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, 2021 | |||||||
| 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 438,100,273 shares of common stock, $0.01 par value, outstanding as of September 30, 2021.
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 | ||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Revenues and Other Income | |||||||||||||||||
| Sales and other operating revenues | $ | 30,243 | 15,929 | 78,872 | 47,720 | ||||||||||||
| Equity in earnings of affiliates | 982 | 349 | 2,097 | 871 | |||||||||||||
| Net gain on dispositions | 9 | 1 | 11 | 87 | |||||||||||||
| Other income | 238 | 20 | 304 | 48 | |||||||||||||
| Total Revenues and Other Income | 31,472 | 16,299 | 81,284 | 48,726 | |||||||||||||
| Costs and Expenses | |||||||||||||||||
| Purchased crude oil and products | 27,529 | 14,509 | 72,812 | 42,557 | |||||||||||||
| Operating expenses | 1,166 | 1,016 | 3,721 | 3,383 | |||||||||||||
| Selling, general and administrative expenses | 424 | 384 | 1,265 | 1,112 | |||||||||||||
| Depreciation and amortization | 361 | 352 | 1,081 | 1,037 | |||||||||||||
| Impairments | 1,298 | 1,140 | 1,496 | 4,146 | |||||||||||||
| Taxes other than income taxes | 85 | 106 | 343 | 377 | |||||||||||||
| Accretion on discounted liabilities | 6 | 6 | 18 | 17 | |||||||||||||
| Interest and debt expense | 151 | 132 | 440 | 360 | |||||||||||||
| Foreign currency transaction (gains) losses | 4 | 4 | (5) | 10 | |||||||||||||
| Total Costs and Expenses | 31,024 | 17,649 | 81,171 | 52,999 | |||||||||||||
| Income (loss) before income taxes | 448 | (1,350) | 113 | (4,273) | |||||||||||||
| Income tax benefit | (40) | (624) | (110) | (1,053) | |||||||||||||
| Net Income (Loss) | 488 | (726) | 223 | (3,220) | |||||||||||||
| Less: net income attributable to noncontrolling interests | 86 | 73 | 179 | 216 | |||||||||||||
| Net Income (Loss) Attributable to Phillips 66 | $ | 402 | (799) | 44 | (3,436) | ||||||||||||
Net Income (Loss) Attributable to Phillips 66 Per Share of Common Stock (dollars) | |||||||||||||||||
| Basic | $ | 0.91 | (1.82) | 0.08 | (7.83) | ||||||||||||
| Diluted | 0.91 | (1.82) | 0.08 | (7.83) | |||||||||||||
Weighted-Average Common Shares Outstanding (thousands) | |||||||||||||||||
| Basic | 440,193 | 438,916 | 439,880 | 439,670 | |||||||||||||
| Diluted | 440,368 | 438,916 | 440,259 | 439,670 | |||||||||||||
| 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 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Net Income (Loss) | $ | 488 | (726) | 223 | (3,220) | |||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||
| Defined benefit plans | ||||||||||||||||||||
| Net actuarial gain (loss) arising during the period | — | — | 210 | (300) | ||||||||||||||||
| Amortization of net actuarial loss, prior service credit and settlements | 36 | 34 | 105 | 112 | ||||||||||||||||
| Plans sponsored by equity affiliates | 4 | 4 | 33 | 9 | ||||||||||||||||
| Income taxes on defined benefit plans | (8) | (10) | (82) | 44 | ||||||||||||||||
| Defined benefit plans, net of income taxes | 32 | 28 | 266 | (135) | ||||||||||||||||
| Foreign currency translation adjustments | (74) | 155 | (70) | (41) | ||||||||||||||||
| Income taxes on foreign currency translation adjustments | 2 | (4) | 2 | (3) | ||||||||||||||||
| Foreign currency translation adjustments, net of income taxes | (72) | 151 | (68) | (44) | ||||||||||||||||
| Cash flow hedges | — | 2 | 3 | (7) | ||||||||||||||||
| Income taxes on hedging activities | — | — | (1) | 2 | ||||||||||||||||
| Hedging activities, net of income taxes | — | 2 | 2 | (5) | ||||||||||||||||
| Other Comprehensive Income (Loss), Net of Income Taxes | (40) | 181 | 200 | (184) | ||||||||||||||||
| Comprehensive Income (Loss) | 448 | (545) | 423 | (3,404) | ||||||||||||||||
| Less: comprehensive income attributable to noncontrolling interests | 86 | 73 | 179 | 216 | ||||||||||||||||
| Comprehensive Income (Loss) Attributable to Phillips 66 | $ | 362 | (618) | 244 | (3,620) | |||||||||||||||
See Notes to Consolidated Financial Statements.
2
| Consolidated Balance Sheet | Phillips 66 | ||||
| Millions of Dollars | |||||||||||
| September 30 2021 | December 31 2020 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 2,897 | 2,514 | ||||||||
| Accounts and notes receivable (net of allowances of $36 million in 2021 and $37 million in 2020) | 6,527 | 5,688 | |||||||||
| Accounts and notes receivable—related parties | 1,479 | 834 | |||||||||
| Inventories | 4,400 | 3,893 | |||||||||
| Prepaid expenses and other current assets | 716 | 347 | |||||||||
| Total Current Assets | 16,019 | 13,276 | |||||||||
| Investments and long-term receivables | 14,059 | 13,624 | |||||||||
| Net properties, plants and equipment | 22,377 | 23,716 | |||||||||
| Goodwill | 1,425 | 1,425 | |||||||||
| Intangibles | 822 | 843 | |||||||||
| Other assets | 1,705 | 1,837 | |||||||||
| Total Assets | $ | 56,407 | 54,721 | ||||||||
| Liabilities | |||||||||||
| Accounts payable | $ | 8,203 | 5,171 | ||||||||
| Accounts payable—related parties | 1,012 | 378 | |||||||||
| Short-term debt | 1,489 | 987 | |||||||||
| Accrued income and other taxes | 1,287 | 1,351 | |||||||||
| Employee benefit obligations | 464 | 573 | |||||||||
| Other accruals | 1,466 | 1,058 | |||||||||
| Total Current Liabilities | 13,921 | 9,518 | |||||||||
| Long-term debt | 13,421 | 14,906 | |||||||||
| Asset retirement obligations and accrued environmental costs | 680 | 657 | |||||||||
| Deferred income taxes | 5,434 | 5,644 | |||||||||
| Employee benefit obligations | 1,123 | 1,341 | |||||||||
| Other liabilities and deferred credits | 1,231 | 1,132 | |||||||||
| Total Liabilities | 35,810 | 33,198 | |||||||||
| Equity | |||||||||||
Common stock (2,500,000,000 shares authorized at $0.01 par value) Issued (2021—649,872,100 shares; 2020—648,643,223 shares) | |||||||||||
| Par value | 6 | 6 | |||||||||
| Capital in excess of par | 20,488 | 20,383 | |||||||||
| Treasury stock (at cost: 2021 and 2020—211,771,827 shares) | (17,116) | (17,116) | |||||||||
| Retained earnings | 15,350 | 16,500 | |||||||||
| Accumulated other comprehensive loss | (589) | (789) | |||||||||
| Total Stockholders’ Equity | 18,139 | 18,984 | |||||||||
| Noncontrolling interests | 2,458 | 2,539 | |||||||||
| Total Equity | 20,597 | 21,523 | |||||||||
| Total Liabilities and Equity | $ | 56,407 | 54,721 | ||||||||
See Notes to Consolidated Financial Statements.
