UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the quarterly period ended | September 30, 2020 | |||||||
| or | ||||||||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the transition period from | to | |||||||||||||
| Commission file number: | 001-35349 | |||||||
Phillips 66
(Exact name of registrant as specified in its charter)
| Delaware | 45-3779385 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
2331 CityWest Blvd., Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
281-293-6600
(Registrant’s telephone number, including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||||||
| Common Stock, $0.01 Par Value | PSX | New York Stock Exchange | ||||||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | ||||||||||||
| Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had 436,800,185 shares of common stock, $0.01 par value, outstanding as of September 30, 2020.
PHILLIPS 66
TABLE OF CONTENTS
| Page | |||||
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
| Consolidated Statement of Operations | Phillips 66 | ||||
| Millions of Dollars | |||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||
| Revenues and Other Income | |||||||||||||||||
| Sales and other operating revenues | $ | 15,929 | 27,218 | 47,720 | 78,168 | ||||||||||||
| Equity in earnings of affiliates | 349 | 499 | 871 | 1,663 | |||||||||||||
| Net gain on dispositions | 1 | 18 | 87 | 19 | |||||||||||||
| Other income | 20 | 36 | 48 | 97 | |||||||||||||
| Total Revenues and Other Income | 16,299 | 27,771 | 48,726 | 79,947 | |||||||||||||
| Costs and Expenses | |||||||||||||||||
| Purchased crude oil and products | 14,509 | 23,806 | 42,557 | 69,415 | |||||||||||||
| Operating expenses | 1,016 | 1,206 | 3,383 | 3,678 | |||||||||||||
| Selling, general and administrative expenses | 384 | 416 | 1,112 | 1,190 | |||||||||||||
| Depreciation and amortization | 352 | 336 | 1,037 | 1,001 | |||||||||||||
| Impairments | 1,140 | 853 | 4,146 | 856 | |||||||||||||
| Taxes other than income taxes | 106 | 105 | 377 | 330 | |||||||||||||
| Accretion on discounted liabilities | 6 | 6 | 17 | 17 | |||||||||||||
| Interest and debt expense | 132 | 109 | 360 | 343 | |||||||||||||
| Foreign currency transaction (gains) losses | 4 | (9) | 10 | 5 | |||||||||||||
| Total Costs and Expenses | 17,649 | 26,828 | 52,999 | 76,835 | |||||||||||||
| Income (loss) before income taxes | (1,350) | 943 | (4,273) | 3,112 | |||||||||||||
| Income tax expense (benefit) | (624) | 150 | (1,053) | 545 | |||||||||||||
| Net Income (Loss) | (726) | 793 | (3,220) | 2,567 | |||||||||||||
| Less: net income attributable to noncontrolling interests | 73 | 81 | 216 | 227 | |||||||||||||
| Net Income (Loss) Attributable to Phillips 66 | $ | (799) | 712 | (3,436) | 2,340 | ||||||||||||
Net Income (Loss) Attributable to Phillips 66 Per Share of Common Stock (dollars) | |||||||||||||||||
| Basic | $ | (1.82) | 1.58 | (7.83) | 5.15 | ||||||||||||
| Diluted | (1.82) | 1.58 | (7.83) | 5.13 | |||||||||||||
Weighted-Average Common Shares Outstanding (thousands) | |||||||||||||||||
| Basic | 438,916 | 449,005 | 439,670 | 453,398 | |||||||||||||
| Diluted | 438,916 | 451,001 | 439,670 | 455,810 | |||||||||||||
| See Notes to Consolidated Financial Statements. | |||||||||||||||||
1
| Consolidated Statement of Comprehensive Income (Loss) | Phillips 66 | ||||
| Millions of Dollars | |||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||
| Net Income (Loss) | $ | (726) | 793 | (3,220) | 2,567 | ||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||
| Defined benefit plans | |||||||||||||||||
| Actuarial loss arising during the period | 0 | 0 | (300) | 0 | |||||||||||||
| Amortization to income of net actuarial loss, prior service credit and settlements | 34 | 17 | 112 | 51 | |||||||||||||
| Plans sponsored by equity affiliates | 4 | 2 | 9 | 7 | |||||||||||||
| Income taxes on defined benefit plans | (10) | (4) | 44 | (13) | |||||||||||||
| Defined benefit plans, net of income taxes | 28 | 15 | (135) | 45 | |||||||||||||
| Foreign currency translation adjustments | 155 | (119) | (41) | (124) | |||||||||||||
| Income taxes on foreign currency translation adjustments | (4) | 1 | (3) | 0 | |||||||||||||
| Foreign currency translation adjustments, net of income taxes | 151 | (118) | (44) | (124) | |||||||||||||
| Cash flow hedges | 2 | (2) | (7) | (13) | |||||||||||||
| Income taxes on hedging activities | 0 | 1 | 2 | 2 | |||||||||||||
| Hedging activities, net of income taxes | 2 | (1) | (5) | (11) | |||||||||||||
| Other Comprehensive Income (Loss), Net of Income Taxes | 181 | (104) | (184) | (90) | |||||||||||||
| Comprehensive Income (Loss) | (545) | 689 | (3,404) | 2,477 | |||||||||||||
| Less: comprehensive income attributable to noncontrolling interests | 73 | 81 | 216 | 227 | |||||||||||||
| Comprehensive Income (Loss) Attributable to Phillips 66 | $ | (618) | 608 | (3,620) | 2,250 | ||||||||||||
See Notes to Consolidated Financial Statements.
2
| Consolidated Balance Sheet | Phillips 66 | ||||
| Millions of Dollars | |||||||||||
| September 30 2020 | December 31 2019 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 1,462 | 1,614 | ||||||||
| Accounts and notes receivable (net of allowances of $37 million in 2020 and $41 million in 2019) | 5,195 | 7,376 | |||||||||
| Accounts and notes receivable—related parties | 768 | 1,134 | |||||||||
| Inventories | 4,897 | 3,776 | |||||||||
| Prepaid expenses and other current assets | 500 | 495 | |||||||||
| Total Current Assets | 12,822 | 14,395 | |||||||||
| Investments and long-term receivables | 13,767 | 14,571 | |||||||||
| Net properties, plants and equipment | 23,489 | 23,786 | |||||||||
| Goodwill | 1,425 | 3,270 | |||||||||
| Intangibles | 849 | 869 | |||||||||
| Other assets | 1,929 | 1,829 | |||||||||
| Total Assets | $ | 54,281 | 58,720 | ||||||||
| Liabilities | |||||||||||
| Accounts payable | $ | 4,905 | 8,043 | ||||||||
| Accounts payable—related parties | 552 | 532 | |||||||||
| Short-term debt | 1,860 | 547 | |||||||||
| Accrued income and other taxes | 1,229 | 979 | |||||||||
| Employee benefit obligations | 443 | 710 | |||||||||
| Other accruals | 1,524 | 835 | |||||||||
| Total Current Liabilities | 10,513 | 11,646 | |||||||||
| Long-term debt | 12,666 | 11,216 | |||||||||
| Asset retirement obligations and accrued environmental costs | 644 | 638 | |||||||||
| Deferred income taxes | 5,507 | 5,553 | |||||||||
| Employee benefit obligations | 1,394 | 1,044 | |||||||||
| Other liabilities and deferred credits | 1,252 | 1,454 | |||||||||
| Total Liabilities | 31,976 | 31,551 | |||||||||
| Equity | |||||||||||
Common stock (2,500,000,000 shares authorized at $0.01 par value) Issued (2020—648,572,012 shares; 2019—647,416,633 shares) | |||||||||||
| Par value | 6 | 6 | |||||||||
| Capital in excess of par | 20,363 | 20,301 | |||||||||
| Treasury stock (at cost: 2020—211,771,827 shares; 2019—206,390,806 shares) | (17,116) | (16,673) | |||||||||
| Retained earnings | 17,436 | 22,064 | |||||||||
| Accumulated other comprehensive loss | (967) | (788) | |||||||||
| Total Stockholders’ Equity | 19,722 | 24,910 | |||||||||
| Noncontrolling interests | 2,583 | 2,259 | |||||||||
| Total Equity | 22,305 | 27,169 | |||||||||
| Total Liabilities and Equity | $ | 54,281 | 58,720 | ||||||||
See Notes to Consolidated Financial Statements.
3
| Consolidated Statement of Cash Flows | Phillips 66 | ||||
| Millions of Dollars | |||||||||||
| Nine Months Ended September 30 | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash Flows From Operating Activities | |||||||||||
| Net income (loss) | $ | (3,220) | 2,567 | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | 1,037 | 1,001 | |||||||||
| Impairments | 4,146 | 856 | |||||||||
| Accretion on discounted liabilities | 17 | 17 | |||||||||
| Deferred income taxes | 2 | 115 | |||||||||
| Undistributed equity earnings | 254 | (25) | |||||||||
| Net gain on dispositions | (87) | (19) | |||||||||
| Other | 52 | (97) | |||||||||
| Working capital adjustments | |||||||||||
| Accounts and notes receivable | 2,684 | (909) | |||||||||
| Inventories | (1,134) | (2,004) | |||||||||
| Prepaid expenses and other current assets | (40) | (269) | |||||||||
| Accounts payable | (2,985) | 1,778 | |||||||||
| Taxes and other accruals | 746 | 103 | |||||||||
| Net Cash Provided by Operating Activities | 1,472 | 3,114 | |||||||||
| Cash Flows From Investing Activities | |||||||||||
| Capital expenditures and investments | (2,414) | (2,595) | |||||||||
| Return of investments in equity affiliates | 139 | 55 | |||||||||
| Proceeds from asset dispositions | 3 | 84 | |||||||||
| Advances/loans—related parties | (251) | (95) | |||||||||
| Collection of advances/loans—related parties | 44 | 95 | |||||||||
| Other | (87) | 24 | |||||||||
| Net Cash Used in Investing Activities | (2,566) | (2,432) | |||||||||
| Cash Flows From Financing Activities | |||||||||||
| Issuance of debt | 3,305 | 1,758 | |||||||||
| Repayment of debt | (546) | (1,004) | |||||||||
| Issuance of common stock | 6 | 15 | |||||||||
| Repurchase of common stock | (443) | (1,238) | |||||||||
| Dividends paid on common stock | (1,182) | (1,172) | |||||||||
| Distributions to noncontrolling interests | (201) | (176) | |||||||||
| Net proceeds from issuance of Phillips 66 Partners LP common units | 2 | 133 | |||||||||
| Other | (22) | 282 | |||||||||
| Net Cash Provided by (Used in) Financing Activities | 919 | (1,402) | |||||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | 23 | (31) | |||||||||
| Net Change in Cash and Cash Equivalents | (152) | (751) | |||||||||
| Cash and cash equivalents at beginning of period | 1,614 | 3,019 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 1,462 | 2,268 | ||||||||
See Notes to Consolidated Financial Statements.
4
| Consolidated Statement of Changes in Equity | Phillips 66 | ||||
| Millions of Dollars | |||||||||||||||||||||||
| Three Months Ended September 30 | |||||||||||||||||||||||
| Attributable to Phillips 66 | |||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||
| Par Value | Capital in Excess of Par | Treasury Stock | Retained Earnings | Accum. Other Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||
| June 30, 2020 | $ | 6 | 20,342 | (17,116) | 18,631 | (1,148) | 2,580 | 23,295 | |||||||||||||||
| Net income (loss) | — | — | — | (799) | — | 73 | (726) | ||||||||||||||||
| Other comprehensive income | — | — | — | — | 181 | — | 181 | ||||||||||||||||
| Dividends paid on common stock ($0.90 per share) | — | — | — | (393) | — | — | (393) | ||||||||||||||||
| Benefit plan activity | — | 21 | — | (3) | — | — | 18 | ||||||||||||||||
| Net distributions to noncontrolling interests | — | — | — | — | — | (70) | (70) | ||||||||||||||||
| September 30, 2020 | $ | 6 | 20,363 | (17,116) | 17,436 | (967) | 2,583 | 22,305 | |||||||||||||||
| June 30, 2019 | $ | 6 | 19,912 | (15,822) | 21,423 | (767) | 2,554 | 27,306 | |||||||||||||||
| Net income | — | — | — | 712 | — | 81 | 793 | ||||||||||||||||
| Other comprehensive loss | — | — | — | — | (104) | — | (104) | ||||||||||||||||
| Dividends paid on common stock ($0.90 per share) | — | — | — | (402) | — | — | (402) | ||||||||||||||||
| Repurchase of common stock | — | — | (439) | — | — | — | (439) | ||||||||||||||||
| Benefit plan activity | — | 22 | — | (3) | — | — | 19 | ||||||||||||||||
| Issuance of Phillips 66 Partners LP common units | — | 44 | — | — | — | 32 | 76 | ||||||||||||||||
| Impacts from Phillips 66 Partners GP/IDR restructuring transaction | — | 275 | — | — | — | (373) | (98) | ||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | (59) | (59) | ||||||||||||||||
| September 30, 2019 | $ | 6 | 20,253 | (16,261) | 21,730 | (871) | 2,235 | 27,092 | |||||||||||||||
| Shares | ||||||||
| Three Months Ended September 30 | ||||||||
| Common Stock Issued | Treasury Stock | |||||||
| June 30, 2020 | 648,468,487 | 211,771,827 | ||||||
| Repurchase of common stock | — | 0 | ||||||
| Shares issued—share-based compensation | 103,525 | — | ||||||
| September 30, 2020 | 648,572,012 | 211,771,827 | ||||||
| June 30, 2019 | 646,828,397 | 198,286,700 | ||||||
| Repurchase of common stock | — | 4,406,701 | ||||||
| Shares issued—share-based compensation | 222,580 | — | ||||||
| September 30, 2019 | 647,050,977 | 202,693,401 | ||||||
| See Notes to Consolidated Financial Statements. | ||||||||
5
| Consolidated Statement of Changes in Equity | Phillips 66 | ||||
| Millions of Dollars | |||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||
| Attributable to Phillips 66 | |||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||
| Par Value | Capital in Excess of Par | Treasury Stock | Retained Earnings | Accum. Other Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||
| December 31, 2019 | $ | 6 | 20,301 | (16,673) | 22,064 | (788) | 2,259 | 27,169 | |||||||||||||||
| Net income (loss) | — | — | — | (3,436) | — | 216 | (3,220) | ||||||||||||||||
| Other comprehensive loss | — | — | — | — | (184) | — | (184) | ||||||||||||||||
| Dividends paid on common stock ($2.70 per share) | — | — | — | (1,182) | — | — | (1,182) | ||||||||||||||||
| Repurchase of common stock | — | — | (443) | — | — | — | (443) | ||||||||||||||||
| Benefit plan activity | — | 62 | — | (8) | — | — | 54 | ||||||||||||||||
| Transfer of equity interest | — | — | — | — | — | 305 | 305 | ||||||||||||||||
| Net distributions to noncontrolling interests | — | — | — | — | — | (197) | (197) | ||||||||||||||||
| Other | — | — | — | (2) | 5 | — | 3 | ||||||||||||||||
| September 30, 2020 | $ | 6 | 20,363 | (17,116) | 17,436 | (967) | 2,583 | 22,305 | |||||||||||||||
| December 31, 2018 | $ | 6 | 19,873 | (15,023) | 20,489 | (692) | 2,500 | 27,153 | |||||||||||||||
| Cumulative effect of accounting changes | — | — | — | 81 | (89) | (1) | (9) | ||||||||||||||||
| Net income | — | — | — | 2,340 | — | 227 | 2,567 | ||||||||||||||||
| Other comprehensive loss | — | — | — | — | (90) | — | (90) | ||||||||||||||||
| Dividends paid on common stock ($2.60 per share) | — | — | — | (1,172) | — | — | (1,172) | ||||||||||||||||
| Repurchase of common stock | — | — | (1,238) | — | — | — | (1,238) | ||||||||||||||||
| Benefit plan activity | — | 56 | — | (8) | — | — | 48 | ||||||||||||||||
| Issuance of Phillips 66 Partners LP common units | — | 49 | — | — | — | 58 | 107 | ||||||||||||||||
| Impacts from Phillips 66 Partners GP/IDR restructuring transaction | — | 275 | — | — | — | (373) | (98) | ||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | (176) | (176) | ||||||||||||||||
| September 30, 2019 | $ | 6 | 20,253 | (16,261) | 21,730 | (871) | 2,235 | 27,092 | |||||||||||||||
| Shares | ||||||||
| Nine Months Ended September 30 | ||||||||
| Common Stock Issued | Treasury Stock | |||||||
| December 31, 2019 | 647,416,633 | 206,390,806 | ||||||
| Repurchase of common stock | — | 5,381,021 | ||||||
| Shares issued—share-based compensation | 1,155,379 | — | ||||||
| September 30, 2020 | 648,572,012 | 211,771,827 | ||||||
| December 31, 2018 | 645,691,761 | 189,526,331 | ||||||
| Repurchase of common stock | — | 13,167,070 | ||||||
| Shares issued—share-based compensation | 1,359,216 | — | ||||||
| September 30, 2019 | 647,050,977 | 202,693,401 | ||||||
| See Notes to Consolidated Financial Statements. | ||||||||
6
| Notes to Consolidated Financial Statements | Phillips 66 | ||||
Note 1—Interim Financial Information
The unaudited interim financial information presented in the financial statements included in this report is prepared 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 the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2019 Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of the results expected for the full year.
Note 2—Sales and Other Operating Revenues
Disaggregated Revenues
The following tables present our disaggregated sales and other operating revenues:
| Millions of Dollars | ||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
| Product Line and Services | ||||||||||||||||||||
| Refined petroleum products | $ | 12,573 | 22,373 | 37,431 | 64,088 | |||||||||||||||
| Crude oil resales | 2,198 | 3,511 | 6,565 | 10,162 | ||||||||||||||||
| Natural gas liquids (NGL) | 966 | 1,025 | 2,645 | 3,508 | ||||||||||||||||
Services and other* | 192 | 309 | 1,079 | 410 | ||||||||||||||||
| Consolidated sales and other operating revenues | $ | 15,929 | 27,218 | 47,720 | 78,168 | |||||||||||||||
| Geographic Location** | ||||||||||||||||||||
| United States | $ | 12,125 | 21,160 | 36,212 | 60,602 | |||||||||||||||
| United Kingdom | 1,850 | 2,375 | 5,131 | 7,318 | ||||||||||||||||
| Germany | 805 | 1,025 | 2,276 | 3,074 | ||||||||||||||||
| Other foreign countries | 1,149 | 2,658 | 4,101 | 7,174 | ||||||||||||||||
| Consolidated sales and other operating revenues | $ | 15,929 | 27,218 | 47,720 | 78,168 | |||||||||||||||
| * Includes derivatives-related activities. See Note 13—Derivatives and Financial Instruments, for additional information. | ||||||||||||||||||||
| ** Sales and other operating revenues are attributable to countries based on the location of the operations generating the revenues. | ||||||||||||||||||||
Contract-Related Assets and Liabilities
At September 30, 2020, and December 31, 2019, receivables from contracts with customers were $3,410 million and $6,902 million, respectively. Significant noncustomer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.
Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At September 30, 2020, and December 31, 2019, our asset balances related to such payments were $389 million and $336 million, respectively.
