*Prior-period financial information has been retrospectively adjusted for acquisitionsSee Notes to Consolidated Financial Statements.
|
| | | | |
Consolidated Statement of Changes in Equity | Phillips 66 Partners LP |
|
| | | | | | | | | | | | | |
| Millions of Dollars |
| Partnership | | |
| Common Unitholders Public |
| Common Unitholder Phillips 66 |
| General Partner Phillips 66 |
| Accum. Other Comprehensive Loss |
| Net Investment— Predecessors* |
| Total |
|
| | | | | | |
December 31, 2015 | $ | 809 |
| 233 |
| (650 | ) | (2 | ) | 1,054 |
| 1,444 |
|
Net income attributable to Predecessors | — |
| — |
| — |
| — |
| 103 |
| 103 |
|
Net contributions from Phillips 66—Predecessors | — |
| — |
| — |
| — |
| 88 |
| 88 |
|
Issuance of common units | 971 |
| — |
| — |
| — |
| — |
| 971 |
|
Allocation of net investment to unitholders | — |
| 233 |
| 33 |
| — |
| (266 | ) | — |
|
Net income attributable to the Partnership | 51 |
| 89 |
| 63 |
| — |
| — |
| 203 |
|
Other comprehensive income | — |
| — |
| — |
| 1 |
| — |
| 1 |
|
Quarterly cash distributions to unitholders and General Partner | (41 | ) | (86 | ) | (50 | ) | — |
| — |
| (177 | ) |
Other contributions from Phillips 66 | — |
| — |
| 4 |
| — |
| — |
| 4 |
|
September 30, 2016* | $ | 1,790 |
| 469 |
| (600 | ) | (1 | ) | 979 |
| 2,637 |
|
|
|
|
|
|
|
|
December 31, 2016 | $ | 1,795 |
| 476 |
| (704 | ) | (1 | ) | — |
| 1,566 |
|
Issuance of common units | 171 |
| — |
| — |
| — |
| — |
| 171 |
|
Net income attributable to the Partnership | 78 |
| 109 |
| 112 |
| — |
| — |
| 299 |
|
Quarterly cash distributions to unitholders and General Partner | (78 | ) | (113 | ) | (96 | ) | — |
| — |
| (287 | ) |
Other contributions from Phillips 66 | — |
| — |
| 26 |
| — |
| — |
| 26 |
|
September 30, 2017 | $ | 1,966 |
| 472 |
| (662 | ) | (1 | ) | — |
| 1,775 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 |
| Preferred Unitholders Public | Common Unitholders Public | Common Unitholder Phillips 66 | General Partner Phillips 66 | Accum. Other Comprehensive Loss | Noncontrolling Interest | Total |
| | | | | | | |
June 30, 2020 | $ | 746 | | 2,735 | | (572) | | 0 | | (1) | | 305 | | 3,213 | |
| | | | | | | |
| | | | | | | |
Net income | 10 | | 50 | | 146 | | — | | — | | 10 | | 216 | |
Quarterly cash distributions to unitholders ($0.875 per common unit) | (9) | | (51) | | (149) | | — | | — | | — | | (209) | |
| | | | | | | |
Proceeds from noncontrolling interest | — | | — | | — | | — | | — | | 3 | | 3 | |
Distributions to noncontrolling interest | — | | — | | — | | — | | — | | (13) | | (13) | |
Other distributions to Phillips 66 | — | | — | | (3) | | — | | — | | — | | (3) | |
September 30, 2020 | $ | 747 | | 2,734 | | (578) | | 0 | | (1) | | 305 | | 3,207 | |
| | | | | | | |
June 30, 2019 | $ | 746 | | 2,555 | | 626 | | (1,310) | | (1) | | 0 | | 2,616 | |
| | | | | | | |
Issuance of common units | — | | 91 | | — | | — | | — | | — | | 91 | |
Net income | 9 | | 67 | | 161 | | — | | — | | — | | 237 | |
Quarterly cash distributions to unitholders and General Partner ($0.855 per common unit) | (9) | | (49) | | (58) | | (70) | | — | | — | | (186) | |
Conversion of GP economic interest | — | | — | | (1,384) | | 1,381 | | — | | — | | (3) | |
Other distributions to Phillips 66 | — | | — | | — | | (1) | | — | | — | | (1) | |
September 30, 2019 | $ | 746 | | 2,664 | | (655) | | 0 | | (1) | | 0 | | 2,754 | |
*Prior-period financial information has been retrospectively adjusted for acquisitions of businesses under common control.
| | | | | | | | | | | | | | | | | |
| Units |
| Three Months Ended September 30 |
| Preferred Units Public | Common Units Public | Common Units Phillips 66 | General Partner Units Phillips 66 | Total Units |
| | | | | |
June 30, 2020 | 13,819,791 | | 58,580,009 | | 169,760,137 | | 0 | | 242,159,937 | |
Units issued in public equity offerings | — | | 0 | | — | | — | | 0 | |
September 30, 2020 | 13,819,791 | | 58,580,009 | | 169,760,137 | | 0 | | 242,159,937 | |
| | | | | |
June 30, 2019 | 13,819,791 | | 56,178,286 | | 68,760,137 | | 2,480,051 | | 141,238,265 | |
Units issued in public equity offerings | — | | 1,635,669 | | — | | — | | 1,635,669 | |
Units issued in conversion of GP economic interest | — | | — | | 101,000,000 | | (2,480,051) | | 98,519,949 | |
September 30, 2019 | 13,819,791 | | 57,813,955 | | 169,760,137 | | 0 | | 241,393,883 | |
See Notes to Consolidated Financial Statements. | | | | | |
|
| | | | | | | | |
| Common Units Public |
| Common Units Phillips 66 |
| General Partner Units Phillips 66 |
| Total Units |
|
| | | | |
December 31, 2015 | 24,138,750 |
| 58,349,042 |
| 1,683,425 |
| 84,171,217 |
|
Units issued in public equity offerings | 18,996,152 |
| — |
| — |
| 18,996,152 |
|
Units issued associated with acquisitions | — |
| 1,813,745 |
| 295,178 |
| 2,108,923 |
|
September 30, 2016 | 43,134,902 |
| 60,162,787 |
| 1,978,603 |
| 105,276,292 |
|
| | | | |
December 31, 2016 | 43,134,902 |
| 64,047,024 |
| 2,187,386 |
| 109,369,312 |
|
Units issued in public equity offerings | 3,323,576 |
| — |
| — |
| 3,323,576 |
|
September 30, 2017 | 46,458,478 |
| 64,047,024 |
| 2,187,386 |
| 112,692,888 |
|
See Notes to Consolidated Financial Statements.
|
| | | | |
Notes to Consolidated Financial StatementsStatement of Changes in Equity | Phillips 66 Partners LP |
| | | | | | | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Nine Months Ended September 30 |
| Preferred Unitholders Public | Common Unitholders Public | Common Unitholder Phillips 66 | General Partner Phillips 66 | Accum. Other Comprehensive Loss | Noncontrolling Interest | Total |
| | | | | | | |
December 31, 2019 | $ | 746 | | 2,717 | | (628) | | 0 | | (1) | | 0 | | 2,834 | |
Issuance of common units | — | | 2 | | — | | — | | — | | — | | 2 | |
Net income | 29 | | 168 | | 490 | | — | | — | | 10 | | 697 | |
Quarterly cash distributions to unitholders ($2.625 per common unit) | (28) | | (153) | | (446) | | — | | — | | — | | (627) | |
Transfer of equity interest | — | | — | | — | | — | | — | | 305 | | 305 | |
Proceeds from noncontrolling interest | — | | — | | — | | — | | — | | 3 | | 3 | |
Distributions to noncontrolling interest | — | | — | | — | | — | | — | | (13) | | (13) | |
Other contributions from Phillips 66 | — | | — | | 6 | | — | | — | | — | | 6 | |
September 30, 2020 | $ | 747 | | 2,734 | | (578) | | — | | (1) | | 305 | | 3,207 | |
| | | | | | | |
December 31, 2018 | $ | 746 | | 2,485 | | 592 | | (1,313) | | (1) | | 0 | | 2,509 | |
Cumulative effect of accounting change | — | | (1) | | — | | — | | — | | — | | (1) | |
Issuance of common units | — | | 133 | | — | | — | | — | | — | | 133 | |
Net income | 28 | | 189 | | 311 | | 140 | | — | | — | | 668 | |
Quarterly cash distributions to unitholders and General Partner ($2.535 per common unit) | (28) | | (142) | | (174) | | (206) | | — | | — | | (550) | |
Conversion of GP economic interest | — | | — | | (1,384) | | 1,381 | | — | | — | | (3) | |
Other distributions to Phillips 66 | — | | — | | — | | (2) | | — | | — | | (2) | |
September 30, 2019 | $ | 746 | | 2,664 | | (655) | | 0 | | (1) | | 0 | | 2,754 | |
| | | | | | | | | | | | | | | | | |
| Units |
| Nine Months Ended September 30 |
| Preferred Units Public | Common Units Public | Common Units Phillips 66 | General Partner Units Phillips 66 | Total Units |
| | | | | |
December 31, 2019 | 13,819,791 | | 58,539,439 | | 169,760,137 | | 0 | | 242,119,367 | |
Units issued in public equity offerings | — | | 40,570 | | — | | — | | 40,570 | |
September 30, 2020 | 13,819,791 | | 58,580,009 | | 169,760,137 | | 0 | | 242,159,937 | |
| | | | | |
December 31, 2018 | 13,819,791 | | 55,343,918 | | 68,760,137 | | 2,480,051 | | 140,403,897 | |
Units issued in public equity offerings | — | | 2,470,037 | | — | | — | | 2,470,037 | |
Units issued in conversion of GP economic interest | — | | — | | 101,000,000 | | (2,480,051) | | 98,519,949 | |
September 30, 2019 | 13,819,791 | | 57,813,955 | | 169,760,137 | | 0 | | 241,393,883 | |
See Notes to Consolidated Financial Statements. | | | | | |
| | | | | |
Notes to Consolidated Financial Statements | Phillips 66 Partners LP |
Note 1—Business and BasisDescription of Presentationthe Business
Unless otherwise stated or the context otherwise indicates, all references to “Phillips 66 Partners,” “the Partnership,” “us,” “our,” “we,” or similar expressions refer to Phillips 66 Partners LP, including its consolidated subsidiaries. References to Phillips 66 may refer to Phillips 66 and/or its subsidiaries, depending on the context. References to our “General Partner” or “GP” refer to Phillips 66 Partners GP LLC, and references to Phillips“Phillips 66 PDIPDI” refer to Phillips 66 Project Development Inc., the Phillips 66 subsidiary that holds a limited partner interest in us.us and wholly owns our General Partner.
Description of the Business
We are a growth-oriented master limited partnership formed to own, operate, develop and acquire primarily fee-based midstream assets. Our operations consist of crude oil, refined petroleum products and natural gas liquids (NGL) pipelines, terminals and other transportation, and midstream assets. Our common units trade on the New York Stock Exchange under the symbol PSXP.
Our assets consist of crude oil, refined petroleum products and NGL transportation,terminaling, processing terminaling and storage systems, as well as an NGL fractionator.assets. We conduct our operations through both wholly owned and joint-venturejoint venture operations. The majority of our wholly owned assets are associated with, and are integral to the operation of, nine9 of Phillips 66’s owned or joint-venturejoint venture refineries. Our operations consist of 1 reportable segment.
We primarily generate revenue by providing fee-based transportation, terminaling, processing, terminaling, storage and NGL fractionation services to Phillips 66 and other customers. Our equity affiliates primarily generate revenue from transporting and terminaling NGL,crude oil, refined petroleum products and crude oil.NGL. Since we do not own any of the NGL, crude oil, and refined petroleum products and NGL we handle and do not engage in the trading of NGL, crude oil and refined petroleum products,those commodities, we have limited direct exposure to risks associated with fluctuating commodity prices, although these risks indirectly influence our activities and results of operations over the long term.
Basis of Presentation
We have acquired assets from Phillips 66 that were considered transfers of businesses between entities under common control. This required the transactions to be accounted for as if the transfers had occurred at the beginning of the transfer period, with prior periods retrospectively adjusted to furnish comparative information. Accordingly, the accompanying financial statements and related notes have been retrospectively adjusted to include the historical results and financial position of these acquired businesses prior to the effective date of each acquisition. We refer to these pre-acquisition operations as those of our “Predecessors.”
The combined financial statements of our Predecessors were derived from the accounting records of Phillips 66 and reflect the combined historical results of operations, financial position and cash flows of our Predecessors as if such businesses had been combined for all periods presented.
All intercompany transactions and accounts of our Predecessors have been eliminated. The assets and liabilities of our Predecessors in these financial statements have been reflected on a historical cost basis because the transfer of the Predecessors to us took place within the Phillips 66 consolidated group. The consolidated statement of income also includes expense allocations for certain functions performed by Phillips 66, including operational support services such as engineering and logistics and allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, information technology and procurement. These allocations were based primarily on relative carrying values of properties, plants and equipment (PP&E) and equity-method investments, or number of terminals and pipeline miles, and secondarily on activity-based cost allocations. Our management believes the assumptions underlying the allocation of expenses from Phillips 66 are reasonable. Nevertheless, the financial results of our Predecessors may not include all of the actual expenses that would have been incurred had our Predecessors been a stand-alone publicly traded partnership during the periods presented.
Note 2—Interim Financial Information
The unaudited interim financial information presented in the financial statements included in this report is unauditedprepared in accordance with generally accepted accounting principles in the United States (GAAP) and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of our financial position, 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 audited consolidated financial statements and notes included in our 20162019 Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2017,2020, are not necessarily indicative of the results to be expected for the full year.
The Coronavirus Disease 2019 (COVID-19) pandemic continues to result in economic disruption globally. Reduced demand for petroleum products has resulted in decreased volumes through logistics infrastructure. The depth and duration of the economic consequences of the COVID-19 pandemic remain unknown. We continue to assess our long-lived assets and equity investments for impairment in this challenging business environment. Impairments may be required in the future if there is a further deterioration in our projected cash flows.
Note 3—ChangesOperating Revenues
Operating revenues are primarily generated from long-term pipeline transportation, terminaling, storage, processing and fractionation lease and service agreements, mainly with Phillips 66. These agreements typically include escalation clauses to adjust transportation tariffs and terminaling and storage fees to reflect changes in Accounting Principlesprice indices. In addition, most of these agreements contain renewal options, which typically require the mutual consent of both our customers and us.
Effective January 1, 2017, we early adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the second step from the goodwill impairment test. Under the revised test, an entity should perform its annual, or interim, goodwill impairment testTotal operating revenues disaggregated by comparing the fair valueasset type were as follows:
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2020 | | 2019 | | | 2020 | | 2019 | |
| | | | | |
Pipelines | $ | 117 | 121 | | 325 | 347 |
Terminals | 36 | 41 | | 112 | 120 |
Storage, processing and other revenues | 112 | 108 | | 336 | 368 |
Total operating revenues | $ | 265 | 270 | | 773 | 835 |
The majority of our agreements with Phillips 66 are considered operating leases under GAAP. The classification of a reporting unit with its carrying amount. An entity should recognizelease as either an impairment chargeoperating or a financing lease requires judgment in assessing the contract’s lease and service components and in determining the asset’s fair value. We have elected to account for lease and service elements of contracts classified as leases on a combined basis, except for leases of processing-type assets, which contain non-ratable fees related to turnaround activity. For these types of leases, we continue to separate the amountlease and service elements based on relative standalone prices and apply the lease standard to the lease element and the revenue standard to the service element.
Total operating revenues disaggregated by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amountlease and service revenues were as follows:
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2020 | | 2019 | | | 2020 | | 2019 | |
| | | | | |
Lease revenues | $ | 209 | | 217 | | | 622 | | 688 | |
Service revenues | 56 | | 53 | | | 151 | | 147 | |
Total operating revenues | $ | 265 | | 270 | | | 773 | | 835 | |
Accounts Receivable
We bill our customers, mainly Phillips 66, under our lease and service contracts generally on a monthly basis.
Total accounts receivable by revenue type was as follows:
| | | | | | | | | | | |
| Millions of Dollars |
| September 30 2020 | | December 31 2019 |
| | | |
Lease receivables | $ | 69 | | | 87 | |
Service receivables | 19 | | | 18 | |
| | | |
Total accounts receivable | $ | 88 | | | 105 | |
Deferred Revenues
Effective January 1, 2017, we early adopted ASU No. 2016-18, “StatementOur deferred revenues represent payments received from our customers, mainly Phillips 66, in advance of Cash Flows (Topic 230): Restricted Cash.” The new update changes the classification and presentation of restricted cash in the statement of cash flows. The amendment requires that a statement of cash flows explain the change during the period in the totalwhich lease and service contract performance obligations have been fulfilled. The majority of cash, cash equivalents,our deferred revenues relate to a tolling agreement and amounts generally describeda storage agreement that are classified as restricted cashleases. The remainder of our deferred revenues relate to lease and restricted cash equivalents. Adoption of this ASU on a retrospective basis did not impact our financial statements.
Effective January 1, 2017, we early adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new update clarifies how certain cash receipts and cash payments should be presented and classifiedservice agreements that contain minimum volume commitments with recovery provisions. Our deferred revenues are recorded in the statement“Deferred revenues” and “Other liabilities” line items on our consolidated balance sheet.