3
| Consolidated Statement of Cash Flows | Phillips 66 | ||||
| Millions of Dollars | |||||||||||
| Nine Months Ended September 30 | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows From Operating Activities | |||||||||||
| Net income (loss) | $ | 223 | (3,220) | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | 1,081 | 1,037 | |||||||||
| Impairments | 1,496 | 4,146 | |||||||||
| Accretion on discounted liabilities | 18 | 17 | |||||||||
| Deferred income taxes | (290) | 2 | |||||||||
| Undistributed equity earnings | (78) | 254 | |||||||||
| Net gain on dispositions | (5) | (87) | |||||||||
| Unrealized investment gain | (224) | — | |||||||||
| Other | 289 | 52 | |||||||||
| Working capital adjustments | |||||||||||
| Accounts and notes receivable | (1,465) | 2,684 | |||||||||
| Inventories | (495) | (1,134) | |||||||||
| Prepaid expenses and other current assets | (369) | (40) | |||||||||
| Accounts payable | 3,723 | (2,985) | |||||||||
| Taxes and other accruals | 313 | 746 | |||||||||
| Net Cash Provided by Operating Activities | 4,217 | 1,472 | |||||||||
| Cash Flows From Investing Activities | |||||||||||
| Capital expenditures and investments | (1,263) | (2,414) | |||||||||
| Return of investments in equity affiliates | 236 | 139 | |||||||||
| Proceeds from asset dispositions | 26 | 3 | |||||||||
| Advances/loans—related parties | (310) | (251) | |||||||||
| Collection of advances/loans—related parties | 1 | 44 | |||||||||
| Other | (5) | (87) | |||||||||
| Net Cash Used in Investing Activities | (1,315) | (2,566) | |||||||||
| Cash Flows From Financing Activities | |||||||||||
| Issuance of debt | 450 | 3,305 | |||||||||
| Repayment of debt | (1,485) | (546) | |||||||||
| Issuance of common stock | 24 | 6 | |||||||||
| Repurchase of common stock | — | (443) | |||||||||
| Dividends paid on common stock | (1,182) | (1,182) | |||||||||
| Distributions to noncontrolling interests | (239) | (201) | |||||||||
| Repurchase of noncontrolling interests | (24) | — | |||||||||
| Other | (36) | (20) | |||||||||
| Net Cash Provided by (Used in) Financing Activities | (2,492) | 919 | |||||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | (27) | 23 | |||||||||
| Net Change in Cash and Cash Equivalents | 383 | (152) | |||||||||
| Cash and cash equivalents at beginning of period | 2,514 | 1,614 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 2,897 | 1,462 | ||||||||
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, 2021 | $ | 6 | 20,463 | (17,116) | 15,345 | (549) | 2,453 | 20,602 | |||||||||||||||
| Net income | — | — | — | 402 | — | 86 | 488 | ||||||||||||||||
| Other comprehensive loss | — | — | — | — | (40) | — | (40) | ||||||||||||||||
| Dividends paid on common stock ($0.90 per share) | — | — | — | (394) | — | — | (394) | ||||||||||||||||
| Benefit plan activity | — | 25 | — | (3) | — | — | 22 | ||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | (81) | (81) | ||||||||||||||||
| September 30, 2021 | $ | 6 | 20,488 | (17,116) | 15,350 | (589) | 2,458 | 20,597 | |||||||||||||||
| 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 | |||||||||||||||
| Shares | ||||||||
| Three Months Ended September 30 | ||||||||
| Common Stock Issued | Treasury Stock | |||||||
| June 30, 2021 | 649,761,235 | 211,771,827 | ||||||
| Repurchase of common stock | — | — | ||||||
| Shares issued—share-based compensation | 110,865 | — | ||||||
| September 30, 2021 | 649,872,100 | 211,771,827 | ||||||
| June 30, 2020 | 648,468,487 | 211,771,827 | ||||||
| Repurchase of common stock | — | — | ||||||
| Shares issued—share-based compensation | 103,525 | — | ||||||
| September 30, 2020 | 648,572,012 | 211,771,827 | ||||||
| See Notes to Consolidated Financial Statements. | ||||||||
5
| Consolidated Statement of Changes in Equity | Phillips 66 | ||||
| Millions of Dollars | |||||||||||||||||||||||
| Nine 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 | |||||||||||||||||
| December 31, 2020 | $ | 6 | 20,383 | (17,116) | 16,500 | (789) | 2,539 | 21,523 | |||||||||||||||
| Net income | — | — | — | 44 | — | 179 | 223 | ||||||||||||||||
| Other comprehensive income | — | — | — | — | 200 | — | 200 | ||||||||||||||||
| Dividends paid on common stock ($2.70 per share) | — | — | — | (1,182) | — | — | (1,182) | ||||||||||||||||
| Benefit plan activity | — | 105 | — | (10) | — | — | 95 | ||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | (239) | (239) | ||||||||||||||||
| Repurchase of noncontrolling interests | — | — | — | (2) | — | (21) | (23) | ||||||||||||||||
| September 30, 2021 | $ | 6 | 20,488 | (17,116) | 15,350 | (589) | 2,458 | 20,597 | |||||||||||||||
| 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 | |||||||||||||||
| Shares | ||||||||
| Nine Months Ended September 30 | ||||||||
| Common Stock Issued | Treasury Stock | |||||||
| December 31, 2020 | 648,643,223 | 211,771,827 | ||||||
| Repurchase of common stock | — | — | ||||||
| Shares issued—share-based compensation | 1,228,877 | — | ||||||
| September 30, 2021 | 649,872,100 | 211,771,827 | ||||||
| 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 | ||||||
| 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 2020 Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2021, 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 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Product Line and Services | ||||||||||||||||||||
| Refined petroleum products | $ | 24,838 | 12,573 | 63,057 | 37,431 | |||||||||||||||
| Crude oil resales | 3,091 | 2,198 | 9,484 | 6,565 | ||||||||||||||||
| Natural gas liquids (NGL) | 2,331 | 966 | 6,048 | 2,645 | ||||||||||||||||
Services and other* | (17) | 192 | 283 | 1,079 | ||||||||||||||||
| Consolidated sales and other operating revenues | $ | 30,243 | 15,929 | 78,872 | 47,720 | |||||||||||||||
| Geographic Location** | ||||||||||||||||||||
| United States | $ | 24,011 | 12,125 | 61,920 | 36,212 | |||||||||||||||
| United Kingdom | 2,948 | 1,850 | 8,070 | 5,131 | ||||||||||||||||
| Germany | 1,194 | 805 | 3,049 | 2,276 | ||||||||||||||||
| Other foreign countries | 2,090 | 1,149 | 5,833 | 4,101 | ||||||||||||||||
| Consolidated sales and other operating revenues | $ | 30,243 | 15,929 | 78,872 | 47,720 | |||||||||||||||
| * Includes derivatives-related activities. See Note 12—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. | ||||||||||||||||||||
7
Contract-Related Assets and Liabilities
At September 30, 2021, and December 31, 2020, receivables from contracts with customers were $6,341 million and $3,911 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, 2021, and December 31, 2020, our asset balances related to such payments were $435 million and $404 million, respectively.
Our contract liabilities represent advances from our customers prior to product or service delivery. At September 30, 2021, and December 31, 2020, contract liabilities were immaterial.
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 the unsatisfied performance obligations. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing. At September 30, 2021, the remaining performance obligations related to these minimum volume commitment contracts were immaterial.
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) have increased 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, 2021, and December 31, 2020, we reported $8,006 million and $6,522 million of accounts and notes receivable, net of allowances of $36 million and $37 million, respectively. Based on an aging analysis at September 30, 2021, more than 95% 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 10—Guarantees, and Note 11—Contingencies and Commitments, for more information on these off-balance sheet exposures.
8
Note 4—Inventories
Inventories consisted of the following:
| Millions of Dollars | |||||||||||
| September 30 2021 | December 31 2020 | ||||||||||
| Crude oil and petroleum products | $ | 4,015 | 3,536 | ||||||||
| Materials and supplies | 385 | 357 | |||||||||
| $ | 4,400 | 3,893 | |||||||||
Inventories valued on the last-in, first-out (LIFO) basis totaled $3,828 million and $3,368 million at September 30, 2021, and December 31, 2020, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $6.1 billion and $2.7 billion at September 30, 2021, and December 31, 2020, respectively.