Our contract liabilities represent advances from our customers prior to product or service delivery. At September 30, 2020, and December 31, 2019, contract liabilities were not material.
7
Remaining Performance Obligations
Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We do not disclose remaining performance obligations for these contracts as the expected duration is one year or less, or because the variable consideration has been allocated entirely to an unsatisfied performance obligation. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing, which mostly expire by 2021. At September 30, 2020, the remaining performance obligations related to these minimum volume commitment contracts were not material.
Note 3—Credit Losses
We are exposed to credit losses primarily through our sales of refined petroleum products, crude oil and NGL. We assess each counterparty’s ability to pay for the products we sell by conducting a credit review. The credit review considers our expected billing exposure and timing for payment and the counterparty’s established credit rating or our assessment of the counterparty’s creditworthiness based on our analysis of their financial statements when a credit rating is not available. We also consider contract terms and conditions, country and political risk, and business strategy in our evaluation. A credit limit is established for each counterparty based on the outcome of this review. We may require collateralized asset support or a prepayment to mitigate credit risk.
We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliations, dispute resolution and payment confirmations. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.
The negative economic impacts associated with Coronavirus Disease 2019 (COVID-19) increase the probability that certain of our counterparties may not be able to completely fulfill their obligations in a timely manner. In response, we have enhanced our credit monitoring, sought collateral to support some transactions, and required prepayments from higher-risk counterparties.
At September 30, 2020, and December 31, 2019, we reported $5,963 million and $8,510 million of accounts and notes receivable, net of allowances of $37 million and $41 million, respectively. Based on an aging analysis at September 30, 2020, more than 98% of our accounts receivable were outstanding less than 60 days.
We are also exposed to credit losses from off-balance sheet exposures, such as guarantees of joint venture debt and standby letters of credit. See Note 11—Guarantees, and Note 12—Contingencies and Commitments, for more information on these off-balance sheet exposures.
Note 4—Inventories
Inventories consisted of the following:
| Millions of Dollars | |||||||||||
| September 30 2020 | December 31 2019 | ||||||||||
| Crude oil and petroleum products | $ | 4,561 | 3,452 | ||||||||
| Materials and supplies | 336 | 324 | |||||||||
| $ | 4,897 | 3,776 | |||||||||
Inventories valued on the last-in, first-out (LIFO) basis totaled $4,436 million and $3,331 million at September 30, 2020, and December 31, 2019, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $1.6 billion and $4.3 billion at September 30, 2020, and December 31, 2019, respectively.
8
Note 5—Investments, Loans and Long-Term Receivables
Equity Investments
Gray Oak Pipeline, LLC
Phillips 66 Partners LP (Phillips 66 Partners) has a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. Phillips 66 Partners has an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC, after considering a co-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 Phillips 66 Partners or any of its co-venturers. Net proceeds from the offering were used to repay a third-party term loan of $1,379 million, and for general company purposes. Concurrent with the full repayment of the third-party term loan facility, the associated 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 impacted economic performance. The Gray Oak Pipeline commenced full operations in the second quarter of 2020 and ceased being a VIE. At September 30, 2020, Phillips 66 Partners’ investment in the Gray Oak Pipeline had a book value of $896 million. See Note 20—Phillips 66 Partners LP, for additional information regarding Phillips 66 Partners’ ownership in Gray Oak Pipeline, LLC.
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, Phillips 66 Partners and its 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, Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU was approximately $631 million.
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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, Phillips 66 Partners also could be asked to support its 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.
CF United LLC (CF United)
We hold a 50% voting interest and a 48% economic interest in CF United, a retail marketing joint venture with operations primarily on the U.S. West Coast. CF United is considered a VIE because our co-venturer has an option to sell its interest to us based on a fixed multiple. The put option becomes effective July 1, 2023, and expires on March 31, 2024. The put option is viewed as a variable interest as the purchase price on the exercise date may not represent the then-current fair value of CF United. We have determined that we are not the primary beneficiary because we and our co-venturer jointly direct the activities of CF United that most significantly impact economic performance. At September 30, 2020, our maximum exposure to loss was comprised of our $326 million investment in CF United and any potential future loss resulting from the put option, if the purchase price based on a fixed multiple exceeds the then-current fair value of CF United.
DCP Midstream, LLC (DCP Midstream)
At September 30, 2019, we estimated the fair value of our investment in DCP Midstream was below our book value due to a decline in the market values of DCP Midstream, LP (DCP Partners) common units and its then general partner interest. Accordingly, we recorded an $853 million before-tax impairment in the third quarter of 2019. After the elimination of its general partner’s economic interests in November 2019, the fair value of our investment in DCP Midstream depends solely on the market value of DCP Partners common units. In the first quarter of 2020, the market value of DCP Partners common units further declined by approximately 85%. As a result, at March 31, 2020, the fair value of our investment in DCP Midstream was significantly lower than its book value. We concluded the difference between its fair value and book value was not temporary primarily due to the magnitude of the difference. Accordingly, we recorded a $1.2 billion before-tax impairment of our investment in the first quarter of 2020. These charges are included in the “Impairments” line item on our consolidated statement of operations. These impairments increased the basis difference for our investment in DCP Midstream to $1.8 billion at March 31, 2020, which indicated the carrying value of our investment was lower than our share of DCP Midstream’s recorded net assets at March 31, 2020. The basis difference is being amortized and recognized as a benefit to equity earnings over a period of 22 years, which was the estimated remaining useful life of DCP Midstream’s properties, plants and equipment (PP&E) at March 31, 2020. Equity earnings for the three and nine months ended September 30, 2020, were increased by approximately $20 million and $50 million, respectively, due to the amortization of the basis difference. See Note 14—Fair Value Measurements, for additional information on the techniques used to determine the fair value of our investment in DCP Midstream. At September 30, 2020, our investment in DCP Midstream had a book value of $281 million.
Liberty Pipeline LLC (Liberty)
Phillips 66 Partners holds a 50% interest in Liberty, a joint venture formed to develop and construct the Liberty Pipeline system which, upon completion, will transport crude oil from the Rockies and Bakken production areas to Cushing, Oklahoma. Liberty is considered a VIE because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of Liberty that most significantly impact economic performance. The development and construction of the Liberty Pipeline system have been deferred as a result of the current challenging business environment. At September 30, 2020, our maximum exposure to loss was $252 million, which represented the book value of Phillips 66 Partners’ investment in Liberty of $239 million and our outstanding proportionate vendor guarantees of $13 million.
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OnCue Holdings, LLC (OnCue)
We hold a 50% interest in OnCue, a joint venture that owns and operates retail convenience stores. We fully guaranteed various debt agreements of OnCue and our co-venturer did not participate in the guarantees. This entity is considered a VIE because our debt guarantees resulted in OnCue not being exposed to all potential losses. We have determined we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact OnCue’s economic performance. At September 30, 2020, our maximum exposure to loss was $165 million, which represented the book value of our investment in OnCue of $92 million and guaranteed debt obligations of $73 million.
Red Oak Pipeline LLC (Red Oak)
We hold a 50% interest in a joint venture formed to develop and construct the Red Oak Pipeline system. In the third quarter of 2020, the Red Oak Pipeline project was canceled. As a result, we assessed our investment for impairment and concluded that the carrying value of our investment at September 30, 2020, was greater than its fair value. Accordingly, we recorded a before-tax impairment of $84 million in the Midstream segment, which is included in the “Impairments” line item on our consolidated statement of operations for the three and nine months ended September 30, 2020. See Note 14—Fair Value Measurements, for additional information on the techniques used to determine the fair value of our investment in Red Oak. At September 30, 2020, the remaining book value of our investment in Red Oak was $20 million.
Related Party Loan
In the second and third quarters of 2020, we and our co-venturer provided a short-term member loan to WRB Refining LP (WRB). At September 30, 2020, the outstanding loan balance to WRB was approximately $420 million, of which our share was approximately $210 million.
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Note 6—Properties, Plants and Equipment
Our gross investment in PP&E and the associated accumulated depreciation and amortization (Accum. D&A) balances were as follows:
| Millions of Dollars | |||||||||||||||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Gross PP&E | Accum. D&A | Net PP&E | Gross PP&E | Accum. D&A | Net PP&E | ||||||||||||||||||||||||||||||
| Midstream | $ | 12,154 | 2,727 | 9,427 | 11,221 | 2,391 | 8,830 | ||||||||||||||||||||||||||||
| Chemicals | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
| Refining | 24,330 | 11,819 | 12,511 | 23,692 | 10,336 | 13,356 | |||||||||||||||||||||||||||||
| Marketing and Specialties (M&S) | 1,762 | 988 | 774 | 1,847 | 959 | 888 | |||||||||||||||||||||||||||||
| Corporate and Other | 1,434 | 657 | 777 | 1,311 | 599 | 712 | |||||||||||||||||||||||||||||
| $ | 39,680 | 16,191 | 23,489 | 38,071 | 14,285 | 23,786 | |||||||||||||||||||||||||||||
In the third quarter of 2020, we announced a plan to reconfigure our San Francisco Refinery to produce renewable fuels at the Rodeo refining facility in Rodeo, California, starting in early 2024. Consequently, we plan to cease operation of the Santa Maria refining facility in Arroyo Grande, California, certain assets at the Rodeo refining facility, and associated Midstream assets in 2023. We assessed the San Francisco Refinery asset group for impairment and concluded that the carrying value of the asset group was not recoverable. As a result, we recorded a $1,030 million before-tax impairment to reduce the carrying value of the net PP&E and intangible assets in this asset group to its fair value of $940 million. The impairment charge resulted in a reduction of net PP&E totaling $1,009 million, consisting of $889 million in the Refining segment and $120 million in the Midstream segment, as well as a reduction of the Refining segment’s intangible assets of $21 million. This impairment charge is included within the “Impairments” line item on our consolidated statement of operations for the three and nine months ended September 30, 2020. See Note 14—Fair Value Measurements for additional information on the techniques used to determine the fair value of the asset group.
Note 7—Goodwill
Our stock price declined significantly in the first quarter of 2020 due to the disruption in global commodity and equity markets related to the COVID-19 pandemic and other factors. We assessed our goodwill for impairment due to the decline in our market capitalization and concluded that the carrying value of our Refining reporting unit at March 31, 2020, was greater than its fair value by an amount in excess of its goodwill balance. Accordingly, we recorded a before-tax goodwill impairment charge of $1,845 million in our Refining segment during the first quarter of 2020. This charge is included in the “Impairments” line item on our consolidated statement of operations for the nine months ended September 30, 2020. See Note 14—Fair Value Measurements for additional information on the techniques used to determine the fair value of our Refining reporting unit.
The carrying amount of goodwill by segment at September 30, 2020, was:
| Millions of Dollars | |||||||||||||||||||||||
| Midstream | Refining | M&S | Total | ||||||||||||||||||||
| Balance at January 1, 2020 | $ | 626 | 1,845 | 799 | 3,270 | ||||||||||||||||||
| Impairments | 0 | (1,845) | 0 | (1,845) | |||||||||||||||||||
| Balance at September 30, 2020 | $ | 626 | 0 | 799 | 1,425 | ||||||||||||||||||
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Note 8—Impairments
| Millions of Dollars | |||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||
| Midstream | $ | 204 | 853 | 1,365 | 856 | ||||||||||||
| Refining | 911 | 0 | 2,756 | 0 | |||||||||||||
| Corporate and Other | 25 | 0 | 25 | 0 | |||||||||||||
| Total impairments | $ | 1,140 | 853 | 4,146 | 856 | ||||||||||||
These impairment charges are included within the “Impairments” line item on our consolidated statement of operations. See Note 5—Investments, Loans and Long-Term Receivables, Note 6—Properties, Plants and Equipment, Note 7—Goodwill, and Note 14—Fair Value Measurements for additional information regarding our impairment charges.
The COVID-19 pandemic continues to result in economic disruption globally. Reduced demand for petroleum products has resulted in low crude oil prices and refining margins, as well as decreased volumes through logistics infrastructure. We continue to assess our long-lived assets and equity investments for impairment in this challenging business environment. The depth and duration of the economic consequences of the COVID-19 pandemic remain unknown. Additional impairments may be required in the future if there is a further deterioration in our projected cash flows.
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Note 9—Earnings (Loss) Per Share
The numerator of basic earnings (loss) per share (EPS) is net income (loss) attributable to Phillips 66, adjusted for noncancelable dividends paid on unvested share-based employee awards during the vesting period (participating securities). The denominator of basic EPS is the sum of the daily weighted-average number of common shares outstanding during the periods presented and fully vested stock and unit awards that have not yet been issued as common stock. The numerator of diluted EPS is also based on net income (loss) attributable to Phillips 66, which is reduced only by dividend equivalents paid on participating securities for which the dividends are more dilutive than the participation of the awards in the earnings (losses) of the periods presented. To the extent unvested stock, unit or option awards and vested unexercised stock options are dilutive, they are included with the weighted-average common shares outstanding in the denominator. Treasury stock is excluded from the denominator in both basic and diluted EPS.
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||
| Basic | Diluted | Basic | Diluted | Basic | Diluted | Basic | Diluted | ||||||||||||||||||||||
Amounts Attributed to Phillips 66 Common Stockholders (millions): | |||||||||||||||||||||||||||||
| Net income (loss) attributable to Phillips 66 | $ | (799) | (799) | 712 | 712 | (3,436) | (3,436) | 2,340 | 2,340 | ||||||||||||||||||||
| Income allocated to participating securities | (2) | (2) | (2) | (1) | (6) | (6) | (5) | (1) | |||||||||||||||||||||
| Net income (loss) available to common stockholders | $ | (801) | (801) | 710 | 711 | (3,442) | (3,442) | 2,335 | 2,339 | ||||||||||||||||||||
Weighted-average common shares outstanding (thousands): | 436,783 | 438,916 | 446,498 | 449,005 | 437,492 | 439,670 | 450,836 | 453,398 | |||||||||||||||||||||
| Effect of share-based compensation | 2,133 | 0 | 2,507 | 1,996 | 2,178 | 0 | 2,562 | 2,412 | |||||||||||||||||||||
Weighted-average common shares outstanding—EPS | 438,916 | 438,916 | 449,005 | 451,001 | 439,670 | 439,670 | 453,398 | 455,810 | |||||||||||||||||||||
Earnings (Loss) Per Share of Common Stock (dollars) | $ | (1.82) | (1.82) | 1.58 | 1.58 | (7.83) | (7.83) | 5.15 | 5.13 | ||||||||||||||||||||
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Note 10—Debt
Debt Issuances
On June 10, 2020, Phillips 66 closed its public offering of $1 billion aggregate principal amount of senior unsecured notes consisting of:
•$150 million aggregate principal amount of 3.850% Senior Notes due 2025.
•$850 million aggregate principal amount of 2.150% Senior Notes due 2030.
On April 9, 2020, Phillips 66 closed its public offering of $1 billion aggregate principal amount of senior unsecured notes consisting of:
•$500 million aggregate principal amount of 3.700% Senior Notes due 2023.
•$500 million aggregate principal amount of 3.850% Senior Notes due 2025.
Interest on the Senior Notes due 2023 is payable semiannually on April 6 and October 6 of each year, commencing on October 6, 2020. The Senior Notes due 2025 issued on June 10, 2020, constitute a further issuance of the Senior Notes due 2025 originally issued on April 9, 2020. The $650 million in aggregate principal amount of Senior Notes due 2025 is treated as a single class of debt securities. Interest on the Senior Notes due 2025 is payable semiannually on April 9 and October 9 of each year, commencing on October 9, 2020. Interest on the Senior Notes due 2030 is payable semiannually on June 15 and December 15 of each year, commencing on December 15, 2020.
Proceeds received from the public offerings of senior unsecured notes on June 10, 2020, and April 9, 2020, were $1,008 million and $993 million, respectively, net of underwriters’ discounts or premiums and commissions, as well as debt issuance costs. These proceeds are being used for general corporate purposes.
On March 19, 2020, Phillips 66 entered into a $1 billion 364-day delayed draw term loan agreement (the Facility) and borrowed $1 billion under the Facility shortly thereafter. On April 6, 2020, Phillips 66 increased the size of the Facility to $2 billion, and in June 2020, the Facility was amended to extend the commitment period to September 19, 2020. We did not draw additional amounts under the Facility before the end of the commitment period or further extend the commitment period. Accordingly, the additional borrowing capacity under the Facility expired prior to September 30, 2020. Borrowings under the Facility bear interest at a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by the credit rating of Phillips 66’s senior unsecured long-term debt. Phillips 66 is using the proceeds from the debt issuance for general corporate purposes.
At September 30, 2020, borrowings of $290 million were outstanding and $3 million in letters of credit had been drawn under Phillips 66 Partners’ $750 million revolving credit facility.
Debt Repayments
In April 2020, Phillips 66 repaid $300 million of floating-rate notes due April 2020 and $200 million outstanding under the term loan facility due April 2020. Also, in April 2020, Phillips 66 Partners repaid $25 million of tax-exempt bonds due April 2020.
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Note 11—Guarantees
At September 30, 2020, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantees and expect future performance to be either immaterial or have only a remote chance of occurrence.
Lease Residual Value Guarantees
Under the operating lease agreement on our headquarters facility in Houston, Texas, we had the option, at the end of the lease term to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. In September 2020, we amended and extended the lease term to September 2025. We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at September 30, 2020. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future payments totaling $396 million. These leases have remaining terms of up to ten years.
Guarantees of Joint Venture and Other Obligations
In March 2019, Phillips 66 Partners and its co-venturers in Dakota Access provided a CECU in conjunction with a senior unsecured notes offering. See Note 5—Investments, Loans and Long-Term Receivables, for additional information on Dakota Access and the CECU.
In September 2020, concurrent with the full repayment of a third-party term loan facility by Gray Oak Pipeline, LLC, the associated guarantee issued by Phillips 66 Partners through an equity contribution agreement was terminated. See Note 5—Investments, Loans and Long-Term Receivables, for additional information on Gray Oak Pipeline, LLC.
In addition, at September 30, 2020, we had other guarantees outstanding for our portion of certain joint venture debt obligations and purchase obligations, which have remaining terms of up to eight years. The maximum potential amount of future payments to third parties under these guarantees was approximately $216 million. Payment would be required if a joint venture defaults on its obligations.
Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnification. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses and employee claims, as well as real estate indemnities against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. At September 30, 2020, and December 31, 2019, the carrying amount of recorded indemnifications was $147 million and $153 million, respectively.
We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information to support the reversal. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. At September 30, 2020, and December 31, 2019, environmental accruals for known contamination of $105 million were included in the carrying amount of recorded indemnifications noted above. These environmental accruals were primarily included in the “Asset retirement obligations and accrued environmental costs” line item on our consolidated balance sheet. For additional information about environmental liabilities, see Note 12—Contingencies and Commitments.
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Indemnification and Release Agreement
In 2012, in connection with our separation from ConocoPhillips, we entered into the Indemnification and Release Agreement. This agreement governs the treatment between ConocoPhillips and us of matters relating to indemnification, insurance, litigation responsibility and management, and litigation document sharing and cooperation arising in connection with the separation. Generally, the agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of ConocoPhillips’ business with ConocoPhillips. The agreement also establishes procedures for handling claims subject to indemnification and related matters.
