | | |
| Millions of Dollars, Except as Indicated |
| Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| U.S. |
| International |
| | U.S. |
| International |
|
Realized Marketing Fuel Margins | | | | | |
Net income | $ | 140 |
| 66 |
| | 132 |
| 56 |
|
Plus: | | | | | |
Income tax expense | 47 |
| 16 |
| | 79 |
| 19 |
|
Taxes other than income taxes* | 3 |
| 2 |
| | 1,375 |
| 1,881 |
|
Depreciation and amortization | 3 |
| 18 |
| | 3 |
| 16 |
|
Selling, general and administrative expenses | 193 |
| 71 |
| | 193 |
| 63 |
|
Equity in earnings of affiliates | (2 | ) | (25 | ) | | (2 | ) | (22 | ) |
Other operating revenues* | (98 | ) | (6 | ) | | (1,459 | ) | (1,883 | ) |
Other segment (income) expense, net | — |
| 2 |
| | (14 | ) | 1 |
|
Marketing margins | 286 |
| 144 |
|
| 307 |
| 131 |
|
Less: margin for non-fuel related sales | — |
| 14 |
| | — |
| 11 |
|
Realized marketing fuel margins | $ | 286 |
| 130 |
|
| 307 |
| 120 |
|
| | | | | |
Total fuel sales volumes (thousands of barrels) | 177,725 |
| 24,717 |
| | 176,419 |
| 24,229 |
|
| | | | | |
Net income per barrel (dollars per barrel) | $ | 0.79 |
| 2.67 |
| | 0.75 |
| 2.31 |
|
Realized marketing fuel margins (dollars per barrel)** | 1.61 |
| 5.25 |
| | 1.74 |
| 4.95 |
|
* Includes excise taxes on sales of petroleum products for periods prior to the adoption of ASU No. 2014-09 on January 1, 2018. See Note 2—Changes in Accounting Principles, in the Notes to Consolidated Financial Statements, for further information on our adoption of this ASU. Other operating revenues also includes other non-fuel revenues. |
** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding.
|
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | |
| Dollars Per Gallon |
U.S. Average Wholesale Prices* | | | | | |
Gasoline | $ | 1.89 |
| 1.69 |
| | 1.85 |
| 1.60 |
|
Distillates | 1.85 |
| 1.60 |
| | 1.77 |
| 1.43 |
|
* On third-party branded petroleum product sales, excluding excise taxes. | | | | | |
|
| | | | | | | | | |
| Thousands of Barrels Daily |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
Marketing Petroleum Products Sales Volumes | | | | | |
Gasoline | 1,272 |
| 1,247 |
| | 1,235 |
| 1,228 |
|
Distillates | 946 |
| 969 |
| | 898 |
| 949 |
|
Other products | 18 |
| 17 |
| | 17 |
| 17 |
|
Total | 2,236 |
| 2,233 |
| | 2,150 |
| 2,194 |
|
The M&S segment purchases for resale and markets refined petroleum products (such as gasoline, distillates and aviation fuels), mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products (such as base oils and lubricants), as well as power generation operations.
The M&S segment earnings decreased $59 million in the third quarter and $138 million in the nine-month period of 2017. The decreases were primarily due to lower realized marketing margins. In addition, the nine-month period results reflected lower equity earnings due to increased turnaround activities and unplanned outages at Excel Paralubes, as well as the absence of biodiesel tax credits recognized in 2016.
See the “Business Environment and Executive Overview” section for information on marketing fuel margins and other market factors impacting this quarter’s results.
Non-GAAP Reconciliations
| | | Millions of Dollars, Except as Indicated | Millions of Dollars, Except as Indicated |
| U.S. |
| International |
| | U.S. |
| International |
| Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | U.S. |
| International |
| | U.S. |
| International |
|
Realized Marketing Fuel Margins | | | | | | | | |
| | | | | |
Net income attributable to Phillips 66 | $ | 118 |
| 44 |
| | 153 |
| 75 |
| |
Plus (Less): | | | | | |
Provision for income taxes | 73 |
| 14 |
| | 90 |
| 23 |
| |
Taxes other than income taxes | 1,409 |
| 1,970 |
| | 1,330 |
| 2,019 |
| |
Net income | | $ | 239 |
| 98 |
| | 213 |
| 94 |
|
Plus: | | | | | |
Income tax expense | | 80 |
| 21 |
| | 127 |
| 29 |
|
Taxes other than income taxes* | | (7 | ) | — |
| | 2,653 |
| 3,637 |
|
Depreciation and amortization | 3 |
| 17 |
| | 3 |
| 15 |
| 7 |
| 36 |
| | 7 |
| 31 |
|
Selling, general and administrative expenses | 193 |
| 70 |
| | 185 |
| 66 |
| 369 |
| 141 |
| | 367 |
| 123 |
|
Equity in earnings of affiliates | (2 | ) | (22 | ) | | (1 | ) | (21 | ) | (4 | ) | (43 | ) | | (2 | ) | (41 | ) |
Other operating revenues* | (1,499 | ) | (1,973 | ) | | (1,425 | ) | (2,024 | ) | (182 | ) | (13 | ) | | (2,813 | ) | (3,643 | ) |
Other segment income, net | — |
| (1 | ) | | — |
| — |
| — |
| (3 | ) | | (15 | ) | — |
|
Marketing margins | 295 |
| 119 |
|
| 335 |
| 153 |
| 502 |
| 237 |
|
| 537 |
| 230 |
|
Less: margin for non-fuel related sales | — |
| (10 | ) | | — |
| (12 | ) | — |
| 26 |
| | — |
| 22 |
|
Realized marketing fuel margins | $ | 295 |
| 109 |
|
| 335 |
| 141 |
| $ | 502 |
| 211 |
|
| 537 |
| 208 |
|
| | | | | | | | |
Total fuel sales volumes (thousands of barrels) | 181,110 |
| 24,596 |
| | 178,343 |
| 27,124 |
| 333,505 |
| 49,251 |
| | 332,967 |
| 48,114 |
|
| | | | | | | | |
Net income attributable to Phillips 66 per barrel (dollars per barrel) | $ | 0.65 |
| 1.79 |
| | 0.86 |
| 2.77 |
| |
Net income per barrel (dollars per barrel) | | $ | 0.72 |
| 1.99 |
| | 0.64 |
| 1.95 |
|
Realized marketing fuel margins (dollars per barrel)** | 1.63 |
| 4.45 |
| | 1.88 |
| 5.19 |
| 1.51 |
| 4.29 |
| | 1.61 |
| 4.33 |
|
| | | | | |
| Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | |
| | | | | |
Net income attributable to Phillips 66 | $ | 331 |
| 138 |
| | 430 |
| 165 |
| |
Plus (Less): | | | | | |
Provision for income taxes | 200 |
| 43 |
| | 252 |
| 46 |
| |
Taxes other than income taxes | 4,062 |
| 5,607 |
| | 3,909 |
| 6,287 |
| |
Depreciation and amortization | 10 |
| 48 |
| | 9 |
| 46 |
| |
Selling, general and administrative expenses | 560 |
| 193 |
| | 526 |
| 193 |
| |
Equity in earnings of affiliates | (4 | ) | (63 | ) | | (4 | ) | (56 | ) | |
Other operating revenues* | (4,312 | ) | (5,616 | ) | | (4,171 | ) | (6,307 | ) | |