Certain planned reductions in inventory that are not expected to be replaced by the end of the year cause liquidations of LIFO inventory values. LIFO inventory liquidations decreased our net income by $17 million and $99 million in the three and nine months ended September 30, 2021, respectively. The impact was immaterial for the corresponding periods of 2020.
9
Note 5—Investments, Loans and Long-Term Receivables
Equity Investments
Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In 2020, the trial court presiding over litigation regarding the Dakota Access Pipeline ordered the U.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) relating to an easement under Lake Oahe in North Dakota and later vacated the easement. Although the easement has been vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS, which is expected to be completed in the second half of 2022. In May 2021, the court denied a request for an injunction to shut down the pipeline while the EIS is being prepared and in June 2021, dismissed the litigation. It is possible that the litigation could be reopened or new litigation challenging the EIS, once completed, could be filed. In September 2021, Dakota Access filed a writ of certiorari, requesting the U.S. Supreme Court to review the lower court’s judgment that ordered the EIS and vacated the easement.
Dakota Access and ETCO have guaranteed repayment of $2.5 billion aggregate principal amount of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access. In addition, Phillips 66 Partners LP (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 in certain circumstances relating to the litigation described above. At September 30, 2021, Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU was approximately $631 million.
If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, Phillips 66 Partners also could be required 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.
At September 30, 2021, the aggregate book value of Phillips 66 Partners’ investments in Dakota Access and ETCO was $579 million.
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 variable interest entity (VIE) because our co-venturer has an option to require us to purchase its interest 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, 2021, our maximum exposure to loss was comprised of our $271 million investment in CF United, and any potential future loss resulting from the put option should the purchase price based on a fixed multiple exceed the then-current fair value of CF United.
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 economic performance. At September 30, 2021, our maximum exposure to loss was $183 million, which represented the book value of our investment in OnCue of $113 million and guaranteed debt obligations of $70 million.
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Liberty Pipeline LLC (Liberty)
In the first quarter of 2021, Phillips 66 Partners’ decision to exit the Liberty Pipeline project resulted in a $198 million before-tax impairment of its investment in Liberty. The impairment is included in the “Impairments” line item on our consolidated statement of operations for the nine months ended September 30, 2021. See Note 7—Impairments, and Note 13—Fair Value Measurements, for additional information regarding the impairment and the techniques used to determine the fair value of Phillips 66 Partners’ investment in Liberty. In April 2021, Phillips 66 Partners transferred its ownership interest in Liberty to its co-venturer for cash and certain pipeline assets with a value that approximated its book value of $46 million at March 31, 2021.
Other Investments
In September 2021, we acquired 78 million ordinary shares in NOVONIX Limited (NOVONIX), representing a 16% ownership interest, for $150 million. NOVONIX is a Brisbane, Australia-based company listed on the Australian Securities Exchange that develops and supplies materials for lithium-ion batteries. Since we do not have significant influence over the operating and financial policies of NOVONIX and the shares we own have a readily determinable fair value, our investment is recorded at fair value at the end of each reporting period. The fair value of our investment is recorded in the “Investments and long-term receivables” line item on our consolidated balance sheet, and the change in the fair value of our investment, or unrealized gain (loss), is recorded in the “Other income” line item on our consolidated statement of operations. The fair value of our investment in NOVONIX was $374 million at September 30, 2021, and the unrealized investment gain was $224 million for the three and nine months ended September 30, 2021. See Note 13—Fair Value Measurements, for additional information regarding the recurring fair value measurement of our investment in NOVONIX.
Related Party Loans
We and our co-venturer provided member loans to WRB Refining LP (WRB). At September 30, 2021, our 50% share of the outstanding member loan balance, including accrued interest, was $593 million.
Note 6—Properties, Plants and Equipment
Our gross investment in properties, plants and equipment (PP&E) and the associated accumulated depreciation and amortization (Accum. D&A) balances were as follows:
| Millions of Dollars | |||||||||||||||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Gross PP&E | Accum. D&A | Net PP&E | Gross PP&E | Accum. D&A | Net PP&E | ||||||||||||||||||||||||||||||
| Midstream | $ | 12,435 | 2,975 | 9,460 | 12,313 | 2,815 | 9,498 | ||||||||||||||||||||||||||||
| Chemicals | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Refining | 25,378 | 14,033 | 11,345 | 24,647 | 12,019 | 12,628 | |||||||||||||||||||||||||||||
| Marketing and Specialties | 1,802 | 1,028 | 774 | 1,815 | 1,007 | 808 | |||||||||||||||||||||||||||||
| Corporate and Other | 1,524 | 726 | 798 | 1,448 | 666 | 782 | |||||||||||||||||||||||||||||
| $ | 41,139 | 18,762 | 22,377 | 40,223 | 16,507 | 23,716 | |||||||||||||||||||||||||||||
See Note 7—Impairments, for information regarding a PP&E impairment associated with our Alliance Refinery asset group.
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Note 7—Impairments
| Millions of Dollars | ||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Midstream | $ | 10 | 204 | 208 | 1,365 | |||||||||||||||
| Refining | 1,288 | 911 | 1,288 | 2,756 | ||||||||||||||||
| Corporate and Other | — | 25 | — | 25 | ||||||||||||||||
| Total impairments | $ | 1,298 | 1,140 | 1,496 | 4,146 | |||||||||||||||
Equity Investments
Liberty
In the first quarter of 2021, Phillips 66 Partners decided to exit the Liberty Pipeline project, which had previously been deferred due to the challenging business environment caused by the COVID-19 pandemic. As a result, Phillips 66 Partners recorded a $198 million before-tax impairment to reduce the book value of its investment in Liberty at March 31, 2021, to estimated fair value.
Red Oak Pipeline LLC (Red Oak)
In the third quarter of 2020, the Red Oak Pipeline project was canceled. As a result, we recorded an $84 million before-tax impairment to reduce the carrying value of our investment to our share of the estimated salvage value of the joint venture’s assets at September 30, 2020.
DCP Midstream, LLC (DCP Midstream)
In the first quarter of 2020, the market value of DCP Partners, LP (DCP Partners) common units 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 this difference was not temporary primarily due to its magnitude, and we recorded a $1,161 million before-tax impairment of our investment in the first quarter of 2020.
PP&E and Intangible Assets
Alliance Refinery
In the third quarter of 2021, we identified impairment indicators related to our Alliance Refinery as a result of damages sustained from Hurricane Ida and our reassessment of the role this refinery will play in our refining portfolio. Accordingly, we assessed the refinery asset group for impairment by performing an analysis that considered several usage scenarios, including selling or converting the asset group to an alternative use. Based on our analysis, we concluded that the carrying value of the asset group was not recoverable. As a result, we recorded a $1,298 million before-tax impairment to reduce the carrying value of net PP&E in this asset group to its fair value of approximately $200 million. $1,288 million of the impairment charge was recorded in our Refining segment and $10 million was recorded in our Midstream segment.
San Francisco Refinery
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. 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 resulted in a reduction of net PP&E totaling $1,009 million and intangible assets of $21 million. This impairment was primarily related to our Refining segment, with the exception of $120 million that was related to PP&E in our Midstream segment.
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Goodwill
Our stock price declined significantly in the first quarter of 2020, mainly due to the disruption in global commodity and equity markets related to the COVID-19 pandemic. 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.
These impairment charges are included within the “Impairments” line item on our consolidated statement of operations. See Note 13—Fair Value Measurements, for additional information on the determination of fair value used to record these impairments.