Note 12—Contingencies and Commitments
A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.
Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.
Environmental
We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using information available at the time. We measure estimates and base contingent liabilities on currently available facts, existing technology and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring contingent environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.
Although liability for environmental remediation costs is generally joint and several for federal sites and frequently so for state sites, we are usually only one of many companies alleged to have liability at a particular site. Due to such joint and several liabilities, we could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites for which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit, although some of the indemnifications are subject to dollar and time limits.
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We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At September 30, 2020, our total environmental accruals were $428 million, compared with $441 million at December 31, 2019. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.
Legal Proceedings
Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required.
Other Contingencies
We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized.
At September 30, 2020, we had performance obligations secured by letters of credit and bank guarantees of $519 million related to various purchase and other commitments incident to the ordinary conduct of business.
Note 13—Derivatives and Financial Instruments
Derivative Instruments
We use financial and commodity-based derivative contracts to manage exposures to fluctuations in commodity prices, interest rates and foreign currency exchange rates, or to capture market opportunities. Because we do not apply hedge accounting for commodity derivative contracts, all realized and unrealized gains and losses from commodity derivative contracts are recognized in our consolidated statement of operations. Gains and losses from derivative contracts held for trading not directly related to our physical business are reported net in the “Other income” line item on our consolidated statement of operations. Cash flows from all our derivative activity for the periods presented appear in the operating section on our consolidated statement of cash flows.
Purchase and sales contracts with firm minimum notional volumes for commodities that are readily convertible to cash are recorded on our consolidated balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception, whereby the contracts are recorded on an accrual basis. We generally apply the normal purchases and normal sales exception to eligible crude oil, refined petroleum product, NGL, natural gas and power commodity contracts to purchase or sell quantities we expect to use or sell in the normal course of business. All other derivative instruments are recorded at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 14—Fair Value Measurements.
Commodity Derivative Contracts—We sell into or receive supply from the worldwide crude oil, refined petroleum product, NGL, natural gas and electric power markets, exposing our revenues, purchases, cost of operating activities and cash flows to fluctuations in the prices for these commodities. Generally, our policy is to remain exposed to the market prices of commodities; however, we use futures, forwards, swaps and options in various markets to balance physical systems, meet customer needs, manage price exposures on specific transactions, and do a limited amount of trading not directly related to our physical business, all of which may reduce our exposure to fluctuations in market prices. We also use the market knowledge gained from these activities to capture market opportunities such as moving physical commodities to more profitable locations, storing commodities to capture seasonal or time premiums, and blending commodities to capture quality upgrades.
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The following table indicates the consolidated balance sheet line items that include the fair values of commodity derivative assets and liabilities. The balances in the following table are presented on a gross basis, before the effects of counterparty and collateral netting. However, we have elected to present our commodity derivative assets and liabilities with the same counterparty on a net basis on our consolidated balance sheet when the legal right of offset exists.
| Millions of Dollars | ||||||||||||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
| Commodity Derivatives | Effect of Collateral Netting | Net Carrying Value Presented on the Balance Sheet | Commodity Derivatives | Effect of Collateral Netting | Net Carrying Value Presented on the Balance Sheet | |||||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Prepaid expenses and other current assets | $ | 838 | (730) | (20) | 88 | 23 | 0 | 0 | 23 | |||||||||||||||||||||||
| Other assets | 0 | 0 | 0 | 0 | 3 | 0 | 0 | 3 | ||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Other accruals | 109 | (137) | 20 | (8) | 1,188 | (1,281) | 80 | (13) | ||||||||||||||||||||||||
| Other liabilities and deferred credits | 10 | (12) | 0 | (2) | 0 | (1) | 0 | (1) | ||||||||||||||||||||||||
| Total | $ | 957 | (879) | 0 | 78 | 1,214 | (1,282) | 80 | 12 | |||||||||||||||||||||||
At September 30, 2020, and December 31, 2019, there was no material cash collateral received or paid that was not offset on our consolidated balance sheet.
The realized and unrealized gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of operations, were:
| Millions of Dollars | ||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
| Sales and other operating revenues | $ | 20 | 71 | 519 | (89) | |||||||||||||||
| Other income | 0 | 20 | 9 | 33 | ||||||||||||||||
| Purchased crude oil and products | (16) | 60 | 301 | (41) | ||||||||||||||||
| Net gain (loss) from commodity derivative activity | $ | 4 | 151 | 829 | (97) | |||||||||||||||
19
The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from nonderivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward purchase and sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was at least 97% at September 30, 2020, and December 31, 2019.
| Open Position Long / (Short) | |||||||||||
| September 30 2020 | December 31 2019 | ||||||||||
| Commodity | |||||||||||
Crude oil, refined petroleum products and NGL (millions of barrels) | (36) | (16) | |||||||||
Interest Rate Derivative Contracts—In 2016, we entered into interest rate swaps to hedge the variability of lease payments on our headquarters facility. These monthly lease payments vary based on monthly changes in the one-month London Inter-Bank Offered Rate (LIBOR) and changes, if any, in our credit rating over the five-year term of the lease. The pay-fixed, receive-floating interest rate swaps have an aggregate notional value of $650 million and end in April 2021. We have designated these swaps as cash flow hedges.
The aggregate net fair value of these swaps was immaterial at September 30, 2020, and December 31, 2019. We report the mark-to-market gains or losses on our interest rate swaps designated as highly effective cash flow hedges as a component of other comprehensive income (loss), and reclassify such gains and losses into earnings in the same period during which the hedged transaction affects earnings. Net realized gains and losses from settlements of the swaps were immaterial for the three and nine months ended September 30, 2020 and 2019.
We currently estimate that before-tax losses of $5 million will be reclassified from accumulated other comprehensive loss into general and administrative expenses during the next 12 months as the hedged transactions settle; however, the actual amounts that will be reclassified will vary based on changes in interest rates.
Credit Risk from Derivative Instruments
The credit risk from our derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements, typically on a daily basis, until settled.
Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if our credit ratings fall below investment grade. Cash is the primary collateral in all contracts; however, many contracts also permit us to post letters of credit as collateral.
The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were immaterial at September 30, 2020, and December 31, 2019.
20
Note 14—Fair Value Measurements
Recurring Fair Value Measurements
We carry certain assets and liabilities at fair value, which we measure at the reporting date using the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price), and disclose the quality of these fair values based on the valuation inputs used in these measurements under the following hierarchy:
•Level 1: Fair value measured with unadjusted quoted prices from an active market for identical assets or liabilities.
•Level 2: Fair value measured either with: (1) adjusted quoted prices from an active market for similar assets or liabilities; or (2) other valuation inputs that are directly or indirectly observable.
•Level 3: Fair value measured with unobservable inputs that are significant to the measurement.
We classify the fair value of an asset or liability based on the significance of its observable or unobservable inputs to the measurement. However, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable.
We used the following methods and assumptions to estimate the fair value of financial instruments:
•Cash and cash equivalents—The carrying amount reported on our consolidated balance sheet approximates fair value.
•Accounts and notes receivable—The carrying amount reported on our consolidated balance sheet approximates fair value.
•Derivative instruments—We fair value our exchange-traded contracts based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange or other exchanges, and classify them as Level 1 in the fair value hierarchy. When exchange-cleared contracts lack sufficient liquidity, or are valued using either adjusted exchange-provided prices or nonexchange quotes, we classify those contracts as Level 2.
Physical commodity forward purchase and sales contracts and over-the-counter (OTC) financial swaps are generally valued using forward quotes provided by brokers and price index developers, such as Platts and Oil Price Information Service. We corroborate these quotes with market data and classify the resulting fair values as Level 2. When forward market prices are not available, we estimate fair value using the forward price of a similar commodity, adjusted for the difference in quality or location. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, physical commodity purchase and sales contracts and OTC swaps are valued using internally developed methodologies that consider historical relationships among various commodities that result in management’s best estimate of fair value. We classify these contracts as Level 3. Physical and OTC commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines whether the options are classified as Level 2 or 3. We use a midmarket pricing convention (the midpoint between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
We determine the fair value of our interest rate swaps based on observable market valuations for interest rate swaps that have notional amounts, terms and pay and reset frequencies similar to ours.
•Rabbi trust assets—These deferred compensation investments are measured at fair value using unadjusted quoted prices available from national securities exchanges and are therefore categorized as Level 1 in the fair value hierarchy.
•Debt—The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on observable market prices.
21
The following tables display the fair value hierarchy for our financial assets and liabilities either accounted for or disclosed at fair value on a recurring basis. These values are determined by treating each contract as the fundamental unit of account; therefore, derivative assets and liabilities with the same counterparty are shown on a gross basis in the hierarchy sections of these tables, before the effects of counterparty and collateral netting. The following tables also reflect the effect of netting derivative assets and liabilities with the same counterparty for which we have the legal right of offset and collateral netting.
The carrying values and fair values by hierarchy of our financial assets and liabilities, either carried or disclosed at fair value, including any effects of counterparty and collateral netting, were:
| Millions of Dollars | ||||||||||||||||||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||||||||||||||
| Fair Value Hierarchy | Total Fair Value of Gross Assets & Liabilities | Effect of Counterparty Netting | Effect of Collateral Netting | Difference in Carrying Value and Fair Value | Net Carrying Value Presented on the Balance Sheet | |||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||
| Commodity Derivative Assets | ||||||||||||||||||||||||||||||||||||||
| Exchange-cleared instruments | $ | 735 | 203 | 0 | 938 | (849) | (20) | 0 | 69 | |||||||||||||||||||||||||||||
| OTC instruments | 0 | 1 | 0 | 1 | 0 | 0 | 0 | 1 | ||||||||||||||||||||||||||||||
| Physical forward contracts | 0 | 17 | 1 | 18 | 0 | 0 | 0 | 18 | ||||||||||||||||||||||||||||||
| Rabbi trust assets | 133 | 0 | 0 | 133 | N/A | N/A | 0 | 133 | ||||||||||||||||||||||||||||||
| $ | 868 | 221 | 1 | 1,090 | (849) | (20) | 0 | 221 | ||||||||||||||||||||||||||||||
| Commodity Derivative Liabilities | ||||||||||||||||||||||||||||||||||||||
| Exchange-cleared instruments | $ | 653 | 218 | 0 | 871 | (849) | (20) | 0 | 2 | |||||||||||||||||||||||||||||
| Physical forward contracts | 0 | 8 | 0 | 8 | 0 | 0 | 0 | 8 | ||||||||||||||||||||||||||||||
| Interest rate derivatives | 0 | 5 | 0 | 5 | 0 | 0 | 0 | 5 | ||||||||||||||||||||||||||||||
| Floating-rate debt | 0 | 1,863 | 0 | 1,863 | N/A | N/A | 0 | 1,863 | ||||||||||||||||||||||||||||||
| Fixed-rate debt, excluding finance leases | 0 | 13,803 | 0 | 13,803 | N/A | N/A | (1,421) | 12,382 | ||||||||||||||||||||||||||||||
| $ | 653 | 15,897 | 0 | 16,550 | (849) | (20) | (1,421) | 14,260 | ||||||||||||||||||||||||||||||
| Millions of Dollars | ||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||||||||
| Fair Value Hierarchy | Total Fair Value of Gross Assets & Liabilities | Effect of Counterparty Netting | Effect of Collateral Netting | Difference in Carrying Value and Fair Value | Net Carrying Value Presented on the Balance Sheet | |||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||
| Commodity Derivative Assets | ||||||||||||||||||||||||||||||||||||||
| Exchange-cleared instruments | $ | 820 | 368 | 0 | 1,188 | (1,188) | 0 | 0 | 0 | |||||||||||||||||||||||||||||
| Physical forward contracts | 0 | 26 | 0 | 26 | 0 | 0 | 0 | 26 | ||||||||||||||||||||||||||||||
| Interest rate derivatives | 0 | 1 | 0 | 1 | 0 | 0 | 0 | 1 | ||||||||||||||||||||||||||||||
| Rabbi trust assets | 127 | 0 | 0 | 127 | N/A | N/A | 0 | 127 | ||||||||||||||||||||||||||||||
| $ | 947 | 395 | 0 | 1,342 | (1,188) | 0 | 0 | 154 | ||||||||||||||||||||||||||||||
| Commodity Derivative Liabilities | ||||||||||||||||||||||||||||||||||||||
| Exchange-cleared instruments | $ | 884 | 385 | 0 | 1,269 | (1,188) | (80) | 0 | 1 | |||||||||||||||||||||||||||||
| OTC instruments | 0 | 1 | 0 | 1 | 0 | 0 | 0 | 1 | ||||||||||||||||||||||||||||||
| Physical forward contracts | 0 | 12 | 0 | 12 | 0 | 0 | 0 | 12 | ||||||||||||||||||||||||||||||
| Floating-rate debt | 0 | 1,100 | 0 | 1,100 | N/A | N/A | 0 | 1,100 | ||||||||||||||||||||||||||||||
| Fixed-rate debt, excluding finance leases | 0 | 11,813 | 0 | 11,813 | N/A | N/A | (1,438) | 10,375 | ||||||||||||||||||||||||||||||
| $ | 884 | 13,311 | 0 | 14,195 | (1,188) | (80) | (1,438) | 11,489 | ||||||||||||||||||||||||||||||
22
The rabbi trust assets are recorded in the “Investments and long-term receivables” line item and floating-rate and fixed-rate debt are recorded in the “Short-term debt” and “Long-term debt” line items on our consolidated balance sheet. See Note 13—Derivatives and Financial Instruments, for information regarding where the assets and liabilities related to our commodity and interest rate derivatives are recorded on our consolidated balance sheet.
Nonrecurring Fair Value Measurements
Equity Investments
In the first quarter of 2020, the nonrecurring fair value measurement used to record an impairment of our DCP Midstream investment was the fair value of our share of DCP Midstream’s limited partner interest in DCP Partners, which was estimated based on average market prices of DCP Partners common units for a multi-day trading period encompassing March 31, 2020. This valuation resulted in a Level 2 nonrecurring fair value measurement.
In the third quarter of 2019, the nonrecurring fair value measurement used to record an impairment of our DCP Midstream investment consisted of:
•The fair value of our share of DCP Midstream’s limited partner interest in DCP Partners was estimated based on an average market price of DCP Partners common units for a multi-day trading period encompassing September 30, 2019.
•The fair value of our share of DCP Midstream’s general partner interest in DCP Partners was estimated using two primary inputs: 1) estimated future cash flows of distributions attributable to the incentive distribution rights from DCP Partners, and 2) a multiple of those cash flows based on internal estimates and observation of incentive distribution right (IDR) conversion transactions by other master limited partnerships.
Overall, we concluded the valuation above resulted in a Level 3 nonrecurring fair value measurement.
In the third quarter of 2020, the nonrecurring fair value measurement used to record an impairment of our Red Oak investment was the estimated salvage value of the joint venture’s assets. This valuation resulted in a Level 3 nonrecurring fair value measurement.
See Note 5—Investments, Loans and Long-Term Receivables, for additional information on these impairments.
PP&E and Intangible Assets
In the third quarter of 2020, we remeasured the carrying value of the net PP&E and intangible assets of our San Francisco Refinery asset group to fair value. The estimated fair value of the plants, equipment and intangible assets was determined using a replacement cost approach adjusted, as applicable, for physical deterioration, functional obsolescence and economic obsolescence. The estimated fair value of the properties was determined using a sales comparison approach. This valuation resulted in a Level 3 nonrecurring fair value measurement. See Note 6—Properties, Plants and Equipment, for additional information on this impairment.
Goodwill
The carrying value of the Refining reporting unit’s goodwill was remeasured to fair value on a nonrecurring basis in the first quarter of 2020. The fair value of the Refining reporting unit was calculated by weighting the results from the income approach and the market approach. The income approach uses a discounted cash flow model that requires various observable and nonobservable inputs, such as prices, volumes, expenses, capital expenditures, discount rates and projected long-term growth rates and terminal values. The market approach uses peer company enterprise values relative to current and future net income (loss) before net interest expense, income taxes, depreciation and amortization (EBITDA) projections to arrive at an average multiple. This multiple was applied to the reporting unit’s current and projected EBITDA, with consideration for an estimated market participant acquisition premium. The resulting fair value Level 3 estimate was less than the Refining reporting unit’s carrying value by an amount that exceeded the existing goodwill balance of the reporting unit. As a result, the Refining reporting unit’s goodwill was impaired to 0. As part of our impairment analysis, the fair value of all reporting units was reconciled to the company’s market capitalization. See Note 7—Goodwill, for additional information regarding the goodwill impairment.
23
Note 15—Pension and Postretirement Plans
The components of net periodic benefit cost for the three and nine months ended September 30, 2020 and 2019, were as follows:
| Millions of Dollars | |||||||||||||||||||||||||||||||||||
| Pension Benefits | Other Benefits | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| U.S. | Int’l. | U.S. | Int’l. | ||||||||||||||||||||||||||||||||
| Components of Net Periodic Benefit Cost | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30 | |||||||||||||||||||||||||||||||||||
| Service cost | $ | 35 | 7 | 32 | 5 | 1 | 1 | ||||||||||||||||||||||||||||
| Interest cost | 21 | 5 | 27 | 6 | 2 | 2 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (38) | (12) | (36) | (10) | 0 | 0 | |||||||||||||||||||||||||||||
| Amortization of prior service credit | 0 | 0 | 0 | 0 | (1) | 0 | |||||||||||||||||||||||||||||
| Recognized net actuarial loss | 21 | 4 | 14 | 2 | 0 | 0 | |||||||||||||||||||||||||||||
| Settlements | 17 | 0 | 1 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
| Net periodic benefit cost* | $ | 56 | 4 | 38 | 3 | 2 | 3 | ||||||||||||||||||||||||||||
| Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||||
| Service cost | $ | 102 | 21 | 95 | 17 | 4 | 4 | ||||||||||||||||||||||||||||
| Interest cost | 70 | 16 | 81 | 19 | 5 | 6 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (121) | (37) | (107) | (33) | 0 | 0 | |||||||||||||||||||||||||||||
| Amortization of prior service credit | 0 | 0 | 0 | 0 | (2) | (1) | |||||||||||||||||||||||||||||
| Recognized net actuarial loss | 50 | 12 | 40 | 5 | 0 | 0 | |||||||||||||||||||||||||||||
| Settlements | 56 | 0 | 7 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
| Net periodic benefit cost* | $ | 157 | 12 | 116 | 8 | 7 | 9 | ||||||||||||||||||||||||||||
| * Included in the “Operating expenses” and “Selling, general and administrative expenses” line items on our consolidated statement of operations. | |||||||||||||||||||||||||||||||||||
During the nine months ended September 30, 2020, we contributed $28 million to our U.S. pension and other postretirement benefit plans and $20 million to our international pension plans. We currently expect to make additional contributions of approximately $6 million to our U.S. pension and other postretirement benefit plans and $7 million to our international pension plans during the remainder of 2020.
Lump-sum benefit payments exceeded the sum of service and interest costs for our U.S. qualified pension plan during 2020 and for our U.S. non-qualified pension plan during 2020 and 2019. As a result, we recognized a proportionate share of prior actuarial losses, or pension settlement expense, totaling $56 million and $7 million for the nine months ended September 30, 2020 and 2019, respectively.