Total deferred revenues under our lease and service agreements were as follows:
| | | | | | | | | | | |
| Millions of Dollars |
| September 30 2020 | | December 31 2019 |
| | | |
Deferred lease revenues | $ | 41 | | | 41 | |
Deferred service revenues | 3 | | | 1 | |
Total deferred revenues | $ | 44 | | | 42 | |
Future Minimum Lease Payments from Customers
At September 30, 2020, future minimum payments to be received under our lease agreements with customers were estimated to be:
| | | | | |
| Millions of Dollars |
| |
Remainder of 2020 | $ | 178 | |
2021 | 706 | |
2022 | 694 | |
2023 | 648 | |
2024 | 526 | |
Remaining years | 1,389 | |
Total future minimum lease payments from customers | $ | 4,141 | |
Remaining Performance Obligations
We typically have long-term service contracts with our customers, of cash flows. In addition,which the new update clarifiesoriginal durations range from 5 to 15 years. The weighted-average remaining duration of these contracts is 10 years. These contracts include both fixed and variable transaction price components. At September 30, 2020, future service revenues expected to be recognized for the fixed component of the transaction price of our remaining performance obligations from service contracts with our customers that when cash receipts and cash payments have aspectsan original expected duration of moregreater than one classyear were:
| | | | | |
| Millions of Dollars |
| |
Remainder of 2020 | $ | 39 | |
2021 | 152 | |
2022 | 151 | |
2023 | 151 | |
2024 | 132 | |
Remaining years | 756 | |
Total future service revenues | $ | 1,381 | |
For the predominant sourceremaining service performance obligations, we applied the exemption for variable prices allocated entirely to a wholly unsatisfied performance obligation or use. Adoption of this ASU onto a retrospective basis did not have a material impact on our financial statements.
Note 4—Acquisitions
River Parish Acquisition
In November 2016, we acquired the River Parish NGL System, a non-affiliated party’s NGL logistics assets located in southeast Louisiana, consisting of pipelines and storage caverns connecting multiple fractionation facilities, refineries and a petrochemical facility. 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 changewholly unsatisfied promise to the provisional amounts recorded in 2016.
During 2016, we completed three acquisitions that were considered transfers of businesses between entities under common control, and therefore the related acquired assets were transferred at historical carrying value. Because these acquisitions were common control transactions in which we acquired businesses, our historical financial statements have been retrospectively adjustedtransfer distinct services as if we owned the acquired assets for all periods presented.
Fractionator Acquisitions
Initial Fractionator Acquisition. In February 2016, we entered into a Contribution, Conveyance and Assumption Agreement (CCAA) with subsidiaries of Phillips 66 to acquire a 25 percent controlling interest in Phillips 66 Sweeny Frac LLC (Sweeny Frac LLC) for total consideration of $236 million (the Initial Fractionator Acquisition). Total consideration consisted of the assumptionpart of a $212 million note payable to a subsidiary of Phillips 66 and the issuance of 412,823 common units to Phillips 66 PDI and 8,425 general partner units to our General Partner to maintain its 2 percent general partner interest. The Initial Fractionator Acquisition closed in March 2016.performance obligation.
Subsequent Fractionator Acquisition.In May 2016, we entered into a CCAA with subsidiaries of Phillips 66 to acquire the remaining 75 percent interest in Sweeny Frac LLC and 100 percent of the Standish Pipeline for total consideration of $775 million (the Subsequent Fractionator Acquisition). Total consideration consisted of the assumption of $675 million of notes payable to a subsidiary of Phillips 66 and the issuance of 1,400,922 common units to Phillips 66 PDI and 286,753 general partner units to our General Partner to maintain its 2 percent general partner interest in us after also taking into account the public offering we completed in May 2016. The Subsequent Fractionator Acquisition closed in May 2016.
Eagle Acquisition
In October 2016, we entered into a CCAA with subsidiaries of Phillips 66 to acquire certain pipeline and terminal assets supporting four Phillips 66-operated refineries (the Eagle Acquisition). We paid Phillips 66 total consideration of $1,305 million, consisting of $1,109 million in cash and the issuance of 3,884,237 common units to Phillips 66 PDI and 208,783 general partner units to our General Partner to maintain its 2 percent general partner interest. The Eagle Acquisition closed in October 2016.
The following tables present our previously reported results of operations and cash flows giving effect to the Eagle Acquisition. The results of operations and cash flows of the Initial Fractionator Acquisition and Subsequent Fractionator Acquisition are included in our previously reported consolidated statement of income and consolidated statement of cash flows for the periods presented, within the first column. The second column in all tables presents the retrospective adjustments made to our historical financial information for the related acquired assets prior to the effective date of acquisition. The third column in all tables presents our consolidated financial information as retrospectively adjusted.
|
| | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30, 2016 |
Consolidated Statement of Income | Phillips 66 Partners LP (As previously reported) |
| | Acquired Eagle Assets Predecessor |
|
| Consolidated Results |
|
Revenues and Other Income |
| | |
|
|
Operating revenues—related parties | $ | 108 |
| | 73 |
|
| 181 |
|
Operating revenues—third parties | 2 |
| | 5 |
|
| 7 |
|
Equity in earnings of affiliates | 33 |
| | — |
|
| 33 |
|
Other income | 1 |
| | — |
|
| 1 |
|
Total revenues and other income | 144 |
| | 78 |
|
| 222 |
|
| | | |
|
|
Costs and Expenses | | | |
|
|
Operating and maintenance expenses | 26 |
| | 28 |
|
| 54 |
|
Depreciation | 15 |
| | 10 |
|
| 25 |
|
General and administrative expenses | 9 |
| | 8 |
|
| 17 |
|
Taxes other than income taxes | 1 |
| | 3 |
|
| 4 |
|
Interest and debt expense | 10 |
| | — |
|
| 10 |
|
Total costs and expenses | 61 |
| | 49 |
|
| 110 |
|
Income before income taxes | 83 |
| | 29 |
|
| 112 |
|
Provision for income taxes | — |
| | — |
|
| — |
|
Net income | 83 |
| | 29 |
|
| 112 |
|
Less: Net income attributable to Predecessors | — |
| | 29 |
|
| 29 |
|
Net income attributable to the Partnership | 83 |
| | — |
|
| 83 |
|
Less: General partner’s interest in net income attributable to the Partnership | 26 |
| | — |
|
| 26 |
|
Limited partners’ interest in net income attributable to the Partnership | $ | 57 |
| | — |
|
| 57 |
|
|
| | | | | | | | | |
| Millions of Dollars |
| Nine Months Ended September 30, 2016 |
Consolidated Statement of Income | Phillips 66 Partners LP (As previously reported) |
| | Acquired Eagle Assets Predecessor |
| | Consolidated Results |
|
Revenues and Other Income | | | | | |
Operating revenues—related parties | $ | 315 |
| | 219 |
| | 534 |
|
Operating revenues—third parties | 6 |
| | 16 |
| | 22 |
|
Equity in earnings of affiliates | 88 |
| | — |
| | 88 |
|
Other income | 1 |
| | — |
| | 1 |
|
Total revenues and other income | 410 |
| | 235 |
| | 645 |
|
| | | | | |
Costs and Expenses | | | | | |
Operating and maintenance expenses | 76 |
| | 86 |
| | 162 |
|
Depreciation | 44 |
| | 27 |
| | 71 |
|
General and administrative expenses | 26 |
| | 24 |
| | 50 |
|
Taxes other than income taxes | 11 |
| | 13 |
| | 24 |
|
Interest and debt expense | 31 |
| | — |
| | 31 |
|
Total costs and expenses | 188 |
| | 150 |
| | 338 |
|
Income before income taxes | 222 |
| | 85 |
| | 307 |
|
Provision for income taxes | 1 |
| | — |
| | 1 |
|
Net income | 221 |
| | 85 |
| | 306 |
|
Less: Net income attributable to Predecessors | 18 |
| | 85 |
| | 103 |
|
Net income attributable to the Partnership | 203 |
| | — |
| | 203 |
|
Less: General partner’s interest in net income attributable to the Partnership | 63 |
| | — |
| | 63 |
|
Limited partners’ interest in net income attributable to the Partnership | $ | 140 |
| | — |
| | 140 |
|
|
| | | | | | | | | |
| Millions of Dollars |
| Nine Months Ended September 30, 2016 |
| Phillips 66 Partners LP (As previously reported) |
| | Acquired Eagle Assets Predecessor |
| | Consolidated Results |
|
Cash Flows From Operating Activities | | | | | |
Net income | $ | 221 |
| | 85 |
| | 306 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | | | |
Depreciation | 44 |
| | 27 |
| | 71 |
|
Deferred taxes | 1 |
| | — |
| | 1 |
|
Adjustment to equity earnings for cash distributions received | (4 | ) | | — |
| | (4 | ) |
Deferred revenues and other | 9 |
| | — |
| | 9 |
|
Other | 4 |
| | — |
| | 4 |
|
Working capital adjustments | | | | | |
Decrease (increase) in accounts receivable | (16 | ) | | 1 |
| | (15 | ) |
Decrease (increase) in materials and supplies | (1 | ) | | — |
| | (1 | ) |
Decrease (increase) in prepaid expenses and other current assets | (2 | ) | | — |
| | (2 | ) |
Increase (decrease) in accounts payable | 4 |
| | 3 |
| | 7 |
|
Increase (decrease) in accrued interest | (17 | ) | | — |
| | (17 | ) |
Increase (decrease) in deferred revenues | 5 |
| | — |
| | 5 |
|
Increase (decrease) in other accruals | 3 |
| | 4 |
| | 7 |
|
Net Cash Provided by Operating Activities | 251 |
| | 120 |
| | 371 |
|
| | | | | |
Cash Flows From Investing Activities | | | | | |
Cash capital expenditures and investments | (249 | ) | | (72 | ) | | (321 | ) |
Return of investment from equity affiliates | 10 |
| | — |
| | 10 |
|
Other | (24 | ) | | — |
| | (24 | ) |
Net Cash Used in Investing Activities | (263 | ) | | (72 | ) | | (335 | ) |
| | | | | |
Cash Flows From Financing Activities | | | | | |
Net contributions from (to) Phillips 66 to (from) Predecessors | 89 |
| | (48 | ) | | 41 |
|
Acquisition of noncontrolling interest in Sweeny Frac LLC | (656 | ) | | — |
| | (656 | ) |
Issuance of debt | 428 |
| | — |
| | 428 |
|
Repayment of debt | (686 | ) | | — |
| | (686 | ) |
Issuance of common units | 972 |
| | — |
| | 972 |
|
Quarterly distributions to common unitholders—public | (41 | ) | | — |
| | (41 | ) |
Quarterly distributions to common unitholder—Phillips 66 | (86 | ) | | — |
| | (86 | ) |
Quarterly distributions to General Partner—Phillips 66 | (50 | ) | | — |
| | (50 | ) |
Other cash contributions from Phillips 66 | 11 |
| | — |
| | 11 |
|
Net Cash Used in Financing Activities | (19 | ) | | (48 | ) | | (67 | ) |
| | | | | |
Net Change in Cash and Cash Equivalents | (31 | ) | | — |
| | (31 | ) |
Cash and cash equivalents at beginning of period | 50 |
| | — |
| | 50 |
|
Cash and Cash Equivalents at End of Period | $ | 19 |
| | — |
| | 19 |
|
Note 5—4—Equity Investments
The following table summarizes the carrying value of our equity investments.investments:
| | | | | | | | | | | | | | | | | |
| | | Millions of Dollars |
| Percentage Ownership | | September 30 2020 | | December 31 2019 |
| | | | | |
Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (Bakken Pipeline) | 25.00 | % | | $ | 578 | | | 592 | |
Bayou Bridge Pipeline, LLC (Bayou Bridge) | 40.00 | | | 292 | | | 294 | |
DCP Sand Hills Pipeline, LLC (Sand Hills) | 33.34 | | | 586 | | | 595 | |
DCP Southern Hills Pipeline, LLC (Southern Hills) | 33.34 | | | 215 | | | 215 | |
Explorer Pipeline Company (Explorer) | 21.94 | | | 98 | | | 105 | |
Gray Oak Pipeline, LLC | 65.00 | | | 896 | | | 759 | |
Liberty Pipeline LLC (Liberty) | 50.00 | | | 239 | | | 0 | |
Paradigm Pipeline LLC (Paradigm) | 50.00 | | | 141 | | | 143 | |
Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal) | 70.00 | | | 66 | | | 70 | |
South Texas Gateway Terminal LLC (South Texas Gateway Terminal) | 25.00 | | | 152 | | | 74 | |
STACK Pipeline LLC (STACK) | 50.00 | | | 110 | | | 114 | |
Total equity investments | | | $ | 3,373 | | | 2,961 | |
|
| | | | | | | | |
| | | Millions of Dollars |
| Percentage Ownership |
| | Carrying Value |
| | September 30 2017 |
| December 31 2016 |
|
| | | | |
DCP Sand Hills Pipeline, LLC (Sand Hills) | 33.34 | % | | $ | 478 |
| 445 |
|
DCP Southern Hills Pipeline, LLC (Southern Hills) | 33.34 |
| | 208 |
| 212 |
|
Explorer Pipeline Company (Explorer) | 21.94 |
| | 124 |
| 126 |
|
Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal) | 70.00 |
| | 57 |
| 72 |
|
Paradigm Pipeline LLC (Paradigm) | 50.00 |
| | 130 |
| 117 |
|
Bayou Bridge Pipeline, LLC (Bayou Bridge) | 40.00 |
| | 171 |
| 115 |
|
STACK Pipeline LLC (STACK) | 50.00 |
| | 97 |
| 55 |
|
Total equity investments | | | $ | 1,265 |
| 1,142 |
|
|
Earnings from our equity investments were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | | |
| 2020 | | 2019 | | | 2020 | | 2019 | | | | |
| | | | | | | | |
Bakken Pipeline | $ | 37 | | 58 | | | 124 | | 167 | | | | |
Bayou Bridge | 6 | | 9 | | | 23 | | 21 | | | | |
Sand Hills | 33 | | 39 | | | 111 | | 113 | | | | |
Southern Hills | 11 | | 10 | | | 32 | | 34 | | | | |
Explorer | 6 | | 12 | | | 17 | | 26 | | | | |
Gray Oak Pipeline, LLC | 30 | | (2) | | | 49 | | (2) | | | | |
Liberty | 0 | | 0 | | | 0 | | 0 | | | | |
Paradigm | 4 | | 4 | | | 10 | | 10 | | | | |
Phillips 66 Partners Terminal | (1) | | 6 | | | (2) | | 18 | | | | |
South Texas Gateway Terminal | 2 | | 0 | | | 2 | | 0 | | | | |
STACK | 1 | | 3 | | | 3 | | 8 | | | | |
Total equity in earnings of affiliates | $ | 129 | | 139 | | | 369 | | 395 | | | | |
|
| | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | |
Sand Hills | $ | 21 |
| 16 |
| | 58 |
| 48 |
|
Southern Hills | 6 |
| 7 |
| | 20 |
| 21 |
|
Explorer | 7 |
| 8 |
| | 18 |
| 17 |
|
Phillips 66 Partners Terminal | 2 |
| — |
| | 5 |
| — |
|
Paradigm | (1 | ) | — |
| | (2 | ) | — |
|
Bayou Bridge | 4 |
| 2 |
| | 8 |
| 2 |
|
STACK | 2 |
| — |
| | 4 |
| — |
|
Total equity in earnings of affiliates | $ | 41 |
| 33 |
| | 111 |
| 88 |
|
Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of $2.5 billion aggregate principal amount of senior unsecured notes, consisting of:
•$650 million aggregate principal amount of 3.625% Senior Notes due 2022.
Note 6—Properties, Plants•$1.0 billion aggregate principal amount of 3.900% Senior Notes due 2024.
•$850 million aggregate principal amount of 4.625% Senior Notes due 2029.
Dakota Access and Equipment
Our investmentETCO have guaranteed repayment of the notes. In addition, we and our co-venturers in PP&E,Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the associated accumulated depreciation, was:
|
| | | | | |
| Millions of Dollars |
| September 30 2017 |
| December 31 2016 |
|
| | |
Land | $ | 19 |
| 19 |
|
Buildings and improvements | 87 |
| 88 |
|
Pipelines and related assets* | 1,352 |
| 1,335 |
|
Terminals and related assets* | 631 |
| 610 |
|
Rail racks and related assets* | 137 |
| 137 |
|
Fractionator and related assets* | 616 |
| 615 |
|
Caverns and related assets* | 583 |
| 569 |
|
Construction-in-progress | 53 |
| 27 |
|
Gross PP&E | 3,478 |
| 3,400 |
|
Less: Accumulated depreciation | 803 |
| 725 |
|
Net PP&E | $ | 2,675 |
| 2,675 |
|
*Assets for which we arenotes offering. Under the lessor.