Other segment (income) expense, net | (15 | ) | (1 | ) | | — |
| 2 |
| |
Marketing margins | 832 |
| 349 |
|
| 951 |
| 376 |
| |
Less: margin for non-fuel related sales | — |
| (32 | ) | | — |
| (34 | ) | |
Realized marketing fuel margins | $ | 832 |
| 317 |
|
| 951 |
| 342 |
| |
| | | | | |
Total fuel sales volumes (thousands of barrels) | 514,077 |
| 72,710 |
| | 519,129 |
| 82,058 |
| |
| | | | | |
Net income attributable to Phillips 66 per barrel (dollars per barrel) | $ | 0.64 |
| 1.90 |
| | 0.83 |
| 2.01 |
| |
Realized marketing fuel margins (dollars per barrel)** | 1.62 |
| 4.37 |
| | 1.83 |
| 4.16 |
| |
* Primarily excise taxes and other non-fuel revenues. | |
* Includes excise taxes on sales of petroleum products for periods prior to the adoption of ASU No. 2014-09 on January 1, 2018. See Note 2—Changes in Accounting Principles, in the Notes to Consolidated Financial Statements, for further information on our adoption of this ASU. Other operating revenues also includes other non-fuel revenues. | | * Includes excise taxes on sales of petroleum products for periods prior to the adoption of ASU No. 2014-09 on January 1, 2018. See Note 2—Changes in Accounting Principles, in the Notes to Consolidated Financial Statements, for further information on our adoption of this ASU. Other operating revenues also includes other non-fuel revenues. |
** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding.
| ** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding.
| ** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding.
|
Corporate and Other
| | | Millions of Dollars | Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
| 2018 |
| 2017 |
| | 2018 |
| 2017 |
|
Net Loss Attributable to Phillips 66 | | | | | |
Net interest | $ | (68 | ) | (49 | ) | | (198 | ) | (155 | ) | |
Net Loss | | | | | |
Net interest expense | | $ | (101 | ) | (65 | ) | | (190 | ) | (130 | ) |
Corporate general and administrative expenses | (45 | ) | (39 | ) | | (131 | ) | (121 | ) | (58 | ) | (47 | ) | | (105 | ) | (86 | ) |
Technology | (16 | ) | (15 | ) | | (45 | ) | (43 | ) | (17 | ) | (14 | ) | | (35 | ) | (29 | ) |
U.S. tax reform | | (24 | ) | — |
| | (17 | ) | — |
|
Other | (12 | ) | (6 | ) | | (33 | ) | (28 | ) | (7 | ) | (23 | ) | | (15 | ) | (34 | ) |
Total Corporate and Other | $ | (141 | ) | (109 | ) | | (407 | ) | (347 | ) | $ | (207 | ) | (149 | ) |
| (362 | ) | (279 | ) |
Net interest consists of interest and financing expense, net of interest income and capitalized interest. Net interest increased in the thirdsecond quarter and nine-monthsix-month period of 2017,2018, mainly due to lower capitalized interest and higher interest expense driven by higher average debt principal balances, reflecting our issuance of senior notes totaling $1,500 million in March 2018 and Phillips 66 Partners’ debt issuance of senior notes totaling $650 million in October 2016.2017; lower capitalized interest; and impacts of the new U.S. federal corporate income tax rate beginning January 1, 2018.
Higher pension settlement expense contributedDuring the second quarter and six-month period of 2018, Corporate and Other also includes one-time impacts related to the increaseenactment of the Tax Act in Corporate generalDecember 2017, totaling $24 million and administrative expenses in both 2017 periods.
The category “Other” includes certain$17 million, respectively. These one-time impacts related to the Tax Act are comprised of adjustments to the provisional deemed repatriation income tax expenses, environmental costs associated with sites no longerexpense and deferred income tax revaluation benefit recorded in operation, foreign currency transaction gains and losses andDecember 2017, income tax benefits recorded by equity affiliates, as well as other costs not directly associated with an operating segment. The increase in costs duringindirect income tax effects of the third quarter of 2017 was primarily due to the accrual of environmental-related indemnities associated with a previously sold refinery, partially offset by favorable tax impacts.
Tax Act.
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
| | | Millions of Dollars Except as Indicated | Millions of Dollars, Except as Indicated |
| September 30 2017 |
| | December 31 2016 |
| June 30 2018 |
| | December 31 2017 |
|
| | | | | | |
Cash and cash equivalents | $ | 1,547 |
| | 2,711 |
| $ | 1,884 |
| | 3,119 |
|
Short-term debt | 706 |
| | 550 |
| 341 |
| | 41 |
|
Total debt | 10,201 |
| | 10,138 |
| 11,364 |
| | 10,110 |
|
Total equity | 23,959 |
| | 23,725 |
| 24,960 |
| | 27,428 |
|
Percent of total debt to capital* | 30 | % | | 30 |
| 31 | % | | 27 |
|
Percent of floating-rate debt to total debt | 17 | % | | 3 |
| 12 | % | | 11 |
|
* Capital includes total debt and total equity. |
To meet our short- and long-term liquidity requirements, we look to a variety of funding sources but rely primarily on cash generated from operating activities. Additionally, Phillips 66 Partners raises funds forhas the ability to fund its growth activities through debt and equity offerings. During the first ninesix months of 2017,2018, we generated $1,717 million$2.9 billion in cash from operations. In addition, Phillips 66 Partnersoperations and raised net proceeds of $171 million$1.5 billion from its continuous offering programthe issuance of common units (ATM program), and we collected $325 million of previously issued related-party loans.senior notes. Available cash was primarily used for capital expenditures and investments ($1,295 million), repurchases of our common stock ($1,127 million)of $3.7 billion; capital expenditures and investments of $866 million; dividend payments on our common stock ($1,042 million).of $699 million; and repayment of term loans of $250 million. During the first ninesix months of 2017,2018, cash and cash equivalents decreased by $1,164 million$1.2 billion to $1,547 million.$1.9 billion.