24
Note 16—Accumulated Other Comprehensive Loss
Changes in the balances of each component of accumulated other comprehensive loss were as follows:
| Millions of Dollars | |||||||||||||||||||||||
| Defined Benefit Plans | Foreign Currency Translation | Hedging | Accumulated Other Comprehensive Loss | ||||||||||||||||||||
| December 31, 2019 | $ | (656) | (131) | (1) | (788) | ||||||||||||||||||
| Other comprehensive loss before reclassifications | (221) | (44) | (8) | (273) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
| Defined benefit plans* | |||||||||||||||||||||||
| Amortization of net actuarial loss, prior service credit and settlements | 86 | — | — | 86 | |||||||||||||||||||
| Foreign currency translation | — | 0 | — | 0 | |||||||||||||||||||
| Hedging | — | — | 3 | 3 | |||||||||||||||||||
| Net current period other comprehensive loss | (135) | (44) | (5) | (184) | |||||||||||||||||||
| Other | — | 5 | — | 5 | |||||||||||||||||||
| September 30, 2020 | $ | (791) | (170) | (6) | (967) | ||||||||||||||||||
| December 31, 2018 | $ | (472) | (228) | 8 | (692) | ||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 5 | (124) | (6) | (125) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
| Defined benefit plans* | |||||||||||||||||||||||
| Amortization of net actuarial loss, prior service credit and settlements | 40 | — | — | 40 | |||||||||||||||||||
| Foreign currency translation | — | 0 | — | 0 | |||||||||||||||||||
| Hedging | — | — | (5) | (5) | |||||||||||||||||||
| Net current period other comprehensive income (loss) | 45 | (124) | (11) | (90) | |||||||||||||||||||
| Income taxes reclassified to retained earnings** | (93) | 2 | 2 | (89) | |||||||||||||||||||
| September 30, 2019 | $ | (520) | (350) | (1) | (871) | ||||||||||||||||||
| * Included in the computation of net periodic benefit cost. See Note 15—Pension and Postretirement Plans, for additional information. | |||||||||||||||||||||||
| ** As of January 1, 2019, stranded income taxes related to the enactment of the Tax Cuts and Jobs Act in December 2017 were reclassified to retained earnings upon adoption of ASU No. 2018-02. | |||||||||||||||||||||||
25
Note 17—Related Party Transactions
Significant transactions with related parties were:
| Millions of Dollars | ||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
| Operating revenues and other income (a) | $ | 450 | 756 | 1,337 | 2,235 | |||||||||||||||
| Purchases (b) | 1,612 | 2,842 | 4,868 | 8,770 | ||||||||||||||||
| Operating expenses and selling, general and administrative expenses (c) | 65 | 8 | 171 | 25 | ||||||||||||||||
(a)We sold NGL, other petrochemical feedstocks and solvents to Chevron Phillips Chemical Company LLC (CPChem), gas oil and hydrogen feedstocks to Excel Paralubes (Excel), and refined petroleum products to several of our equity affiliates in the M&S segment, including OnCue and CF United. We also sold certain feedstocks and intermediate products to WRB and acted as agent for WRB in supplying crude oil and other feedstocks for a fee. In addition, we charged several of our equity affiliates, including CPChem, for the use of common facilities, such as steam generators, waste and water treaters and warehouse facilities.
(b)We purchased crude oil, refined petroleum products and NGL from WRB and also acted as agent for WRB in distributing solvents. We also purchased natural gas and NGL from DCP Midstream and CPChem, as well as other feedstocks from various equity affiliates, for use in our refinery and fractionation processes. In addition, we purchased base oils and fuel products from Excel for use in our specialty and refining businesses. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline equity affiliates for transporting crude oil, refined petroleum products and NGL.
(c)We paid consignment fees to CF United, and utility and processing fees to various equity affiliates.
26
Note 18—Segment Disclosures and Related Information
Our operating segments are:
1)Midstream—Provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, fractionation, processing, and marketing services, mainly in the United States. The Midstream segment includes our master limited partnership (MLP), Phillips 66 Partners, as well as our 50% equity investment in DCP Midstream.
2)Chemicals—Consists of our 50% equity investment in CPChem, which manufactures and markets petrochemicals and plastics on a worldwide basis.
3)Refining—Refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates and aviation fuels, at 13 refineries in the United States and Europe.
4)Marketing and Specialties—Purchases for resale and markets refined petroleum products, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products.
Corporate and Other includes general corporate overhead, interest expense, our investment in new technologies, and various other corporate activities. Corporate assets include all cash, cash equivalents and income tax-related assets.
Intersegment sales are at prices that we believe approximate market.
27
Analysis of Results by Operating Segment
| Millions of Dollars | |||||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Sales and Other Operating Revenues* | |||||||||||||||||||||||
| Midstream | |||||||||||||||||||||||
| Total sales | $ | 1,458 | 1,602 | 4,096 | 5,208 | ||||||||||||||||||
| Intersegment eliminations | (446) | (482) | (1,323) | (1,526) | |||||||||||||||||||
| Total Midstream | 1,012 | 1,120 | 2,773 | 3,682 | |||||||||||||||||||
| Chemicals | 1 | 1 | 3 | 3 | |||||||||||||||||||
| Refining | |||||||||||||||||||||||
| Total sales | 10,434 | 19,591 | 31,567 | 56,839 | |||||||||||||||||||
| Intersegment eliminations | (6,286) | (11,452) | (18,356) | (34,008) | |||||||||||||||||||
| Total Refining | 4,148 | 8,139 | 13,211 | 22,831 | |||||||||||||||||||
| Marketing and Specialties | |||||||||||||||||||||||
| Total sales | 11,038 | 18,535 | 32,780 | 53,464 | |||||||||||||||||||
| Intersegment eliminations | (278) | (584) | (1,068) | (1,833) | |||||||||||||||||||
| Total Marketing and Specialties | 10,760 | 17,951 | 31,712 | 51,631 | |||||||||||||||||||
| Corporate and Other | 8 | 7 | 21 | 21 | |||||||||||||||||||
| Consolidated sales and other operating revenues | $ | 15,929 | 27,218 | 47,720 | 78,168 | ||||||||||||||||||
| * See Note 2—Sales and Other Operating Revenues, for further details on our disaggregated sales and other operating revenues. | |||||||||||||||||||||||
| Income (Loss) Before Income Taxes | |||||||||||||||||||||||
| Midstream | $ | 146 | (460) | (232) | 279 | ||||||||||||||||||
| Chemicals | 231 | 227 | 442 | 729 | |||||||||||||||||||
| Refining | (1,903) | 856 | (5,042) | 1,641 | |||||||||||||||||||
| Marketing and Specialties | 415 | 498 | 1,214 | 1,056 | |||||||||||||||||||
| Corporate and Other | (239) | (178) | (655) | (593) | |||||||||||||||||||
| Consolidated income (loss) before income taxes | $ | (1,350) | 943 | (4,273) | 3,112 | ||||||||||||||||||
| Millions of Dollars | |||||||||||
| September 30 2020 | December 31 2019 | ||||||||||
| Total Assets | |||||||||||
| Midstream | $ | 15,605 | 15,716 | ||||||||
| Chemicals | 6,284 | 6,249 | |||||||||
| Refining | 20,898 | 25,150 | |||||||||
| Marketing and Specialties | 7,322 | 8,659 | |||||||||
| Corporate and Other | 4,172 | 2,946 | |||||||||
| Consolidated total assets | $ | 54,281 | 58,720 | ||||||||
28
Note 19—Income Taxes
Historically, we have calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year to income (loss) for the interim period. In the second quarter of 2020, and again in the third quarter, we concluded that we could not calculate a reliable estimate of our annual effective tax rate due to the range of potential impacts the COVID-19 pandemic may have on our business and results of operations. Accordingly, we computed the effective tax rate for the nine-month period ending September 30, 2020, using actual results.
Our effective income tax rate for the three and nine months ended September 30, 2020, was 46% and 25%, respectively, compared with 16% and 18% for the corresponding periods of 2019. The increase in our effective tax rate for the three months ended September 30, 2020, was primarily due to the ability provided under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to carry back a 2020 net operating loss to a year with a 35% income tax rate, state income tax, foreign operations and income attributable to noncontrolling interests. The increase in our effective tax rate for the nine months ended September 30, 2020, was primarily due to the ability provided under the CARES Act to carry back a 2020 net operating loss to a year with a 35% income tax rate, foreign operations and income attributable to noncontrolling interests, partially offset by the impact of the nondeductible goodwill impairment.
The effective income tax rate for the three months ended September 30, 2020, varied from the U.S. federal statutory income tax rate of 21%, primarily due to the ability provided under the CARES Act to carry back a 2020 net operating loss to a year with a 35% income tax rate and state income tax. The effective income tax rate for the nine months ended September 30, 2020, varied from the U.S. federal statutory rate of 21%, primarily due to the ability provided under the CARES Act to carry back a 2020 net operating loss to a year with a 35% income tax rate and state income tax, partially offset by the impact of the nondeductible goodwill impairment.
An income tax receivable of $1.3 billion is included in the “Accounts and notes receivable” line item on our consolidated balance sheet as of September 30, 2020, which reflects our estimate of the tax benefit that we expect to realize within the next 12 months.
29
Note 20—Phillips 66 Partners LP
Phillips 66 Partners, headquartered in Houston, Texas, is a publicly traded MLP formed in 2013 to own, operate, develop and acquire primarily fee-based midstream assets. Phillips 66 Partners’ operations currently consist of crude oil, refined petroleum product and NGL transportation, fractionation, processing, terminaling, and storage assets.
We consolidate Phillips 66 Partners because we determined it is a VIE of which we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as well as the ability to direct the activities that most significantly impact its economic performance. As a result of this consolidation, the public common and perpetual convertible preferred unitholders’ ownership interests in Phillips 66 Partners are reflected as noncontrolling interests in our financial statements. At September 30, 2020, we owned 170 million Phillips 66 Partners common units, representing a 74% limited partner interest in Phillips 66 Partners, while the public owned a 26% limited partner interest and 13.8 million perpetual convertible preferred units.
The most significant assets of Phillips 66 Partners that are available to settle only its obligations, along with its most significant liabilities for which its creditors do not have recourse to Phillips 66’s general credit, were:
| Millions of Dollars | |||||||||||
| September 30 2020 | December 31 2019 | ||||||||||
| Cash and cash equivalents | $ | 2 | 286 | ||||||||
| Equity investments* | 3,373 | 2,961 | |||||||||
| Net properties, plants and equipment | 3,575 | 3,349 | |||||||||
| Short-term debt | 340 | 25 | |||||||||
| Long-term debt | 3,443 | 3,491 | |||||||||
| * Included in the “Investments and long-term receivables” line item on the Phillips 66 consolidated balance sheet. | |||||||||||
For the nine months ended September 30, 2020, on a settlement-date basis, Phillips 66 Partners generated net proceeds of $2 million from common units issued under its continuous offering of common units, or at-the-market (ATM) programs, with 0 issuances in the second and third quarters of 2020. For the three and nine months ended September 30, 2019, Phillips 66 Partners generated net proceeds of $91 million and $133 million, respectively, under its ATM programs.
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. Phillips 66 Partners has 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 operations. 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. Phillips 66 Partners has an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC, after considering a co-venturer’s 35% interest in the consolidated holding company. See Note 5—Investments, Loans and Long-Term Receivables, for further discussion regarding Phillips 66 Partners’ investment in Gray Oak Pipeline, LLC, Dakota Access and ETCO, and Liberty.
30
Note 21—Condensed Consolidating Financial Information
Phillips 66 has senior notes outstanding, the payment obligations of which are fully and unconditionally guaranteed by Phillips 66 Company, a 100 percent-owned subsidiary. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:
•Phillips 66 and Phillips 66 Company (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
•All other nonguarantor subsidiaries.
•The consolidating adjustments necessary to present Phillips 66’s results on a consolidated basis.
This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.
| Millions of Dollars | |||||||||||||||||
| Three Months Ended September 30, 2020 | |||||||||||||||||
| Statement of Operations | Phillips 66 | Phillips 66 Company | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||
| Revenues and Other Income (Loss) | |||||||||||||||||
| Sales and other operating revenues | $ | 0 | 11,907 | 4,022 | — | 15,929 | |||||||||||
| Equity in earnings (losses) of affiliates | (725) | 173 | 220 | 681 | 349 | ||||||||||||
| Net gain on dispositions | 0 | 1 | 0 | 0 | 1 | ||||||||||||
| Other income | 0 | 11 | 9 | 0 | 20 | ||||||||||||
| Intercompany revenues | 1 | 1,000 | 2,332 | (3,333) | — | ||||||||||||
| Total Revenues and Other Income (Loss) | (724) | 13,092 | 6,583 | (2,652) | 16,299 | ||||||||||||
| Costs and Expenses | |||||||||||||||||
| Purchased crude oil and products | 0 | 12,056 | 5,685 | (3,232) | 14,509 | ||||||||||||
| Operating expenses | 0 | 795 | 253 | (32) | 1,016 | ||||||||||||
| Selling, general and administrative expenses | 1 | 295 | 91 | (3) | 384 | ||||||||||||
| Depreciation and amortization | 0 | 237 | 115 | 0 | 352 | ||||||||||||
| Impairments | 0 | 962 | 178 | 0 | 1,140 | ||||||||||||
| Taxes other than income taxes | 0 | 78 | 28 | 0 | 106 | ||||||||||||
| Accretion on discounted liabilities | 0 | 4 | 2 | 0 | 6 | ||||||||||||
| Interest and debt expense | 98 | 15 | 85 | (66) | 132 | ||||||||||||
| Foreign currency transaction losses | 0 | 0 | 4 | 0 | 4 | ||||||||||||
| Total Costs and Expenses | 99 | 14,442 | 6,441 | (3,333) | 17,649 | ||||||||||||
| Income (loss) before income taxes | (823) | (1,350) | 142 | 681 | (1,350) | ||||||||||||
| Income tax expense (benefit) | (24) | (625) | 25 | 0 | (624) | ||||||||||||
| Net Income (Loss) | (799) | (725) | 117 | 681 | (726) | ||||||||||||
| Less: net income attributable to noncontrolling interests | 0 | 0 | 73 | 0 | 73 | ||||||||||||
| Net Income (Loss) Attributable to Phillips 66 | $ | (799) | (725) | 44 | 681 | (799) | |||||||||||
| Comprehensive Income (Loss) | $ | (618) | (544) | 254 | 363 | (545) | |||||||||||
31
| Millions of Dollars | |||||||||||||||||
| Three Months Ended September 30, 2019 | |||||||||||||||||
| Statement of Operations | Phillips 66 | Phillips 66 Company | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||
| Revenues and Other Income | |||||||||||||||||
| Sales and other operating revenues | $ | 0 | 20,947 | 6,271 | — | 27,218 | |||||||||||
| Equity in earnings of affiliates | 781 | 214 | 147 | (643) | 499 | ||||||||||||
| Net gain on dispositions | 0 | 1 | 17 | 0 | 18 | ||||||||||||
| Other income | 0 | 25 | 11 | 0 | 36 | ||||||||||||
| Intercompany revenues | 0 | 837 | 3,704 | (4,541) | — | ||||||||||||
| Total Revenues and Other Income | 781 | 22,024 | 10,150 | (5,184) | 27,771 | ||||||||||||
| Costs and Expenses | |||||||||||||||||
| Purchased crude oil and products | 0 | 19,383 | 8,866 | (4,443) | 23,806 | ||||||||||||
| Operating expenses | 0 | 959 | 264 | (17) | 1,206 | ||||||||||||
| Selling, general and administrative expenses | 1 | 324 | 94 | (3) | 416 | ||||||||||||
| Depreciation and amortization | 0 | 230 | 106 | 0 | 336 | ||||||||||||
| Impairments | 0 | 0 | 853 | 0 | 853 | ||||||||||||
| Taxes other than income taxes | 0 | 77 | 28 | 0 | 105 | ||||||||||||
| Accretion on discounted liabilities | 0 | 4 | 2 | 0 | 6 | ||||||||||||
| Interest and debt expense | 85 | 35 | 67 | (78) | 109 | ||||||||||||
| Foreign currency transaction gains | 0 | 0 | (9) | 0 | (9) | ||||||||||||
| Total Costs and Expenses | 86 | 21,012 | 10,271 | (4,541) | 26,828 | ||||||||||||
| Income (loss) before income taxes | 695 | 1,012 | (121) | (643) | 943 | ||||||||||||
| Income tax expense (benefit) | (17) | 231 | (64) | 0 | 150 | ||||||||||||
| Net Income (Loss) | 712 | 781 | (57) | (643) | 793 | ||||||||||||
| Less: net income attributable to noncontrolling interests | 0 | 0 | 81 | 0 | 81 | ||||||||||||
| Net Income (Loss) Attributable to Phillips 66 | $ | 712 | 781 | (138) | (643) | 712 | |||||||||||
| Comprehensive Income (Loss) | $ | 608 | 677 | (170) | (426) | 689 | |||||||||||
32
| Millions of Dollars | |||||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||
| Statement of Operations | Phillips 66 | Phillips 66 Company | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||
| Revenues and Other Income (Loss) | |||||||||||||||||
| Sales and other operating revenues | $ | 0 | 35,653 | 12,067 | — | 47,720 | |||||||||||
| Equity in earnings (losses) of affiliates | (3,231) | 42 | 633 | 3,427 | 871 | ||||||||||||
| Net gain on dispositions | 0 | 2 | 85 | 0 | 87 | ||||||||||||
| Other income | 0 | 28 | 20 | 0 | 48 | ||||||||||||
| Intercompany revenues | 2 | 2,534 | 6,303 | (8,839) | — | ||||||||||||
| Total Revenues and Other Income (Loss) | (3,229) | 38,259 | 19,108 | (5,412) | 48,726 | ||||||||||||
| Costs and Expenses | |||||||||||||||||
| Purchased crude oil and products | 0 | 35,032 | 16,039 | (8,514) | 42,557 | ||||||||||||
| Operating expenses | 0 | 2,722 | 755 | (94) | 3,383 | ||||||||||||
| Selling, general and administrative expenses | 5 | 825 | 290 | (8) | 1,112 | ||||||||||||