Note 7—Debt
DebtCECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the ongoing litigation related to an easement granted by the U.S. Army Corps of Engineers (USACE) to allow the pipeline to be constructed under Lake Oahe in North Dakota. Contributions may be required if Dakota Access determines that the issues included in any such final judgment cannot be remediated and Dakota Access has or is projected to have insufficient funds to satisfy repayment of the notes. If Dakota Access undertakes remediation to cure issues raised in a final judgment, contributions may be required if any series of the notes become due, whether by acceleration or at September 30, 2017, and December 31, 2016, was:
|
| | | | | | | | | | | | |
| Millions of Dollars |
| September 30, 2017 |
| Fair Value Hierarchy | Total Fair Value |
| Balance Sheet Carrying Value |
|
| Level 1 |
| Level 2* |
| Level 3 |
|
| |
2.646% Senior Notes due 2020 | $ | — |
| 302 |
| — |
| 302 |
| 300 |
|
3.605% Senior Notes due 2025 | — |
| 499 |
| — |
| 499 |
| 500 |
|
3.550% Senior Notes due 2026 | — |
| 490 |
| — |
| 490 |
| 500 |
|
4.680% Senior Notes due 2045 | — |
| 291 |
| — |
| 291 |
| 300 |
|
4.900% Senior Notes due 2046 | — |
| 631 |
| — |
| 631 |
| 625 |
|
Revolving credit facility at 2.45% at September 30, 2017 | — |
| 87 |
| — |
| 87 |
| 87 |
|
Total | $ | — |
| 2,300 |
| — |
| 2,300 |
| 2,312 |
|
Net unamortized discounts and debt issuance costs | | | | | (22 | ) |
Total debt |
|
|
|
| 2,290 |
|
Short-term debt | | | | | (17 | ) |
Long-term debt | | | | | $ | 2,273 |
|
*Fair value was estimated using observable market prices.
|
| | | | | | | | | | | | |
| Millions of Dollars |
| December 31, 2016 |
| Fair Value Hierarchy | Total Fair Value |
| Balance Sheet Carrying Value |
|
| Level 1 |
| Level 2* |
| Level 3 |
|
| | | | | |
2.646% Senior Notes due 2020 | $ | — |
| 298 |
| — |
| 298 |
| 300 |
|
3.605% Senior Notes due 2025 | — |
| 490 |
| — |
| 490 |
| 500 |
|
3.550% Senior Notes due 2026 | — |
| 483 |
| — |
| 483 |
| 500 |
|
4.680% Senior Notes due 2045 | — |
| 277 |
| — |
| 277 |
| 300 |
|
4.900% Senior Notes due 2046 | — |
| 599 |
| — |
| 599 |
| 625 |
|
Revolving credit facility at 1.98% at December 31, 2016 | — |
| 210 |
| — |
| 210 |
| 210 |
|
Total | $ | — |
| 2,357 |
| — |
| 2,357 |
| 2,435 |
|
Net unamortized discounts and debt issuance costs | | | | | (24 | ) |
Total debt |
|
|
|
| 2,411 |
|
Short-term debt | | | | | (15 | ) |
Long-term debt | | | | | $ | 2,396 |
|
*Fair value was estimated using observable market prices. |
Revolving Credit Facility
maturity, during such time, to the extent Dakota Access has or is projected to have insufficient funds to pay such amounts. At September 30, 2017,2020, our share of the maximum potential equity contributions under the CECU was approximately $631 million.
In March 2020, the trial court presiding over this litigation ordered the USACE to prepare an Environmental Impact Statement (EIS), and December 31, 2016, we hadrequested additional information to enable a decision on whether the Dakota Access Pipeline should be shut down while the EIS is being prepared. On July 6, 2020, the trial court ordered the Dakota Access Pipeline to be shut down and emptied of crude oil within 30 days, and that the pipeline should remain shut down pending the preparation of the EIS by the USACE, which the USACE has indicated is expected to take approximately 13 months. Dakota Access filed an aggregateappeal and a request for a stay of $87 millionthe order, which was granted. The case is now on an expedited appellate track and $210 million, respectively, borrowedoral arguments regarding whether the pipeline easement is valid and outstanding under our $750 million revolving credit facility.
Note 8—Equity
ATM Program
whether the USACE must prepare an EIS are set for early November 2020, with a decision expected in late 2020 or early 2021. In June 2016, we filed a prospectus supplementaddition to the shelf registration statement forproceedings in the appellate court, the trial court has been asked to issue an injunction to shut down the pipeline until the USACE completes the EIS, which could be ruled on as early as late December 2020. If the pipeline is required to cease operations pending the preparation of the EIS, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we also could be asked to support our continuous offering program that became effective withshare of the Securities and Exchange Commissionongoing expenses, including scheduled interest payments on the notes of approximately $25 million annually, in May 2016, relatedaddition to the continuous issuancepotential obligations under the CECU.
Summarized financial information for 100% of upDakota Access is as follows:
| | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2020 | | | 2019 | | | 2020 | | 2019 | |
| | | | | | |
Revenues | $ | 196 | | | 258 | | | 623 | | 748 | |
Income before income taxes | 121 | | | 189 | | | 401 | | 527 | |
Net income | 121 | | | 189 | | | 401 | | 527 | |
Gray Oak Pipeline, LLC
Gray Oak Pipeline, LLC was formed to an aggregatedevelop and construct the Gray Oak Pipeline, which transports crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi and the Sweeny area, including the Phillips 66 Sweeny Refinery, as well as access to the Houston market. We have a consolidated holding company that owns 65% of $250 millionGray Oak Pipeline, LLC. In December 2018, a third party exercised its option to acquire a 35% interest in the holding company. Because the holding company’s sole asset was its ownership interest in Gray Oak Pipeline, LLC, which was considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in the holding company during the construction of common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the timeGray Oak Pipeline, the legal sale of our offerings (such continuous offering program, or at-the-market program, is referred to as our ATM Program). Wethe 35% interest did not issue any common unitsqualify as a sale under GAAP at that time. The Gray Oak Pipeline commenced full operations in the ATM Program duringsecond quarter of 2020 and the three months ended Septemberrestrictions placed on the co-venturer were lifted on June 30, 2017.2020, resulting in the recognition of the sale under GAAP. Accordingly, at June 30, 2020, the co-venturer’s 35% interest in the holding company was recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet, and the premium of $84 million previously paid by the co-venturer in 2019 was recharacterized from a long-term obligation to a gain in our consolidated statement of income. For the nine months ended September 30, 2017, on a settlement date basis, we issued 3,323,576 common units under our ATM Program, which generated net proceeds of $171 million. For2020, the three and nine months ended September 30, 2016, on a settlement date basis, we issued 83,294 and 346,152 common units, respectively, under our ATM Program, generating net proceeds of $5 million and $19 million, respectively. Since inception through September 30, 2017, we have issuedco-venturer contributed an aggregate of 3,669,728 common units under$64 million to the holding company to fund its portion of Gray Oak Pipeline, LLC’s cash calls. We have an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC, after considering our ATM Program, generating netco-venturer’s 35% interest in the consolidated holding company.
In September 2020, Gray Oak Pipeline, LLC closed its offering of $1.4 billion aggregate principal amount of senior unsecured notes with maturities ranging from 2023 to 2027. These senior notes are not guaranteed by the Partnership or any of its co-venturers. Net proceeds from the offering were used to repay a third-party term loan of $190$1,379 million, after broker commissionsand for general company purposes. Concurrent with the full repayment of $2the third-party term loan facility, the associated guarantee we issued through an equity contribution agreement was terminated.
During its development phase, Gray Oak Pipeline, LLC was considered a variable interest entity (VIE) because it did not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We determined we were not the primary beneficiary because we and our co-venturers jointly directed the activities of Gray Oak Pipeline, LLC that most significantly impact economic performance. The Gray Oak Pipeline commenced full operations in the second quarter of 2020 and ceased being a VIE.
Liberty
In February 2020, we entered into a Purchase and Sale Agreement with Phillips 66 PDI to acquire its 50% interest in the Liberty Pipeline joint venture for $75 million. The net proceeds from sales underpurchase price reflected the ATM Program are used for general partnership purposes,reimbursement of project costs incurred by Phillips 66 prior to the effective date of the transaction. The transaction was funded through a combination of cash on hand and our revolving credit facility, and closed on March 2, 2020. Liberty was formed to develop and construct the Liberty Pipeline system which, may include debt repayment, future acquisitions, capital expenditures and additions to working capital.
Common Unit Offerings
In August 2016, we completed a public offering of 6,000,000 common units representing limited partner interests at a price of $50.22 per common unit. We received proceeds (net of underwriting discounts and commissions) of $299 millionupon completion, will transport crude oil from the offering. We utilizedRockies and Bakken production areas to Cushing, Oklahoma. On March 24, 2020, we and our co-venturer announced we are deferring the net proceeds to repay the note assumed as partdevelopment and construction of the Initial Fractionator Acquisition andLiberty Pipeline system as a result of the current challenging business environment.
Liberty is considered a VIE because it does not have sufficient equity at risk to repay other short-term borrowings incurred tofully fund our acquisitionthe construction of an additional interest in Explorerall assets required for principal operations. We have determined we are not the primary beneficiary because we and our contributionco-venturer jointly direct the activities of Liberty that most significantly impact economic performance. At September 30, 2020, our maximum exposure to form STACK Pipeline. SeeNote 4—Acquisitionsloss was $239 million, which represented the aggregate book value of our equity investment in Liberty. At September 30, 2020, Phillips 66 had an outstanding guarantee of $13 million to vendors for additional information.
In May 2016, we completed a public offering, consisting of an aggregate of 12,650,000 common units representing limited partner interests at a price of $52.40 per common unit. We received proceeds (net of underwriting discounts and commissions) of $656 million from the offering. We utilized the net proceeds to partially repay debt assumed as partour proportionate share of the Subsequent Fractionator Acquisition. See payment of certain purchase obligations of Liberty.
Note 4—Acquisitionsfor additional information.
Note 9—5—Net Income Per Limited Partner Unit
Net income per limited partner unit applicable to common units is computed by dividing the limited partners’ interest in net income attributable to the Partnership by the weighted-average number of common units outstanding for the period. Prior to August 1, 2019, we had more than one class of participating securities and used the two-class method to calculate net income per unit applicable to the limited partners. The classes of participating securities as of September 30, 2017,prior to August 1, 2019, included common units, general partner units and incentive distribution rights (IDRs). BasicEffective August 1, 2019, common units are the only participating securities. For the three and dilutednine months ended September 30, 2020 and 2019, our preferred units are potentially dilutive securities and were dilutive to net income per limited partner unit are the same because we do not have potentially dilutive instruments outstanding.unit.
Net income earned by the Partnership is allocated between the limited partners and the General Partner (including the General Partner’s IDRs)classes of participating securities in accordance with our partnership agreement.agreement, after giving effect to priority income allocations to the holders of the preferred units. First, earnings are allocated based on actual cash distributions madedeclared to our unitholders, including those attributable to the General Partner’s IDRs.unitholders. To the extent net income attributable to the Partnership exceeds or is less than cash distributions declared, this difference is allocated based on the unitholders’ respective ownership percentages, after consideration of any priority allocations of earnings.
When our financial statements For the diluted net income per limited partner unit calculation, the preferred units are retrospectively adjusted after a dropdown transaction,assumed to be converted at the earningsbeginning of the acquired business, prior toperiod into common limited partner units on a 1-for-one basis, and the closing of the transaction, are allocated entirely to our General Partner and presented as net income (loss) attributable to Predecessors. The earnings per unit of our limited partners prior to the close of the transaction do not change as a result of a dropdown transaction. After the closing of a dropdown transaction, the earnings of the acquired business are allocateddistribution formula for available cash in accordance with our partnership agreement as previously described.is recalculated, using the original available cash amount increased only for the preferred distributions which would not have been paid after conversion.
|
| | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | |
Net income attributable to the Partnership | $ | 99 |
| 83 |
| | 299 |
| 203 |
|
Less: General partner’s distribution declared (including IDRs)* | 43 |
| 26 |
| | 111 |
| 63 |
|
Limited partners’ distribution declared on common units* | 78 |
| 56 |
| | 209 |
| 145 |
|
Distributions less than (in excess of) net income attributable to the Partnership | $ | (22 | ) | 1 |
| | (21 | ) | (5 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | | |
| 2020 | | | 2019 | | | 2020 | | 2019 | | | | |
| | | | | | | | | |
Net income attributable to the Partnership | $ | 206 | | | 237 | | | 687 | | 668 | | | | |
Less: | | | | | | | | | |
General partners’ distributions declared (including IDRs)* | 0 | | | 0 | | | 0 | | 139 | | | | |
Limited partners’ distributions declared on preferred units* | 10 | | | 9 | | | 29 | | 28 | | | | |
Limited partners’ distributions declared on common units* | 200 | | | 197 | | | 599 | | 409 | | | | |
Distributions less than (more than) net income attributable to the Partnership | $ | (4) | | | 31 | | | 59 | | 92 | | | | |
*DistributionDistributions declared are attributable to the indicated periods.
| | | | | | | | | | | | |
| Limited Partners’ Common Units | | Limited Partners’ Preferred Units | Total |
Three Months Ended September 30, 2020 | | | | |
Net income attributable to the Partnership (millions): | | | | |
Distributions declared | $ | 200 | | | 10 | | 210 | |
Distributions more than net income attributable to the Partnership | (4) | | | 0 | | (4) | |
Net income attributable to the Partnership (basic) | 196 | | | 10 | | 206 | |
Dilutive effect of preferred units | 10 | | | | |
Net income attributable to the Partnership (diluted) | $ | 206 | | | | |
| | | | |
Weighted-average units outstanding—basic | 228,340,146 | | | | |
Dilutive effect of preferred units | 13,819,791 | | | | |
Weighted-average units outstanding—diluted | 242,159,937 | | | | |
| | | | |
Net income attributable to the Partnership per limited partner unit—basic (dollars) | $ | 0.86 | | | | |
Net income attributable to the Partnership per limited partner unit—diluted (dollars) | 0.85 | | | | |
|
| | | | | | | | |
| General Partner (including IDRs) |
| Limited Partners’ Common Units |
| Total |
|
Three Months Ended September 30, 2017 | | | |
Net income attributable to the Partnership (millions): | | | |
Distribution declared | $ | 43 |
| 78 |
| 121 |
|
Distribution in excess of net income attributable to the Partnership | — |
| (22 | ) | (22 | ) |
Net income attributable to the Partnership | $ | 43 |
| 56 |
| 99 |
|
| | | |
Weighted-average units outstanding—basic and diluted | | 110,505,502 |
|
|
| | | |
Net income per limited partner unit—basic and diluted (dollars) | | $ | 0.51 |
| |
| | | |
Three Months Ended September 30, 2016 | | | |
Net income attributable to the Partnership (millions): | | | |
Distribution declared | $ | 26 |
| 56 |
| 82 |
|
Distribution less than net income attributable to the Partnership | — |
| 1 |
| 1 |
|
Net income attributable to the Partnership | $ | 26 |
| 57 |
| 83 |
|
| | | |
Weighted-average units outstanding—basic and diluted | | 100,555,277 |
| |
| | | |
Net income per limited partner unit—basic and diluted (dollars) | | $ | 0.57 |
| |
| | | | | | | | | | | |
| Limited Partners’ Common Units | Limited Partners’ Preferred Units | Total |
Three Months Ended September 30, 2019 | | | |
Net income attributable to the Partnership (millions): | | | |
Distributions declared | $ | 197 | | 9 | | 206 | |
Distributions less than net income attributable to the Partnership | 31 | | 0 | | 31 | |
Net income attributable to the Partnership (basic) | 228 | | 9 | | 237 | |
Dilutive effect of preferred units | 9 | | | |
Net income attributable to the Partnership (diluted) | $ | 237 | | | |
| | | |
Weighted-average units outstanding—basic | 192,273,672 | | | |
Dilutive effect of preferred units | 13,819,792 | | | |
Weighted-average units outstanding—diluted | 206,093,464 | | | |
| | | |
Net income attributable to the Partnership per limited partner unit—basic (dollars) | $ | 1.18 | | | |
Net income attributable to the Partnership per limited partner unit—diluted (dollars) | 1.15 | | | |
| | | | | | | | | | | | |
| Limited Partners’ Common Units | | Limited Partners’ Preferred Units | Total |
Nine Months Ended September 30, 2020 | | | | |
Net income attributable to the Partnership (millions): | | | | |
Distributions declared | $ | 599 | | | 29 | | 628 | |
Distributions less than net income attributable to the Partnership | 59 | | | 0 | | 59 | |
Net income attributable to the Partnership (basic) | 658 | | | 29 | | 687 | |
Dilutive effect of preferred units | 29 | | | | |
Net income attributable to the Partnership (diluted) | $ | 687 | | | | |
| | | | |
Weighted-average units outstanding—basic | 228,330,885 | | | | |
Dilutive effect of preferred units | 13,819,791 | | | | |
Weighted-average units outstanding—diluted | 242,150,676 | | | | |
| | | | |
Net income attributable to the Partnership per limited partner unit—basic (dollars) | $ | 2.88 | | | | |
Net income attributable to the Partnership per limited partner unit—diluted (dollars) | 2.84 | | | | |
|
| | | | | | | | |
| General Partner (including IDRs) |
| Limited Partners’ Common Units |
| Total |
|
Nine Months Ended September 30, 2017 | | | |
Net income attributable to the Partnership (millions): | | | |
Distribution declared | $ | 111 |
| 209 |
| 320 |
|
Distribution less than (in excess of) net income attributable to the Partnership | 1 |
| (22 | ) | (21 | ) |
Net income attributable to the Partnership | $ | 112 |
| 187 |
| 299 |
|
| | | |
Weighted-average units outstanding—basic and diluted | | 109,042,961 |
| |
| | | |
Net income per limited partner unit—basic and diluted (dollars) | | $ | 1.72 |
| |
| | | |
Nine Months Ended September 30, 2016 | | | |
Net income attributable to the Partnership (millions): | | | |
Distribution declared | $ | 63 |
| 145 |
| 208 |
|
Distribution in excess of net income attributable to the Partnership | — |
| (5 | ) | (5 | ) |
Net income attributable to the Partnership | $ | 63 |
| 140 |
| 203 |
|
| | | |
Weighted-average units outstanding—basic and diluted | | 91,414,459 |
| |
| | | |
Net income per limited partner unit—basic and diluted (dollars) | | $ | 1.53 |
| |
| | | | | | | | | | | | | | |
| Limited Partners’ Common Units | General Partner (including IDRs) | Limited Partners’ Preferred Units | Total |
Nine Months Ended September 30, 2019 | | | | |
Net income attributable to the Partnership (millions): | | | | |
Distributions declared | $ | 409 | | 139 | | 28 | | 576 | |
Distributions less than net income attributable to the Partnership | 91 | | 1 | | 0 | | 92 | |
Net income attributable to the Partnership (basic) | 500 | | 140 | | 28 | | 668 | |
Dilutive effect of preferred units* | 23 | | | | |
Net income attributable to the Partnership (diluted) | $ | 523 | | | | |
| | | | |
Weighted-average units outstanding—basic | 147,367,681 | | | | |
Dilutive effect of preferred units* | 13,819,791 | | | | |
Weighted-average units outstanding—diluted | 161,187,472 | | | | |
| | | | |
Net income attributable to the Partnership per limited partner unit—basic (dollars) | $ | 3.39 | | | | |
Net income attributable to the Partnership per limited partner unit—diluted (dollars) | 3.25 | | | | |
*The dilutive effect of preferred units assumes the reallocation of net income attributable to the partnership to the limited and general partners, including a reallocation associated with IDRs, pursuant to the available cash formula in the partnership agreement. |
On October 18, 2017,20, 2020, the Board of Directors of our General Partner declared a quarterly cash distribution of $0.646$0.875 per limited partnercommon unit, which combined with distributions to our General Partner, will result in a total distributionsdistribution of $121$200 million attributable to the third quarter of 2017.2020. This distribution is payable on November 13, 2017,2020, to common unitholders of record as of October 30, 2020.