Outlook
The COVID-19 pandemic continues to disrupt economic activities globally. Reduced demand for refined petroleum products resulted in low refining margins and decreased volumes through refineries and logistics infrastructure in 2020. Global refined product demand has been steadily recovering through 2021 due to the easing of pandemic restrictions and the administration of COVID-19 vaccines. Consequently, refining margins have improved, as has volume throughput. The depth and duration of the economic consequences of the COVID-19 pandemic remain uncertain and we continue to monitor our asset and investment portfolio. The consequences of the sustained disruption of economic activities by the pandemic may include additional asset impairments and portfolio rationalization in the future.
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Note 8—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) and the premium paid for the repurchase of noncontrolling interests. 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 by dividend equivalents paid on participating securities for which the dividends are more dilutive than the participation of the awards in the earnings (loss) of the periods presented, and the premium paid for the repurchase of noncontrolling interests. 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 | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| Basic | Diluted | Basic | Diluted | Basic | Diluted | Basic | Diluted | ||||||||||||||||||||||||||||
Amounts Attributed to Phillips 66 Common Stockholders (millions): | |||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to Phillips 66 | $ | 402 | 402 | (799) | (799) | 44 | 44 | (3,436) | (3,436) | ||||||||||||||||||||||||||
| Income allocated to participating securities | (2) | (2) | (2) | (2) | (7) | (7) | (6) | (6) | |||||||||||||||||||||||||||
| Premium paid for the repurchase of noncontrolling interests | — | — | — | — | (2) | (2) | — | — | |||||||||||||||||||||||||||
| Net income (loss) available to common stockholders | $ | 400 | 400 | (801) | (801) | 35 | 35 | (3,442) | (3,442) | ||||||||||||||||||||||||||
Weighted-average common shares outstanding (thousands): | 438,067 | 440,193 | 436,783 | 438,916 | 437,783 | 439,880 | 437,492 | 439,670 | |||||||||||||||||||||||||||
| Effect of share-based compensation | 2,126 | 175 | 2,133 | — | 2,097 | 379 | 2,178 | — | |||||||||||||||||||||||||||
| Weighted-average common shares outstanding—EPS | 440,193 | 440,368 | 438,916 | 438,916 | 439,880 | 440,259 | 439,670 | 439,670 | |||||||||||||||||||||||||||
Earnings (Loss) Per Share of Common Stock (dollars) | $ | 0.91 | 0.91 | (1.82) | (1.82) | 0.08 | 0.08 | (7.83) | (7.83) | ||||||||||||||||||||||||||
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Note 9—Debt
2021 Activities
Debt Issuances and Repayments
In September 2021, Phillips 66 repaid the $500 million of outstanding borrowings under the delayed draw term loan facility due November 2023 described below under “Term Loan Facility.”
In April 2021, Phillips 66 Partners entered into a $450 million term loan agreement and borrowed the full amount. The term loan agreement has a maturity date of April 5, 2022, and the outstanding borrowings can be repaid at any time and from time to time, in whole or in part, without premium or penalty. Borrowings bear interest at a floating rate based on either a Eurodollar rate or a reference rate, plus a margin of 0.875%. Proceeds were primarily used to repay amounts borrowed under Phillips 66 Partners’ $750 million revolving credit facility.
In April 2021, Phillips 66 Partners repaid $50 million of its tax-exempt bonds upon maturity.
In February 2021, Phillips 66 repaid $500 million outstanding principal balance of its floating-rate senior notes upon maturity.
At September 30, 2021, no borrowings were outstanding and $1 million in letters of credit had been drawn under Phillips 66 Partners’ $750 million revolving credit facility, compared with outstanding borrowings of $415 million and $1 million in letters of credit drawn under the facility at December 31, 2020.
Debt Classification
At September 30, 2021, $1 billion of Phillips 66’s debt due within a year was classified as long-term debt based on its intent and ability to refinance the obligation with long-term debt.
2020 Activities
Senior Unsecured Notes
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 exclusive of accrued interest received, and $993 million, respectively, net of underwriters’ discounts or premiums and commissions, as well as debt issuance costs. These proceeds were used for general corporate purposes.
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Term Loan Facility
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. In November 2020, we repaid $500 million of borrowings outstanding under the Facility, and the Facility was amended to extend the maturity date of the remaining $500 million outstanding borrowings from March 18, 2021, to November 20, 2023. Borrowings under the Facility bear interest at a floating rate based on either a Eurodollar rate or a reference rate, plus a margin determined by the credit rating of Phillips 66’s senior unsecured long-term debt. Phillips 66 used the proceeds for general corporate purposes.
Other Debt Repayments
In April 2020, Phillips 66 repaid $300 million outstanding principal balance of its floating-rate notes due April 2020 and the $200 million outstanding principal balance of its term loan facility due April 2020. Also in April 2020, Phillips 66 Partners repaid $25 million of its tax-exempt bonds upon maturity.
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Note 10—Guarantees
At September 30, 2021, 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 for our headquarters facility in Houston, Texas, we have the option, at the end of the lease term in September 2025, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at September 30, 2021. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling $209 million. These leases have remaining terms of up to ten years.
Guarantees of Joint Venture 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.
At September 30, 2021, we also had other guarantees outstanding primarily for our portion of certain joint venture debt, which have remaining terms of up to four years. The maximum potential future exposures under these guarantees were approximately $122 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, employee claims, and real estate 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, 2021, and December 31, 2020, the carrying amount of recorded indemnifications was $146 million and $145 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, 2021, and December 31, 2020, environmental accruals for known contamination of $108 million and $104 million, respectively, were included in the carrying amount of the 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 11—Contingencies and Commitments.
Indemnification and Release Agreement
In 2012, in connection with our separation from ConocoPhillips, we entered into an 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.
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Note 11—Contingencies and Commitments
A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is uncertain.
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 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.
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, 2021, our total environmental accruals were $453 million, compared with $427 million at December 31, 2020. 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.
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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, 2021, we had performance obligations secured by letters of credit and bank guarantees of $740 million related to various purchase and other commitments incident to the ordinary conduct of business.
Note 12—Derivatives and Financial Instruments
Derivative Instruments
We use financial and commodity-based derivative contracts to manage exposures to fluctuations in commodity prices, interest rates and foreign currency exchange rates, or to capture market opportunities. Because we do not apply hedge accounting for commodity derivative contracts, all realized 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, renewable feedstock, 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 13—Fair Value Measurements.
Commodity Derivative Contracts—We sell into or receive supply from the worldwide crude oil, refined petroleum product, NGL, natural gas, renewable feedstock, 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, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||
| 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 | $ | 38 | (2) | (4) | 32 | 13 | — | — | 13 | |||||||||||||||||||||||
| Other assets | 15 | (5) | — | 10 | 5 | (4) | — | 1 | ||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Other accruals | 1,990 | (2,194) | 145 | (59) | 665 | (721) | 46 | (10) | ||||||||||||||||||||||||
| Other liabilities and deferred credits | 4 | (6) | — | (2) | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | 2,047 | (2,207) | 141 | (19) | 683 | (725) | 46 | 4 | |||||||||||||||||||||||
At September 30, 2021, and December 31, 2020, 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 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Sales and other operating revenues | $ | (214) | 20 | (530) | 519 | |||||||||||||||
| Other income | 11 | — | 30 | 9 | ||||||||||||||||
| Purchased crude oil and products | 66 | (16) | (282) | 301 | ||||||||||||||||
| Net gain (loss) from commodity derivative activity | $ | (137) | 4 | (782) | 829 | |||||||||||||||
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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 more than 95% at September 30, 2021, and December 31, 2020.
| Open Position Long / (Short) | |||||||||||
| September 30 2021 | December 31 2020 | ||||||||||
| Commodity | |||||||||||
Crude oil, refined petroleum products, NGL and renewable feedstocks (millions of barrels) | (32) | (13) | |||||||||
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 Interbank Offered Rate (LIBOR) and changes, if any, in our credit rating. The pay-fixed, receive-floating interest rate swaps have an aggregate notional value of $650 million and ended in April 2021. These swaps were designated as cash flow hedges. We reported 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 reclassified such gains and losses into earnings (loss) in the same period during which the hedged transaction affected earnings (loss). Net realized gains and losses from settlements of the swaps were immaterial for the three and nine months ended September 30, 2021 and 2020.