| Depreciation and amortization | 0 | 707 | 330 | 0 | 1,037 | ||||||||||||
| Impairments | 0 | 2,767 | 1,379 | 0 | 4,146 | ||||||||||||
| Taxes other than income taxes | 0 | 287 | 90 | 0 | 377 | ||||||||||||
| Accretion on discounted liabilities | 0 | 13 | 4 | 0 | 17 | ||||||||||||
| Interest and debt expense | 268 | 73 | 242 | (223) | 360 | ||||||||||||
| Foreign currency transaction losses | 0 | 0 | 10 | 0 | 10 | ||||||||||||
| Total Costs and Expenses | 273 | 42,426 | 19,139 | (8,839) | 52,999 | ||||||||||||
| Loss before income taxes | (3,502) | (4,167) | (31) | 3,427 | (4,273) | ||||||||||||
| Income tax benefit | (66) | (936) | (51) | 0 | (1,053) | ||||||||||||
| Net Income (Loss) | (3,436) | (3,231) | 20 | 3,427 | (3,220) | ||||||||||||
| Less: net income attributable to noncontrolling interests | 0 | 0 | 216 | 0 | 216 | ||||||||||||
| Net Loss Attributable to Phillips 66 | $ | (3,436) | (3,231) | (196) | 3,427 | (3,436) | |||||||||||
| Comprehensive Loss | $ | (3,620) | (3,415) | (30) | 3,661 | (3,404) | |||||||||||
33
| Millions of Dollars | |||||||||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||
| Statement of Operations | Phillips 66 | Phillips 66 Company | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||
| Revenues and Other Income | |||||||||||||||||
| Sales and other operating revenues | $ | 0 | 60,060 | 18,108 | — | 78,168 | |||||||||||
| Equity in earnings of affiliates | 2,557 | 1,645 | 514 | (3,053) | 1,663 | ||||||||||||
| Net gain on dispositions | 0 | 1 | 18 | 0 | 19 | ||||||||||||
| Other income | 0 | 67 | 30 | 0 | 97 | ||||||||||||
| Intercompany revenues | 0 | 2,720 | 11,014 | (13,734) | — | ||||||||||||
| Total Revenues and Other Income | 2,557 | 64,493 | 29,684 | (16,787) | 79,947 | ||||||||||||
| Costs and Expenses | |||||||||||||||||
| Purchased crude oil and products | 0 | 56,648 | 26,202 | (13,435) | 69,415 | ||||||||||||
| Operating expenses | 0 | 2,876 | 861 | (59) | 3,678 | ||||||||||||
| Selling, general and administrative expenses | 5 | 898 | 295 | (8) | 1,190 | ||||||||||||
| Depreciation and amortization | 0 | 686 | 315 | 0 | 1,001 | ||||||||||||
| Impairments | 0 | 1 | 855 | 0 | 856 | ||||||||||||
| Taxes other than income taxes | 0 | 242 | 88 | 0 | 330 | ||||||||||||
| Accretion on discounted liabilities | 0 | 13 | 4 | 0 | 17 | ||||||||||||
| Interest and debt expense | 267 | 108 | 200 | (232) | 343 | ||||||||||||
| Foreign currency transaction losses | 0 | 0 | 5 | 0 | 5 | ||||||||||||
| Total Costs and Expenses | 272 | 61,472 | 28,825 | (13,734) | 76,835 | ||||||||||||
| Income before income taxes | 2,285 | 3,021 | 859 | (3,053) | 3,112 | ||||||||||||
| Income tax expense (benefit) | (55) | 464 | 136 | 0 | 545 | ||||||||||||
| Net Income | 2,340 | 2,557 | 723 | (3,053) | 2,567 | ||||||||||||
| Less: net income attributable to noncontrolling interests | 0 | 0 | 227 | 0 | 227 | ||||||||||||
| Net Income Attributable to Phillips 66 | $ | 2,340 | 2,557 | 496 | (3,053) | 2,340 | |||||||||||
| Comprehensive Income | $ | 2,250 | 2,467 | 615 | (2,855) | 2,477 | |||||||||||
34
| Millions of Dollars | |||||||||||||||||
| September 30, 2020 | |||||||||||||||||
| Balance Sheet | Phillips 66 | Phillips 66 Company | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||
| Assets | |||||||||||||||||
| Cash and cash equivalents | $ | 0 | 665 | 797 | 0 | 1,462 | |||||||||||
| Accounts and notes receivable | 0 | 4,477 | 3,905 | (2,419) | 5,963 | ||||||||||||
| Inventories | 0 | 3,421 | 1,476 | 0 | 4,897 | ||||||||||||
| Prepaid expenses and other current assets | 0 | 255 | 245 | 0 | 500 | ||||||||||||
| Total Current Assets | 0 | 8,818 | 6,423 | (2,419) | 12,822 | ||||||||||||
| Investments and long-term receivables | 30,358 | 25,272 | 10,990 | (52,853) | 13,767 | ||||||||||||
| Net properties, plants and equipment | 0 | 12,783 | 10,706 | 0 | 23,489 | ||||||||||||
| Goodwill | 0 | 1,047 | 378 | 0 | 1,425 | ||||||||||||
| Intangibles | 0 | 717 | 132 | 0 | 849 | ||||||||||||
| Other assets | 12 | 4,207 | 713 | (3,003) | 1,929 | ||||||||||||
| Total Assets | $ | 30,370 | 52,844 | 29,342 | (58,275) | 54,281 | |||||||||||
| Liabilities and Equity | |||||||||||||||||
| Accounts payable | $ | 0 | 5,282 | 2,594 | (2,419) | 5,457 | |||||||||||
| Short-term debt | 1,498 | 15 | 347 | 0 | 1,860 | ||||||||||||
| Accrued income and other taxes | 0 | 480 | 749 | 0 | 1,229 | ||||||||||||
| Employee benefit obligations | 0 | 392 | 51 | 0 | 443 | ||||||||||||
| Other accruals | 159 | 1,304 | 425 | (364) | 1,524 | ||||||||||||
| Total Current Liabilities | 1,657 | 7,473 | 4,166 | (2,783) | 10,513 | ||||||||||||
| Long-term debt | 8,939 | 156 | 3,571 | 0 | 12,666 | ||||||||||||
| Asset retirement obligations and accrued environmental costs | 0 | 463 | 181 | 0 | 644 | ||||||||||||
| Deferred income taxes | 0 | 3,566 | 1,944 | (3) | 5,507 | ||||||||||||
| Employee benefit obligations | 0 | 1,166 | 228 | 0 | 1,394 | ||||||||||||
| Other liabilities and deferred credits | 22 | 10,990 | 5,664 | (15,424) | 1,252 | ||||||||||||
| Total Liabilities | 10,618 | 23,814 | 15,754 | (18,210) | 31,976 | ||||||||||||
| Common stock | 3,253 | 25,886 | 9,582 | (35,468) | 3,253 | ||||||||||||
| Retained earnings | 17,466 | 4,111 | 1,743 | (5,884) | 17,436 | ||||||||||||
| Accumulated other comprehensive loss | (967) | (967) | (320) | 1,287 | (967) | ||||||||||||
| Noncontrolling interests | 0 | 0 | 2,583 | 0 | 2,583 | ||||||||||||
| Total Liabilities and Equity | $ | 30,370 | 52,844 | 29,342 | (58,275) | 54,281 | |||||||||||
35
| Millions of Dollars | |||||||||||||||||
| December 31, 2019 | |||||||||||||||||
| Balance Sheet | Phillips 66 | Phillips 66 Company | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||
| Assets | |||||||||||||||||
| Cash and cash equivalents | $ | 0 | 136 | 1,478 | 0 | 1,614 | |||||||||||
| Accounts and notes receivable | 86 | 6,334 | 4,148 | (2,058) | 8,510 | ||||||||||||
| Inventories | 0 | 2,594 | 1,182 | 0 | 3,776 | ||||||||||||
| Prepaid expenses and other current assets | 2 | 362 | 131 | 0 | 495 | ||||||||||||
| Total Current Assets | 88 | 9,426 | 6,939 | (2,058) | 14,395 | ||||||||||||
| Investments and long-term receivables | 33,082 | 25,039 | 10,989 | (54,539) | 14,571 | ||||||||||||
| Net properties, plants and equipment | 0 | 13,676 | 10,110 | 0 | 23,786 | ||||||||||||
| Goodwill | 0 | 2,853 | 417 | 0 | 3,270 | ||||||||||||
| Intangibles | 0 | 732 | 137 | 0 | 869 | ||||||||||||
| Other assets | 14 | 4,290 | 714 | (3,189) | 1,829 | ||||||||||||
| Total Assets | $ | 33,184 | 56,016 | 29,306 | (59,786) | 58,720 | |||||||||||
| Liabilities and Equity | |||||||||||||||||
| Accounts payable | $ | 0 | 7,024 | 3,609 | (2,058) | 8,575 | |||||||||||
| Short-term debt | 500 | 16 | 31 | 0 | 547 | ||||||||||||
| Accrued income and other taxes | 0 | 386 | 593 | 0 | 979 | ||||||||||||
| Employee benefit obligations | 0 | 648 | 62 | 0 | 710 | ||||||||||||
| Other accruals | 65 | 850 | 249 | (329) | 835 | ||||||||||||
| Total Current Liabilities | 565 | 8,924 | 4,544 | (2,387) | 11,646 | ||||||||||||
| Long-term debt | 7,434 | 155 | 3,627 | 0 | 11,216 | ||||||||||||
| Asset retirement obligations and accrued environmental costs | 0 | 460 | 178 | 0 | 638 | ||||||||||||
| Deferred income taxes | 0 | 3,727 | 1,828 | (2) | 5,553 | ||||||||||||
| Employee benefit obligations | 0 | 825 | 219 | 0 | 1,044 | ||||||||||||
| Other liabilities and deferred credits | 245 | 8,975 | 5,465 | (13,231) | 1,454 | ||||||||||||
| Total Liabilities | 8,244 | 23,066 | 15,861 | (15,620) | 31,551 | ||||||||||||
| Common stock | 3,634 | 25,838 | 9,516 | (35,354) | 3,634 | ||||||||||||
| Retained earnings | 22,094 | 7,900 | 1,940 | (9,870) | 22,064 | ||||||||||||
| Accumulated other comprehensive loss | (788) | (788) | (270) | 1,058 | (788) | ||||||||||||
| Noncontrolling interests | 0 | 0 | 2,259 | 0 | 2,259 | ||||||||||||
| Total Liabilities and Equity | $ | 33,184 | 56,016 | 29,306 | (59,786) | 58,720 | |||||||||||
36
| Millions of Dollars | |||||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||
| Statement of Cash Flows | Phillips 66 | Phillips 66 Company | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||
| Cash Flows From Operating Activities | |||||||||||||||||
| Net Cash Provided by (Used in) Operating Activities | $ | 520 | (225) | 1,733 | (556) | 1,472 | |||||||||||
| Cash Flows From Investing Activities | |||||||||||||||||
| Capital expenditures and investments | 0 | (746) | (1,710) | 42 | (2,414) | ||||||||||||
| Return of investments in equity affiliates | 0 | 12 | 127 | 0 | 139 | ||||||||||||
| Proceeds from asset dispositions | 0 | 2 | 1 | 0 | 3 | ||||||||||||
| Intercompany lending activities | (1,352) | 2,309 | (957) | 0 | 0 | ||||||||||||
| Advances/loans—related parties | 0 | (230) | (21) | 0 | (251) | ||||||||||||
| Collection of advances/loans—related parties | 0 | 20 | 24 | 0 | 44 | ||||||||||||
| Other | 0 | (40) | (47) | 0 | (87) | ||||||||||||
| Net Cash Provided by (Used in) Investing Activities | (1,352) | 1,327 | (2,583) | 42 | (2,566) | ||||||||||||
| Cash Flows From Financing Activities | |||||||||||||||||
| Issuance of debt | 3,015 | 0 | 290 | 0 | 3,305 | ||||||||||||
| Repayment of debt | (500) | (17) | (29) | 0 | (546) | ||||||||||||
| Issuance of common stock | 6 | 0 | 0 | 0 | 6 | ||||||||||||
| Repurchase of common stock | (443) | 0 | 0 | 0 | (443) | ||||||||||||
| Dividends paid on common stock | (1,182) | (556) | 0 | 556 | (1,182) | ||||||||||||
| Distributions to noncontrolling interests | 0 | 0 | (201) | 0 | (201) | ||||||||||||
| Net proceeds from issuance of Phillips 66 Partners LP common units | 0 | 0 | 2 | 0 | 2 | ||||||||||||
| Other | (64) | 0 | 84 | (42) | (22) | ||||||||||||
| Net Cash Provided by (Used in) Financing Activities | 832 | (573) | 146 | 514 | 919 | ||||||||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | 0 | 0 | 23 | 0 | 23 | ||||||||||||
| Net Change in Cash and Cash Equivalents | 0 | 529 | (681) | 0 | (152) | ||||||||||||
| Cash and cash equivalents at beginning of period | 0 | 136 | 1,478 | 0 | 1,614 | ||||||||||||
| Cash and Cash Equivalents at End of Period | $ | 0 | 665 | 797 | 0 | 1,462 | |||||||||||
37
| Millions of Dollars | |||||||||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||
| Statement of Cash Flows | Phillips 66 | Phillips 66 Company | All Other Subsidiaries | Consolidating Adjustments | Total Consolidated | ||||||||||||
| Cash Flows From Operating Activities | |||||||||||||||||
| Net Cash Provided by (Used in) Operating Activities | $ | (143) | 1,645 | 1,730 | (118) | 3,114 | |||||||||||
| Cash Flows From Investing Activities | |||||||||||||||||
| Capital expenditures and investments | 0 | (803) | (1,792) | 0 | (2,595) | ||||||||||||
| Return of investments in equity affiliates | 0 | 352 | 53 | (350) | 55 | ||||||||||||
| Proceeds from asset dispositions | 0 | 0 | 84 | 0 | 84 | ||||||||||||
| Intercompany lending activities | 2,587 | (2,245) | (342) | 0 | 0 | ||||||||||||
| Advances/loans—related parties | 0 | 0 | (95) | 0 | (95) | ||||||||||||
| Collection of advances/loans—related parties | 0 | 0 | 95 | 0 | 95 | ||||||||||||
| Other | 0 | (3) | 27 | 0 | 24 | ||||||||||||
| Net Cash Provided by (Used in) Investing Activities | 2,587 | (2,699) | (1,970) | (350) | (2,432) | ||||||||||||
| Cash Flows From Financing Activities | |||||||||||||||||
| Issuance of debt | 0 | 0 | 1,758 | 0 | 1,758 | ||||||||||||
| Repayment of debt | 0 | (14) | (990) | 0 | (1,004) | ||||||||||||
| Issuance of common stock | 15 | 0 | 0 | 0 | 15 | ||||||||||||
| Repurchase of common stock | (1,238) | 0 | 0 | 0 | (1,238) | ||||||||||||
| Dividends paid on common stock | (1,172) | 0 | (118) | 118 | (1,172) | ||||||||||||
| Distributions to noncontrolling interests | 0 | 0 | (176) | 0 | (176) | ||||||||||||
| Net proceeds from issuance of Phillips 66 Partners LP common units | 0 | 0 | 133 | 0 | 133 | ||||||||||||
| Other | (49) | (4) | (15) | 350 | 282 | ||||||||||||
| Net Cash Provided by (Used in) Financing Activities | (2,444) | (18) | 592 | 468 | (1,402) | ||||||||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | 0 | 0 | (31) | 0 | (31) | ||||||||||||
| Net Change in Cash and Cash Equivalents | 0 | (1,072) | 321 | 0 | (751) | ||||||||||||
| Cash and cash equivalents at beginning of period | 0 | 1,648 | 1,371 | 0 | 3,019 | ||||||||||||
| Cash and Cash Equivalents at End of Period | $ | 0 | 576 | 1,692 | 0 | 2,268 | |||||||||||
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated, “the company,” “we,” “our,” “us” and “Phillips 66” are used in this report to refer to the businesses of Phillips 66 and its consolidated subsidiaries.
Management’s Discussion and Analysis is the company’s analysis of its financial performance, financial condition, and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions often identify forward-looking statements, but the absence of these words does not mean a statement is not forward-looking. The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”
The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to net income (loss) attributable to Phillips 66. The terms “before-tax income” or “before-tax loss” as used in Management’s Discussion and Analysis refer to income (loss) before income taxes.
EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT
Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. At September 30, 2020, we had total assets of $54.3 billion. Our common stock trades on the New York Stock Exchange under the symbol PSX.
Executive Overview
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, including travel and business restrictions, have resulted in substantial decreases in the demand for 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. Accordingly, crude oil producers have shut in high cost production, and refiners have reduced crude oil processing rates.
During the first nine months of 2020, we took the following significant steps to enhance our liquidity in this challenged margin environment:
•Borrowed $1 billion under our 364-day term loan facility.
•Issued $2 billion of senior unsecured notes in three tranches of three-, five-, and ten-year maturities.
•Temporarily suspended our share repurchase programs.
•Reduced our consolidated capital spending plans in 2020 by $700 million.
•Executed a plan to reduce our budgeted operating and administrative costs by $500 million in 2020.
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In the third quarter of 2020, we reported a loss of $799 million and generated cash from operating activities of $491 million. We used available cash to fund capital expenditures and investments of $552 million and pay dividends of $393 million. We ended the third quarter of 2020 with $1.5 billion of cash and cash equivalents and approximately $5.5 billion of total committed capacity available under our revolving credit facilities.
Our earnings in the third quarter of 2020 reflect the continued adverse effects of the pandemic. These adverse effects may continue to be significant in the near term. We continue to assess our long-lived assets and equity investments for impairment in this challenging business environment. The depth and duration of the economic consequences of the COVID-19 pandemic remain unknown. Additional impairments may be required in the future if there is a further deterioration in our projected cash flows.
Business Environment
The Midstream segment includes our Transportation and Natural Gas Liquids (NGL) businesses. Our Transportation business contains fee-based operations that are not directly exposed to commodity price risk. Our NGL business results are primarily driven by fractionation and terminaling margins, throughput volumes, and impacts from NGL prices. The Midstream segment also includes our 50% equity investment in DCP Midstream, LLC (DCP Midstream). During the third quarter of 2020, NGL prices remained relatively flat, compared with the third quarter of 2019.
The Chemicals segment consists of our 50% equity investment in Chevron Phillips Chemical Company LLC (CPChem). The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on supply and demand, as well as cost factors. During the third quarter of 2020, the benchmark high-density polyethylene chain margin decreased, compared with the third quarter of 2019, mainly driven by lower polyethylene sales prices and higher feedstock costs.
Our Refining segment results are driven by several factors, including refining margins, refinery throughput, feedstock costs, product yields, turnaround activity, and other operating costs. The price of U.S. benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, decreased to an average of $40.91 per barrel during the third quarter of 2020, compared with an average of $56.44 per barrel in the third quarter of 2019, due to a significant decline in global demand driven by the negative global economic impacts of the COVID-19 pandemic. Market crack spreads are used as indicators of refining margins and measure the difference between market prices for refined petroleum products and crude oil. During the third quarter of 2020, the worldwide market crack spreads were significantly lower compared with the third quarter of 2019, mainly driven by a sharp decline in demand for refined petroleum products resulting from the global economic disruption caused by the COVID-19 pandemic.
Results for our Marketing and Specialties (M&S) segment depend largely on marketing fuel and lubricant margins, and sales volumes of our refined petroleum and other specialty products. While M&S margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are influenced by the trend in spot prices for refined petroleum products. Generally speaking, a downward trend of spot prices has a favorable impact on marketing fuel margins, while an upward trend of spot prices has an unfavorable impact on marketing fuel margins. The global disruption caused by the COVID-19 pandemic significantly reduced demand for our refined petroleum and specialty products in 2020 compared with 2019.
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RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three and nine months ended September 30, 2020, is based on a comparison with the corresponding periods of 2019.