In addition to cash flows from operating activities, we rely on our commercial paper and credit facility programs, asset sales and our ability to issue securities using our shelf registration statement to support our short- and long-term liquidity requirements. We believe current cash and cash equivalents and cash generated by operations, together with access to external sources of funds as described below under “Significant Sources of Capital,” will be sufficient to meet our funding requirements in the near and long term, including our capital spending, dividend payments, employeedefined benefit plan contributions, debt repaymentrepayments and share repurchases.
Significant Sources of Capital
Operating Activities
During the first ninesix months of 2017,2018, cash generated by operating activities was $1,717$2,852 million, compared with $2,296$1,316 million for the first ninesix months of 2016.2017. The decreaseincrease in the first ninesix months of 2017,2018, compared with the same period in 2016,2017, reflects inventory builds at higher commodity pricesrealized refining margins and an increase in employee benefit plan contributions, partially offset by an increase in distributions from our equity affiliates.affiliates, as well as net favorable working capital changes primarily driven by the effects of increased commodity prices, inventory impacts and timing of payments and collections.
Our short- and long-term operating cash flows are highly dependent upon refining and marketing margins, NGL prices, and chemicals margins. Prices and margins in our industry are typically volatile, and are driven by market conditions over which we have little or no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows.
The level and quality of output from our refineries also impacts our cash flows. Factors such as operating efficiency, maintenance turnarounds, market conditions, feedstock availability and weather conditions can affect output. We actively manage the operations of our refineries, and any variability in their operations typically has not been as significant to cash flows as that caused by margins and prices.
Equity Affiliates
Our operating cash flows are also impacted by distribution decisions made by our equity affiliates, including DCP Midstream, CPChem and WRB. During the first ninesix months of 2017,2018, cash from operations included distributions of $814$1,153 million from our equity affiliates, compared with $387$575 million during the same period of 2016. In2017. CPChem resumed distributions to us in the secondfirst quarter of 2017, DCP Midstream resumed distributions. We did not receive any distributions from CPChem in2018 following the third quarterreturn to full operations of 2017,its Cedar Bayou facility post-Hurricane Harvey and do not expect to receive any distributions in the fourth quarterstart-up of 2017, due to the impacts of Hurricane Harvey on its new U.S. Gulf Coast operations.petrochemicals assets. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these companies are not assured.
Effective January 1, 2017, DCP Midstream, LLC and DCP Partners closed a transaction in which DCP Midstream, LLC contributed subsidiaries owning all of its operating assets, $424 million of cash and $3.15 billion of debt to DCP Partners, in exchange for DCP Partners units which had an estimated fair value of $1.125 billion at the time of the transaction. We and our co-venturer retained our 50/50 investment in DCP Midstream, LLC, and DCP Midstream, LLC retained its incentive distribution rights in DCP Partners through its ownership of the general partner of DCP Partners. After the transaction, DCP Midstream, LLC held a 38 percent interest in DCP Partners. DCP Midstream, LLC, through its ownership of the general partner, has agreed, if required, to forgo receipt of incentive distribution rights up to $100 million annually (100 percent basis) through 2019, to support a minimum distribution coverage ratio for DCP Partners. In connection with the transaction, DCP Midstream, LLC terminated its revolving credit agreement, which had previously served to limit distributions to its owners while amounts had been borrowed under the facility. As a result, distributions to the owners of DCP Midstream, LLC resumed in 2017.
Foreign Cash Holdings
At September 30, 2017, approximately 22 percent of our consolidated cash and cash equivalents balance was available for domestic use without incurring material U.S. income taxes in excess of the amounts already accrued in the financial statements. We believe the remaining amount, primarily attributable to cash held in foreign locations where we have asserted our intention to indefinitely reinvest earnings, does not materially affect our consolidated liquidity due to the following factors:
A substantial portion of our foreign cash supports the liquidity needs and regulatory requirements of our foreign operations.
We have the ability to fund a significant portion of our domestic capital requirements with cash provided by domestic operating activities.
We have access to U.S. capital markets through our $5 billion committed revolving credit facility, commercial paper program and universal shelf registration statement.
Phillips 66 Partners LP
In 2016,Phillips 66 Partners’ initial $250 million continuous offering of common units, or at-the-market (ATM) program, was completed during the three months ended June 30, 2018. At that time, Phillips 66 Partners begancommenced issuing common units under its ATM program, which allows for the issuance of up to an aggregate ofsecond $250 million of Phillips 66 Partners’ common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the time of the offerings.ATM program. For the ninesix months ended SeptemberJune 30, 2017,2018, on a settlement-date basis, Phillips 66 Partners hashad issued 3,323,576an aggregate of 1,340,934 common units under the ATM program,programs, which generated net proceeds of $171$67 million. FromSince inception through SeptemberJune 30, 2017,2018, Phillips 66 Partners hashad issued an aggregate of 3,669,7285,059,802 common units under the ATM program,programs, which generated net proceeds of $190$259 million.
On September 19, 2017, we entered into an agreement to contribute toDebt Issuances
In March 2018, Phillips 66 Partners our 25 percent interests in the Dakota Access, LLC (DAPL) and Energy Transfer Crude Oil Company, LLC (ETCO) joint ventures and our 100 percent interest in MSLP. The transaction closed on October 6, 2017. Total consideration paid to us by Phillips 66 Partners was $1.65 billion, which included $372 million in cash at closing, the assumption of $588 million of promissory notes payable to us, the assumption of $450 million of term loans payable to a third party, and the issuance to us of common and general partner units with a fair value of $240 million. Shortly after closing, Phillips 66 Partners repaid the $588 million of promissory notes payable to us, resulting in total cash received by us for the transaction of $960 million. Phillips 66 Partners financed the consideration paid, in early October 2017, with proceeds from the private placement of $750 million of perpetual convertible preferred units and $300 million of common units, as well as a portion of the proceeds from a public offering of $650$1,500 million aggregate principal amount of unsecured notes consisting of:
$500 million of floating-rate Senior Notes.Notes due 2021. Interest on these notes is equal to the three-month London Interbank Offered Rate (LIBOR) plus 0.60% per annum and is payable quarterly in arrears on February 26, May 26, August 26 and November 26, beginning on May 29, 2018.
$800 million of 3.900% Senior Notes due 2028. Interest on these notes is payable semiannually on March 15 and September 15 of each year, beginning on September 15, 2018.
An additional $200 million of our 4.875% Senior Notes due 2044. Interest on these notes is payable semiannually on May 15 and November 15 of each year, beginning on May 15, 2018.
These notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary. Phillips 66 used the net proceeds from the issuance of these notes to repay commercial paper borrowings during the first quarter of 2018, and for general corporate purposes.