Note 6—Properties, Plants and Equipment
Our investment in properties, plants and equipment (PP&E), with the associated accumulated depreciation, was:
| | | | | | | | | | | |
| Millions of Dollars |
| September 30 2020 | | December 31 2019 |
| | | |
Land | $ | 19 | | 19 |
Buildings and improvements | 95 | | 94 |
Pipelines and related assets* | 1,522 | | 1,424 |
Terminals and related assets* | 840 | | 741 |
Rail racks and related assets* | 137 | | 137 |
Processing and related assets* | 1,058 | | 1,041 |
Caverns and related assets* | 742 | | 585 |
Construction-in-progress | 312 | | 367 |
Gross PP&E | 4,725 | | 4,408 |
Accumulated depreciation | (1,150) | | | (1,059) | |
Net PP&E | $ | 3,575 | | 3,349 |
*Assets for which we are the lessor. |
Note 7—Debt
| | | | | | | | | | | |
| Millions of Dollars |
| September 30 2020 | | December 31 2019 |
| | | |
2.450% Senior Notes due December 2024 | $ | 300 | | | 300 | |
3.605% Senior Notes due February 2025 | 500 | | | 500 | |
3.550% Senior Notes due October 2026 | 500 | | | 500 | |
3.750% Senior Notes due March 2028 | 500 | | | 500 | |
3.150% Senior Notes due December 2029 | 600 | | | 600 | |
4.680% Senior Notes due February 2045 | 450 | | | 450 | |
4.900% Senior Notes due October 2046 | 625 | | | 625 | |
| | | |
Tax-exempt bonds due April 2020 and April 2021 at 0.535% and 1.85% at September 30, 2020, and December 31, 2019, respectively | 50 | | | 75 | |
Revolving credit facility borrowings due October 2020 at 1.401% | 290 | | | 0 | |
Debt at face value | 3,815 | | | 3,550 | |
Net unamortized discounts and debt issuance costs | (32) | | | (34) | |
Total debt | 3,783 | | | 3,516 | |
Short-term debt | (340) | | | (25) | |
Long-term debt | $ | 3,443 | | | 3,491 | |
| | | |
| | | |
The fair value of our fixed-rate and floating-rate debt is estimated based on observable market prices and is classified as Level 2 of the fair value hierarchy. The fair value of our fixed-rate debt was $3,567 million and $3,650 million at September 30, 2020, and December 31, 2017.2019, respectively. The fair value of our floating-rate debt approximated carrying value of $340 million and $75 million at September 30, 2020, and December 31, 2019, respectively.
At September 30, 2020, borrowings of $290 million were outstanding and $3 million in letters of credit had been drawn under our $750 million revolving credit facility.
On April 1, 2020, we repaid the $25 million tranche of tax-exempt bonds due April 2020. The 2 remaining tranches, totaling $50 million, mature in April 2021.
Note 10—8—Contingencies
From time to time, lawsuits involving a variety of claims that arise in the ordinary course of business are filed against 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 sites. We regularly assess the need for accounting 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 any 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 extensive federal, state and local environmental laws and regulations. We record accruals for contingent environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring 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 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.
At both September 30, 2017, and December 31, 2016, our total environmental accrual was $2 million. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.
Legal Proceedings
Under our amended omnibus agreement, Phillips 66 provides certain services for our benefit, including legal support services, and we pay an operational and administrative support fee for these services. Phillips 66’s 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. The process facilitates the early evaluation and quantification of potential exposures in individual cases and enables 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, Phillips 66’s legal organization regularly assesses the adequacy of current accruals and recommendsdetermines if adjustment of existing accruals, or establishment of new accruals, is required. As of September 30, 2017,2020, and December 31, 2016,2019, we did not have any material accrued contingent liabilities associated with litigation matters.
Indemnification and Excluded Liabilities
Under our amended omnibus agreement and pursuant to the terms of various agreements under which we acquired assets from Phillips 66, Phillips 66 will indemnify us, or assume responsibility, for certain environmental liabilities, tax liabilities, litigation and any other liabilities attributable to the ownership or operation of the assets contributed to us and that arose prior to the effective date of each acquisition. These indemnifications and exclusions from liability have, in some cases, time limits and deductibles. When Phillips 66 performs under any of these indemnifications or exclusions from liability, we recognize a non-cash expensenoncash expenses and an associated non-cashnoncash capital contributioncontributions from our General Partner, as these are considered liabilities paid for by a principal unitholder.
Note 9—Equity
ATM Programs
We have assumed,authorized an aggregate of $750 million under 3 $250 million continuous offerings of common units, or at-the-market (ATM) programs. The first two programs concluded in June 2018 and have agreed to pay, dischargeDecember 2019, respectively. We did 0t issue any common units under the current ATM program during the three months ended September 30, 2020. For the nine months ended September 30, 2020, on a settlement date basis, we issued an aggregate of 40,570 common units, generating net proceeds of $2 million. For the three and perform asnine months ended September 30, 2019, we issued an aggregate of 1,635,669 and when due, all liabilities arising out2,470,037 common units, respectively, generating net proceeds of or attributable to$91 million and $133 million, respectively. Since inception in June 2016 through September 30, 2020, we issued an aggregate of 9,487,055 common units under our ATM programs, and generated net proceeds of $494 million, after broker commissions of $5 million and other costs of $3 million. The net proceeds from sales under the ownership or operation of the assets, or other activities occurring in connection with and attributable to the ownership or operation of the assets, from and after the effective date of each acquisition.
Note 11—Cash Flow Information
2016 Subsequent Fractionator Acquisition
The Subsequent Fractionator Acquisition had both cash and noncash elements. The historical book value of the net assets acquired was $871 million. Of this amount, $656 million was a financing cash outflow, representing the acquisition of the noncontrolling interest in Sweeny Frac LLC, through theATM programs are used for general partnership purposes, which may include debt repayment, of a portion of the debt assumed in the transaction. The remaining debt financing balance of $19 million represented a noncash investing and financing activity. The remaining $196 million of book value was attributed to the common and general partner units issued (a noncash investing and financing activity).
2016 Initial Fractionator Acquisition
The Initial Fractionator Acquisition was a noncash transaction. The historical book value of the net assets of our 25 percent interest acquired was $283 million. Of this amount, $212 million was attributed to the note payable assumed (a noncash investing and financing activity). The remaining $71 million was attributed to the common and general partner units issued (a noncash investing and financing activity).
Capital Expenditures
Ouracquisitions, capital expenditures and investments consisted of:additions to working capital.
|
| | | | | |
| Millions of Dollars |
| Nine Months Ended September 30 |
| 2017 |
| 2016* |
|
Capital Expenditures and Investments | | |
Cash capital expenditures and investments | $ | 227 |
| 321 |
|
Change in capital expenditure accruals | (2 | ) | (23 | ) |
Total capital expenditures and investments | $ | 225 |
| 298 |
|
Restructuring Transaction*Prior-period financial information has been retrospectively adjustedOn August 1, 2019, we closed on the transactions contemplated by the Partnership Interests Restructuring Agreement, dated July 24, 2019, entered into with our General Partner. Pursuant to this agreement, all of the outstanding IDRs held by our General Partner were eliminated and its approximately 2% general partner interest in us was converted into a non-economic general partner interest; both in exchange for acquisitionsan aggregate of businesses101 million common units issued to Phillips 66 PDI. Because these transactions were between entities under common control.
|
| | | | | |
| Millions of Dollars |
| Nine Months Ended September 30 |
| 2017 |
| 2016 |
|
Capital Expenditures and Investments |
|
|
Capital expenditures and investments attributable to the Partnership | $ | 225 |
| 207 |
|
Capital expenditures attributable to Predecessors* | — |
| 91 |
|
Total capital expenditures and investments* | $ | 225 |
| 298 |
|
*Prior-period financial information has been retrospectively adjusted for acquisitions of businesses undercontrol, the common control.
|
| | | | | |
| Millions of Dollars |
| Nine Months Ended September 30 |
| 2017 |
| 2016 |
|
Other Noncash Investing and Financing Activities | | |
Certain liabilities of acquired assets retained by Phillips 66(1) | $ | — |
| 45 |
|
(1)Certain liabilities of assets acquired fromunits issued to Phillips 66 PDI were retained bynot assigned any value; rather, our General Partner’s negative equity balance of $1.4 billion at August 1, 2019, was transferred to Phillips 66, pursuant to the terms of various agreements under which we acquired those assets. See 66’s limited partner equity account.
Note 10—Contingencies for additional information on excluded liabilities associated with acquisitions from Phillips 66.
Note 12—Related Party Transactions
Commercial Agreements
We have entered into multiplelong-term, fee-based commercial agreements with Phillips 66 including transportation services agreements, terminal services agreements, storage services agreements, stevedoring services agreements, a fractionation service agreement, a tolling services agreement, and rail terminal services agreements. Under these long-term, fee-based agreements, weto provide transportation, terminaling, storage, stevedoring, fractionation, processing, and rail terminal services to Phillips 66, andservices. Under these agreements, Phillips 66 commits to provide us with minimum quarterlytransportation, throughput or storage volumes, of crude oil, NGL, feedstock, and refined petroleum products or minimum monthly service fees. Under our transportation, processing, and terminaling services agreements, ifIf Phillips 66 fails to transport, throughput or storedoes not meet its minimum throughput volume during any quarter, thencommitments under an agreement, Phillips 66 will paypays us a deficiency payment based on the calculation described in the agreement.
Amended and Restated Operational Services Agreement
Under our amended and restated operational services agreement, we reimburse Phillips 66 for providing certain operational services to usprovided in support of our pipelines, and terminaling, processing, and storage facilities. These services include routine and emergency maintenance and repair services, routine operational activities, routine administrative services, construction and related services and such other services as we and Phillips 66 may mutually agree upon from time to time.
Amended Omnibus Agreement
The amended omnibus agreement addresses our payment of an operating and administrative support fee and our obligation to reimburse Phillips 66 for all other direct or allocated costs and expenses incurred by Phillips 66 in providing general and administrative services. Additionally, the omnibus agreement addresses Phillips 66’s indemnification to us and our indemnification to Phillips 66 for certain environmental and other liabilities. Further, it addresses the granting of a license from Phillips 66 to us with respect to the use of certain Phillips 66 trademarks.
The operational and administrative support fee is for the provision of certain services, including: logistical services; asset oversight, such as operational management and supervision; corporate engineering services, including asset integrity and regulatory services; business development services; executive services; financial and administrative services (including treasury and accounting); information technology; legal services; corporate health, safety and environmental services; facility services; human resources services; procurement services; investor relations; tax matters; and public company reporting services. We pay Phillips 66 an operational and administrative support fee under the terms of our amended omnibus agreement in the amount of $8 million per month.
We also reimburse Phillips 66 for all other direct or allocated costs incurred on behalf of us, pursuant to the terms of our amended omnibus agreement. The classification of these charges between operating and maintenance expenses and general and administrative expenses is based on the functional nature of the services performed for our operations. Under our amended and restated operational services agreement, we reimburse Phillips 66 for the provision of certain operational services in support of our operating assets. Additionally, we pay Phillips 66 for insurance services provided to us, and recoveries under these policies are recorded as an offset to our expenses. Operating and maintenance expenses also include volumetric gains and losses associated with volumes transported by Phillips 66.
Tax Sharing Agreement
We have entered into aUnder our tax sharing agreement, with Phillips 66 pursuant to which we reimburse Phillips 66 for our share of state and local income and other taxes incurred by Phillips 66 due to our results of operations being included in a combined or consolidated tax return filed by Phillips 66. Any reimbursement is limited to the tax that we (and our subsidiaries) would have paid had we not been included in a combined group with Phillips 66. Phillips 66 may use its tax attributes to cause its combined or consolidated group to owe no tax; however, we would nevertheless reimburse Phillips 66 for the tax we would have owed, even though Phillips 66 had no cash expense for that period.
Related Party Transactions
Significant related party transactions included in operatingour costs and maintenance expenses general and administrative expenses and interest and debt expense were:
| | | | | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | | |
| 2020 | | | 2019 | | | 2020 | | 2019 | | | | |
| | | | | | | | | |
Operating and maintenance expenses | $ | 46 | | | 48 | | | 136 | | 203 | | | | |
General and administrative expenses | 15 | | | 14 | | | 46 | | 47 | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016* |
| | 2017 |
| 2016* |
|
| | | | | |
Operating and maintenance expenses | $ | 31 |
| 28 |
| | 88 |
| 79 |
|
General and administrative expenses | 15 |
| 14 |
| | 44 |
| 41 |
|
Interest and debt expense | — |
| 1 |
| | — |
| 3 |
|
Total | $ | 46 |
| 43 |
| | 132 |
| 123 |
|
*Prior-period financial information has been retrospectively adjusted for acquisitions of businesses under common control.
We pay Phillips 66 a monthly operational and administrative support fee under the terms of our amended omnibus agreement in the amount of $7 million. On October 6, 2017, in connection with the transaction described in Note 14—Subsequent Events, the omnibus agreement was amended and our monthly operational and administrative support fee was increased to $8 million prospectively. The operational and administrative support fee is for the provision of certain services, including: logistical services; asset oversight, such as operational management and supervision; corporate engineering services, including asset integrity and regulatory services; business development services; executive services; financial and administrative services (including treasury and accounting); information technology; legal services; corporate health, safety and environmental services; facility services; human resources services; procurement services; investor relations; tax matters; and public company reporting services. We also reimburse Phillips 66 for all other direct or allocated costs incurred on behalf of us, pursuant to the terms of our amended omnibus agreement. The classification of these charges between operating and maintenance expenses and general and administrative expenses is based on the functional nature of the services performed for our operations. Under our amended operational services agreement, we reimburse Phillips 66 for the provision of certain operational services to us in support of our pipeline, rail rack, fractionator, processing, terminaling, and storage facilities. Additionally, we pay Phillips 66 for insurance services provided to us. Operating and maintenance expenses also include volumetric gain/loss associated with volumes transported by Phillips 66.
During the third quarter of 2016, we paid $24 million to Phillips 66 to assume Phillips 66’s rights and obligations under an agreement to acquire the River Parish NGL System in southeast Louisiana. The payment to Phillips 66 is reflected as an “other” investing cash outflow in the consolidated statement of cash flows in 2016.
Other related party balances were included in the following line items on our consolidated balance sheet, consisted of the following, all of which were related to commercial agreements with Phillips 66:
| | | | | | | | | | | |
| Millions of Dollars |
| September 30 2020 | | December 31 2019 |
| | | |
Prepaid expenses and other current assets | $ | 4 | | 7 |
Other assets | 48 | | 44 |
Deferred revenues | 22 | | 16 |
Other current liabilities | 1 | | 1 |
Other liabilities | 66 | | 70 |
|
| | | | | |
| Millions of Dollars |
| September 30 2017 |
| December 31 2016 |
|
| | |
Deferred rentals and other | $ | 5 |
| 5 |
|
Deferred revenues | 24 |
| 14 |
|
Deferred revenues and other | 18 |
| 19 |
|
Note 13—New Accounting Standards
Equity Affiliate Arrangements
In January 2017,March 2019, we and our co-venturers in Dakota Access provided a CECU in conjunction with a senior unsecured notes offering. See Note 4—Equity Investments, for additional information.