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, 2021, and December 31, 2020.
21
Note 13—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.
22
•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.
•Investment in NOVONIX—Our investment in NOVONIX is measured at fair value using unadjusted quoted prices available from Australian Securities Exchange and is 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.
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, 2021 | ||||||||||||||||||||||||||||||||||||||
| 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 | $ | 1,093 | 923 | — | 2,016 | (2,001) | (4) | — | 11 | |||||||||||||||||||||||||||||
| Physical forward contracts | — | 31 | — | 31 | — | — | — | 31 | ||||||||||||||||||||||||||||||
| Rabbi trust assets | 152 | — | — | 152 | N/A | N/A | — | 152 | ||||||||||||||||||||||||||||||
| Investment in NOVONIX | 374 | — | — | 374 | N/A | N/A | — | 374 | ||||||||||||||||||||||||||||||
| $ | 1,619 | 954 | — | 2,573 | (2,001) | (4) | — | 568 | ||||||||||||||||||||||||||||||
| Commodity Derivative Liabilities | ||||||||||||||||||||||||||||||||||||||
| Exchange-cleared instruments | $ | 1,227 | 919 | — | 2,146 | (2,001) | (145) | — | — | |||||||||||||||||||||||||||||
| Physical forward contracts | — | 61 | — | 61 | — | — | — | 61 | ||||||||||||||||||||||||||||||
| Floating-rate debt | — | 925 | — | 925 | N/A | N/A | — | 925 | ||||||||||||||||||||||||||||||
| Fixed-rate debt, excluding finance leases | — | 15,416 | — | 15,416 | N/A | N/A | (1,736) | 13,680 | ||||||||||||||||||||||||||||||
| $ | 1,227 | 17,321 | — | 18,548 | (2,001) | (145) | (1,736) | 14,666 | ||||||||||||||||||||||||||||||
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| Millions of Dollars | ||||||||||||||||||||||||||||||||||||||
| December 31, 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 | $ | 314 | 356 | — | 670 | (669) | — | — | 1 | |||||||||||||||||||||||||||||
| Physical forward contracts | — | 13 | — | 13 | — | — | — | 13 | ||||||||||||||||||||||||||||||
| Rabbi trust assets | 143 | — | — | 143 | N/A | N/A | — | 143 | ||||||||||||||||||||||||||||||
| $ | 457 | 369 | — | 826 | (669) | — | — | 157 | ||||||||||||||||||||||||||||||
| Commodity Derivative Liabilities | ||||||||||||||||||||||||||||||||||||||
| Exchange-cleared instruments | $ | 351 | 364 | — | 715 | (669) | (46) | — | — | |||||||||||||||||||||||||||||
| Physical forward contracts | — | 10 | — | 10 | — | — | — | 10 | ||||||||||||||||||||||||||||||
| Interest-rate derivatives | — | 3 | — | 3 | — | — | — | 3 | ||||||||||||||||||||||||||||||
| Floating-rate debt | — | 1,940 | — | 1,940 | N/A | N/A | — | 1,940 | ||||||||||||||||||||||||||||||
| Fixed-rate debt, excluding finance leases | — | 15,597 | — | 15,597 | N/A | N/A | (1,927) | 13,670 | ||||||||||||||||||||||||||||||
| $ | 351 | 17,914 | — | 18,265 | (669) | (46) | (1,927) | 15,623 | ||||||||||||||||||||||||||||||
The rabbi trust assets and investment in NOVONIX 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 12—Derivatives and Financial Instruments, for information regarding where the assets and liabilities related to our commodity derivatives are recorded on our consolidated balance sheet.
Nonrecurring Fair Value Measurements
Equity Investments
In the first quarter of 2021, Phillips 66 Partners wrote down the book value of its investment in Liberty to estimated fair value using a Level 3 nonrecurring fair value measurement. This nonrecurring measurement was based on the estimated fair value of Phillip 66 Partners’ share of the joint venture’s pipeline assets and net working capital. See Note 5—Investments, Loans and Long-Term Receivables, for more information regarding Phillips 66 Partners’ transfer of its ownership in Liberty to its co-venturer in April 2021.
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.
PP&E and Intangible Assets
In the third quarter of 2021, we remeasured the carrying value of the net PP&E of our Alliance Refinery asset group to fair value. The fair value of PP&E was determined using a combination of the income, cost and sales comparison approaches. The income approach used a discounted cash flow model that requires various observable and non-observable inputs, such as commodity prices, margins, operating rates, sales volumes, operating expenses, capital expenditures, terminal-year values and a risk-adjusted discount rate. The cost approach used assumptions for the current replacement costs of similar plant and equipment assets adjusted for estimated physical deterioration, functional obsolescence and economic obsolescence. The sales comparison approach used the value of similar properties recently sold or currently offered for sale. This valuation resulted in a Level 3 nonrecurring fair value measurement.
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.
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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 used a discounted cash flow model that included 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 used 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 Level 3 fair value 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 zero. As part of our impairment analysis, the fair value of all reporting units was reconciled to the company’s market capitalization.
See Note 7—Impairments, for additional information on the above impairments.
25
Note 14—Pension and Postretirement Plans
The components of net periodic benefit cost for the three and nine months ended September 30, 2021 and 2020, were as follows:
| Millions of Dollars | |||||||||||||||||||||||||||||||||||
| Pension Benefits | Other Benefits | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||
| U.S. | Int’l. | U.S. | Int’l. | ||||||||||||||||||||||||||||||||
| Components of Net Periodic Benefit Cost | |||||||||||||||||||||||||||||||||||
| Three Months Ended September 30 | |||||||||||||||||||||||||||||||||||
| Service cost | $ | 37 | 9 | 35 | 7 | 1 | 1 | ||||||||||||||||||||||||||||
| Interest cost | 20 | 5 | 21 | 5 | 2 | 2 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (39) | (15) | (38) | (12) | — | — | |||||||||||||||||||||||||||||
| Amortization of prior service credit | — | — | — | — | (1) | (1) | |||||||||||||||||||||||||||||
| Recognized net actuarial loss | 8 | 7 | 21 | 4 | — | — | |||||||||||||||||||||||||||||
| Settlements | 18 | — | 17 | — | — | — | |||||||||||||||||||||||||||||
| Net periodic benefit cost* | $ | 44 | 6 | 56 | 4 | 2 | 2 | ||||||||||||||||||||||||||||
| Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||||
| Service cost | $ | 111 | 26 | 102 | 21 | 4 | 4 | ||||||||||||||||||||||||||||
| Interest cost | 60 | 14 | 70 | 16 | 4 | 5 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (121) | (44) | (121) | (37) | — | — | |||||||||||||||||||||||||||||
| Amortization of prior service credit | — | — | — | — | (2) | (2) | |||||||||||||||||||||||||||||
| Recognized net actuarial loss (gain) | 37 | 19 | 50 | 12 | (1) | — | |||||||||||||||||||||||||||||
| Settlements | 47 | — | 56 | — | — | — | |||||||||||||||||||||||||||||
| Net periodic benefit cost* | $ | 134 | 15 | 157 | 12 | 5 | 7 | ||||||||||||||||||||||||||||
| * 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, 2021, we contributed $37 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 $16 million to our U.S. pension and other postretirement benefit plans and $8 million to our international pension plans during the remainder of 2021.
During 2021 and 2020, our lump-sum benefit payments exceeded the sum of service and interest costs for the plan year for our U.S. qualified and non-qualified pension plans. As a result, we recognized a portion of prior actuarial losses, or pension settlement expense, totaling $47 million and $56 million for the nine months ended September 30, 2021 and 2020, respectively.