Credit Facilities and Commercial Paper
At SeptemberJune 30, 2017,2018, no amount had been directly drawn under our $5$5.0 billion revolving credit facility; however, we had $200 million of short-termfacility or our $5.0 billion commercial paper outstanding and $51 million of issued letters of credit that wereprogram supported by thisour revolving credit facility. In addition, at SeptemberJune 30, 2017, there was $87 million2018, Phillips 66 Partners had no borrowings outstanding under theits $750 million revolving credit facility of Phillips 66 Partners.facility. As a result, we had $5.4approximately $5.8 billion of total committed capacity available under our credit facilities at SeptemberJune 30, 2017.
Also in October 2017, we repaid the $200 million of short-term commercial paper outstanding at September 30, 2017, and Phillips 66 Partners repaid the $87 million of borrowings outstanding under its revolving credit facility at September 30, 2017.
Debt Issuances and Repayments
In April 2017, Phillips 66 completed a private offering of $600 million aggregate principal amount of unsecured notes, consisting of $300 million of Notes due 2019 and $300 million of Notes due 2020. Interest on the notes is a floating rate equal to three-month LIBOR plus 0.65% per annum for the 2019 Notes and three-month LIBOR plus 0.75% per annum for the 2020 Notes. Interest on both series of notes is payable quarterly in arrears on January 15, April 15, July 15 and October 15, commencing in July 2017. The 2019 Notes mature on April 15, 2019, and the 2020 Notes mature on April 15, 2020. The notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary.
Also in April 2017, Phillips 66 entered into term loan facilities with an aggregate borrowing amount of $900 million, consisting of a $450 million 364-day facility and a $450 million three-year facility. Interest on the term loans is a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by our long-term credit ratings.
Phillips 66 used the net proceeds from the issuance of the notes, together with the proceeds from the term loans, and cash on-hand to repay its outstanding 2.95% Senior Notes upon maturity in May 2017, for capital expenditures and for general corporate purposes.
In October 2017, as part of the contribution of assets to Phillips 66 Partners, discussed above, Phillips 66 Partners assumed the $450 million of term loans outstanding under the 364-day facility originally issued in April 2017, and repaid those loans shortly thereafter. In addition, Phillips 66 Partners issued $500 million aggregate principal amount of 3.75% Senior Notes due 2028 and $150 million aggregate principal amount of 4.68% Senior Notes due 2045. Interest on the 3.75% Senior Notes due 2028 is payable semiannually in arrears on March 1 and September 1 of each year, commencing on March 1, 2018. The 4.68% Senior Notes due 2045 are an additional issuance of existing Phillips 66 Partners’ 4.68% Senior Notes, and interest is payable semiannually in arrears on February 15 and August 15 of each year.
Shelf Registration
We have a universal shelf registration statement on file with the U.S. Securities and Exchange Commission (SEC) under which we, as a well-known seasoned issuer, have the ability to issue and sell an indeterminate amount of various types of debt and equity securities.
Off-Balance Sheet Arrangements
In 2016,Under the operating lease commencedagreement on our headquarters facility in Houston, Texas. Under this lease agreement,Texas, we have a residual value guarantee with a maximum future exposure of $554 million. The operating lease has a term of five yearsends in June 2021 and provides us the option, at the end of the lease term, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale.
We also have residual value guarantees associated with railcar and airplane leases with maximum future exposures totaling $349$291 million, which have remaining terms of up to five years. For one of our railcar leases, we estimated a total residual value deficiency of $56 million based on third-party appraisals of the railcars’ expected fair value at the end of their lease term in May 2019. The total residual value deficiency is our estimate of the amount we will owe to the lessor at the end of the lease term and is recognized as expense over the remaining lease term. At June 30, 2018, the remaining unrecognized residual value deficiency was $24 million. For information on our need to perform under the railcar lease guarantee, see the Capital Requirements section to follow.
In addition, we have guarantees outstanding related to certain joint venture debt obligations, which have remaining terms of up to 8seven years. The maximum potential amount of future payments to third parties under these guarantees iswas approximately $310$256 million.
See Note 11—10—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.
Capital Requirements
Capital Expenditures and Investments
For information about our capital expenditures and investments, see the “Capital Spending” section.section below.
Debt Financing
Our total debt balance at SeptemberJune 30, 2017,2018, and December 31, 2016,2017, was $10.2 billion$11,364 million and $10.1 billion,$10,110 million, respectively. Our total debt-to-capital ratio was 3031 percent and 27 percent at both SeptemberJune 30, 2017,2018, and December 31, 2016.2017, respectively.
In May 2017, weJune 2018, Phillips 66 repaid $1,500$250 million of 2.95% Senior Notes upon maturity with the funding from the April 2017 debt issuances discussed above.$450 million outstanding under its three-year term loan facility due 2020.
Also in May 2017, we repaid $135 million of MSLP 8.85% Senior Notes due in 2019. This debt was recorded as a result of the consolidation of MSLP in February 2017. See Note 5—Business Combinations, in the Notes to the Consolidated Financial Statements, for additional information regarding MSLP.
Dividends
On July 12, 2017, we announced thatMay 9, 2018, our Board of Directors declared a quarterly cash dividend of $0.70$0.80 per common share. The dividend was paid June 1, 2018, to shareholders of record at the close of business on May 21, 2018. On July 11, 2018, our Board of Directors declared a quarterly cash dividend of $0.80 per common share. This dividend is payable on September 1, 2017,4, 2018, to shareholders of record at the close of business on August 18, 2017. On October 9, 2017, we announced that our21, 2018.
Share Repurchases
Our Board of Directors, declared a quarterly cash dividend of $0.70 per common share. This dividend is payable on December 1, 2017, to shareholders of record at the close of business on November 17, 2017.
On October 9, 2017, we announced that our Board of Directors authorized $3 billion of additional share repurchases. Since July 2012, our Board of Directorsvarious times, has authorized share repurchases of our outstanding common stock totalingunder our share repurchase program, which aggregate to a total authorization of up to $12$12.0 billion. The share repurchases have been, and are expected to be, funded primarily through available cash. The shares will be repurchased from time to time in the open market at our discretion, subject to market conditions and other factors, and in accordance with applicable regulatory requirements. We are not obligated to acquire any particular amount of common stock and may commence, suspend or discontinue purchases at any time or from time to time without prior notice. During the first ninesix months of 2017,ended June 30, 2018, we repurchased 13,852,0414,387,255 shares at a cost of $1,127 million.$463 million under our share repurchase program. Since the inception of our share repurchasesrepurchase program in 2012 through SeptemberJune 30, 2017,2018, we have repurchased a total of 119,256,690128,529,785 shares at a cost of $8,565$9,491 million. Shares of stock repurchased are held as treasury shares.