In September 2020, concurrent with the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definitionfull repayment 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 amendment should be applied prospectively, and no disclosures are required at the effective date. We are currently evaluating the provisions of ASU No. 2017-01.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” In the new standard, the FASB modified its determination of whether a contract is a lease rather than whether a lease is a capital or operating lease under current 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 and 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 under current guidance. Under the new standard, assets and liabilities arising from operating leases will require recognition on the balance sheet. The effect of all leases in the statement of comprehensive income and the statement of cash flows will be largely unchanged. Lessor accounting will also be largely unchanged. Additional disclosures will be required for financing and operating leases for both lessors and lessees. 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, with early adoption permitted. Entities are required to adopt the ASU using a modified retrospective approach, subject to certain optional practical expedients, and apply its provisions 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 work-to-date, we have formed an implementation team, commenced identification of our lease population and are evaluating lease software packages.
In January 2016, 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 affects 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, 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 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 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. Our evaluation of the new ASU is ongoing, which includes understanding the impact of adoption on earnings from equity method investments and revenue generated by lease arrangements. Based on our analysis to-date, we have not identified any material impact on our financial statements, other than disclosure.
Note 14— Subsequent Events
Bakken Pipeline/MSLP Acquisition
On September 19, 2017, we entered into a CCAA with subsidiaries of Phillips 66 for us to acquire an indirect 25 percent interest in each of Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (together, Dakota/ETCO) and a direct 100 percent interest in Merey Sweeny, L.P. (MSLP and the acquisitions pursuant to the CCAA, collectively, the Bakken Pipeline/MSLP Acquisition).
The assets owned by Dakota/ETCO and MSLP are described below:
Dakota/ETCO owns the Bakken Pipeline, which includes 1,926 combined pipeline miles which has 520,000 barrels per day (BPD) of crude oil capacity expandable to 570,000 BPD. There are receipt stations in North Dakota to access Bakken and Three Forks production, a delivery and receipt point in Patoka, Illinois, and delivery points in Nederland, Texas, including at the Phillips 66 Beaumont Terminal. The pipeline, which commenced commercial operations on June 1, 2017, is supported by long-term, fee-based contracts.
MSLP owns a 125,000 BPD capacity vacuum distillation unit and a 70,000 BPD capacity delayed coker unit. MSLP processes residue from heavy sour crude oil into liquid products and fuel-grade petroleum coke at the Phillips 66 Sweeny Refinery in Old Ocean, Texas.
In connection with the closing of the acquisition, MSLP and Phillips 66 entered into an amended and restated tolling services agreement, effective October 1, 2017, with a 15-year term that includes a base throughput fee and a minimum volume commitment from Phillips 66.
The Bakken Pipeline/MSLP Acquisition closed on October 6, 2017. We paid Phillips 66 total consideration of $1.65 billion, consisting of $372 million in cash, the assumption of $588 million of promissory notes payable to Phillips 66 and a $450 millionthird-party term loan under which Phillips 66facility by Gray Oak Pipeline, LLC, the associated guarantee we issued through an equity contribution agreement was the obligor,terminated. See Note 4—Equity Investments, for additional information.
Note 11—Cash Flow Information
Capital Expenditures and the issuanceInvestments
Our capital expenditures and investments consisted of:
| | | | | | | | | | | |
| Millions of Dollars |
| Nine Months Ended September 30 |
| 2020 | | | 2019 | |
| | | |
Cash capital expenditures and investments | $ | 796 | | | 924 | |
Change in capital expenditure accruals | (1) | | | (17) | |
Total capital expenditures and investments | $ | 795 | | | 907 | |
Debt and Equity Issuances
Private Placement of Preferred and Common Units. In part to fund the cash portion of the Bakken Pipeline/MSLP Acquisition consideration, on October 6, 2017, we closed on a private placement and issued the following:
13,819,791 perpetual convertible preferred units generating gross proceeds of $750 million.
6,304,204 common units generating gross proceeds of $300 million.
Together, the units issued in the private placement resulted in net proceeds, after deducting offering and transaction expenses, of approximately $1.03 billion.
We privately placed approximately 13.8 million Series A Perpetual Convertible Preferred Units (Preferred Units) representing limited partner interests for a price of $54.27 per unit. The Preferred Units rank senior to all common units with respect to distributions and rights upon liquidation. The holders of the Preferred Units are entitled to receive cumulative quarterly distributions equal to $0.678375 per unit, commencing for the quarter ended December 31, 2017, with a prorated amount from the date of issuance. Following the third anniversary of the issuance of the Preferred Units, the holders of the Preferred Units will receive as a quarterly distribution the greater of $0.678375 per unit or the amount of per-unit distributions paid to common unitholders as if such Preferred Units had converted into common units immediately prior to the record date.
The holders of the Preferred Units may convert their Preferred Units into common units, on a one-for-one basis, at any time after the second anniversary of the issuance date, in full or in part, subject to minimum conversion amounts and conditions. After the third anniversary of the issuance date, we may convert the Preferred Units into common units at any time, in whole or in part, subject to certain minimum conversion amounts and conditions, if the arithmetic average of the volume-weighted trading price of our common units is greater than $73.2645 per unit for the 20 day trading period immediately preceding the conversion notice date and the average trading volume of the common units is at least 100,000 for the preceding 20 trading days. The conversion rate for the Preferred Units shall be the quotient of (a) the sum of (i) $54.27, plus (ii) any unpaid cash distributions on the applicable Preferred Unit, divided by (b) $54.27. The holders of the Preferred Units are entitled to vote on an as-converted basis with the common unitholders and have certain other class voting rights with respect to any amendment to our partnership agreement that would adversely affect any rights, preferences or privileges of the Preferred Units. In addition, upon certain events involving a change in control, the holders of Preferred Units may elect, among other potential elections, to convert their Preferred Units to common units at the then change of control conversion rate.
Debt Issuances. On October 13, 2017, we closed on a public debt offering and issued $500 million aggregate principal amount of 3.750% Senior Notes due 2028 and an additional $150 million aggregate principal amount of our outstanding 4.680% Senior Notes due 2045. Interest on the Senior Notes due 2028 is payable semiannually in arrears on March 1 and September 1 of each year, commencing on March 1, 2018. The Senior Notes due 2045 are an additional issuance of our existing Senior Notes due 2045, and interest is payable semiannually in arrears on February 15 and August 15 of each year. The proceeds from the public debt offering have been applied to repay the remaining balances on the promissory notes and term loan assumed in the Bakken Pipeline/MSLP Acquisition and also will be used for general partnership purposes, including funding of future acquisitions and organic projects and the repayment of outstanding indebtedness under our revolving credit facility.
| |
Item 2. | Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Unless otherwise stated or the context otherwise indicates, all references to “Phillips 66 Partners,” “the Partnership,” “us,” “our,” “we”“we,” or similar expressions refer to Phillips 66 Partners LP, including its consolidated subsidiaries. References to Phillips 66 may refer to Phillips 66 and/or its subsidiaries, depending on the context. References to our “General Partner” refer to Phillips 66 Partners GP LLC, and references to Phillips“Phillips 66 PDIPDI” refer to Phillips 66 Project Development Inc., the Phillips 66 subsidiary that holds a limited partner interest in us.us and wholly owns our General Partner.
Management’s Discussion and Analysis is the Partnership’s analysis of its financial performance, financial condition, and of significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes appearingthereto included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the Partnership’s plans, strategies, objectives, expectations and intentions. 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 normally identify forward-looking statements.statements, but the absence of these words does not mean that a statement is not forward-looking. The Partnership 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 Partnership’s disclosures under the heading: “CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.”
BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW
Partnership Overview
We are a growth-oriented master limited partnership formed to own, operate, develop and acquire primarily fee-based midstream assets. Our operations consist of crude oil, refined petroleum products and natural gas liquids (NGL) pipelines and terminals, and other transportation and midstream assets. Our common units trade on the New York Stock Exchange under the symbol PSXP.
Our assets consist of crude oil, refined petroleum products and NGL transportation, terminaling, processing and storage systems, as well as an NGL fractionator.assets. We conduct our operations through both wholly owned and joint-venturejoint venture operations. The majority of our wholly owned assets are associated with, and are integral to the operation of, nine of Phillips 66’s owned or joint-venturejoint venture refineries.
We primarily generate revenue by providing fee-based transportation, terminaling, processing, terminaling, storage and NGL fractionation services to Phillips 66 and other customers. Our equity affiliates primarily generate revenue from transporting and terminaling NGL,crude oil, refined petroleum products and crude oil. Since we do not own any of the NGL, crude oil and refined petroleum products we handle and do not engage in the trading of NGL, crude oil and refined petroleum products, we have limited direct exposure to risks associated with fluctuating commodity prices, although these risks indirectly influence our activities and results of operations over the long term.NGL.
Basis of Presentation
We have acquired assets from Phillips 66 that were considered transfers of businesses between entities underOur common control. This required the transactions to be accounted for as if the transfers had occurred at the beginning of the transfer period, with prior periods retrospectively adjusted to furnish comparative information. Accordingly, the accompanying financial statements and related notes have been retrospectively adjusted to include the historical results and financial position of these acquired businesses prior to the effective date of each acquisition. We refer to these pre-acquisition operations as those of our “Predecessors.”
See the “Basis of Presentation” section of Note 1—Business and Basis of Presentation, in the Notes to Consolidated Financial Statements, for additional informationunits trade on the content and comparability of our historical financial statements.New York Stock Exchange under the symbol PSXP.
How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our performance, including: (1) volumes handled (including pipeline throughput, terminaling throughput and storage volumes);handled; (2) operating and maintenance expenses; (3) net income (loss) before net interest expense, income taxes, depreciation and amortization (EBITDA); (4) adjusted EBITDA; and (5) distributable cash flow.
Volumes Handled
The amount of revenue we generate primarily depends on the volumes of crude oil, refined petroleum products and NGL that we handle in our pipeline, terminal, rail rack, processing, storage and NGL fractionator systems. In addition, our equity affiliates generate revenue from transporting and terminaling NGL, crude oil, and refined petroleum products.products and NGL. These volumes are primarily affected by the supply of, and demand for, NGL, crude oil, and refined petroleum products and NGL in the markets served directly or indirectly by our assets, as well as the operational status of the refineries served by our assets. Phillips 66 has committed to minimum throughput volumes under many of our commercial agreements.
Operating and Maintenance Expenses
Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses primarily consist of labor expenses (including contractor services), utility costs, and repair and maintenance expenses. TheseOperating and maintenance expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities, particularly maintenance activities, performed during the period. Although we seek to manage our maintenance expenditures on our facilities to avoid significant variability in our quarterly cash flows, we balance this approach with our high standards of safety and environmental stewardship, such that critical maintenance is regularly performed.
Our operating and maintenance expenses are also affected by volumetric gains/losses resulting from variances in meter readings and other measurement methods, as well as volume fluctuations due to pressure and temperature changes. Under certain commercial agreements with Phillips 66, the value of any NGL, crude oil, or refined petroleum product and NGL volumetric gain/loss isgains and losses are determined by reference to the monthly average reference price for the applicable commodity. Any gains and gains/losses under these provisions decrease or increase, respectively, our operating and maintenance expenses in the period in which they are realized. These contractual volumetric gain/loss provisions could increase variability in our operating and maintenance expenses.
EBITDA, Adjusted EBITDA and Distributable Cash Flow
We define EBITDA as net income (loss) plus net interest expense, income taxes, depreciation and amortization attributable to both the Partnership and our Predecessors.amortization.
Adjusted EBITDA is the EBITDA directly attributable to the Partnership after deducting the adjusted EBITDA attributable to our Predecessors,noncontrolling interest, further adjusted for:
•The difference between cash distributions receivedproportional share of equity affiliates’ net interest expense, income taxes and equity earnings from our affiliates.depreciation and amortization.
•Transaction costs associated with acquisitions.
•Certain other noncash items, including expenses indemnified by Phillips 66.
Distributable cash flow is defined as adjusted EBITDA less (i) equity affiliate distributions less than proportional EBITDA, (ii) maintenance capital expenditures, (iii) net interest expense, maintenance capital expenditures and(iv) income taxes paid and (v) preferred unit distributions, plus adjustments for deferred revenue impacts and prefunded maintenance capital expenditures.impacts.
EBITDA, adjusted EBITDA, and distributable cash flow are not presentations made in accordance with accounting principles generally accepted (GAAP)accounting principles in the United States.States (GAAP). EBITDA, adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management believes external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may find useful to assess:
•Our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of EBITDA and adjusted EBITDA, financing methods.
•The ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders.
•Our ability to incur and service debt and fund capital expenditures.
•The viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
The GAAP performance measure most directly comparable to EBITDA and adjusted EBITDA is net income. The GAAP liquidity measure most directly comparable to EBITDA and distributable cash flow is net cash provided by operating activities. These non-GAAP financial measures should not be considered alternatives to GAAP net income or net cash provided by operating activities. They have important limitations as analytical tools because they exclude some but not all items that affect net income and net cash provided by operating activities. Additionally, because EBITDA, adjusted EBITDA, and distributable cash flow may be defined differently by other companies in our industry, our definition of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Business Environment
Since weWe do not own any of the NGL, crude oil, and refined petroleum products and NGL we handle and do not engage in the trading of NGL, crude oilthose commodities, and refined petroleum products, wetherefore have limited direct exposure to risks associated with fluctuating commodity prices, although these risks indirectly influence our activities and results of operations over the long term.
Our throughput volumes primarily depend on the volume of crude oil processed and refined petroleum products produced at Phillips 66’s owned or operated refineries with which our assets are integrated, which in turnintegrated. These volumes are primarily dependent on Phillips 66’s refining margins and maintenance schedules. Refining margins depend on the costprice of crude oil or other feedstocks and the price of refined petroleum products. These prices are affected by numerous factors beyond our or Phillips 66’s control, including the domestic and global supply of and demand for crude oil and refined petroleum products. Throughput volumes of our equity affiliates primarily depend on upstream drilling activities, refinery performance and product supply and demand.
The Coronavirus Disease 2019 (COVID-19) pandemic continues to result in economic disruption globally. Actions taken by governments to prevent the spread of the disease have included travel and business restrictions, which have resulted in substantial decreases in the demand for crude oil and many refined petroleum products, particularly gasoline and jet fuel. The lack of demand for petroleum products has resulted in low crude oil prices and refining margins. As a result, crude oil producers have shut in high cost production and refiners have reduced crude oil processing rates. These actions have reduced throughput volumes on both our and our joint ventures’ assets.
The near-term outlook for petroleum product demand remains highly uncertain, and margins and volumes remain challenged. Our customers, including Phillips 66, may continue to experience adverse economic effects in the near term as the depth and duration of the economic consequences of the COVID-19 pandemic remain unknown. We continue to assess our long-lived assets and equity investments for impairment in this challenging business environment. Impairments may be required in the future if there is a further deterioration in our projected cash flows.
While we believe we and the majority of our joint ventures have substantially mitigated our indirect exposure to commodity price fluctuations through the minimum volume commitments in our commercial agreements with Phillips 66 during the respective terms of those agreements, our ability to execute our growth strategy in our areas of operation will depend, in part, on the availability of attractively priced crude oil in the areas served by our crude oil pipelines and rail racks, demand for refined petroleum products in the markets served by our refined petroleum product pipelines and terminals, and the general demand for midstream services, including NGL transportation and fractionation.
RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three-three and nine-month periodsnine months ended September 30, 2017,2020, is based on a comparison with the respective corresponding periods of 2016.2019.
| | | | | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | | |
| 2020 | | | 2019 | | | 2020 | | 2019 | | | | |
Revenues and Other Income | | | | | | | | | |
Operating revenues—related parties | $ | 256 | | | 262 | | | 750 | | 814 | | | | |
Operating revenues—third parties | 9 | | | 8 | | | 23 | | 21 | | | | |
Equity in earnings of affiliates | 129 | | | 139 | | | 369 | | 395 | | | | |
Gain from equity interest transfer | — | | | — | | | 84 | | — | | | | |
Other income | — | | | 2 | | | 2 | | 5 | | | | |
Total revenues and other income | 394 | | | 411 | | | 1,228 | | 1,235 | | | | |
| | | | | | | | | |
Costs and Expenses | | | | | | | | | |
Operating and maintenance expenses | 85 | | | 91 | | | 257 | | 315 | | | | |
Depreciation | 35 | | | 30 | | | 96 | | 88 | | | | |
General and administrative expenses | 16 | | | 16 | | | 50 | | 51 | | | | |
Taxes other than income taxes | 9 | | | 10 | | | 30 | | 30 | | | | |
Interest and debt expense | 32 | | | 26 | | | 89 | | 80 | | | | |
Other expenses | — | | | — | | | 7 | | — | | | | |
Total costs and expenses | 177 | | | 173 | | | 529 | | 564 | | | | |
Income before income taxes | 217 | | | 238 | | | 699 | | 671 | | | | |
Income tax expense | 1 | | | 1 | | | 2 | | 3 | | | | |
Net Income | 216 | | | 237 | | | 697 | | 668 | | | | |
Less: Net income attributable to noncontrolling interest | 10 | | | — | | | 10 | | — | | | | |
| | | | | | | | | |
Net Income Attributable to the Partnership | 206 | | | 237 | | | 687 | | 668 | | | | |
Less: Preferred unitholders’ interest in net income attributable to the Partnership | 10 | | | 9 | | | 29 | | 28 | | | | |
Less: General partner’s interest in net income attributable to the Partnership | — | | | — | | | — | | 140 | | | | |
Limited Partners’ Interest in Net Income Attributable to the Partnership | $ | 196 | | | 228 | | | 658 | | 500 | | | | |
| | | | | | | | | |
Net Cash Provided by Operating Activities | $ | 296 | | | 276 | | | 785 | | 757 | | | | |
| | | | | | | | | |
Adjusted EBITDA | $ | 313 | | | 323 | | | 903 | | 923 | | | | |
| | | | | | | | | |
Distributable Cash Flow | $ | 243 | | | 255 | | | 730 | | 735 | | | | |
|
| | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016* |
| | 2017 |
| 2016* |
|
Revenues and Other Income | | | | | |
Operating revenues—related parties | $ | 193 |
| 181 |
| | 563 |
| 534 |
|
Operating revenues—third parties | 11 |
| 7 |
| | 32 |
| 22 |
|
Equity in earnings of affiliates | 41 |
| 33 |
| | 111 |
| 88 |
|
Other income | — |
| 1 |
| | 7 |
| 1 |
|
Total revenues and other income | 245 |
| 222 |
| | 713 |
| 645 |
|
| | | | | |
Costs and Expenses | | | | | |
Operating and maintenance expenses | 69 |
| 54 |
| | 188 |
| 162 |
|
Depreciation | 30 |
| 25 |
| | 82 |
| 71 |
|
General and administrative expenses | 16 |
| 17 |
| | 48 |
| 50 |
|
Taxes other than income taxes | 7 |
| 4 |
| | 23 |
| 24 |
|
Interest and debt expense | 23 |
| 10 |
| | 71 |
| 31 |
|
Other expenses | 1 |
| — |
| | 1 |
| — |
|
Total costs and expenses | 146 |
| 110 |
| | 413 |
| 338 |
|
Income before income taxes | 99 |
| 112 |
| | 300 |
| 307 |
|
Provision for income taxes | — |
| — |
| | 1 |
| 1 |
|
Net income | 99 |
| 112 |
| | 299 |
| 306 |
|
Less: Net income attributable to Predecessors | — |
| 29 |
| | — |
| 103 |
|
Net income attributable to the Partnership | 99 |
| 83 |
| | 299 |
| 203 |
|
Less: General partner’s interest in net income attributable to the Partnership | 43 |
| 26 |
| | 112 |
| 63 |
|
Limited partners’ interest in net income attributable to the Partnership | $ | 56 |
| 57 |
| | 187 |
| 140 |
|
| | | | | |
Net cash provided by operating activities | $ | 152 |
| 128 |
| | 422 |
| 371 |
|
| | | | | |
Adjusted EBITDA | $ | 168 |
| 111 |
| | 493 |
| 282 |
|
| | | | | |
Distributable cash flow | $ | 136 |
| 102 |
| | 400 |
| 250 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 | | |
| 2020 | | | 2019 | | | 2020 | | 2019 | | | | |
Wholly Owned Operating Data | | | | | | | | | |
Pipelines | | | | | | | | | |
Pipeline revenues (millions of dollars) | $ | 117 | | | 121 | | | 325 | | 347 | | | | |
Pipeline volumes(1) (thousands of barrels daily) | | | | | | | | | |
Crude oil | 867 | | | 998 | | | 871 | | 986 | | | | |
Refined petroleum products and NGL | 907 | | | 990 | | | 866 | | 918 | | | | |
Total | 1,774 | | | 1,988 | | | 1,737 | | 1,904 | | | | |
| | | | | | | | | |
Average pipeline revenue per barrel (dollars) | $ | 0.71 | | | 0.66 | | | 0.68 | | 0.67 | | | | |
| | | | | | | | | |
Terminals | | | | | | | | | |
Terminal revenues (millions of dollars) | $ | 36 | | | 41 | | | 112 | | 120 | | | | |
Terminal throughput (thousands of barrels daily) | | | | | | | | | |
Crude oil(2) | 296 | | | 493 | | | 378 | | 473 | | | | |
Refined petroleum products | 700 | | | 819 | | | 713 | | 788 | | | | |
Total | 996 | | | 1,312 | | | 1,091 | | 1,261 | | | | |
| | | | | | | | | |
Average terminaling revenue per barrel (dollars) | $ | 0.39 | | | 0.33 | | | 0.37 | | 0.34 | | | | |
| | | | | | | | | |
Storage, processing and other revenues (millions of dollars) | $ | 112 | | | 108 | | | 336 | | 368 | | | | |
Total Operating Revenues (millions of dollars) | $ | 265 | | | 270 | | | 773 | | 835 | | | | |
| | | | | | | | | |
Joint Venture Operating Data(3) | | | | | | | | | |
Crude oil, refined petroleum products and NGL (thousands of barrels daily) | 1,142 | | | 786 | | | 975 | | 749 | | | | |
*Prior-period financial information has been retrospectively adjusted for acquisitions of businesses under common control.
|
| | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| Thousands of Barrels Daily |
Pipeline, Terminal and Storage Volumes | | | | | |
Pipelines(1) | | | | | |
Pipeline throughput volumes | | | | | |
Wholly Owned Pipelines | | | | | |
Crude oil* | 1,015 |
| 981 |
| | 965 |
| 1,010 |
|
Refined products and NGL* | 920 |
| 855 |
| | 944 |
| 836 |
|
Total | 1,935 |
| 1,836 |
| | 1,909 |
| 1,846 |
|
| | | | | |
Select Joint Venture Pipelines(2) | | | | | |
NGL | 387 |
| 346 |
| | 371 |
| 333 |
|
| | | | | |
Terminals | | | | | |
Terminal throughput and storage volumes(3) | | | | | |
Crude oil*(4) | 586 |
| 541 |
| | 522 |
| 534 |
|
Refined products and NGL* | 828 |
| 822 |
| | 855 |
| 809 |
|
Total | 1,414 |
| 1,363 |
| | 1,377 |
| 1,343 |
|
| | | | | |
Revenue Per Barrel (dollars) | | | | | |
Average pipeline revenue per barrel(5) | $ | 0.63 |
| 0.59 |
| | 0.62 |
| 0.60 |
|
Average terminaling and storage revenue per barrel | 0.41 |
| 0.41 |
| | 0.42 |
| 0.41 |
|
*Prior-period financial information has been retrospectively adjusted for acquisitions of businesses under common control.
(1) Represents the sum of volumes transported through each separately tariffed pipeline segment.
(2) Total pipeline system throughput volumes for the Sand Hills and Southern Hills pipelines (100 percent basis) per day for each period presented.
(3) Terminal throughput and storage volumes include leased capacity converted to a MBD-equivalent based on capacity divided by days in the period.
(4) Crude oil terminals include Bayway and Ferndale rail rack volumes.volumes included in crude oil terminals.
(5) Excludes(3) Proportional share of total pipeline and terminal volumes of joint ventures consistent with recognized equity in earnings of affiliates.
The following tables present reconciliations of EBITDA and adjusted EBITDA to net income, and EBITDA and distributable cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.
| | | | | | | | | | | | Millions of Dollars |
| Millions of Dollars | | Three Months Ended September 30 | | Nine Months Ended September 30 | |
| Three Months Ended September 30 | | Nine Months Ended September 30 | | 2020 | | | 2019 | | | 2020 | | 2019 | | |
| 2017 |
| 2016* |
| | 2017 |
| 2016* |
| |
Reconciliation to Net Income | | | | | |
Net income | $ | 99 |
| 112 |
| | 299 |
| 306 |
| |
Reconciliation to Net Income Attributable to the Partnership | | Reconciliation to Net Income Attributable to the Partnership | | | | | | |
Net Income Attributable to the Partnership | | Net Income Attributable to the Partnership | $ | 206 | | | 237 | | | 687 | | 668 | | |
Plus: | | Plus: | | | | |
Net income attributable to noncontrolling interest | | Net income attributable to noncontrolling interest | 10 | | | — | | | 10 | | — | | |
Net Income | | Net Income | 216 | | | 237 | | | 697 | | 668 | | |
Plus: | | | | | Plus: | | | | |
Depreciation | 30 |
| 25 |
| | 82 |
| 71 |
| Depreciation | 35 | | | 30 | | | 96 | | 88 | | |
Net interest expense | 23 |
| 10 |
| | 71 |
| 31 |
| Net interest expense | 31 | | | 25 | | | 88 | | 78 | | |
Provision for income taxes | — |
| — |
| | 1 |
| 1 |
| |
Income tax expense | | Income tax expense | 1 | | | 1 | | | 2 | | 3 | | |
EBITDA | 152 |
| 147 |
| | 453 |
| 409 |
| EBITDA | 283 | | | 293 | | | 883 | | 837 | | |
Plus: | | | | | Plus: | | | | |
Distributions in excess of equity earnings | 10 |
| 1 |
| | 30 |
| 7 |
| |
Expenses indemnified by Phillips 66 | 4 |
| — |
| | 7 |
| 4 |
| |
Proportional share of equity affiliates’ net interest, taxes and depreciation and amortization | | Proportional share of equity affiliates’ net interest, taxes and depreciation and amortization | 45 | | | 30 | | | 118 | | 85 | | |
Expenses indemnified or prefunded by Phillips 66 | | Expenses indemnified or prefunded by Phillips 66 | 1 | | | — | | | 1 | | 1 | | |
Transaction costs associated with acquisitions | 2 |
| 2 |
| | 3 |
| 4 |
| Transaction costs associated with acquisitions | — | | | — | | | 1 | | — | | |
Less: | | | | | Less: | | | | |
EBITDA attributable to Predecessors | — |
| 39 |
| | — |
| 142 |
| |
Gain from equity interest transfer | | Gain from equity interest transfer | — | | | — | | | 84 | | — | | |
Adjusted EBITDA attributable to noncontrolling interest | | Adjusted EBITDA attributable to noncontrolling interest | 16 | | | — | | | 16 | | — | | |
Adjusted EBITDA | 168 |
| 111 |
| | 493 |
| 282 |
| Adjusted EBITDA | 313 | | | 323 | | | 903 | | 923 | | |
Plus: | | | | | Plus: | | | | |
Deferred revenue impacts** | 1 |
| 4 |
| | 9 |
| 7 |
| |
Deferred revenue impacts*† | | Deferred revenue impacts*† | (3) | | | — | | | 4 | | (4) | | |
Less: | | | | | Less: | | | | |
Equity affiliate distributions less than (more than) proportional EBITDA | | Equity affiliate distributions less than (more than) proportional EBITDA | 4 | | | 9 | | | (5) | | 31 | | |
Maintenance capital expenditures† | | Maintenance capital expenditures† | 21 | | | 25 | | | 64 | | 46 | | |
Net interest expense | 23 |
| 10 |
| | 71 |
| 31 |
| Net interest expense | 31 | | | 25 | | | 88 | | 78 | | |
Maintenance capital expenditures | 10 |
| 3 |
| | 31 |
| 8 |
| |
Distributable cash flow | $ | 136 |
| 102 |
| | 400 |
| 250 |
| |
Preferred unit distributions | | Preferred unit distributions | 10 | | | 9 | | | 29 | | 28 | | |
Income taxes paid | | Income taxes paid | 1 | | | — | | | 1 | | 1 | | |
Distributable Cash Flow | | Distributable Cash Flow | $ | 243 | | | 255 | | | 730 | | 735 | | |
*Prior-period financial information has been retrospectively adjusted for acquisitions of businesses under common control.
**Difference between cash receipts and revenue recognition.
†Excludes Merey Sweeny capital reimbursements and turnaround impacts.
| | | Millions of Dollars | | Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended September 30 | | Nine Months Ended September 30 | |
| 2017 | 2016* |
| | 2017 | 2016* |
| | 2020 | | | 2019 | | | 2020 | | 2019 | | |
Reconciliation to Net Cash Provided by Operating Activities | | | | | Reconciliation to Net Cash Provided by Operating Activities | | | | | | |
Net Cash Provided by Operating Activities | $ | 152 |
| 128 |
| | 422 |
| 371 |
| Net Cash Provided by Operating Activities | $ | 296 | | | 276 | | 785 | | 757 | |
Plus: | | | | | Plus: | | | | |
Net interest expense | 23 |
| 10 |
| | 71 |
| 31 |
| Net interest expense | 31 | | | 25 | | | 88 | | 78 | | |
Provision for income taxes | — |
| — |
| | 1 |
| 1 |
| |
Income tax expense | | Income tax expense | 1 | | | 1 | | | 2 | | 3 | | |
Changes in working capital | (20 | ) | 8 |
| | (31 | ) | 16 |
| Changes in working capital | (45) | | | (9) | | | (60) | | 14 | | |
Adjustment to equity earnings for cash distributions received | — |
| 3 |
| | (2 | ) | 4 |
| |
Undistributed equity earnings | | Undistributed equity earnings | — | | | (4) | | | (9) | | (7) | | |
Gain from equity interest transfer | | Gain from equity interest transfer | — | | | — | | | 84 | | — | | |
Deferred revenues and other liabilities | | Deferred revenues and other liabilities | 1 | | | 2 | | | 3 | | (6) | | |
Other | (3 | ) | (2 | ) | | (8 | ) | (14 | ) | Other | (1) | | | 2 | | | (10) | | (2) | | |
EBITDA | 152 |
| 147 |
| | 453 |
| 409 |
| EBITDA | 283 | | | 293 | | | 883 | | 837 | | |
Plus: | | | | | Plus: | | | | |
Distributions in excess of equity earnings | 10 |
| 1 |
| | 30 |
| 7 |
| |
Expenses indemnified by Phillips 66 | 4 |
| — |
| | 7 |
| 4 |
| |
Proportional share of equity affiliates’ net interest, taxes and depreciation and amortization | | Proportional share of equity affiliates’ net interest, taxes and depreciation and amortization | 45 | | | 30 | | | 118 | | 85 | | |
Expenses indemnified or prefunded by Phillips 66 | | Expenses indemnified or prefunded by Phillips 66 | 1 | | | — | | | 1 | | 1 | | |
Transaction costs associated with acquisitions | 2 |
| 2 |
| | 3 |
| 4 |
| Transaction costs associated with acquisitions | — | | | — | | | 1 | | — | | |
Less: | | | | | Less: | | | | |
EBITDA attributable to Predecessors | — |
| 39 |
| | — |
| 142 |
| |
Gain from equity interest transfer | | Gain from equity interest transfer | — | | | — | | | 84 | | — | | |
Adjusted EBITDA attributable to noncontrolling interest | | Adjusted EBITDA attributable to noncontrolling interest | 16 | | | — | | | 16 | | — | | |
| Adjusted EBITDA | 168 |
| 111 |
| | 493 |
| 282 |
| Adjusted EBITDA | 313 | | | 323 | | | 903 | | 923 | | |
Plus: | | | | | Plus: | | | | |
Deferred revenue impacts** | 1 |
| 4 |
| | 9 |
| 7 |
| |
Deferred revenue impacts*† | | Deferred revenue impacts*† | (3) | | | — | | | 4 | | (4) | | |
| Less: |
|
| | | Less: | | | | |
Equity affiliate distributions less than (more than) proportional EBITDA | | Equity affiliate distributions less than (more than) proportional EBITDA | 4 | | | 9 | | | (5) | | 31 | | |
Maintenance capital expenditures† | | Maintenance capital expenditures† | 21 | | | 25 | | | 64 | | 46 | | |
Net interest expense | 23 |
| 10 |
| | 71 |
| 31 |
| Net interest expense | 31 | | | 25 | | | 88 | | 78 | | |
Maintenance capital expenditures | 10 |
| 3 |
| | 31 |
| 8 |
| |
Distributable cash flow | $ | 136 |
| 102 |
| | 400 |
| 250 |
| |
Preferred unit distributions | | Preferred unit distributions | 10 | | | 9 | | | 29 | | 28 | | |
Income taxes paid | | Income taxes paid | 1 | | | — | | | 1 | | 1 | | |
Distributable Cash Flow | | Distributable Cash Flow | $ | 243 | | | 255 | | | 730 | | 735 | | |
*Prior-period financial information has been retrospectively adjusted for acquisitions of businesses under common control.
**Difference between cash receipts and revenue recognition.
†Excludes Merey Sweeny capital reimbursements and turnaround impacts.
Minimum Volume Commitments
Under certain of our transportation and terminal services agreements, if Phillips 66 fails to transport a minimum throughput volume during any quarter, then Phillips 66 will pay us a deficiency payment based on the calculation described in the agreement. Payments made by Phillips 66 for these shortfall volumes are initially recorded as “Deferred revenues” on our consolidated balance sheet, as Phillips 66 generally has the right to make up the shortfall volumes in the following four quarters. The deferred revenue is recognized at the earlier of the quarter in which Phillips 66 makes up the shortfall volumes or the expiration of the period in which Phillips 66 is contractually allowed to make up the shortfall volumes.
Detail on these transportation- and terminal-based deferred revenues follows:
|
| | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 |
| 2016 |
| | 2017 |
| 2016 |
|
| | | | | |
Deferred revenues—beginning of period | $ | 21 |
| 5 |
| | 12 |
| 4 |
|
Quarterly deficiency payments(1) | 4 |
| 3 |
| | 17 |
| 7 |
|
Quarterly deficiency make-up/expirations(2) | (3 | ) | — |
| | (7 | ) | (3 | ) |
Deferred revenues—end of period | $ | 22 |
| 8 |
| | 22 |
| 8 |
|
(1) Cash received with deferred revenue recognition.