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Note 15—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, 2020 | $ | (809) | 25 | (5) | (789) | ||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 184 | (68) | 1 | 117 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
| Defined benefit plans* | |||||||||||||||||||||||
| Amortization of net actuarial loss, prior service credit and settlements | 82 | — | — | 82 | |||||||||||||||||||
| Foreign currency translation | — | — | — | — | |||||||||||||||||||
| Hedging | — | — | 1 | 1 | |||||||||||||||||||
| Net current period other comprehensive income (loss) | 266 | (68) | 2 | 200 | |||||||||||||||||||
| September 30, 2021 | $ | (543) | (43) | (3) | (589) | ||||||||||||||||||
| 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 | — | — | — | — | |||||||||||||||||||
| Hedging | — | — | 3 | 3 | |||||||||||||||||||
| Net current period other comprehensive loss | (135) | (44) | (5) | (184) | |||||||||||||||||||
| Other | — | 5 | — | 5 | |||||||||||||||||||
| September 30, 2020 | $ | (791) | (170) | (6) | (967) | ||||||||||||||||||
| * Included in the computation of net periodic benefit cost. See Note 14—Pension and Postretirement Plans, for additional information. | |||||||||||||||||||||||
27
Note 16—Related Party Transactions
Significant transactions with related parties were:
| Millions of Dollars | ||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Operating revenues and other income (a) | $ | 1,005 | 450 | 2,734 | 1,337 | |||||||||||||||
| Purchases (b) | 3,980 | 1,612 | 9,789 | 4,868 | ||||||||||||||||
| Operating expenses and selling, general and administrative expenses (c) | 80 | 65 | 215 | 171 | ||||||||||||||||
(a)We sold NGL, other petrochemical feedstocks and solvents to Chevron Phillips Chemical Company LLC (CPChem), NGL and certain feedstocks to DCP Midstream, gas oil and hydrogen feedstocks to Excel Paralubes (Excel), and refined petroleum products to several of our equity affiliates in the Marketing and Specialties segment, including OnCue and CF United. We also sold certain feedstocks and intermediate products to WRB and acted as an 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, NGL and solvents from WRB. 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.
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Note 17—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, our 50% equity investment in DCP Midstream, and our investment in NOVONIX.
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.
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Analysis of Results by Operating Segment
| Millions of Dollars | |||||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Sales and Other Operating Revenues* | |||||||||||||||||||||||
| Midstream | |||||||||||||||||||||||
| Total sales | $ | 3,067 | 1,458 | 8,049 | 4,096 | ||||||||||||||||||
| Intersegment eliminations | (802) | (446) | (2,138) | (1,323) | |||||||||||||||||||
| Total Midstream | 2,265 | 1,012 | 5,911 | 2,773 | |||||||||||||||||||
| Chemicals | 1 | 1 | 3 | 3 | |||||||||||||||||||
| Refining | |||||||||||||||||||||||
| Total sales | 20,206 | 10,434 | 53,939 | 31,567 | |||||||||||||||||||
| Intersegment eliminations | (12,853) | (6,286) | (32,826) | (18,356) | |||||||||||||||||||
| Total Refining | 7,353 | 4,148 | 21,113 | 13,211 | |||||||||||||||||||
| Marketing and Specialties | |||||||||||||||||||||||
| Total sales | 21,184 | 11,038 | 53,286 | 32,780 | |||||||||||||||||||
| Intersegment eliminations | (569) | (278) | (1,462) | (1,068) | |||||||||||||||||||
| Total Marketing and Specialties | 20,615 | 10,760 | 51,824 | 31,712 | |||||||||||||||||||
| Corporate and Other | 9 | 8 | 21 | 21 | |||||||||||||||||||
| Consolidated sales and other operating revenues | $ | 30,243 | 15,929 | 78,872 | 47,720 | ||||||||||||||||||
| * 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 | $ | 629 | 146 | 1,017 | (232) | ||||||||||||||||||
| Chemicals | 631 | 231 | 1,408 | 442 | |||||||||||||||||||
| Refining | (1,126) | (1,903) | (2,895) | (5,042) | |||||||||||||||||||
| Marketing and Specialties | 545 | 415 | 1,311 | 1,214 | |||||||||||||||||||
| Corporate and Other | (231) | (239) | (728) | (655) | |||||||||||||||||||
| Consolidated income (loss) before income taxes | $ | 448 | (1,350) | 113 | (4,273) | ||||||||||||||||||
| Millions of Dollars | |||||||||||
| September 30 2021 | December 31 2020 | ||||||||||
| Total Assets | |||||||||||
| Midstream | $ | 16,063 | 15,596 | ||||||||
| Chemicals | 6,446 | 6,183 | |||||||||
| Refining | 20,576 | 20,404 | |||||||||
| Marketing and Specialties | 8,782 | 7,180 | |||||||||
| Corporate and Other | 4,540 | 5,358 | |||||||||
| Consolidated total assets | $ | 56,407 | 54,721 | ||||||||
30
Note 18—Income Taxes
Our effective income tax rate for the three and nine months ended September 30, 2021, was (9)% and (97)%, respectively, compared with 46% and 25%, respectively, for the corresponding periods of 2020. The decrease in our effective tax rate for the three and nine months ended September 30, 2021, was primarily attributable to the discrete tax treatment of the Alliance Refinery impairment. The tax consequences of the impairment were not included in our estimated annual effective rate but instead were fully reported in the third quarter of 2021.
The effective income tax rate for the three months ended September 30, 2021, varied from the U.S. federal statutory income tax rate of 21%, primarily due to the discrete tax treatment of the Alliance Refinery impairment, income attributable to noncontrolling interests, and foreign operations, partially offset by state income tax. The effective income tax rate for the nine months ended September 30, 2021, varied from the U.S. federal statutory income tax rate of 21%, primarily due to the discrete tax treatment of the Alliance Refinery impairment, income attributable to noncontrolling interests, foreign operations and enacted income tax rate changes, partially offset by state income tax.
We received a U.S. federal income tax refund of $1.1 billion in the second quarter of 2021.
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Note 19—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. In June 2021, Phillips 66 Partners repurchased 368,528 of its outstanding perpetual convertible preferred units for $24 million in cash. Upon the repurchase, these preferred units were canceled and are no longer outstanding. At September 30, 2021, 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 13.5 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 2021 | December 31 2020 | ||||||||||
| Equity investments* | $ | 2,941 | 3,244 | ||||||||
| Net properties, plants and equipment | 3,693 | 3,639 | |||||||||
| Short-term debt | 450 | 465 | |||||||||
| Long-term debt | 3,446 | 3,444 | |||||||||
| * Included in the “Investments and long-term receivables” line item on the Phillips 66 consolidated balance sheet. | |||||||||||
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, Texas, and the Sweeny area, including our Sweeny Refinery. Phillips 66 Partners has a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. In December 2018, a third party acquired 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’ effective ownership interest in Gray Oak Pipeline, LLC is 42.25%, after considering the 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’ investments in Dakota Access and ETCO, and Liberty.
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Pending Merger
On October 26, 2021, we entered into a definitive merger agreement with Phillips 66 Partners to acquire all of the publicly held common units representing limited partner interests in Phillips 66 Partners not already owned by us on the closing date of the transaction. The agreement provides for an all-stock transaction in which each outstanding Phillips 66 Partners common unitholder would receive 0.50 shares of Phillips 66 common stock for each Phillips 66 Partners common unit. Phillips 66 Partners’ perpetual convertible preferred units will be converted into common units at a premium to the original issuance price prior to exchange for Phillips 66 common stock. This merger is expected to close in the first quarter of 2022, subject to customary closing conditions.
Based on the closing market prices of Phillips 66 common stock and Phillips 66 Partners common units on October 26, 2021, we currently expect to issue approximately 42 million shares of our common stock with a value of approximately $3.4 billion on the closing date of this transaction. The number of shares of common stock we will issue and the value of those shares are subject to change until the merger is closed.