DuringIn February 2018, we entered into a Stock Purchase and Sale Agreement (Purchase Agreement) with Berkshire Hathaway Inc. and National Indemnity Company, a wholly owned subsidiary of Berkshire Hathaway, to repurchase 35 million shares of Phillips 66 common stock for an aggregate purchase price of $3,280 million. Pursuant to the first nine monthsPurchase Agreement, the purchase price per share of 2017, we contributed $432$93.725 was based on the volume-weighted-average price of our common stock on the New York Stock Exchange on February 13, 2018. The transaction closed in February 2018. We funded the repurchase with cash of $1,880 million toand borrowings of $1,400 million under our U.S. employee benefit planscommercial paper program. These borrowings were subsequently refinanced through a public offering of senior notes. This specific share repurchase transaction was separately authorized by our Board of Directors and $26 million totherefore does not impact previously announced authorizations under our international employee benefit plans. We currently expect to make additional contributions of approximately $6 million to our U.S. employee benefit plans and $9 million to our international employee benefit plans during the remainder of 2017.share repurchase program, which are discussed above.
We haveRailcar and Airplane Lease Residual Value Guarantees
For one of our railcar leases, we estimated a 25 percent ownership interest in both DAPL and ETCO, which were formed to construct pipelines to deliver crude oil produced in the Bakken area of North Dakota to market centers in the Midwest and the Gulf Coast. In 2016, we and our co-venturer executed agreements, and an amendment to the original agreements, that provided we and our co-venturer would loan DAPL and ETCO up to a maximum of $1,411 million and $76 million, respectively, with the amounts loaned by us and our co-venturer being proportionate to our ownership interests (Sponsor Loans). Also in 2016, DAPL and ETCO secured a $2.5 billion facility (Facility) with a syndicate of financial institutions on a limited recourse basis with certain guarantees. Allowable draws under the Facility were initially reduced and finally suspended in September 2016 pending resolution of permitting delays. As a result, DAPL and ETCO resumed making draws under the Sponsor Loans. In February 2017, DAPL was granted the lone outstanding easement required to complete work beneath the Missouri River. As a result, construction of the pipelines resumed and draws under the Facility were reinitiated and all outstanding Sponsor Loans were paid in February 2017. Construction on both pipelines was completed, with commercial operations beginning in June 2017. As of September 30, 2017, DAPL and ETCO have an aggregate balance outstanding under the Facility of $2.5 billion.
In 2016, we and our co-venturer in WRB each made a $75 million partner loan to provide for WRB’s short-term operating needs. These partner loans were repaid in the first quarter of 2017.
During the first nine months of 2017, we recognized an additional $35 million of thetotal residual value deficiency of our leased railcars.$56 million based on a third-party appraisal of the railcars’ expected fair value at the end of their lease term. The total residual value deficiency is our estimate of $31 million remainingthe amount we will owe to the lessor at September 30, 2017, will be recognized on a straight-line basis throughthe end of the lease term in May 2019. Due to current market uncertainties, changes in the estimated fair values of railcars could occur, which could increase or decrease our currently estimated residual value deficiency. As of September
At June 30, 2017,2018, our maximum future exposure for residual value guarantees associated with ourunder railcar and airplane leaseslease arrangements was approximately $349$291 million. In October 2017, we paid $53 million of our railcar residual value guarantee liability. For additional information, see Note 11—10—Guarantees, in the Notes to Consolidated Financial Statements.
Capital Spending
| | | Millions of Dollars | Millions of Dollars |
| Nine Months Ended September 30 | Six Months Ended June 30 |
| 2017 |
| | 2016 |
| 2018 |
| | 2017 |
|
Capital Expenditures and Investments | | | | | | |
Midstream | $ | 559 |
| | 1,045 |
| $ | 475 |
| | 381 |
|
Chemicals | — |
| | — |
| — |
| | — |
|
Refining | 623 |
| | 827 |
| 325 |
| | 475 |
|
Marketing and Specialties | 65 |
| | 63 |
| 28 |
| | 38 |
|
Corporate and Other | 48 |
| | 96 |
| 38 |
| | 34 |
|
| $ | 1,295 |
| | 2,031 |
| $ | 866 |
| | 928 |
|
| | | | | | |
Selected Equity Affiliates* | | | | | | |
DCP Midstream | $ | 166 |
| | 76 |
| $ | 193 |
| | 104 |
|
CPChem | 506 |
| | 746 |
| 224 |
| | 387 |
|
WRB | 91 |
| | 116 |
| 75 |
| | 64 |
|
| $ | 763 |
| | 938 |
| $ | 492 |
| | 555 |
|
* Our share of capital spending.
Midstream
During the first ninesix months of 2017,2018, capital spending in our Midstream segment included continued development of additional Gulf Coast fractionation capacity, construction activities related to increasing storage capacity at our crude oil and petroleum products terminal located near Beaumont, Texas, wrap-up activities related to our Freeport LPG Export Terminal and spending associated with return, reliability and maintenance projects in our Transportation and NGL businesses. OtherPhillips 66 Partners advanced several major construction activities includedprojects, including progressing construction on the further developmenteastern leg of Phillips 66 Partners’its 40-percent-owned Bayou Bridge joint venture Bayou Bridge Pipeline,pipeline, expansion activities on its 33-percent-owned DCP Sand Hills joint venture pipeline, constructing a new isomerization unit at the Phillips 66 Partners’ 50-percent owned STACKLake Charles Refinery, and development of the Gray Oak Pipeline joint venture and related ventures.
In April 2018, Phillips 66 Partners announced that it received sufficient binding commitments to proceed with construction of the development of twoGray Oak Pipeline. The pipeline will provide crude oil pipelines (collectively,transportation from the Bakken Pipeline) by our 25-percent-owned joint ventures, DAPLPermian Basin and ETCO. ConstructionEagle Ford to destinations in the Corpus Christi and Sweeny/Freeport markets on the Texas Gulf Coast, including the Sweeny Refinery. In July 2018, Phillips 66 Partners completed the expansion open season to determine the scope and capacity of the Bakkenpipeline system. The pipeline will have an initial capacity of 800,000 barrels per day (BPD) based on shipper commitments of 700,000 BPD and the reservation of capacity for walk-up shippers. The pipeline is expandable to approximately 1 million BPD subject to additional shipper commitments. Phillips 66 Partners currently owns a 75 percent interest in the pipeline system, and other third parties have options to acquire up to a 32.75 percent interest. If all options are exercised, Phillips 66 Partners would own 42.25 percent. The pipeline is expected to be in service by the end of 2019, with total cost of approximately $2 billion on a 100 percent basis.
In Corpus Christi, Texas, the Gray Oak Pipeline was completed,will connect to the new South Texas Gateway Terminal under development by Buckeye Partners, L.P. The marine terminal will have an initial storage capacity of 3.4 million barrels and is expected to begin operations by the end of 2019. Phillips 66 Partners owns a 25 percent interest in the joint venture that is constructing the terminal.