Consolidated Results
A summary of income (loss) before income taxes by business segment with a reconciliation to net income (loss) attributable to Phillips 66 follows:
| Millions of Dollars | ||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
| Midstream | $ | 146 | (460) | (232) | 279 | |||||||||||||||
| Chemicals | 231 | 227 | 442 | 729 | ||||||||||||||||
| Refining | (1,903) | 856 | (5,042) | 1,641 | ||||||||||||||||
| Marketing and Specialties | 415 | 498 | 1,214 | 1,056 | ||||||||||||||||
| Corporate and Other | (239) | (178) | (655) | (593) | ||||||||||||||||
| Income (loss) before income taxes | (1,350) | 943 | (4,273) | 3,112 | ||||||||||||||||
| Income tax expense (benefit) | (624) | 150 | (1,053) | 545 | ||||||||||||||||
| Net income (loss) | (726) | 793 | (3,220) | 2,567 | ||||||||||||||||
| Less: net income attributable to noncontrolling interests | 73 | 81 | 216 | 227 | ||||||||||||||||
| Net income (loss) attributable to Phillips 66 | $ | (799) | 712 | (3,436) | 2,340 | |||||||||||||||
Our earnings decreased $1,511 million in the third quarter of 2020, mainly reflecting:
•Lower realized refining margins and decreased refinery production.
•Higher impairment charges, primarily related to a long-lived asset impairment associated with our plan to reconfigure the San Francisco Refinery into a renewable fuels plant, which impacted our Refining and Midstream segments.
These decreases were partially offset by an income tax benefit recognized in the current quarter, compared with income tax expense recognized in the third quarter of 2019.
Our earnings decreased $5,776 million in the nine-month period of 2020, mainly reflecting:
•Lower realized refining margins and decreased refinery production.
•A goodwill impairment in our Refining segment.
•A long-lived asset impairment, which impacted our Refining and Midstream segments.
•Higher impairments of equity investments in our Midstream segment.
•Lower chemicals margins.
These decreases were partially offset by an income tax benefit recognized in the current nine-month period, compared with income tax expense recognized in the nine-month period of 2019.
See the “Segment Results” section for additional information on our segment results.
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Statement of Operations Analysis
Sales and other operating revenues for the third quarter and nine-month period of 2020 decreased 41% and 39%, respectively, and purchased crude oil and products decreased 39% for both periods. These decreases were mainly due to lower petroleum product and crude oil sales prices and volumes.
Equity in earnings of affiliates decreased 30% and 48% in the third quarter and nine-month period of 2020, respectively. The decrease in both periods was primarily due to lower realized refining margins and decreased refinery production at WRB Refining LP (WRB), partially offset by increased equity earnings from the Gray Oak Pipeline, which commenced full operations in the second quarter of 2020. The decrease in the nine-month period of 2020 was also driven by lower equity earnings from CPChem as a result of lower margins. See Chemicals segment analysis in the “Segment Results” section for additional information on CPChem.
Impairments increased $287 million and $3,290 million in the third quarter and nine-month period of 2020, respectively. See Note 5—Investments, Loans and Long-Term Receivables, Note 6—Properties, Plants and Equipment, Note 7—Goodwill, and Note 8—Impairments, in the Notes to Consolidated Financial Statements, for information regarding these impairments.
We had an income tax benefit of $624 million and $1,053 million in the third quarter and nine-month period of 2020, respectively, compared with income tax expense of $150 million and $545 million, respectively, in the corresponding periods of 2019. See Note 19—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our effective income tax rates.
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Segment Results
Midstream
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
| Millions of Dollars | ||||||||||||||||||||
| Income (Loss) Before Income Taxes | ||||||||||||||||||||
| Transportation | $ | (3) | 248 | 411 | 696 | |||||||||||||||
| NGL and Other | 99 | 169 | 356 | 402 | ||||||||||||||||
| DCP Midstream | 50 | (877) | (999) | (819) | ||||||||||||||||
| Total Midstream | $ | 146 | (460) | (232) | 279 | |||||||||||||||
| Thousands of Barrels Daily | ||||||||||||||||||||
| Transportation Volumes | ||||||||||||||||||||
| Pipelines* | 3,076 | 3,443 | 3,032 | 3,346 | ||||||||||||||||
| Terminals | 2,966 | 3,381 | 2,999 | 3,236 | ||||||||||||||||
| Operating Statistics | ||||||||||||||||||||
| NGL fractionated** | 217 | 203 | 195 | 223 | ||||||||||||||||
| NGL production*** | 414 | 409 | 395 | 420 | ||||||||||||||||
* Pipelines represent the sum of volumes transported through each separately tariffed consolidated pipeline segment.
** Excludes DCP Midstream.
*** Includes 100% of DCP Midstream’s volumes.
| Dollars Per Gallon | ||||||||||||||||||||
| Weighted-Average NGL Price* | ||||||||||||||||||||
| DCP Midstream | $ | 0.44 | 0.44 | 0.38 | 0.52 | |||||||||||||||
| * Based on index prices from the Mont Belvieu market hub, which are weighted by NGL component mix. | ||||||||||||||||||||
The Midstream segment provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, fractionation, processing and marketing services, mainly in the United States. This segment includes our master limited partnership (MLP), Phillips 66 Partners LP (Phillips 66 Partners), as well as our 50% equity investment in DCP Midstream, which includes the operations of DCP Midstream, LP (DCP Partners), its MLP.
Results from our Midstream segment increased $606 million in the third quarter of 2020 and decreased $511 million in the nine-month period of 2020.
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Results from our Transportation business decreased $251 million and $285 million in the third quarter and nine-month period of 2020, respectively. The decreased results in both periods were primarily attributable to before-tax impairment charges totaling $204 million for the pipeline and terminal assets associated with the planned reconfiguration of our San Francisco Refinery into a renewal fuels plant, and the cancellation of the Red Oak Pipeline project, along with lower throughput volumes and decreased equity earnings. The decreased results for the nine-month period also included higher operating costs and an $84 million before-tax gain recognized in the second quarter of 2020 associated with the Gray Oak Pipeline joint venture. See Note 5—Investments, Loans and Long-Term Receivables, and Note 6—Properties, Plants and Equipment, in the Notes to Consolidated Financial Statements, for additional information regarding the impairments, and Note 20—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the $84 million before-tax gain.
Before-tax income from our NGL and Other business decreased $70 million and $46 million in the third quarter and nine-month period of 2020, respectively. The decrease in both periods was primarily due to lower results from our trading activities around NGL inventory management and start-up costs for additional fractionation capacity at the Sweeny Hub, partially offset by the startup of a new isomerization unit at our Lake Charles Refinery in the second half of 2019. Lower cargo margins at the Sweeny Hub also contributed to the decrease in the third quarter of 2020.
Results from our investment in DCP Midstream increased $927 million in the third quarter of 2020 and decreased $180 million in the nine-month period of 2020. The increased results in the third quarter of 2020 were mainly due to the absence of an $853 million before-tax impairment of our investment in DCP Midstream recorded in the third quarter of 2019. The decreased results in the nine-month period of 2020 were primarily attributable to higher impairment charges. Excluding the impairments, equity earnings from DCP Midstream increased in the nine-month period of 2020, primarily due to the recognition of a benefit to equity earnings from the amortization of the basis difference created by the impairments, lower operating costs, and favorable impacts from its commodity price risk management activities. See Note 5—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding impairments of our investment in DCP Midstream.
See the “Executive Overview and Business Environment” section for information on market factors impacting this quarter’s results.
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Chemicals
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
| Millions of Dollars | ||||||||||||||||||||
| Income Before Income Taxes | $ | 231 | 227 | 442 | 729 | |||||||||||||||
| Millions of Pounds | ||||||||||||||||||||
| CPChem Externally Marketed Sales Volumes* | ||||||||||||||||||||
| Olefins and Polyolefins | 5,069 | 5,402 | 15,559 | 15,314 | ||||||||||||||||
| Specialties, Aromatics and Styrenics | 1,120 | 1,322 | 3,322 | 3,360 | ||||||||||||||||
| 6,189 | 6,724 | 18,881 | 18,674 | |||||||||||||||||
| * Represents 100% of CPChem’s outside sales of produced petrochemical products, as well as commission sales from equity affiliates. | ||||||||||||||||||||
| Olefins and Polyolefins Capacity Utilization (percent) | 94 | % | 97 | 98 | 97 | |||||||||||||||
The Chemicals segment consists of our 50% interest in CPChem, which we account for under the equity method. CPChem uses NGL and other feedstocks to produce petrochemicals. These products are then marketed and sold or used as feedstocks to produce plastics and other chemicals. We structure our reporting of CPChem’s operations around two primary business lines: Olefins and Polyolefins (O&P) and Specialties, and Aromatics and Styrenics (SA&S).
Before-tax income from the Chemicals segment increased $4 million in the third quarter of 2020 and decreased $287 million in the nine-month period of 2020. The decrease in the current nine-month period was primarily driven by lower margins and decreased earnings from CPChem’s equity affiliates, partially offset by higher volumes, lower operating costs and a favorable impact from lower-of-cost-or-market adjustments of inventories attributable to petrochemical product price recovery in the current quarter.
See the “Executive Overview and Business Environment” section for information on market factors impacting this quarter’s results.
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Refining
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
| Millions of Dollars | ||||||||||||||||||||
| Income (Loss) Before Income Taxes | ||||||||||||||||||||
| Atlantic Basin/Europe | $ | (199) | 296 | (1,063) | 547 | |||||||||||||||
| Gulf Coast | (405) | 184 | (1,613) | 288 | ||||||||||||||||
| Central Corridor | (132) | 408 | (463) | 1,005 | ||||||||||||||||
| West Coast | (1,167) | (32) | (1,903) | (199) | ||||||||||||||||
| Worldwide | $ | (1,903) | 856 | (5,042) | 1,641 | |||||||||||||||
| Dollars Per Barrel | ||||||||||||||||||||
| Income (Loss) Before Income Taxes | ||||||||||||||||||||
| Atlantic Basin/Europe | $ | (4.61) | 5.93 | (8.60) | 3.83 | |||||||||||||||
| Gulf Coast | (7.86) | 2.46 | (9.13) | 1.32 | ||||||||||||||||
| Central Corridor | (5.35) | 15.26 | (6.73) | 13.07 | ||||||||||||||||
| West Coast | (38.12) | (0.93) | (22.59) | (2.03) | ||||||||||||||||
| Worldwide | (12.69) | 4.60 | (11.12) | 3.07 | ||||||||||||||||
| Realized Refining Margins* | ||||||||||||||||||||
| Atlantic Basin/Europe | $ | 1.65 | 11.48 | 1.86 | 10.17 | |||||||||||||||
| Gulf Coast | (0.61) | 8.34 | 2.40 | 7.42 | ||||||||||||||||
| Central Corridor | 4.46 | 15.99 | 8.09 | 14.91 | ||||||||||||||||
| West Coast | 2.23 | 10.11 | 3.94 | 8.84 | ||||||||||||||||
| Worldwide | 1.78 | 11.18 | 3.91 | 10.06 | ||||||||||||||||
* See the “Non-GAAP Reconciliations” section for a reconciliation of this non-GAAP measure to the most directly comparable measure under generally accepted accounting principles in the United States (GAAP), income (loss) before income taxes per barrel.
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| Thousands of Barrels Daily | ||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| Operating Statistics | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||
| Refining operations* | ||||||||||||||||||||
| Atlantic Basin/Europe | ||||||||||||||||||||
| Crude oil capacity | 537 | 537 | 537 | 537 | ||||||||||||||||
| Crude oil processed | 432 | 509 | 424 | 485 | ||||||||||||||||
| Capacity utilization (percent) | 81 | % | 95 | 79 | 90 | |||||||||||||||
| Refinery production | 473 | 545 | 454 | 527 | ||||||||||||||||
| Gulf Coast | ||||||||||||||||||||
| Crude oil capacity | 769 | 764 | 769 | 764 | ||||||||||||||||
| Crude oil processed | 506 | 729 | 586 | 714 | ||||||||||||||||
| Capacity utilization (percent) | 66 | % | 95 | 76 | 93 | |||||||||||||||
| Refinery production | 563 | 817 | 647 | 797 | ||||||||||||||||
| Central Corridor | ||||||||||||||||||||
| Crude oil capacity | 530 | 515 | 530 | 515 | ||||||||||||||||
| Crude oil processed | 455 | 517 | 437 | 495 | ||||||||||||||||
| Capacity utilization (percent) | 86 | % | 100 | 82 | 96 | |||||||||||||||
| Refinery production | 469 | 535 | 451 | 515 | ||||||||||||||||
| West Coast | ||||||||||||||||||||
| Crude oil capacity | 364 | 364 | 364 | 364 | ||||||||||||||||
| Crude oil processed | 311 | 351 | 285 | 325 | ||||||||||||||||
| Capacity utilization (percent) | 85 | % | 97 | 78 | 89 | |||||||||||||||
| Refinery production | 334 | 371 | 307 | 357 | ||||||||||||||||
| Worldwide | ||||||||||||||||||||
| Crude oil capacity | 2,200 | 2,180 | 2,200 | 2,180 | ||||||||||||||||
| Crude oil processed | 1,704 | 2,106 | 1,732 | 2,019 | ||||||||||||||||
| Capacity utilization (percent) | 77 | % | 97 | 79 | 93 | |||||||||||||||
| Refinery production | 1,839 | 2,268 | 1,859 | 2,196 | ||||||||||||||||
| * Includes our share of equity affiliates. | ||||||||||||||||||||
The Refining segment refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates and aviation fuels, at 13 refineries in the United States and Europe.
Results from our Refining segment decreased $2,759 million and $6,683 million in the third quarter and nine-month period of 2020, respectively. The decreased results in both periods were primarily due to:
•Lower realized refining margins and decreased refinery production. A sharp decline in demand for refined petroleum products resulting from global economic disruption caused by the COVID-19 pandemic led to lower market crack spreads and reduced refinery production in the current periods. In addition, hurricane impacts contributed to the lower refinery production in the Gulf Coast region.
•A before-tax long-lived asset impairment of $910 million associated with our plan to reconfigure the San Francisco Refinery into a renewable fuels plant.
In addition, the decreased results in the current nine-month period were also attributable to a before-tax goodwill impairment of $1,845 million recognized in the first quarter of 2020.
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See Note 6—Properties, Plants and Equipment, and Note 7—Goodwill, in the Notes to Consolidated Financial Statements, for additional information regarding these impairments.
See the “Executive Overview and Business Environment” section for information on market factors impacting this quarter’s results.
Our worldwide refining crude oil capacity utilization rate was 77% and 79% in the third quarter and nine-month period of 2020, respectively, compared with 97% and 93% in the corresponding periods of 2019, respectively. The decreases were primarily due to reduced refining runs in the current year periods driven by lower demand for refined petroleum products, as well as hurricane impacts in the Gulf Coast region.
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Marketing and Specialties
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
| Millions of Dollars | ||||||||||||||||||||
| Income Before Income Taxes | ||||||||||||||||||||
| Marketing and Other | $ | 365 | 440 | 1,091 | 872 | |||||||||||||||
| Specialties | 50 | 58 | 123 | 184 | ||||||||||||||||
| Total Marketing and Specialties | $ | 415 | 498 | 1,214 | 1,056 | |||||||||||||||
| Dollars Per Barrel | ||||||||||||||||||||
| Income Before Income Taxes | ||||||||||||||||||||
| U.S. | $ | 1.74 | 1.66 | 1.60 | 1.14 | |||||||||||||||
| International | 5.01 | 5.19 | 5.16 | 4.10 | ||||||||||||||||
| Realized Marketing Fuel Margins* | ||||||||||||||||||||
| U.S. | $ | 2.23 | 2.11 | 2.03 | 1.59 | |||||||||||||||
| International | 6.28 | 6.37 | 6.78 | 5.42 | ||||||||||||||||
* See the “Non-GAAP Reconciliations” section for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure, income before income taxes per barrel.
| Dollars Per Gallon | ||||||||||||||||||||
| U.S. Average Wholesale Prices* | ||||||||||||||||||||
| Gasoline | $ | 1.62 | 2.14 | 1.57 | 2.11 | |||||||||||||||
| Distillates | 1.41 | 2.07 | 1.45 | 2.10 | ||||||||||||||||
| * On third-party branded petroleum product sales, excluding excise taxes. | ||||||||||||||||||||
| Thousands of Barrels Daily | ||||||||||||||||||||
| Marketing Petroleum Products Sales Volumes | ||||||||||||||||||||
| Gasoline | 1,080 | 1,222 | 1,029 | 1,205 | ||||||||||||||||
| Distillates | 863 | 1,099 | 915 | 1,041 | ||||||||||||||||
| Other | 15 | 16 | 17 | 18 | ||||||||||||||||
| Total | 1,958 | 2,337 | 1,961 | 2,264 | ||||||||||||||||
The M&S segment purchases for resale and markets refined petroleum products, such as gasoline, distillates and aviation fuels, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products, such as base oils and lubricants.
Before-tax income from the M&S segment decreased $83 million in the third quarter of 2020 and increased $158 million in the nine-month period of 2020. The decrease in the third quarter of 2020 was primarily due to lower sales volumes driven by decreased demand for refined petroleum and specialty products. The increase in the nine-month period of 2020 was primarily attributable to higher realized marketing fuel margins, partially offset by lower sales volumes for refined petroleum and specialty products driven by decreased demand.
See the “Executive Overview and Business Environment” section for information on marketing fuel margins and other market factors impacting this quarter’s results.
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Corporate and Other
| Millions of Dollars | ||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||
| Loss Before Income Taxes | ||||||||||||||||||||
| Net interest expense | $ | (131) | (98) | (348) | (311) | |||||||||||||||
| Corporate overhead and other | (108) | (80) | (307) | (282) | ||||||||||||||||
| Total Corporate and Other | $ | (239) | (178) | (655) | (593) | |||||||||||||||
Net interest expense consists of interest and financing expense, net of interest income and capitalized interest. Corporate overhead and other includes general and administrative expenses, technology costs, environmental costs associated with sites no longer in operation, foreign currency transaction gains and losses, and other costs not directly associated with an operating segment.
Net interest expense increased $33 million and $37 million in the third quarter and nine-month period of 2020, respectively, primarily due to higher average debt principal balances, reflecting new debt issuances in the nine-month period of 2020, along with decreased interest income driven by lower interest rates in 2020. The increase in net interest expense in the nine-month period of 2020 was partially offset by higher capitalized interest associated with Midstream capital projects. See Note 10—Debt, in the Notes to Consolidated Financial Statements, for additional information on the debt issuances in 2020.
Corporate overhead and other increased by $28 million and $25 million in the third quarter and nine-month period of 2020, respectively, reflecting a property impairment charge of $25 million in the third quarter of 2020.
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CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
| Millions of Dollars, Except as Indicated | |||||||||||
| September 30 2020 | December 31 2019 | ||||||||||
| Cash and cash equivalents | $ | 1,462 | 1,614 | ||||||||
| Short-term debt | 1,860 | 547 | |||||||||
| Total debt | 14,526 | 11,763 | |||||||||
| Total equity | 22,305 | 27,169 | |||||||||
| Percent of total debt to capital* | 39% | 30 | |||||||||
| Percent of floating-rate debt to total debt | 13% | 9 | |||||||||
| * Capital includes total debt and total equity. | |||||||||||
To meet our short- and long-term liquidity requirements, we use a variety of funding sources but rely primarily on cash generated from operating activities and debt financing. During the first nine months of 2020, we generated $1.5 billion of cash from operations, received approximately $2.0 billion in proceeds from two public offerings of senior unsecured notes, and borrowed $1.0 billion under a term loan facility. We used available cash primarily for capital expenditures and investments of $2.4 billion, repayment of $525 million of maturing debt, and dividend payments on our common stock of $1.2 billion. During the first quarter of 2020, we spent $443 million on common stock repurchases, before suspending our share repurchase programs in March 2020. During the first nine months of 2020, cash and cash equivalents decreased $152 million to $1.5 billion.