Upon closing, Phillips 66 Partners will become a wholly owned subsidiary of Phillips 66 and will no longer be a publicly traded partnership. This transaction will be accounted for as an equity transaction and after the closing we will no longer reflect the ownership interest previously held by Phillips 66 Partners’ publicly held common and perpetual convertible preferred unitholders as a noncontrolling interest on our consolidated balance sheet nor will we attribute a portion of Phillips 66 Partners’ net income to these former unitholders on our consolidated statement of operations.
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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” or “loss” as used in Management’s Discussion and Analysis refer to net income (loss) attributable to Phillips 66. The terms “results,” “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, 2021, we had total assets of $56 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 disrupt economic activities globally. Reduced demand for refined petroleum products resulted in low refining margins and decreased volumes through refineries and logistics infrastructure in 2020. Global refined product demand has been steadily recovering through 2021 due to the easing of pandemic restrictions and the administration of COVID-19 vaccines. Consequently, refining margins have improved, as has volume throughput. The depth and duration of the economic consequences of the COVID-19 pandemic remain uncertain and we continue to monitor our asset and investment portfolio. The consequences of the sustained disruption of economic activities by the pandemic may include additional asset impairments and portfolio rationalization in the future.
In the third quarter of 2021, we reported earnings of $402 million and generated cash from operating activities of $2.2 billion. We used available cash to fund capital expenditures and investments of $552 million, including our strategic investment in NOVONIX Limited (NOVONIX), repay the $500 million of outstanding borrowings under our 364-day delayed draw term loan facility due November 2023, and pay dividends on our common stock of $394 million. We ended the third quarter of 2021 with $2.9 billion of cash and cash equivalents and approximately $5.7 billion of total committed capacity available under our revolving credit facilities.
In September 2021, we announced a set of company-wide greenhouse gas (GHG) emissions reduction targets that are impactful, attainable and measurable. By 2030, we expect to reduce GHG emissions intensity by 30% for Scope 1 and 2 emissions from our operations and by 15% for Scope 3 emissions from our energy products, below 2019 levels. Also in September 2021, we acquired a 16% interest in NOVONIX, a Brisbane, Australia-based company that develops and supplies materials for lithium-ion batteries. This investment reflects our commitment to building a lower-carbon business platform.
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On October 26, 2021, we entered into a definitive merger agreement with Phillips 66 Partners to acquire all of the publicly held common units representing limited partner interests in Phillips 66 Partners not already owned by us on the closing date of the transaction. The agreement provides for an all-stock transaction in which each outstanding Phillips 66 Partners common unitholder would receive 0.50 shares of Phillips 66 common stock for each Phillips 66 Partners common unit. Phillips 66 Partners’ perpetual convertible preferred units will be converted into common units at a premium to the original issuance price prior to exchange for Phillips 66 common stock. This merger is expected to close in the first quarter of 2022, subject to customary closing conditions. Upon closing, Phillips 66 Partners will become a wholly owned subsidiary of Phillips 66 and will no longer be a publicly traded partnership. See Note 19—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the pending merger transaction.
Business Environment
The Midstream segment includes our Transportation and NGL businesses. Our Transportation business contains fee-based operations that are not directly exposed to commodity price risk. Our NGL business contains both fee-based operations and operations that are directly impacted by NGL prices. The Midstream segment also includes our 50% equity investment in DCP Midstream, LLC (DCP Midstream). During the third quarter of 2021, NGL prices increased significantly, compared with the third quarter of 2020, due to strong demand as economic activities gradually recovered following the administration of COVID-19 vaccines and the easing of pandemic restrictions.
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 2021, the benchmark high-density polyethylene chain margin increased significantly, compared with the third quarter of 2020. This significant increase was due to continued strong demand and tight supply.
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, increased to an average of $70.58 per barrel during the third quarter of 2021, compared with an average of $40.91 per barrel in the third quarter of 2020. 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 2021, worldwide market crack spreads were significantly higher than the third quarter of 2020. The increases in crude oil prices and market crack spreads were mainly driven by a significant increase in demand for refined petroleum products, as economic activities gradually recovered following the administration of COVID-19 vaccines and the easing of pandemic restrictions, as well as a tightening supply. In addition, in the third quarter of 2021, renewable identification number (RIN) costs increased significantly, compared with the third quarter of 2020.
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 resulted in reduced demand for refined petroleum and specialty products since March 2020. Following the administration of COVID-19 vaccines in 2021 and the easing of pandemic restrictions, demand for refined petroleum and specialty products in the third quarter of 2021 has improved, compared with the third quarter of 2020.
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RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three and nine months ended September 30, 2021, is based on a comparison with the corresponding periods of 2020.
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 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Midstream | $ | 629 | 146 | 1,017 | (232) | |||||||||||||||
| Chemicals | 631 | 231 | 1,408 | 442 | ||||||||||||||||
| Refining | (1,126) | (1,903) | (2,895) | (5,042) | ||||||||||||||||
| Marketing and Specialties | 545 | 415 | 1,311 | 1,214 | ||||||||||||||||
| Corporate and Other | (231) | (239) | (728) | (655) | ||||||||||||||||
| Income (loss) before income taxes | 448 | (1,350) | 113 | (4,273) | ||||||||||||||||
| Income tax benefit | (40) | (624) | (110) | (1,053) | ||||||||||||||||
| Net income (loss) | 488 | (726) | 223 | (3,220) | ||||||||||||||||
| Less: net income attributable to noncontrolling interests | 86 | 73 | 179 | 216 | ||||||||||||||||
| Net income (loss) attributable to Phillips 66 | $ | 402 | (799) | 44 | (3,436) | |||||||||||||||
Our net income attributable to Phillips 66 in the third quarter of 2021 was $402 million, compared with a net loss attributable to Phillips 66 of $799 million in third quarter of 2020. The improvement was primarily due to:
•Improved realized refining margins.
•Higher equity earnings from CPChem.
•An unrealized gain on our investment in NOVONIX in our Midstream segment.
These improvements were partially offset by a lower income tax benefit and higher impairments.
Our net income attributable to Phillips 66 for the nine months ended September 30, 2021, was $44 million, compared with a net loss attributable to Phillips 66 of $3,436 million for the nine months ended September 30, 2020. The improvement was primarily driven by:
•Lower impairments.
•Improved realized refining margins.
•Increased equity earnings from CPChem.
These improvements were partially offset by a lower income tax benefit.
See the “Segment Results” section for additional information on our segment performance, and Note 5—Investments, Loans and Long-Term Receivables, Note 7—Impairments, and Note 18—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information on our investment in NOVONIX, impairments and income taxes, respectively.
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Statement of Operations Analysis
Sales and other operating revenues for the third quarter and nine-month period of 2021 increased 90% and 65%, respectively, and purchased crude oil and products increased 90% and 71%, respectively. These increases were mainly due to higher prices for refined petroleum products, crude oil and NGL, as well as increased volumes.
Equity in earnings of affiliates increased $633 million and $1,226 million in the third quarter and nine-month period of 2021, respectively. The increase in both periods was primarily due to higher equity earnings from CPChem mainly driven by increased margins, WRB Refining LP (WRB) resulting from improved realized refining margins and refinery production, and Excel Paralubes LLC (Excel) attributable to higher base oil margins. See Chemicals segment analysis in the “Segment Results” section for additional information on CPChem.
Net gain on dispositions decreased 87% in the nine-month period of 2021, primarily due to a before-tax gain of $84 million recognized in the second quarter of 2020 associated with a co-venturer’s acquisition of an ownership interest in the consolidated holding company that owns an interest in Gray Oak Pipeline, LLC. See Note 19—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information regarding the gain recognition.
Other income increased $218 million and $256 million in the third quarter and nine-month period of 2021, respectively. The increase in both periods was primarily due to an unrealized gain of $224 million related to the change in fair value of our investment in NOVONIX, which we acquired in the third quarter of 2021.