(2) Revenue recognized on cash previously received.
Statement of Income Analysis
Operating revenues increased $16 decreased $62 million, or 9 percent, and $397%, in the nine-month period of 2020. The decrease was primarily attributable to the recognition of deferred revenues related to turnaround activity at Merey Sweeny LLC (Merey Sweeny) in the first quarter of 2019, as well as lower volumes, partially offset by increased rates.
Equity in earnings of affiliates decreased $10 million, or 7 percent,7%, and decreased $26 million, or 7%, in the third quarter and the nine-month period of 2017,2020, respectively. The increasedecreases in the third quarter of 2017 wasboth periods were primarily attributabledue to additional revenues from the River Parish NGL System acquired in November 2016 and higherdecreased volumes, on the Ponca Crude System, partially offset by lower volumesan increase in equity earnings from Gray Oak Pipeline, LLC, which commenced full operations during the second quarter of 2020. See Note 4—Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.
Gain on equity interest transfer reflects the Sweenysecond-quarter 2020 gain recognition related to Pasadena Products System as a resultco-venturer’s prior-year acquisition of Hurricane Harvey impacts. The increasea 35% interest in the consolidated holding company that owns an interest in Gray Oak Pipeline, LLC. See Note 4—Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.
Operating and maintenance expenses decreased $58 million, or 18%, in the nine-month period of 20172020. The decrease was primarily due to additional revenues from the River Parish NGL Systemturnaround activity at Merey Sweeny in 2019.
Depreciation increased $5 million, or 17%, and from additional storage capacity coming online at Clemens Caverns, partially offset by lower throughput volumes on the Gold Line Products System due to maintenance at Phillips 66’s Borger refinery.
Equity in earnings of affiliates increased $8 million, or 24 percent, and $23 million, or 26 percent,9%, in the third quarter and the nine-month period of 2017,2020, respectively. The increases in both periods were primarily attributable to higher earnings from DCP Sand Hills Pipeline, LLC (Sand Hills)additional assets placed in operation, including the isomerization unit at the Phillips 66 Lake Charles Refinery and Bayou Bridge Pipeline, LLC (Bayou Bridge), primarily due to higher volumes. In addition, the increase in the nine-month period also reflected additional earnings from Bayou Bridge, which began operations in April 2016,storage capacity at Clemens Caverns.
Interest and STACK Pipeline LLC (STACK), in which we acquired a 50 percent interest in August 2016.
Operating and maintenance expensesdebt expense increased by $15 $6 million,, or 28 percent23%, and $26increased $9 million, or 16 percent, in the third quarter and the nine-month period of 2017, respectively. The increases were primarily due to operating expenses associated with the River Parish NGL System acquired in November 2016.
Depreciation increased $5 million, or 20 percent, and $11 million, or 15 percent,11%, in the third quarter and the nine-month period of 2017,2020, respectively. The increases in both periods were mainly attributable to the River Parish NGL System acquired in November 2016, additional cavern storage capacity placed into service,lower capitalized interest and accelerated depreciation for assets taken out of service.increased borrowings on our revolving credit facility.
Interest and debt expense increased $13 million and $40 million in the third quarter and the nine-month period of 2017, respectively, primarily due to higher average debt principal balances as a result of the issuance of $1,125 million in aggregate principal amount of senior notes in October 2016.
CAPITAL RESOURCES AND LIQUIDITY
Significant Sources of Capital
Our sources of liquidity include cash generated from operations, distributions from our equity affiliates, borrowings from related parties and under our revolving credit facility, and issuances of additional debt and equity securities.securities, and funding from joint venture partners. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements, long-term capital expenditure requirements and our quarterly cash distributions.
Operating Activities
We generated $422$785 million in cash from operations during the first nine months of 2017,2020, an improvement over cash from operations of $371$28 million forcompared with the corresponding period of 2016.2019. The improvement was mainlyprimarily driven by working capital impacts.lower operating and maintenance expenses, partly offset by lower operating distributions from equity affiliates.
Common UnitsEquity Affiliate Operating Distributions
In August 2016, we completed a public offeringOur operating cash flows are also impacted by distribution decisions made by our equity affiliates. During the first nine months of 6,000,000 common units representing limited partner interests at a price2020, cash from operations included distributions of $50.22 per common unit. We received proceeds (net of underwriting discounts and commissions) of $299$378 million from our equity affiliates, compared with $402 million during the offering.same period of 2019. We utilizedcannot control the net proceeds to repay the note assumed as partamount or timing of the Initial Fractionator Acquisition and to repay other short-term borrowings incurred to fund our acquisition of an additional interest in Explorer and our contribution to form STACK Pipeline. SeeNote 4—Acquisitions in the Notes to Consolidated Financial Statements for additional information.future distributions from equity affiliates; therefore, future distributions are not assured.
In May 2016, we completed a public offering, consisting ofATM Programs
We have authorized an aggregate of 12,650,000 common units representing limited partner interests, at a price of $52.40 per common unit. We received proceeds (net of underwriting discounts and commissions) of $656$750 million from the offering (2016 Unit Offering). We utilized the net proceeds to partially repay debt assumed as part of the Subsequent Fractionator Acquisition. See Note 4—Acquisitions in the Notes to Consolidated Financial Statements for additional information.
ATM Program
In June 2016, we filed a prospectus supplement to the shelf registration statement for ourunder three $250 million continuous offering program that became effective with the Securities and Exchange Commission in May 2016, related to the continuous issuance of up to an aggregate of $250 millionofferings of common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the time of our offerings (such continuous offering program, or at-the-market program, is referred to as our ATM Program).(ATM) programs. The first two programs concluded in June 2018 and December 2019, respectively. We did not issue any common units under ourthe current ATM Programprogram during the three months ended September 30, 2017.2020. For the nine months ended September 30, 2017,2020, on a settlement date basis, we issued 3,323,576an aggregate of 40,570 common units, under our ATM Program, which generatedgenerating net proceeds of $171$2 million. For the three and nine months ended September 30, 2016, on a settlement date basis,2019, we issued 83,294an aggregate of 1,635,669 and 346,1522,470,037 common units, respectively, under our ATM Program, generating net proceeds of $5$91 million and $19$133 million, respectively. Since inception in June 2016 through September 30, 2017,2020, we have issued an aggregate of 3,669,7289,487,055 common units under our ATM Program, generatingprograms, and generated net proceeds of $190$494 million, after broker commissions of $2$5 million and other costs of $3 million. The net proceeds from sales under the ATM Programprograms are used for general partnership purposes, which may include funding of debt repayment, future acquisitions, capital expenditures and additions to working capital.
Issuances of common units under our ATM Program can reduce our General Partner’s interest below 2 percent. We expect the General Partner’s interest to be periodically restored to 2 percent in connection with dropdown transactions or through direct equity contributions. However, these future contributions from our General Partner cannot be assured. At September 30, 2017, our General Partner’s interest was slightly less than 2 percent.
Revolving Credit Facility
At September 30, 2017,2020, borrowings of $290 million were outstanding and December 31, 2016, we$3 million in letters of credit had an aggregate of $87 million and $210 million, respectively, borrowed and outstandingbeen drawn under our $750 million revolving credit facility.
Transfer of Equity Interest
Gray Oak Pipeline, LLC was formed to develop and construct the Gray Oak Pipeline, which transports crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi and the Sweeny area, including the Phillips 66 Sweeny Refinery, as well as access to the Houston market. We have a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. In December 2018, a third party exercised its option to acquire a 35% interest in the holding company. Because the holding company’s sole asset was its ownership interest in Gray Oak Pipeline, LLC, which was considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in the holding company during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP at that time. The Gray Oak Pipeline commenced full operations in the second quarter of 2020 and the restrictions placed on the co-venturer were lifted on June 30, 2020, resulting in the recognition of the sale under GAAP. Accordingly, at June 30, 2020, the co-venturer’s 35% interest in the holding company was recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet, and the premium of $84 million previously paid by the co-venturer in 2019 was recharacterized from a long-term obligation to a gain in our consolidated statement of income. For the nine months ended September 30, 2020, the co-venturer contributed an aggregate of $64 million to the holding company to fund its portion of Gray Oak Pipeline, LLC’s cash calls. We have an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC, after considering our co-venturer’s 35% interest in the consolidated holding company.
Off-Balance Sheet Arrangements
Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of $2.5 billion aggregate principal amount of senior unsecured notes, consisting of:
•$650 million aggregate principal amount of 3.625% Senior Notes due 2022.
•$1.0 billion aggregate principal amount of 3.900% Senior Notes due 2024.
•$850 million aggregate principal amount of 4.625% Senior Notes due 2029.
Dakota Access and ETCO have guaranteed repayment of the notes. In addition, we and our co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the ongoing litigation related to an easement granted by the U.S. Army Corps of Engineers (USACE) to allow the pipeline to be constructed under Lake Oahe in North Dakota. Contributions may be required if Dakota Access determines that the issues included in any such final judgment cannot be remediated and Dakota Access has or is projected to have insufficient funds to satisfy repayment of the notes. If Dakota Access undertakes remediation to cure issues raised in a final judgment, contributions may be required if any series of the notes become due, whether by acceleration or at maturity, during such time, to the extent Dakota Access has or is projected to have insufficient funds to pay such amounts. At September 30, 2020, our share of the maximum potential equity contributions under the CECU was approximately $631 million.
In March 2020, the trial court presiding over this litigation ordered the USACE to prepare an Environmental Impact Statement (EIS), and requested additional information to enable a decision on whether the Dakota Access Pipeline should be shut down while the EIS is being prepared. On July 6, 2020, the trial court ordered the Dakota Access Pipeline to be shut down and emptied of crude oil within 30 days, and that the pipeline should remain shut down pending the preparation of the EIS by the USACE, which the USACE has indicated is expected to take approximately 13 months. Dakota Access filed an appeal and a request for a stay of the order, which was granted. The case is now on an expedited appellate track and oral arguments regarding whether the pipeline easement is valid and whether the USACE must prepare an EIS are set for early November 2020, with a decision expected in late 2020 or early 2021. In addition to the proceedings in the appellate court, the trial court has been asked to issue an injunction to shut down the pipeline until the USACE completes the EIS, which could be ruled on as early as late December 2020. If the pipeline is required to cease operations pending the preparation of the EIS, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we also could be asked to support our share of the ongoing expenses, including scheduled interest payments on the notes of approximately $25 million annually, in addition to the potential obligations under the CECU.
Gray Oak Pipeline, LLC
Gray Oak Pipeline, LLC had a third-party term loan facility with a borrowing capacity of $1,379 million, inclusive of accrued interest. Borrowings under the facility were due on June 3, 2022. We and our co-venturers provided a guarantee through an equity contribution agreement requiring proportionate equity contributions to Gray Oak Pipeline, LLC up to the total outstanding loan amount, plus any additional accrued interest and associated fees, if Gray Oak Pipeline, LLC defaults on certain of its obligations thereunder. In September 2020, Gray Oak Pipeline, LLC fully repaid the $87 million outstanding balance of the term loan facility and the associated guarantee we issued through an equity contribution agreement was terminated.
Capital Requirements
Liberty Acquisition
In February 2020, we entered into a Purchase and Sale Agreement with Phillips 66 PDI to acquire its 50% interest in the Liberty Pipeline joint venture for $75 million. The purchase price reflected the reimbursement of project costs incurred by Phillips 66 prior to the effective date of the transaction. The transaction was funded through a combination of cash on hand and our revolving credit facility, in October 2017, utilizing proceedsand closed on March 2, 2020. Liberty Pipeline LLC was formed to develop and construct the Liberty Pipeline system which, upon completion, will transport crude oil from the equityRockies and debt issuances discussed inBakken production areas to Cushing, Oklahoma. On March 24, 2020, we and our co-venturer announced we are deferring the “Outlook” section.
Note Payable
In May 2016, in connection with the Subsequent Fractionator Acquisition, we entered into three separate Assignmentdevelopment and Assumption of Note agreements with subsidiaries of Phillips 66, pursuant to which we assumed the obligations under three term promissory notes (the Subsequent Notes), each with a $225 million principal balance. Also in May 2016, using proceeds from the 2016 Unit Offering, we repaid twoconstruction of the Subsequent Notes in their entirety and reduced the outstanding balance on the remaining Subsequent Note to $19 million, which was repaid in June 2016.
Shelf Registration
We have a universal shelf registration statement on file with the SEC under which we,Liberty Pipeline system as a well-known seasoned issuer, haveresult of the ability to issue and sell an indeterminate amount of common units representing limited partner interests, preferred units representing limited partner interests, and debt securities.current challenging business environment.
Off-Balance Sheet Arrangements
We have not entered into any transactions, agreements or other contractual arrangements that would result in off-balance sheet liabilities.
Capital Requirements
Capital Expenditures and Investments
Our operations can beare capital intensive requiringand require investments to expand, upgrade, maintain or enhance existing operations and to meet environmental and operational requirements of our wholly owned and joint venture entities. Our capital requirements consist of maintenance and expansion capital expenditures, as well as contributions to our joint ventures. Examples of maintenanceMaintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or to maintain existing system volumes and related cash flows. In contrast, expansion capital expenditures are those made to expand and upgrade our systems and facilities and to construct or acquire new systems or facilities to grow our business, including contributions to joint ventures that are using the contributed funds for such purposes.
Our capital expenditures and investments represent the total spending for our capital requirements. Our adjusted capital spending is a non-GAAP financial measure that demonstrates our net share of capital spending, and reflects an adjustment for the portion of consolidated capital spending funded by certain joint venture partners. Additionally, the disaggregation of adjusted capital spending between expansion and maintenance is not a distinction recognized under GAAP. We disaggregate adjusted capital spending because our partnership agreement requires that we treat expansion and maintenance capital differently for operating and capital surplus determinations. Further, we generally fund expansion capital spending with both operating and financing cash flows and fund maintenance capital spending with operating cash flows.
Our capital expenditures and investments were:
| | | | | | | | | | | |
| Millions of Dollars |
| Nine Months Ended September 30 |
| 2020 | | | 2019 | |
Capital Expenditures and Investments | | | |
Capital expenditures and investments | $ | 795 | | | 907 | |
Capital expenditures and investments funded by certain joint venture partners* | (64) | | | (422) | |
Adjusted Capital Spending | $ | 731 | | | 485 | |
| | | |
Expansion | $ | 667 | | | 433 | |
Maintenance | 64 | | | 52 | |
*See Note 4—Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.
Our capital expenditures and investments for the first nine months of 2017 and 2016 were:
|
| | | | | |
| Millions of Dollars |
| Nine Months Ended September 30 |
| 2017 |
| 2016 |
|
| | |
Capital expenditures and investments attributable to the Partnership | | |
Expansion | $ | 194 |
| 199 |
|
Maintenance | 31 |
| 8 |
|
Total | 225 |
| 207 |
|
Capital expenditures attributable to Predecessors* | — |
| 91 |
|
Total capital expenditures and investments | $ | 225 |
| 298 |
|
*Prior-period financial information has been retrospectively adjusted for acquisitions of businesses under common control.
Our capital expenditures and investments for the first nine months of 20172020 were $225 million, primarily associated with the following activities:
•Contributions to Bayou Bridge to continue progress on its pipeline segment from Lake Charles, Louisiana, to St. James, Louisiana.
Contributions to STACK to extend the origination point of its pipeline system to access additional area producers and increase capacity.
Contributions to Sand Hills to increase capacity on its NGL pipeline system.
Reactivation and upgrading of various tanks at the Bayway Products System to facilitate additional storage and gasoline blending.
Contributions to ParadigmGray Oak Pipeline, LLC to fundcomplete construction of the pipeline system.
•Contributions to Liberty Pipeline LLC for its contributionsprevious commitments related to the Sacagaweadevelopment and construction of the crude oil pipeline system.
•Construction activities related to a new ethane pipeline from the Clemens Caverns to petrochemical facilities in Gregory, Texas, near Corpus Christi.
•Contributions to South Texas Gateway Terminal for construction activities related to the marine export terminal that connects to the Gray Oak Pipeline joint venturein Corpus Christi, Texas.
•Completion of construction activities related to construct a natural gasincreasing capacity on the Sweeny to Pasadena refined petroleum products pipeline.
Various upgrades•Completion of construction activities related to increasing storage capacity at Clemens Caverns.
•Spending associated with other return, reliability and replacements of assets.maintenance projects.
Other Investing2021 Capital Budget
During the third quarter of 2016, we paid $24 millionWe currently expect our 2021 capital budget to Phillips 66 to assume Phillips 66’s rights and obligations under an agreement to acquire the River Parish NGL System in southeast Louisiana. The payment to Phillips 66 is reflected as an “other” investing cash outflow in the consolidated statement of cash flows in 2016.be approximately $300 million.
Cash DistributionDistributions
On October 18, 2017,20, 2020, the Board of Directors of our General Partner declared a quarterly cash distribution of $0.646$0.875 per common unit, which combined with distributions to our General Partner, will result in a total distribution of $121$200 million attributable to the third quarter of 2020. This distribution is payable on November 13, 2017,2020, to common unitholders of record as of October 31, 2017.30, 2020.