In June 2018, we announced the expansion of the Sweeny Hub, which is an integrated NGL fractionation, storage and export complex strategically located on the Texas Gulf Coast with commercial operations beginningaccess to petrochemicals, fuels and liquefied petroleum gas (LPG) export markets. The expansion includes two 150,000-BPD fractionators, associated pipeline infrastructure, and 6 million barrels of additional storage capacity at Phillips 66 Partners’ Clemens Caverns. DCP Midstream has committed to supply Y-grade NGL feedstock and has an option to acquire up to a 30 percent ownership interest in June 2017.the fractionators. Upon completion of the expansion, expected in late 2020, the Sweeny Hub will have 400,000 BPD of fractionation capability and access to 15 million barrels of storage capacity.
During the first ninesix months of 2017,2018, DCP Midstream had a self-funded capital program, and thus had no new capital infusions from us or our co-venturer. During this period, on a 100 percent basis, DCP Midstream’s capital expenditures and investments were approximately $332$385 million, which were primarily for expansion capital expenditures, including construction of the Mewbourn 3 plantand O’Connor 2 plants, and investments in the DCP Sand Hills Pipelineand Gulf Coast Express joint venture pipelines, as well as maintenance capital expenditures for existing assets. We expect DCP to continue self-funding its capital program for the remainder of 2018.
In July 2018, Rockies Express Pipeline LLC (REX) repaid $550 million of its debt, reducing its total debt to approximately $2.0 billion. REX funded the repayment through member cash contributions. Our 25 percent share was approximately $138 million, which we contributed to REX in July 2018.
Chemicals
During the first ninesix months of 2017,2018, CPChem had a self-funded capital program, and thus required no new capital infusions from us or our co-venturer. During this period, on a 100 percent basis, CPChem’s capital expenditures and investments were $1,012$448 million, which were primarily for completion of its U.S. Gulf Coast Petrochemicals Project. We expect CPChem to continue self-funding theirits capital program for the remainder of 2017.2018.
Refining
Capital spending for the Refining segment during the first ninesix months of 20172018 was primarily for air emission reduction projects to meet new environmental standards, refinery upgrade projects to increase accessibility of advantaged crudes and improve product yields, improvements to the operating integrity of key processing units and safety-related projects.
Major construction activities included:
Installation of facilities to comply with U.S. Environmental Protection Agency (EPA) Tier 3 gasoline regulations at the SweenyBayway and BaywayFerndale refineries.
Installation of facilities to improve processing of advantaged crudes at the Billings and Lake Charles refineries.Refinery.
Installation of facilities to improve clean product yield at the Bayway and Ponca City refineries,Refinery, as well as the jointly owned Wood River refinery.Refinery.
Our
Additionally, a project was approved at the Sweeny Refinery to optimize a fluid catalytic cracking unit to increase advantaged crude processing at the Billings Refinery wasproduction of higher-value petrochemical products and higher-octane gasoline. The project is anticipated to be completed in June 2017 and is operating at design specifications.mid-2020.
Generally, our equity affiliates in the Refining segment are intended to have self-funding capital programs.
Marketing and Specialties
Capital spending for the M&S segment during the first ninesix months of 20172018 was primarily for reliability and maintenance projects and projects targeted at developing our new international sites.
2017 Forecast and 2018 Budget
We are forecasting total capital spending in 2017 of approximately $2 billion. Looking forward to 2018, we expect to finalize and announce our 2018 capital budget in December 2017. Our preliminary view is that the 2018 capital budget will be in the range of $2 billion to $3 billion, subject to approval by our Board of Directors.
Contingencies
A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.
Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.
Legal and Tax Matters
Our legal and tax matters are handled by our legal and tax organizations. These organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions. We employ a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required. In the case of income-tax-related contingencies, we monitor tax legislation and court decisions, the status of tax audits and the statute of limitations within which a taxing authority can assert a liability.
Environmental
Like other companies in our industry, we are subject to numerous international, federal, state and local environmental laws and regulations. For a discussion of the most significant of these international and federal environmental laws and regulations, including those with associated remediation obligations, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 20162017 Annual Report on Form 10-K.
We occasionally receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging that we are a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. As of December 31, 2016,2017, we reported that we had been notified of potential liability under
CERCLA and comparable state laws at 31 sites within the United States. During the first ninesix months of 2017,2018, there were threewas one new sitessite for which we received noticenotification of potential liability, and threetwo sites were deemed resolved and closed, and one site was deemed resolved but not closed, leaving 3129 unresolved sites with potential liability at SeptemberJune 30, 2017.2018.
Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in certain of our operations and products, and there can be no assurance that material costs and liabilities will not be incurred. However, we currently do not expect any material adverse effect on our results of operations or financial position as a result of compliance with current environmental laws and regulations.
Climate Change
There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (GHG) emissions reduction, including various regulations proposed or issued by the EPA. These proposed or promulgated laws apply or could apply in states and/or countries where we have interests or may have interests in the future. Laws regulating GHG emissions continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws potentially could have a material impact on our results of operations and financial condition as a result of increasing costs of compliance, lengthening project implementation and agency review items, or reducing demand for certain hydrocarbon products. We continue to monitor legislative and regulatory actions and legal proceedings globally relating to GHG emissions for potential impacts on our operations.
For examples of legislation and regulation or precursors for possible regulation that do or could affect our operations, see the “Climate Change” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 20162017 Annual Report on Form 10-K.
We consider and take into account anticipated future GHG emissions in designing and developing major facilities and projects, and implement energy efficiency initiatives to reduce GHG emissions. Data on our GHG emissions, legal requirements regulating such emissions, and the possible physical effects of climate change on our coastal assets are incorporated into our planning, investment and risk management decision-making.