We believe current cash and cash equivalents and cash generated by operations, together with access to external sources of funds as described below under “Significant Sources of Capital,” will be sufficient to meet our funding requirements in the near and long term, including our capital spending, dividend payments, defined benefit plan contributions, and debt repayments.
Significant Sources of Capital
Operating Activities
During the first nine months of 2020, cash generated by operating activities was $1,472 million, compared with $3,114 million for the first nine months of 2019. The decrease in the first nine months of 2020, compared with the same period in 2019, was primarily due to lower refining margins driven by global economic disruption caused by the COVID-19 pandemic, and reduced cash distributions from our equity affiliates, partially offset by higher realized marketing margins and working capital impacts.
Our short- and long-term operating cash flows are highly dependent upon refining, marketing and chemical margins, as well as NGL prices. Prices and margins in our industry are typically volatile, and are driven by market conditions over which we have little or no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows. The recent decline in demand for refined petroleum products has led to a decrease in refining margins. If the global economic disruption associated with the COVID-19 pandemic sustains, we expect refining margins, along with marketing, transportation and terminaling volumes, to remain challenged in the near term, all of which could have an unfavorable impact on our future operating cash flows.
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The level and quality of output from our refineries also impact our cash flows. Factors such as operating efficiency, maintenance turnarounds, market conditions, feedstock availability, and weather conditions can affect output. We actively manage the operations of our refineries, and variability in their operations typically has not been as significant to cash flows as that caused by margins and prices. However, the recent decline in demand for refined petroleum products has led to a reduction of our refinery production; and if the global economic disruption associated with the COVID-19 pandemic sustains, we expect the reduced refinery production to continue in the near term, which could have an unfavorable impact on our future operating cash flows.
Equity Affiliate Operating Distributions
Our operating cash flows are also impacted by distribution decisions made by our equity affiliates. During the first nine months of 2020, cash from operations included distributions of $1,125 million from our equity affiliates, compared with $1,638 million during the same period of 2019. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these equity affiliates are not assured.
Phillips 66 Partners LP
Unit Issuances
During the first nine months of 2020, on a settlement-date basis, Phillips 66 Partners generated net proceeds of $2 million from common units issued under its active continuous offering of common units, or at-the-market (ATM) program.
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. Phillips 66 Partners has 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 operations. 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. Phillips 66 Partners has an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC, after considering a co-venturer’s 35% interest in the consolidated holding company. See Note 5—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for further discussion regarding Phillips 66 Partners’ investment in Gray Oak Pipeline, LLC.
Credit Facilities and Commercial Paper
At September 30, 2020, borrowings of $290 million were outstanding and $3 million in letters of credit had been drawn under Phillips 66 Partners’ $750 million revolving credit facility. At September 30, 2020, no amount had been drawn under Phillips 66’s $5 billion revolving credit facility or uncommitted $5 billion commercial paper program.
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Other Debt Issuances and Financings
On June 10, 2020, Phillips 66 closed its public offering of $1 billion aggregate principal amount of senior unsecured notes consisting of:
•$150 million aggregate principal amount of 3.850% Senior Notes due 2025.
•$850 million aggregate principal amount of 2.150% Senior Notes due 2030.
On April 9, 2020, Phillips 66 closed its public offering of $1 billion aggregate principal amount of senior unsecured notes consisting of:
•$500 million aggregate principal amount of 3.700% Senior Notes due 2023.
•$500 million aggregate principal amount of 3.850% Senior Notes due 2025.
Interest on the Senior Notes due 2023 is payable semiannually on April 6 and October 6 of each year, commencing on October 6, 2020. The Senior Notes due 2025 issued on June 10, 2020, constitute a further issuance of the Senior Notes due 2025 originally issued on April 9, 2020. The $650 million in aggregate principal amount of Senior Notes due 2025 is treated as a single class of debt securities. Interest on the Senior Notes due 2025 is payable semiannually on April 9 and October 9 of each year, commencing on October 9, 2020. Interest on the Senior Notes due 2030 is payable semiannually on June 15 and December 15 of each year, commencing on December 15, 2020.
Proceeds received from the public offerings of senior unsecured notes on June 10, 2020, and April 9, 2020, were $1,008 million and $993 million, respectively, net of underwriters’ discounts or premiums and commissions, as well as debt issuance costs. These proceeds are being used for general corporate purposes.
On March 19, 2020, Phillips 66 entered into a $1 billion 364-day delayed draw term loan agreement (the Facility) and borrowed $1 billion under the Facility shortly thereafter. On April 6, 2020, Phillips 66 increased the size of the Facility to $2 billion, and in June 2020, the Facility was amended to extend the commitment period to September 19, 2020. We did not draw additional amounts under the Facility before the end of the commitment period or further extend the commitment period. Accordingly, the additional borrowing capacity under the Facility expired prior to September 30, 2020. Borrowings under the Facility bear interest at a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by the credit rating of Phillips 66’s senior unsecured long-term debt. Phillips 66 is using the proceeds from the debt issuance for general corporate purposes.
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Off-Balance Sheet Arrangements
Lease Residual Value Guarantees
Under the operating lease agreement on our headquarters facility in Houston, Texas, we had the option, at the end of the lease term to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. In September 2020, we amended and extended the lease term to September 2025. We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million as of September 30, 2020. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future payments totaling $396 million. These leases have remaining terms of up to ten years.
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, Phillips 66 Partners and its 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, Phillips 66 Partners’ 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, Phillips 66 Partners could be asked to support its 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. Phillips 66 Partners and its 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 outstanding balance of the term loan facility, and the associated equity contribution agreement was terminated.
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Other Guarantees
At September 30, 2020, we had other guarantees outstanding for our portion of certain joint venture debt obligations and purchase obligations, which have remaining terms of up to eight years. The maximum potential amount of future payments to third parties under these guarantees was approximately $216 million. Payment would be required if a joint venture defaults on its obligations.
See Note 11—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.
Capital Requirements
Capital Expenditures and Investments
For information about our capital expenditures and investments, see the “Capital Spending” section below.
Debt Financing
Our total debt balance at September 30, 2020, and December 31, 2019, was $14.5 billion and $11.8 billion, respectively. Our total debt-to-capital ratio was 39% and 30% at September 30, 2020, and December 31, 2019, respectively.
In April 2020, Phillips 66 repaid $300 million of floating-rate notes due April 2020 and $200 million outstanding under the term loan facility due April 2020. Also, in April 2020, Phillips 66 Partners repaid $25 million of tax-exempt bonds due April 2020.
Dividends
On July 8, 2020, our Board of Directors declared a quarterly cash dividend of $0.90 per common share. The dividend was paid on September 1, 2020, to shareholders of record at the close of business on August 18, 2020. On October 9, 2020, our Board of Directors declared a quarterly cash dividend of $0.90 per common share. This dividend is payable on December 1, 2020, to shareholders of record at the close of business on November 17, 2020.
Share Repurchases
Since July 2012, our Board of Directors has authorized an aggregate of $15 billion of repurchases of our outstanding common stock. The authorizations do not have expiration dates. The share repurchases are expected to be funded primarily through available cash. We are not obligated to repurchase any shares of common stock pursuant to these authorizations and may commence, suspend or terminate repurchases at any time. Since the inception of our share repurchase programs in 2012, we have repurchased 159 million shares at an aggregate cost of $12.5 billion. Shares of stock repurchased are held as treasury shares. We suspended share repurchases in mid-March 2020 to preserve liquidity primarily in response to the global economic disruption caused by the COVID-19 pandemic.
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Capital Spending
Our capital expenditures and investments represent consolidated capital spending. 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 our consolidated capital spending funded by certain joint venture partners.
| Millions of Dollars | |||||||||||
| Nine Months Ended September 30 | |||||||||||
| 2020 | 2019 | ||||||||||
| Capital Expenditures and Investments | |||||||||||
| Midstream | $ | 1,556 | 1,724 | ||||||||
| Chemicals | — | — | |||||||||
| Refining | 577 | 645 | |||||||||
| Marketing and Specialties | 139 | 76 | |||||||||
| Corporate and Other | 142 | 150 | |||||||||
| Total Capital Expenditures and Investments | 2,414 | 2,595 | |||||||||
| Less: capital spending funded by certain joint venture partners* | 64 | 422 | |||||||||
| Adjusted Capital Spending | $ | 2,350 | 2,173 | ||||||||
Selected Equity Affiliates** | |||||||||||
| DCP Midstream | $ | 102 | 355 | ||||||||
| CPChem | 204 | 252 | |||||||||
| WRB | 110 | 135 | |||||||||
| $ | 416 | 742 | |||||||||
* Included in the Midstream segment.
** Our share of joint ventures’ self-funded capital spending.
Midstream
During the first nine months of 2020, capital spending in our Midstream segment included:
•Continued development of additional Gulf Coast fractionation capacity.
•Cash contributions to joint ventures to develop and construct crude oil pipeline systems, including the Liberty Pipeline system.
•Cash contributions by Phillips 66 Partners to fund Gray Oak Pipeline projects and South Texas Gateway Terminal development activities.
•Construction activities on Phillips 66 Partners’ new ethane pipeline from Clemens Caverns to petrochemical facilities in Gregory, Texas (C2G Pipeline).
•Completion of Phillips 66 Partners’ Sweeny to Pasadena refined petroleum product pipeline.
•Construction activities to increase storage and export capacity at our crude oil and refined petroleum product terminal located near Beaumont, Texas.
•Other reliability, return and maintenance projects.
In March 2020, the development and construction of our Red Oak Pipeline system and Sweeny Frac 4, as well as Phillips 66 Partners’ Liberty Pipeline system projects were deferred as a result of the current challenging business environment. In the third quarter of 2020, the Red Oak Pipeline project was canceled. See Note 5—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding our investment in Red Oak.
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During the first nine months of 2020, DCP Midstream’s self-funded capital expenditures and investments were $203 million on a 100% basis. Capital spending during this period was primarily for expansion projects and maintenance capital expenditures for existing assets. Expansion projects included the construction of the Latham II offload facilities and the Cheyenne Connector, and investments in the Sand Hills and Southern Hills joint ventures. In April 2020, DCP Midstream announced capital and cost reduction plans, including a 75% growth capital reduction. We expect that DCP Midstream’s capital program will continue to be self-funded for the remainder of 2020.
Chemicals
During the first nine months of 2020, CPChem had a self-funded capital program. During this period, on a 100% basis, CPChem’s capital expenditures and investments were $407 million. The capital spending was primarily for the continued development of its second U.S. Gulf Coast petrochemical project and debottlenecking projects on existing assets. We expect CPChem to continue self-funding its capital program for the remainder of 2020.
Refining
Capital spending for the Refining segment during the first nine months of 2020 was primarily for refinery upgrade projects to enhance the yield of high-value products, renewable diesel projects, improvements to the operating integrity of key processing units, and safety-related projects.
Major construction activities included:
•Installation and startup of facilities to improve product value at the Sweeny Refinery.
•Installation of facilities to improve product value at the Ponca City and Bayway refineries.
•Installation of facilities to produce biofuels at the Humber Refinery.
In the third quarter of 2020, we announced Rodeo Renewed, a project to reconfigure our San Francisco Refinery in Rodeo, California, to produce renewable fuels. The plant would no longer produce fuels from crude oil, but instead would make fuels from used cooking oil, fats, greases, soybean oils and other feedstocks. Upon completion expected in early 2024, the facility would have over 50,000 barrels per day, or 800 million gallons per year, of renewable fuel production capacity.
Marketing and Specialties
Capital spending for the M&S segment during the first nine months of 2020 was primarily for an additional investment in the U.S. West Coast retail marketing joint venture, and the acquisition, development and enhancement of retail sites in Europe.
Corporate and Other
Capital spending for Corporate and Other during the first nine months of 2020 was primarily for information technology.
2021 Outlook
Subject to approval by our Board of Directors, we currently expect our 2021 capital spending to be $2 billion or less. Our 2021 capital program details are scheduled to be released in December 2020.
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Contingencies
A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal, or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.
Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.
Legal and Tax Matters
Our legal and tax matters are handled by our legal and tax organizations. These organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions. We employ a litigation management process to manage and monitor the legal proceedings. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required. In the case of income tax-related contingencies, we monitor tax legislation and court decisions, the status of tax audits and the statute of limitations within which a taxing authority can assert a liability.
Environmental
Like other companies in our industry, we are subject to numerous international, federal, state and local environmental laws and regulations. For a discussion of the most significant of these international and federal environmental laws and regulations, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K.
We occasionally receive requests for information or notices of potential liability from the U.S. Environmental Protection Agency (EPA) and state environmental agencies alleging that we are a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. At December 31, 2019, we reported that we had been notified of potential liability under CERCLA and comparable state laws at 27 sites within the United States. In the first nine months of 2020, we were notified of two Superfund sites that were deemed resolved and closed, and one Superfund site that was reopened, accordingly, leaving 26 unresolved sites with potential liability at September 30, 2020.
Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in certain of our operations and products, and there can be no assurance that those costs and liabilities will not be material. However, we currently do not expect any material adverse effect on our results of operations or financial position as a result of compliance with current environmental laws and regulations.
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Climate Change
There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (GHG) emissions reduction, including various regulations proposed or issued by the EPA. These proposed or promulgated laws apply or could apply in states and/or countries where we have interests or may have interests in the future. Laws regulating GHG emissions continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws potentially could have a material impact on our results of operations and financial condition as a result of increasing costs of compliance, lengthening project implementation and agency reviews, or reducing demand for certain hydrocarbon products. We continue to monitor legislative and regulatory actions and legal proceedings globally relating to GHG emissions for potential impacts on our operations.
For examples of legislation and regulation or precursors for possible regulation that do or could affect our operations, see the “Climate Change” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K.
We consider and take into account anticipated future GHG emissions in designing and developing major facilities and projects, and implement energy efficiency initiatives to reduce GHG emissions. Data on our GHG emissions, legal requirements regulating such emissions, and the possible physical effects of climate change on our coastal assets are incorporated into our planning, investment, and risk management decision-making. We are working to continuously improve operational and energy efficiency through resource and energy conservation throughout our operations.
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NON-GAAP RECONCILIATIONS
Refining
Our realized refining margins measure the difference between (a) sales and other operating revenues derived from the sale of petroleum products manufactured at our refineries and (b) purchase costs of feedstocks, primarily crude oil, used to produce the petroleum products. The realized refining margins are adjusted to include our proportional share of our joint venture refineries’ realized margins, as well as to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized refining margins are converted to a per-barrel basis by dividing them by total refinery processed inputs (primarily crude oil) measured on a barrel basis, including our share of inputs processed by our joint venture refineries. Our realized refining margin per barrel is intended to be comparable with industry refining margins, which are known as “crack spreads.” As discussed in “Business Environment,” industry crack spreads measure the difference between market prices for refined petroleum products and crude oil. We believe realized refining margin per barrel calculated on a similar basis as industry crack spreads provides a useful measure of how well we performed relative to benchmark industry margins.