Cash distributions will be made toThe holders of our General Partner in respect of its general partner interest and its ownership of all incentive distribution rights (IDRs), which entitle our General Partnerpreferred units are entitled to receive increasing percentages, upcumulative quarterly distributions equal to 50 percent,$0.678375 per preferred unit. Preferred unitholders will receive $10 million of distributions attributable to the third quarter of 2020. This distribution is payable on November 13, 2020, to preferred unitholders of record as of October 30, 2020.
Beginning with the distribution to preferred unitholders attributable to the fourth quarter of 2020, the preferred unitholders are entitled to receive a quarterly cash distributions in excessdistribution equal to the greater of $0.244375$0.678375 per unit. Accordingly, based onunit, or the per-unit distribution declared on October 18, 2017, our General Partner will receive 35 percentamount paid to the common unitholders.
Debt Repayment
On April 1, 2020, we repaid the $25 million tranche of the third-quarter 2017 cash distributiontax-exempt bonds due April 2020. The two remaining tranches, totaling $50 million, mature in respect of its general partner interest and its ownership of all IDRs.April 2021.
Contingencies
From time to time, lawsuits involving a variety of claims that arise in the ordinary course of business are filed against 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 sites. We regularly assess the need for accounting 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 any 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.
Regulatory Matters
Our interstate common carrier crude oil and refined petroleum products pipeline operations are subject to rate regulation by the Federal Energy Regulatory Commission under the Interstate Commerce Act and Energy Policy Act of 1992, and certain of our pipeline systems providing intrastate service are subject to rate regulation by applicable state authorities under their respective laws and regulations. Our pipeline, rail rack and terminal operations are also subject to safety regulations adopted by the Department of Transportation, as well as to state regulations.
Legal and Tax Matters
Under our amended omnibus agreement, Phillips 66 provides certain services for our benefit, including legal and tax support services, and we pay an operational and administrative support fee for these services. Phillips 66’s legal and tax organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions. Phillips 66’s legal organization employs a litigation management process to manage and monitor the legal proceedings against us. The process facilitates the early evaluation and quantification of potential exposures in individual cases and enables 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, Phillips 66’s legal organization regularly assesses the adequacy of current accruals and recommends if adjustment of existing accruals, or establishment of new accruals, is required. As of September 30, 2017,2020, and December 31, 2016,2019, we did not have any material accrued contingent liabilities associated with litigation matters.
Environmental
We are subject to extensive federal, state and local environmental laws and regulations. These requirements, which frequently change, regulate the discharge of materials into the environment or otherwise relate to protection of the environment. Compliance with these laws and regulations may require us to remediate environmental damage from any discharge of petroleum or chemical substances from our facilities or require us to install additional pollution control equipment at or on our facilities. Our failure to comply with these or any other environmental or safety-related regulations could result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of governmental orders that may subject us to additional operational constraints. Future expenditures may be required to comply with the Federal Clean Air Act and other federal, state and local requirements in respect of our various sites, including our pipelines and storage assets. The impact of legislative and regulatory developments, if enacted or adopted, could result in increased compliance costs and additional operating restrictions on our business, each of which could have an adverse impact on our financial position, results of operations and liquidity.
As with all costs, if these expenditures are not ultimately reflectedrecovered in the tariffs and other fees we receive for our services, our operating results will be adversely affected. We believe that substantially all similarly situated parties and holders of comparable assets must comply with similar environmental laws and regulations. However, the specific impact on each may vary depending on a number of factors, including, but not limited to, the age and location of its operating facilities.
We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. New or expanded environmental requirements, which could increase our environmental costs, may arise in the future. We believe we are in substantial compliance with all legal obligations regarding the environment and have established the environmental accruals that are currently required; however, it is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed, because not all of the costs are fixed or presently determinable (even under existing legislation) and the costs may be affected by future legislation or regulations.
Paradis Pipeline Station Incident
On February 9, 2017, a fire occurred at the Paradis Pipeline Station on the River Parish NGL System. There was one Phillips 66 employee fatality and other workers injured. We continue to cooperate with regulatory agencies investigating this incident. We do not currently expect claims related to this incident, individually or in the aggregate, to have a material impact on our results of operations.
Indemnification and Excluded Liabilities
Under our amended omnibus agreement and pursuant to the terms of various agreements under which we acquired assets from Phillips 66, Phillips 66 will indemnify us, or assume responsibility, for certain environmental liabilities, tax liabilities, litigation and any other liabilities attributable to the ownership or operation of the assets contributed to us and that arose prior to the effective date of each acquisition. These indemnifications and exclusions from liability have, in some cases, time limits and deductibles. When Phillips 66 performs under any of these indemnifications or exclusions from liability, we recognize a non-cash expenseexpenses and an associated non-cash capital contributioncontributions from our General Partner, as these are considered liabilities paid for by a principal unitholder.
We have assumed, and have agreed to pay, discharge and perform as and when due, all liabilities arising out
NEW ACCOUNTING STANDARDS
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 amendment should be applied prospectively, and no disclosures are required at the effective date. We are currently evaluating the provisions of ASU No. 2017-01.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” In the new standard, the FASB modified its determination of whether a contract is a lease rather than whether a lease is a capital or operating lease under current 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 and 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 under current guidance. Under the new standard, assets and liabilities arising from operating leases will require recognition on the balance sheet. The effect of all leases in the statement of comprehensive income and the statement of cash flows will be largely unchanged. Lessor accounting will also be largely unchanged. Additional disclosures will be required for financing and operating leases for both lessors and lessees. 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, with early adoption permitted. Entities are required to adopt the ASU using a modified retrospective approach, subject to certain optional practical expedients, and apply its provisions 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 work-to-date, we have formed an implementation team, commenced identification of our lease population and are evaluating lease software packages.
In January 2016, 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 affects 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, 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 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 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. Our evaluation of the new ASU is ongoing, which includes understanding the impact of adoption on earnings from equity method investments and revenue generated by lease arrangements. Based on our analysis to-date, we have not identified any material impact on our financial statements, other than disclosure.
OUTLOOK
Bakken Pipeline/MSLP Acquisition
On September 19, 2017, we entered into a Contribution, Conveyance and Assumption Agreement (CCAA) with subsidiaries of Phillips 66 for us to acquire an indirect 25 percent interest in each of Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (together, Dakota/ETCO) and a direct 100 percent interest in Merey Sweeny, L.P. (MSLP and the acquisitions pursuant to the CCAA, collectively, the Bakken Pipeline/MSLP Acquisition).
The assets owned by Dakota/ETCO and MSLP are described below:
Dakota/ETCO owns the Bakken Pipeline, which includes 1,926 combined pipeline miles which has 520,000 barrels per day (BPD) of crude oil capacity expandable to 570,000 BPD. There are receipt stations in North Dakota to access Bakken and Three Forks production, a delivery and receipt point in Patoka, Illinois, and delivery points in Nederland, Texas, including at the Phillips 66 Beaumont Terminal. The pipeline, which commenced commercial operations on June 1, 2017, is supported by long-term, fee-based contracts.
MSLP owns a 125,000 BPD capacity vacuum distillation unit and a 70,000 BPD capacity delayed coker unit. MSLP processes residue from heavy sour crude oil into liquid products and fuel-grade petroleum coke at the Phillips 66 Sweeny Refinery in Old Ocean, Texas.
In connection with the closing of the acquisition, MSLP and Phillips 66 entered into an amended and restated tolling services agreement, effective October 1, 2017, with a 15-year term that includes a base throughput fee and a minimum volume commitment from Phillips 66.
The Bakken Pipeline/MSLP Acquisition closed on October 6, 2017. We paid Phillips 66 total consideration of $1.65 billion, consisting of $372 million in cash, the assumption of $588 million of promissory notes payable to Phillips 66 and a $450 term loan under which Phillips 66 was the obligor, and the issuance of 5,005,778 newly issued units, which were allocated as 4,713,113 common units to P66 PDI and 292,665 general partner units to our General Partner to maintain its 2 percent general partner interest. After the closing of the Bakken Pipeline/MSLP Acquisition, we repaid the $588 million of promissory notes and the $450 million term loan using proceeds from the private placement and debt issuances described below.
Debt and Equity Issuances
In part to fund the cash portion of the Bakken Pipeline/MSLP Acquisition consideration, on October 6, 2017, we closed on a private placement and issued the following:
13,819,791 perpetual convertible preferred units (Preferred Units) generating gross proceeds of $750 million.
6,304,204 common units generating gross proceeds of $300 million.
Together, the Preferred Units and common units issued in the private placement resulted in net proceeds, after deducting offering and transaction expenses, of approximately $1.03 billion. Additionally, on October 13, 2017, we closed on a public debt offering pursuant to our effective shelf registration statement and issued $500 million aggregate principal amount of 3.750% Senior Notes due 2028 and an additional $150 million aggregate principal amount of our outstanding 4.680% Senior Notes due 2045.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. You can normally 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.expressions, although the absence of these words does not mean that a statement is not forward-looking.
We based the forward-looking statements on our current expectations, estimates and projections about us, our operations, the operations of our joint ventures and the entities in which we own equity interests, as well as the industries in which we and they 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:
•The continued ability of Phillips 66 to satisfy its obligations under our commercial and other agreements.
The•Reductions in the volume of crude oil, NGL and refined petroleum products and NGL we or our equity affiliates transport, fractionate, process, terminal and store.
The•Changes to the tariff rates with respect to volumes that we transporttransported through our regulated assets, which rates are subject to review and possible adjustment by federal and state regulators.
•Changes in revenue we realize under the loss allowance provisions of our regulated tariffs resulting from changes in underlying commodity prices.
•Fluctuations in the prices and demand for crude oil, NGL and refined petroleum products.products and NGL.
•Changes in global economic conditions and the effects of a global economic downturn on the business of Phillips 66 and the business of its suppliers, customers, business partners and credit lenders.
Liabilities•The continuing effects of the COVID-19 pandemic and its negative impact on the demand for crude oil and refined petroleum products, as well as the extent and duration of recovery of economies and the demand for crude oil and refined petroleum products after the pandemic subsides.
•Actions taken by OPEC and other countries impacting supply and demand and, correspondingly, commodity prices.
•Changes in governmental policies relating to crude oil, refined petroleum products or NGL pricing, regulation, taxation, or exports.
•Potential liabilities associated with the risks and operational hazards inherent in transporting, fractionating, processing, terminaling and storing crude oil, NGL and refined petroleum products.products and NGL.
•Curtailment of operations due to severe weather disruption;(including as a result of climate change) disruption or natural disasters; riots, strikes, lockouts or other industrial disturbances; or failuredisturbances.
•Failure of information technology systems due to various causes, including unauthorized access or attack.
Inability•Accidents or other unscheduled shutdowns affecting our pipelines, processing, fractionating, terminaling, and storage facilities or equipment, or those of our equity affiliates, suppliers or customers.
•Our, and our equity affiliates’, inability to obtain or maintain permits, in a timely manner ifor at all, including those necessary for capital projects, orand the possibility of the revocation or modification of existingsuch permits.
Inability•The inability to comply with government regulations or make capital expenditures required to maintain compliance.
Failure•The failure to timely complete construction of announced and future capital projects in a timely manner, cost overruns associated with such projects, and the ability to obtain or maintain permits necessary for such projects.
•Our ability to successfully execute our growth strategies, whether through organic growth or acquisitions.
•The operation, financing and distribution decisions of our joint ventures.ventures, which we may not control.
•Costs or liabilities associated with federal, state, and local laws and regulations relating to environmental protection and safety, including spills, releases and pipeline integrity.
•Costs associated with compliance with evolving environmental laws and regulations on climate change.
•Costs associated with compliance with safety regulations, including pipeline integrity management program testing and related repairs.
•Changes in the cost or availability of third-party vessels, pipelines, railcars and other means of delivering and transporting crude oil, NGL and refined petroleum products.products and NGL.
•General domestic and international economic and political developments including armed hostilities, expropriation of assets, and other political, economic or diplomatic developments, including those caused by public health issues and outbreaks of diseases and pandemics.
•Direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war.
•Our ability to comply with the terms of our credit facility, indebtedness and other financing arrangements, which, if accelerated, we may not be able to repay.
•Our ability to incur additional indebtedness or our ability to obtain financing on terms that we deem acceptable, including the refinancing of our current obligations; higher interest rates and costs of financing would increase our expenses.
•Changes in tax, environmental and other laws and regulations.
•The factors generally described in “ItemItem 1A. Risk Factors”Factors in our 20162019 Annual Report on Form 10-K filed with the SECand in Item 1A.— Risk Factors of Part II in this Quarterly Report on February 17, 2017.Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our commodity price risk and interest rate risk at September 30, 2017,2020, did not differ materially from that disclosed under Item 7A of our 20162019 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 U.S. Securities and Exchange Commission (the SEC) rules and forms, and that such information is accumulated and communicated to our General Partner’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2017,2020, our General Partner’s Chairman and Chief Executive Officer and its Vice President and Chief Financial Officer, with the participation of the General Partner’s management, 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 General Partner’s Chairman and Chief Executive Officer and its Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of September 30, 2017.2020.
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 September 30, 2017,2020, 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
Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not a party to any reportable litigation or governmental or other proceeding, including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment, that we believe will have a material adverse impact on our consolidated financial position. In addition, as discussed in Note 10—Contingencies, in the Notes to Consolidated Financial Statements, underUnder our amended omnibus agreement, and pursuant to the terms of various agreements under which we acquired assets from Phillips 66, Phillips 66 indemnifies us or assumes responsibility for certain liabilities relating to litigation and environmental matters attributable to the ownership or operation of our assets prior to their contribution to us from Phillips 66. See Note 10—Related Party Transactions, in the Notes to Consolidated Financial Statements, for additional information.
In this section, we identify reportable legal proceedings attributable to the ownership or operation of our assets, including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment, for this reporting period. There are no new matters to report.
Item 1A. RISK FACTORS
There have beenExcept as provided below, there were no material changes from the risk factors disclosed underin Item 1A of our 20162019 Annual Report on Form 10-K.
The Coronavirus Disease 2019 (COVID-19) pandemic has materially adversely affected, and may continue to materially adversely affect, general economic, financial and business conditions, and could materially and adversely affect our business, financial condition, results of operations and cash flow. The impacts of COVID-19 also may have materially adverse effects on our equity affiliates as well as our customers, suppliers and other counterparties.
The COVID-19 pandemic has had, and is continuing to have, a negative impact on worldwide economic and commercial activity and financial markets. Responses of governmental authorities, companies and individuals to prevent the spread of COVID-19, including travel restrictions, business and school closures, and stay at home orders have significantly reduced global economic activity. The reduction in economic activity has resulted in substantial decreases in the demand for many refined petroleum products, which has led refiners to reduce crude oil processing rates and also to lower crude oil demand and prices. These events have negatively impacted the volumes of products we transport and terminal.
The extent to which COVID-19 will continue to negatively impact our business and operations, as well as the business and operations of our equity affiliates, as well as our customers, including Phillips 66, will depend on the severity, location and duration of the effects and spread of COVID-19, related impacts on overall economic activity, including the actions undertaken by national, regional and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume.
To the extent COVID-19 adversely affects our business, financial condition, results of operations and liquidity, or the business, financial condition, results of operation and liquidity of our equity affiliates, as well as our customers, including Phillips 66, suppliers or counterparties, it may also have the effect of heightening many of the other risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 6. EXHIBITS
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Exhibit Number | | Exhibit Description | Form | Exhibit Number | Filing Date | SEC File No. |
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| S-1 | 3.1 | 3/27/2013 | 333-187582 |
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| | | 8-K | 3.1 | 10/10/2017 | 001-36011 |
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| | | 8-K | 3.2 | 10/10/2017 | 001-36011 |
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| | | 8-K | 4.2 | 10/13/2017 | 001-36011 |
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| | | 8-K | 4.4 | 10/13/2017 | 001-36011 |
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| | | 8-K | 4.1 | 10/10/2017 | 001-36011 |
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| | | 8-K | 10.1 | 9/25/2017 | 001-36011 |
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| | | 8-K | 2.1 | 9/25/2017 | 001-36011 |
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| | | 8-K | 10.1 | 10/10/2017 | 001-36011 |
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| | | 8-K | 10.2 | 10/10/2017 | 001-36011 |
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| | | 8-K | 10.3 | 10/10/2017 | 001-36011 |
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101.INS* | | XBRL Instance Document. | | | | |
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| | | Incorporated by Reference |
Exhibit
Number | | Exhibit Description | Form | Exhibit Number | Filing Date | SEC File No. |
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101.SCH* | | | | | | |
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101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | |
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101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. | | | | |
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101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | |
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101.LAB*101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | |
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101.LAB* | | Inline XBRL Taxonomy Extension Labels Linkbase Document. | | | | |
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101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | |
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101.DEF*104* | | Cover Page Interactive Data File (formatted as Inline XBRL Definition Linkbase Document.and contained in Exhibit 101). | | | | |
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* Filed herewith |
†Confidential treatment has been requested for certain portion of this Exhibit pursuant to a confidential treatment request filed with the Securities and Exchange Commission on October 10, 2017. Such portions have been omitted and filed separately with the Securities and Exchange Commission. |
* 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 PARTNERS LP |
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| PHILLIPS 66 PARTNERS LP |
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| By: Phillips 66 Partners GP LLC, its general partner |
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| /s/ Chukwuemeka A. Oyolu |
| Chukwuemeka A. Oyolu Vice President and Controller (Chief Accounting and Duly Authorized Officer) |
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Date: October 27, 2017
30, 2020