NEW ACCOUNTING STANDARDS
In February 2017,2018, the Financial Accounting Standards Board (FASB)FASB issued Accounting Standards Update (ASU)ASU No. 2017-05, “Other Income—Gains and Losses2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from the Derecognition of Nonfinancial Assets (Subtopic 610-20).Accumulated Other Comprehensive Income.” This ASU clarifies the scope and accountingallows for the sale or transfer of nonfinancial assets anddeferred income tax effects stranded in substance nonfinancial assetsaccumulated other comprehensive income (AOCI) resulting from the Tax Act enacted in December 2017 to noncustomers, including partial sales.be reclassed from AOCI to retained earnings. This ASU will eliminate the use of carryover basisis effective for most nonmonetary exchanges, including contributions of assets to equity method joint ventures. These amendments could result in the entity recognizing a gain or loss on the sale or transfer of nonfinancial assets. Public entities should apply the guidance in ASU No. 2017-05 to annualfiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, including interim periods within those periods.2018, with early adoption permitted. We are currently evaluating the provisionsimpact of this ASU No. 2017-05.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendment provides a screen for determining when a transaction involves an acquisition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset, or a group of similar identifiable assets, then the transaction is not considered an acquisition of a business. If the screen is not met, then the amendment requires that to be considered a business, the operation must include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The guidance may reduce the number of transactions accounted for as business acquisitions. Public business entities should apply the guidance in ASU No. 2017-01 to annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The amendments should be applied prospectively and no disclosures are required at the effective date. We are currently evaluating the provisions of ASU No. 2017-01.on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The new standard amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which may result in earlier recognition of losses. Public business entities should apply the guidance in ASU No. 2016-13 for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption will be permitted for annual periods beginning after December 15, 2018. We are currently evaluating the provisions of ASU No. 2016-13 and assessing the impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” In theThe new standard the FASB modified its determination of whetherestablishes a contract isright-of-use (ROU) model that requires a lessee to record a ROU asset and a lease rather than whether a lease is a capital or operating lease under the previous accounting principles generally accepted in the United States (GAAP). A contract represents a lease if a transfer of control occurs over an identified property, plant or equipment for a period of time in exchange for consideration. Control over the use of the identified asset includes the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct its use. The FASB continued to maintain two classifications of leases—financing and operating—which are substantially similar to capital and operating leases in the previous lease guidance. Under the new standard, recognition of assets and liabilities arising from operating leases will require recognitionliability on the balance sheet. The effect ofsheet for all leases with terms longer than 12 months. Leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of comprehensive income and the statement of cash flows will be largely unchanged. Lessor accounting will also be largely unchanged. Additional disclosuresstatement. Similarly, lessors will be required for financing andto classify leases as sales-type, finance or operating, leaseswith classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and lessees.rewards, as well as substantive control have been transferred through a lease contract. Public business entities should apply the guidance in ASU No. 2016-02 for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. Entities are required to adopt the ASU using a modified retrospective approach, subject to certain optional practical expedients, and apply the provisions of ASU No. 2016-02 to leasing arrangements existing at or entered into after the earliest comparative period presented in the financial statements. We are currently evaluating the provisions of ASU No. 2016-02 and assessing its impact on our financial statements. As part of our assessment to-date, we have formed an implementation team, commenced identificationselected a software package, and completed software design and configuration within a test environment. Furthermore, we have loaded a majority of our lease population into the software and are evaluatingcommenced both software and lease software packages.
In January 2016,data testing. We expect the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” to meet its objective of providing more decision-useful information about financial instruments. The majority of this ASU’s provisions amend only the presentation or disclosures of financial instruments; however, one provision will also affect net income. Equity investments carried under the cost method or lower of cost or fair value method of accounting, in accordance with current GAAP, will have to be carried at fair value upon adoption of ASU No. 2016-01,2016-02 will materially gross up our consolidated balance sheet with changes in fair value recorded in net income. For equity investments that do not have readily determinable fair values, a company may elect to carry such investments at cost less impairments, if any, adjusted up or down for price changes in similar financial instruments issued by the investee, when and if observed. Public business entities should apply the guidance in ASU No. 2016-01 for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption prohibited. We are currently evaluating the provisions of ASU No. 2016-01. Our initial review indicates that ASU No. 2016-01 will have a limited impact on our financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU and other related updates are intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets and expand disclosure requirements. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.”ROU assets and operating lease liabilities. The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. As part of our assessment work to-date, we have formed an implementation work team, completed training on the new ASU’s revenue recognition model and are continuing our contract review and documentation. Our expectation is to adopt the standard on January 1, 2018, using the modified retrospective application. In addition, we expect to present revenue net of sales-based taxes collected from our customers, resulting in no impact to earnings. Sales-based taxes include excise taxes on petroleum product sales as noted on our consolidated statementstatements of income. Our evaluation of theincome and cash flows is not expected to be material. The new ASU is ongoing, which includes understanding the impact of adoption on earnings from equity method investments. Based upon our analysis to-date, we have not identified any other material impact on our financial statements other than disclosures.standard will also require additional disclosures for financing and operating leases.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.
We based the forward-looking statements on our current expectations, estimates and projections about us and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:
Fluctuations in NGL, crude oil, petroleum products and natural gas prices and refining, marketing and petrochemical margins.
Failure of new products and services to achieve market acceptance.
Unexpected changes in costs or technical requirements for constructing, modifying or operating our facilities or transporting our products.
Unexpected technological or commercial difficulties in manufacturing, refining or transporting our products, including chemicals products.
Lack of, or disruptions in, adequate and reliable transportation for our NGL, crude oil, natural gas and refined products.
The level and success of drilling and quality of production volumes around DCP Midstream’s assets and its ability to connect supplies to its gathering and processing systems, residue gas and NGL infrastructure.
Inability to timely obtain or maintain permits, including those necessary for capital projects; comply with government regulations; or make capital expenditures required to maintain compliance.
Failure to complete definitive agreements and feasibility studies for, and to timely complete construction of, announced and future capital projects.
Potential disruption or interruption of our operations due to accidents, weather events, civil unrest, political events, terrorism or cyber attacks.
International monetary conditions and exchange controls.
Substantial investment or reduced demand for products as a result of existing or future environmental rules and regulations.
Liability resulting from litigation or for remedial actions, including removal and reclamation obligations under environmental regulations.
General domestic and international economic and political developments including: armed hostilities; expropriation of assets; changes in governmental policies relating to NGL, crude oil, natural gas or refined product pricing, regulation or taxation; and other political, economic or diplomatic developments.
Changes in tax, environmental and other laws and regulations (including alternative energy mandates) applicable to our business.
Limited access to capital or significantly higher cost of capital related to changes to our credit profile or illiquidity or uncertainty in the domestic or international financial markets.
The operation, financing and distribution decisions of our joint ventures.
Domestic and foreign supplies of crude oil and other feedstocks.
Domestic and foreign supplies of petrochemicals and refined products, such as gasoline, diesel, aviation fuel and home heating oil.
Governmental policies relating to exports of crude oil and natural gas.
Overcapacity or undercapacity in the midstream, chemicals and refining industries.
Fluctuations in consumer demand for refined products.
The factors generally described in Item 1A.—Risk Factors in our 20162017 Annual Report on Form 10-K.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our commodity price risk and interest rate risk at SeptemberJune 30, 2017,2018, did not differ materially from the risks disclosed under Item 7A of our 20162017 Annual Report on Form 10-K.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of SeptemberJune 30, 20172018, with the participation of management, our Chairman and Chief Executive Officer and our Executive Vice President, Finance and Chief Financial Officer carried out an evaluation, pursuant to Rule 13a-15(b) of the Act, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our Chairman and Chief Executive Officer and our Executive Vice President, Finance and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of SeptemberJune 30, 20172018.