The GAAP performance measure most directly comparable to realized refining margin per barrel is the Refining segment’s “income (loss) before income taxes per barrel.” Realized refining margin per barrel excludes items that are typically included in a manufacturer’s gross margin, such as depreciation and operating expenses, and other items used to determine income (loss) before income taxes, such as general and administrative expenses. It also includes our proportional share of joint venture refineries’ realized refining margins and excludes special items. Because realized refining margin per barrel is calculated in this manner, and because realized refining margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. Following are reconciliations of income (loss) before income taxes to realized refining margins:
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| Millions of Dollars, Except as Indicated | |||||||||||||||||
| Realized Refining Margins | Atlantic Basin/ Europe | Gulf Coast | Central Corridor | West Coast | Worldwide | ||||||||||||
| Three Months Ended September 30, 2020 | |||||||||||||||||
| Loss before income taxes | $ | (199) | (405) | (132) | (1,167) | (1,903) | |||||||||||
| Plus: | |||||||||||||||||
| Taxes other than income taxes | 14 | 30 | 11 | 16 | 71 | ||||||||||||
| Depreciation, amortization and impairments | 50 | 75 | 33 | 974 | 1,132 | ||||||||||||
| Selling, general and administrative expenses | 6 | 11 | 7 | 9 | 33 | ||||||||||||
| Operating expenses | 180 | 258 | 111 | 235 | 784 | ||||||||||||
| Equity in losses of affiliates | 2 | 1 | 118 | — | 121 | ||||||||||||
| Other segment (income) expense, net | — | (1) | (1) | 1 | (1) | ||||||||||||
| Proportional share of refining gross margins contributed by equity affiliates | 18 | — | 45 | — | 63 | ||||||||||||
| Realized refining margins | $ | 71 | (31) | 192 | 68 | 300 | |||||||||||
Total processed inputs (thousands of barrels) | 43,176 | 51,543 | 24,682 | 30,615 | 150,016 | ||||||||||||
Adjusted total processed inputs (thousands of barrels)* | 43,176 | 51,543 | 42,979 | 30,615 | 168,313 | ||||||||||||
Loss before income taxes per barrel (dollars per barrel)** | $ | (4.61) | (7.86) | (5.35) | (38.12) | (12.69) | |||||||||||
Realized refining margins (dollars per barrel)*** | 1.65 | (0.61) | 4.46 | 2.23 | 1.78 | ||||||||||||
| Three Months Ended September 30, 2019 | |||||||||||||||||
| Income (loss) before income taxes | $ | 296 | 184 | 408 | (32) | 856 | |||||||||||
| Plus: | |||||||||||||||||
| Taxes other than income taxes | 12 | 23 | 10 | 23 | 68 | ||||||||||||
| Depreciation, amortization and impairments | 49 | 66 | 34 | 66 | 215 | ||||||||||||
| Selling, general and administrative expenses | 10 | 7 | 6 | 8 | 31 | ||||||||||||
| Operating expenses | 208 | 345 | 125 | 282 | 960 | ||||||||||||
| Equity in (earnings) losses of affiliates | 3 | (1) | (69) | — | (67) | ||||||||||||
| Other segment (income) expense, net | (24) | 1 | (3) | 1 | (25) | ||||||||||||
| Proportional share of refining gross margins contributed by equity affiliates | 19 | — | 269 | — | 288 | ||||||||||||
| Realized refining margins | $ | 573 | 625 | 780 | 348 | 2,326 | |||||||||||
Total processed inputs (thousands of barrels) | 49,895 | 74,936 | 26,740 | 34,498 | 186,069 | ||||||||||||
Adjusted total processed inputs (thousands of barrels)* | 49,895 | 74,936 | 48,853 | 34,498 | 208,182 | ||||||||||||
Income (loss) before income taxes per barrel (dollars per barrel)** | $ | 5.93 | 2.46 | 15.26 | (0.93) | 4.60 | |||||||||||
Realized refining margins (dollars per barrel)*** | 11.48 | 8.34 | 15.99 | 10.11 | 11.18 | ||||||||||||
| * Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate. | |||||||||||||||||
| ** Income (loss) before income taxes divided by total processed inputs. | |||||||||||||||||
| *** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts. | |||||||||||||||||
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| Millions of Dollars, Except as Indicated | |||||||||||||||||
| Realized Refining Margins | Atlantic Basin/ Europe | Gulf Coast | Central Corridor | West Coast | Worldwide | ||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||
| Loss before income taxes | $ | (1,063) | (1,613) | (463) | (1,903) | (5,042) | |||||||||||
| Plus: | |||||||||||||||||
| Taxes other than income taxes | 48 | 92 | 42 | 69 | 251 | ||||||||||||
| Depreciation, amortization and impairments | 591 | 891 | 535 | 1,401 | 3,418 | ||||||||||||
| Selling, general and administrative expenses | 31 | 28 | 20 | 28 | 107 | ||||||||||||
| Operating expenses | 564 | 1,027 | 367 | 734 | 2,692 | ||||||||||||
| Equity in (earnings) losses of affiliates | 7 | (1) | 248 | — | 254 | ||||||||||||
| Other segment (income) expense, net | 1 | — | (1) | 3 | 3 | ||||||||||||
| Proportional share of refining gross margins contributed by equity affiliates | 50 | — | 250 | — | 300 | ||||||||||||
| Realized refining margins | $ | 229 | 424 | 998 | 332 | 1,983 | |||||||||||
Total processed inputs (thousands of barrels) | 123,632 | 176,641 | 68,805 | 84,229 | 453,307 | ||||||||||||
Adjusted total processed inputs (thousands of barrels)* | 123,632 | 176,641 | 123,337 | 84,229 | 507,839 | ||||||||||||
Loss before income taxes per barrel (dollars per barrel)** | $ | (8.60) | (9.13) | (6.73) | (22.59) | (11.12) | |||||||||||
Realized refining margins (dollars per barrel)*** | 1.86 | 2.40 | 8.09 | 3.94 | 3.91 | ||||||||||||
| * Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate. | |||||||||||||||||
| ** Loss before income taxes divided by total processed inputs. | |||||||||||||||||
| *** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts. | |||||||||||||||||
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| Millions of Dollars, Except as Indicated | |||||||||||||||||
| Realized Refining Margins | Atlantic Basin/ Europe | Gulf Coast | Central Corridor | West Coast | Worldwide | ||||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||
| Income (loss) before income taxes | $ | 547 | 288 | 1,005 | (199) | 1,641 | |||||||||||
| Plus: | |||||||||||||||||
| Taxes other than income taxes | 38 | 62 | 33 | 68 | 201 | ||||||||||||
| Depreciation, amortization and impairments | 148 | 201 | 101 | 191 | 641 | ||||||||||||
| Selling, general and administrative expenses | 27 | 13 | 14 | 21 | 75 | ||||||||||||
| Operating expenses | 642 | 1,051 | 404 | 780 | 2,877 | ||||||||||||
| Equity in (earnings) losses of affiliates | 9 | 1 | (286) | — | (276) | ||||||||||||
| Other segment (income) expense, net | (14) | (3) | (1) | 4 | (14) | ||||||||||||
| Proportional share of refining gross margins contributed by equity affiliates | 55 | — | 834 | — | 889 | ||||||||||||
| Special items: | |||||||||||||||||
| Pending claims and settlements | — | — | (21) | — | (21) | ||||||||||||
| Realized refining margins | $ | 1,452 | 1,613 | 2,083 | 865 | 6,013 | |||||||||||
Total processed inputs (thousands of barrels) | 142,749 | 217,556 | 76,877 | 97,898 | 535,080 | ||||||||||||
Adjusted total processed inputs (thousands of barrels)* | 142,749 | 217,556 | 139,681 | 97,898 | 597,884 | ||||||||||||
Income (loss) before income taxes per barrel (dollars per barrel)** | $ | 3.83 | 1.32 | 13.07 | (2.03) | 3.07 | |||||||||||
Realized refining margins (dollars per barrel)*** | 10.17 | 7.42 | 14.91 | 8.84 | 10.06 | ||||||||||||
| * Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate. | |||||||||||||||||
| ** Income (loss) before income taxes divided by total processed inputs. | |||||||||||||||||
| *** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts. | |||||||||||||||||
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Marketing
Our realized marketing fuel margins measure the difference between (a) sales and other operating revenues derived from the sale of fuels in our M&S segment and (b) purchase costs of those fuels. The realized marketing fuel margins are adjusted to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized marketing fuel margins are converted to a per-barrel basis by dividing them by sales volumes measured on a barrel basis. We believe realized marketing fuel margin per barrel demonstrates the value uplift our marketing operations provide by optimizing the placement and ultimate sale of our refineries’ fuel production.
Within the M&S segment, the GAAP performance measure most directly comparable to realized marketing fuel margin per barrel is the marketing business’ “income before income taxes per barrel.” Realized marketing fuel margin per barrel excludes items that are typically included in gross margin, such as depreciation and operating expenses, and other items used to determine income before income taxes, such as general and administrative expenses. Because realized marketing fuel margin per barrel excludes these items, and because realized marketing fuel margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. Following are reconciliations of income before income taxes to realized marketing fuel margins:
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| Millions of Dollars, Except as Indicated | |||||||||||||||||
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | ||||||||||||||||
| U.S. | International | U.S. | International | ||||||||||||||
| Realized Marketing Fuel Margins | |||||||||||||||||
| Income before income taxes | $ | 271 | 121 | 312 | 139 | ||||||||||||
| Plus: | |||||||||||||||||
| Taxes other than income taxes | — | 1 | 3 | 2 | |||||||||||||
| Depreciation and amortization | 3 | 18 | 2 | 16 | |||||||||||||
| Selling, general and administrative expenses | 174 | 62 | 184 | 61 | |||||||||||||
| Equity in earnings of affiliates | (10) | (31) | (3) | (27) | |||||||||||||
| Other operating revenues* | (90) | (7) | (101) | (10) | |||||||||||||
| Other segment (income) expense, net | — | (1) | — | 1 | |||||||||||||
| Marketing margins | 348 | 163 | 397 | 182 | |||||||||||||
| Less: margin for nonfuel related sales | — | 11 | — | 11 | |||||||||||||
| Realized marketing fuel margins | $ | 348 | 152 | 397 | 171 | ||||||||||||
Total fuel sales volumes (thousands of barrels) | 155,948 | 24,164 | 188,172 | 26,796 | |||||||||||||
Income before income taxes per barrel (dollars per barrel) | $ | 1.74 | 5.01 | 1.66 | 5.19 | ||||||||||||
Realized marketing fuel margins (dollars per barrel)** | 2.23 | 6.28 | 2.11 | 6.37 | |||||||||||||
| * Includes other nonfuel revenues. | |||||||||||||||||
| ** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts. | |||||||||||||||||
| Millions of Dollars, Except as Indicated | |||||||||||||||||
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | ||||||||||||||||
| U.S. | International | U.S. | International | ||||||||||||||
| Realized Marketing Fuel Margins | |||||||||||||||||
| Income before income taxes | $ | 749 | 360 | 613 | 326 | ||||||||||||
| Plus: | |||||||||||||||||
| Taxes other than income taxes | 4 | 4 | 8 | 5 | |||||||||||||
| Depreciation and amortization | 9 | 51 | 7 | 48 | |||||||||||||
| Selling, general and administrative expenses | 452 | 182 | 522 | 184 | |||||||||||||
| Equity in earnings of affiliates | (21) | (81) | (7) | (74) | |||||||||||||
| Other operating revenues* | (245) | (9) | (286) | (25) | |||||||||||||
| Marketing margins | 948 | 507 | 857 | 464 | |||||||||||||
| Less: margin for nonfuel related sales | — | 34 | — | 33 | |||||||||||||
| Realized marketing fuel margins | $ | 948 | 473 | 857 | 431 | ||||||||||||
Total fuel sales volumes (thousands of barrels) | 467,643 | 69,726 | 538,718 | 79,429 | |||||||||||||
Income before income taxes per barrel (dollars per barrel) | $ | 1.60 | 5.16 | 1.14 | 4.10 | ||||||||||||
Realized marketing fuel margins (dollars per barrel)** | 2.03 | 6.78 | 1.59 | 5.42 | |||||||||||||
| * Includes other nonfuel revenues. | |||||||||||||||||
| ** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts. | |||||||||||||||||
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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can 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, but the absence of such words does not mean a statement is not forward-looking.
We based the forward-looking statements on our current expectations, estimates and projections about us, our operations, our joint ventures and entities in which we have 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 continuing effects of the COVID-19 pandemic and its negative impact on commercial activity and demand for refined petroleum products, as well as the extent and duration of recovery of economies and demand for our products after the pandemic subsides.
•Fluctuations in NGL, crude oil, refined petroleum product and natural gas prices and refining, marketing and petrochemical margins.
•Changes in governmental policies relating to NGL, crude oil, natural gas or refined petroleum products pricing, regulation or taxation, including exports.
•Actions taken by the Organization of the Petroleum Exporting Countries (OPEC) and other countries impacting supply and demand and correspondingly, commodity prices.
•Unexpected changes in costs or technical requirements for constructing, modifying or operating our facilities or transporting our products.
•Unexpected technological or commercial difficulties in manufacturing, refining or transporting our products, including chemical products.
•Lack of, or disruptions in, adequate and reliable transportation for our NGL, crude oil, natural gas and refined petroleum products.
•The level and success of drilling and quality of production volumes around our Midstream assets.
•The inability to timely obtain or maintain permits, including those necessary for capital projects.
•The inability to comply with government regulations or make capital expenditures required to maintain compliance.
•Changes to worldwide government policies relating to renewable fuels and greenhouse gas emissions that adversely affect programs like the renewable fuel standards program, low carbon fuel standards and tax credits for biofuels.
•Failure to complete definitive agreements and feasibility studies for, and to complete construction of, announced and future capital projects on time and within budget.
•Potential disruption or interruption of our operations due to accidents, weather events (including as a result of climate change), civil unrest, political events, terrorism or cyberattacks.
•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, outbreaks of diseases and pandemics.
•Failure of new products and services to achieve market acceptance.
•International monetary conditions and exchange controls.
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•Substantial investments required, or reduced demand for products, as a result of existing or future environmental rules and regulations, including reduced consumer demand for refined petroleum products.
•Liability resulting from litigation or for remedial actions, including removal and reclamation obligations under environmental regulations.
•Changes in tax, environmental and other laws and regulations (including alternative energy mandates) applicable to our business.
•Changes in estimates or projections used to assess fair value of intangible assets, goodwill and property and equipment and/or strategic decisions with respect to our asset portfolio that cause impairment charges.
•Limited access to capital or significantly higher cost of capital related to changes to our credit profile or illiquidity or uncertainty in the domestic or international financial markets.
•The operation, financing and distribution decisions of our joint ventures that we do not control.
•The factors generally described in Item 1A.—Risk Factors in our 2019 Annual Report on Form 10-K and in Item 1A.—Risk Factors of Part II in this Quarterly Report on Form 10-Q.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
Our commodity price risk at September 30, 2020, did not differ materially from the risks disclosed under Item 7A of our 2019 Annual Report on Form 10-K.
Interest Rate Risk
In April 2020, we repaid $300 million of floating-rate notes due April 2020 and $200 million outstanding under our term loan facility due April 2020. Also, in April 2020, Phillips 66 Partners repaid $25 million of tax-exempt bonds due April 2020.
In March 2020, we borrowed $1 billion under our new term loan facility. In April and June 2020, we issued a total of $2 billion of senior notes with varying maturity dates. Because the senior notes have fixed rates, their fair value is sensitive to changes in U.S. interest rates. The following table presents the principal cash flows and associated interest rates of the newly issued debt by expected maturity dates, as of September 30, 2020. The carrying amount of our floating-rate debt approximates its fair value. The fair value of the fixed-rate debt is estimated based on observable market prices.
| Millions of Dollars, Except as Indicated | ||||||||||||||||||||||||||||||||
| Expected Maturity Date | Fixed Rate Maturity | Average Interest Rate | Floating Rate Maturity | Average Interest Rate | ||||||||||||||||||||||||||||
| Remainder of 2020 | $ | — | — | % | $ | — | — | % | ||||||||||||||||||||||||
| 2021 | — | — | 1,000 | 1.65 | ||||||||||||||||||||||||||||
| 2022 | — | — | — | — | ||||||||||||||||||||||||||||
| 2023 | 500 | 3.70 | — | — | ||||||||||||||||||||||||||||
| 2024 | — | — | — | — | ||||||||||||||||||||||||||||
| Remaining years | 1,500 | 2.89 | — | — | ||||||||||||||||||||||||||||
| Total | $ | 2,000 | $ | 1,000 | ||||||||||||||||||||||||||||
| Fair value | $ | 2,083 | $ | 1,000 | ||||||||||||||||||||||||||||
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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 rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2020, with the participation of management, our Chairman and Chief Executive Officer and our Executive Vice President, Finance and Chief Financial Officer carried out an evaluation, pursuant to Rule 13a-15(b) of the Act, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our Chairman and Chief Executive Officer and our Executive Vice President, Finance and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of September 30, 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, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Item 103 of Regulation S-K promulgated by the U.S. Securities and Exchange Commission (SEC) requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believe will be in excess of $100,000. The following matters are disclosed in accordance with that requirement. We do not currently believe that the eventual outcome of any matters reported, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Our U.S. refineries are implementing two separate consent decrees, regarding alleged violations of the Federal Clean Air Act, with the U.S. Environmental Protection Agency (EPA), five states and one local air pollution agency. Some of the requirements and limitations contained in the decrees provide for stipulated penalties for violations. Stipulated penalties under the decrees are not automatic, but must be requested by one of the agency signatories. As part of periodic reports under the decrees or other reports required by permits or regulations, we occasionally report matters that could be subject to a request for stipulated penalties. If a specific request for stipulated penalties meeting the reporting threshold set forth in SEC rules is made pursuant to these decrees based on a given reported exceedance, we will separately report that matter and the amount of the proposed penalty.
New Matters
There are no new matters to report.
Matters Previously Reported
On January 6, 2020, the California State Water Resources Control (Water Board) issued a penalty demand of $558,300 to resolve the Rodeo refining facility’s National Pollutant Discharge Elimination System permit requirement exceedance for total suspended solids that occurred following heavy rains on February 14, 2019. We reached agreement with the Water Board to resolve this matter with a penalty payment of $142,500 and a monetary contribution of $142,500 for the San Francisco Estuary Institute’s San Francisco Bay Regional Monitoring Program. Final Water Board acceptance of the agreement was subject to a 30-day public comment period. The settlement has become final and the matter is resolved.
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Item 1A. RISK FACTORS
Except as provided below, there were no material changes from the risk factors disclosed in Item 1A of our 2019 Annual Report on Form 10-K.
Impacts of Coronavirus Disease 2019 (COVID-19) have resulted in a significant decrease in demand for many of our products, which has had, and is expected to continue to have, a materially adverse effect on our results of operations and cash flows, and impacts of COVID-19 may have materially adverse effects on our equity affiliates as well as our customers, suppliers and other counterparties.
The COVID-19 pandemic continues to negatively impact worldwide economic and commercial activity. Travel restrictions, business and school closures, and stay at home orders have significantly reduced global economic activity and have resulted in substantial decreases in the demand for many refined petroleum products we manufacture and sell, particularly gasoline and jet fuel. Additionally, although OPEC and other countries agreed to production cuts after disputes over production levels resulted in an oversupply of crude oil earlier in the year, the commitments have not offset the dramatic decrease in global demand. The oversupply and resulting depressed oil prices continue to negatively impact refinery utilization rates and operating margins in our Refining business. Any prolonged period of economic stagnation, as well as depressed oil prices, may also adversely impact the financial results of our Midstream, Chemicals, and Marketing and Specialties businesses. These events also could result in an increased risk that our equity affiliates, as well as our customers and other counterparties, may be unable to fulfill their obligations in a timely manner, or at all, which could negatively affect our financial condition and cash flows. The extent to which our business and operations will continue to be negatively impacted depends on the duration and scope of the pandemic, including any resurgences, and how quickly and to what extent economic conditions improve and normal business and operating conditions, including demand for refined petroleum products, resume. Depending on future movements of market prices for products held in inventories, we or certain of our equity affiliates could be required to make future inventory valuation adjustments, which could affect our financial results.
Any of the foregoing events or conditions, or other consequences of the COVID-19 pandemic, could significantly adversely affect our business and financial condition and the business and financial condition of our equity affiliates, as well as our customers and other counterparties. Moreover, many risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019, should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.
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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
| Millions of Dollars | ||||||||||||||||||||
| Period | Total Number of Shares Purchased* | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs** | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||
| July 1-31, 2020 | — | $ | — | — | $ | 2,514 | ||||||||||||||
| August 1-31, 2020 | — | — | — | 2,514 | ||||||||||||||||
| September 1-30, 2020 | — | — | — | 2,514 | ||||||||||||||||
| Total | — | $ | — | — | ||||||||||||||||
| * Includes repurchase of shares of common stock from company employees in connection with the company’s broad-based employee incentive plans, when applicable. | ||||||||||||||||||||
| ** As of September 30, 2020, our Board of Directors has authorized an aggregate of $15 billion of repurchases of our outstanding common stock. The authorizations do not have expiration dates. The share repurchases are expected to be funded primarily through available cash. We are not obligated to repurchase any shares of common stock pursuant to these authorizations and may commence, suspend or terminate repurchases at any time. Shares of stock repurchased are held as treasury shares. Effective March 18, 2020, share repurchases under our share repurchase programs were temporarily suspended. | ||||||||||||||||||||
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Item 6. EXHIBITS
| Incorporate by Reference | ||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | Exhibit Number | Filing Date | SEC File No. | |||||||||||||||||||||||||||
31.1* | ||||||||||||||||||||||||||||||||
31.2* | ||||||||||||||||||||||||||||||||
32* | ||||||||||||||||||||||||||||||||
| 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. | |||||||||||||||||||||||||||||||
| 101.SCH* | Inline XBRL Schema Document. | |||||||||||||||||||||||||||||||
| 101.CAL* | Inline XBRL Calculation Linkbase Document. | |||||||||||||||||||||||||||||||
| 101.LAB* | Inline XBRL Labels Linkbase Document. | |||||||||||||||||||||||||||||||
| 101.PRE* | Inline XBRL Presentation Linkbase Document. | |||||||||||||||||||||||||||||||
| 101.DEF* | Inline XBRL Definition Linkbase Document. | |||||||||||||||||||||||||||||||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||||||||||||||||||||||||||
| * Filed herewith. | ||||||||||||||||||||||||||||||||
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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.
| PHILLIPS 66 | ||||||||
| /s/ Chukwuemeka A. Oyolu | ||||||||
Chukwuemeka A. Oyolu Vice President and Controller (Chief Accounting and Duly Authorized Officer) | ||||||||
Date: October 30, 2020
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