There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the quarterly period ended SeptemberJune 30, 2017,2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following is a description of reportable legal proceedings, including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment, for this reporting period. There were no new matters that arose during the thirdsecond quarter of 2017.2018. There were no material developments that occurred with respect to mattersone matter previously reported in our 20162017 Annual Report on Form 10-K or our Quarterly Report on Form 10-Q for the quarterly periodsperiod ended March 31, 2017, and June 30, 2017.2018. While it is not possible to accurately predict the final outcome of thesereported, pending proceedings, even if any one or more of such proceedings were decided adversely to Phillips 66, we expect there would be no material effect on our consolidated financial position. Nevertheless, such proceedings are reported pursuant to SECSecurities and Exchange Commission (SEC) regulations.
Our U.S. refineries are implementing two separate consent decrees, regarding alleged violations of the Federal Clean Air Act, with the EPA,U.S. Environmental Protection Agency (EPA), five states and one local air pollution agency. Some of the requirements and limitations contained in the decrees provide for stipulated penalties for violations. Stipulated penalties under the decrees are not automatic, but must be requested by one of the agency signatories. As part of periodic reports under the decrees or other reports required by permits or regulations, we occasionally report matters that could be subject to a request for stipulated penalties. If a specific request for stipulated penalties meeting the reporting threshold set forth in SEC rules is made pursuant to these decrees based on a given reported exceedance, we will separately report that matter and the amount of the proposed penalty.
New Matters
There are no new matters to report.
Matters Previously Reported
In March 2018, Phillips 66 Partners received notification from the Illinois Attorney General’s office of a proposed penalty arising from the April 2015 release of approximately 800 barrels of diesel fuel from its pipeline that transports products from a terminal in Hartford, Illinois, to a dock on the Mississippi River. This matter has been resolved with a penalty payment of $120,000.
Item 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Item 1A of our 20162017 Annual Report on Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
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| | | | | | Millions of Dollars |
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Period | Total Number of Shares Purchased* | | Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs** | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
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July 1-31, 2017 | 1,635,271 | | $ | 82.57 |
| 1,635,271 | | $ | 761 |
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August 1-31, 2017 | 1,968,056 | | 83.81 |
| 1,968,056 | | 596 |
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September 1-30, 2017 | 1,857,760 | | 86.52 |
| 1,857,760 | | 435 |
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Total | 5,461,087 | �� | $ | 84.36 |
| 5,461,087 | |
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* Includes repurchase of shares of common stock from company employees in connection with the company’s broad-based employee incentive plans, when applicable. |
** As of September 30, 2017, our Board of Directors has authorized repurchases totaling up to $9 billion of our outstanding common stock. In October 2017, the Board of Directors authorized additional repurchases of $3 billion, which increased the total authorized repurchases to $12 billion. The authorizations do not have expiration dates. The share repurchases are expected to be funded primarily through available cash. The shares under these authorizations will be repurchased from time to time in the open market at the company’s discretion, subject to market conditions and other factors, and in accordance with applicable regulatory requirements. We are not obligated to acquire any particular amount of common stock and may commence, suspend or discontinue purchases at any time or from time to time without prior notice. Shares of stock repurchased are held as treasury shares. |
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| | | | | | Millions of Dollars |
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Period | Total Number of Shares Purchased* | | Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs** | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
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April 1-30, 2018 | 678,312 | | $ | 101.89 |
| 678,312 | | $ | 2,670 |
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May 1-31, 2018 | 676,104 | | 117.00 |
| 676,104 | | 2,591 |
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June 1-30, 2018 | 707,994 | | 115.41 |
| 707,994 | | 2,509 |
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Total | 2,062,410 | | $ | 111.49 |
| 2,062,410 | |
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* Includes repurchase of shares of common stock from company employees in connection with the company’s broad-based employee incentive plans, when applicable. |
** As of June 30, 2018, our Board of Directors has authorized repurchases totaling up to $12.0 billion of our outstanding common stock. The authorizations do not have expiration dates. The share repurchases are expected to be funded primarily through available cash. The shares under these authorizations will be repurchased from time to time in the open market at the company’s discretion, subject to market conditions and other factors, and in accordance with applicable regulatory requirements. We are not obligated to acquire any particular amount of common stock and may commence, suspend or discontinue purchases at any time or from time to time without prior notice. Shares of stock repurchased are held as treasury shares. |
Item 6. EXHIBITS
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| | | | | | |
| | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | Form | Exhibit Number | Filing Date | SEC File No. |
| | | 8-K | 4.1 | 2/23/2015 | 001-36011 |
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| | | 8-K | 4.2 | 2/23/2015 | 001-36011 |
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| | | 8-K | 4.3 | 2/23/2015 | 001-36011 |
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| | | 8-K | 4.4 | 2/23/2015 | 001-36011 |
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| | | 8-K | 4.2 | 10/17/2016 | 001-36011 |
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| | | 8-K | 4.3 | 10/17/2016 | 001-36011 |
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| | | 8-K | 4.2 | 10/13/2017 | 001-36011 |
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| | | 8-K | 4.5 | 2/23/2015 | 001-36011 |
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| | | 8-K | 4.6 | 2/23/2015 | 001-36011 |
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| | | 8-K | 4.7 | 2/23/2015 | 001-36011 |
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| | | 8-K | 4.4 | 10/17/2016 | 001-36011 |
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| | | 8-K | 4.5 | 10/17/2016 | 001-36011 |
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| | | 8-K | 4.4 | 10/13/2017 | 001-36011 |
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| | | Incorporated by Reference |
Exhibit Number | | Exhibit Description | Form | Exhibit Number | Filing Date | SEC File No. |
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| | As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the company has not filed with this Quarterly Report on Form 10-Q certain instruments defining the rights of holders of long-term debt of the company and its subsidiaries because the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the company and its subsidiaries on a consolidated basis. The company agrees to furnish a copy of such agreements to the Commission upon request. | | | | |
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101.INS* | | XBRL Instance Document. | | | | |
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101.SCH* | | XBRL Schema Document. | | | | |
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101.CAL* | | XBRL Calculation Linkbase Document. | | | | |
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101.LAB* | | XBRL Labels Linkbase Document. | | | | |
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101.PRE* | | XBRL Presentation Linkbase Document. | | | | |
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101.DEF* | | XBRL Definition Linkbase Document. | | | | |
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* Filed herewith. | | | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | PHILLIPS 66 |
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| | /s/ Chukwuemeka A. Oyolu |
| | Chukwuemeka A. Oyolu Vice President and Controller (Chief Accounting and Duly Authorized Officer) |
Date: OctoberJuly 27, 20172018