Operating expenses increased 15% and 10% in the third quarter and nine-month period of 2021, respectively. The increase in the third quarter of 2021 was primarily driven by higher utility, turnaround, maintenance and repair costs. The increase in the nine-month period was mainly due to higher utility costs, and increased maintenance and repair costs primarily driven by the winter storms that occurred in the Central and Gulf Coast regions in February 2021.
Selling, general and administrative expenses increased 10% and 14% in the third quarter and nine-month period of 2021, respectively. The increase in both periods was primarily due to increased employee-related expenses, as well as higher selling expenses due to rising refined petroleum product prices and demand. The increase in the nine-month period also reflects a benefit received from a legal settlement in the first quarter of 2020.
Impairments increased $158 million in the third quarter of 2021 and decreased $2,650 million in the nine-month period of 2021. See Note 7—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments.
Taxes other than income taxes decreased 20% in the third quarter of 2021, primarily driven by tax credits received from renewable diesel blending activity at our San Francisco Refinery in the third quarter of 2021.
Interest and debt expense increased 14% and 22% in the third quarter and nine-month period of 2021, respectively. The increase in both periods was primarily driven by lower capitalized interest due to the completion of capital projects and the placement of assets into service, as well as higher average debt principal balances.
Income tax benefit decreased 94% and 90% in the third quarter and nine-month period of 2021, respectively. See Note 18—Income Taxes, in the Notes to Consolidated Financial Statements, for discussion on the effective income tax rates.
Net income attributable to noncontrolling interests increased 18% in the third quarter of 2021 and decreased 17% in the nine-month period of 2021. The increase in the third quarter of 2021 was primarily due to higher net income from Phillips 66 Partners. The decrease in the nine-month period of 2021 was primarily due to lower net income from Phillips 66 Partners resulting from the before-tax impairment of $198 million associated with its investment in the Liberty Pipeline project. See Note 7—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding the impairment.
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Segment Results
Midstream
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Millions of Dollars | ||||||||||||||||||||
| Income (Loss) Before Income Taxes | ||||||||||||||||||||
| Transportation | $ | 244 | (3) | 475 | 411 | |||||||||||||||
| NGL and Other | 354 | 99 | 468 | 356 | ||||||||||||||||
| DCP Midstream | 31 | 50 | 74 | (999) | ||||||||||||||||
| Total Midstream | $ | 629 | 146 | 1,017 | (232) | |||||||||||||||
| Thousands of Barrels Daily | ||||||||||||||||||||
| Transportation Volumes | ||||||||||||||||||||
| Pipelines* | 3,483 | 3,076 | 3,238 | 3,032 | ||||||||||||||||
| Terminals | 2,771 | 2,966 | 2,744 | 2,999 | ||||||||||||||||
| Operating Statistics | ||||||||||||||||||||
| NGL fractionated** | 420 | 217 | 395 | 195 | ||||||||||||||||
| NGL production*** | 398 | 414 | 387 | 395 | ||||||||||||||||
* 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 | $ | 0.91 | 0.44 | 0.77 | 0.38 | |||||||||||||||
| * 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, our 50% equity investment in DCP Midstream, which includes the operations of DCP Midstream, LP (DCP Partners), its MLP, and our investment in NOVONIX.
Results from our Midstream segment increased $483 million and $1,249 million in the third quarter and nine-month period of 2021, respectively.
Results from our Transportation business increased $247 million and $64 million in the third quarter and nine-month period of 2021, respectively. The increase in the third quarter of 2021 reflects before-tax impairments of $204 million recorded in the third quarter of 2020 for the pipeline and terminal assets associated with the planned reconfiguration of our San Francisco Refinery into a renewable fuels plant and the cancellation of the Red Oak Pipeline project. Excluding these impairments, the increase in the third quarter of 2021 was primarily due to higher earnings from equity affiliates driven by increased volumes. The increase in the nine-month period of 2021 was primarily due to increased earnings from equity affiliates, and higher pipeline volumes and margins from our consolidated assets. Increased pipeline volumes were mainly driven by higher refinery utilization. The increase in the nine-month period of 2021 was partially offset by a before-tax gain of $84 million recognized in the second quarter of 2020 associated with a co-venturer’s acquisition of an ownership interest in the consolidated holding company that owns an interest in Gray Oak Pipeline, LLC.
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Results from our NGL and Other business increased $255 million and $112 million in the third quarter and nine-month period of 2021, respectively. The increase in both periods was primarily due to an unrealized gain of $224 million related to the change in fair value of our investment in NOVONIX, which we acquired in the third quarter of 2021. The increase in the third quarter of 2021 also reflects higher fractionation volumes from the startup of Fracs 2 and 3 at the Sweeny Hub in late 2020. The increase in the nine-month period of 2021 was partially offset by trading inventory impacts and higher operating expenses due to the winter storms that occurred in the Gulf Coast region in February 2021.
Results from our investment in DCP Midstream decreased $19 million in the third quarter of 2021, and increased $1,073 million in the nine-month period of 2021. The decrease in the third quarter of 2021 was primarily due to unfavorable impacts from DCP Midstream’s commodity price risk management activities. The increase in the nine-month period of 2021 reflects a $1,161 million before-tax impairment of our investment in DCP Midstream recorded in the first quarter of 2020. Excluding the impairment, results from our investment in DCP Midstream decreased $88 million in the nine-month period of 2021, mainly driven by unfavorable impacts from DCP Midstream’s commodity price risk management activities.
See Note 7—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments in our Midstream segment.
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 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Millions of Dollars | ||||||||||||||||||||
| Income Before Income Taxes | $ | 631 | 231 | 1,408 | 442 | |||||||||||||||
| Millions of Pounds | ||||||||||||||||||||
| CPChem Externally Marketed Sales Volumes* | ||||||||||||||||||||
| Olefins and Polyolefins | 4,912 | 5,069 | 14,260 | 15,559 | ||||||||||||||||
| Specialties, Aromatics and Styrenics | 1,216 | 1,120 | 3,431 | 3,322 | ||||||||||||||||
| 6,128 | 6,189 | 17,691 | 18,881 | |||||||||||||||||
| * 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) | 102 | % | 94 | 94 | 98 | |||||||||||||||
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, Aromatics and Styrenics (SA&S).
Results from the Chemicals segment increased $400 million and $966 million in the third quarter and nine-month period of 2021, respectively. The increase in both periods was primarily driven by improved margins, partially offset by higher utility, turnaround, maintenance and repair costs. The increase in the third quarter of 2021 was also partially offset by a favorable lower-of-cost-or-market inventory adjustment recorded in the third quarter of 2020 attributable to petrochemical product price recovery.
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 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Millions of Dollars | ||||||||||||||||||||
| Income (Loss) Before Income Taxes | ||||||||||||||||||||
| Atlantic Basin/Europe | $ | 90 | (199) | (173) | (1,063) | |||||||||||||||
| Gulf Coast | (1,333) | (405) | (1,850) | (1,613) | ||||||||||||||||
| Central Corridor | 229 | (132) | (101) | (463) | ||||||||||||||||
| West Coast | (112) | (1,167) | (771) | (1,903) | ||||||||||||||||
| Worldwide | $ | (1,126) | (1,903) | (2,895) | (5,042) | |||||||||||||||
| Dollars Per Barrel | ||||||||||||||||||||
| Income (Loss) Before Income Taxes | ||||||||||||||||||||
| Atlantic Basin/Europe | $ | 1.88 | (4.61) | (1.23) | (8.60) | |||||||||||||||
| Gulf Coast | (20.82) | (7.86) | (9.84) | (9.13) | ||||||||||||||||
| Central Corridor | 8.68 | (5.35) | (1.45) | (6.73) | ||||||||||||||||
| West Coast | (3.67) | (38.12) | (9.11) | (22.59) | ||||||||||||||||
| Worldwide | (6.67) | (12.69) | (6.00) | (11.12) | ||||||||||||||||
| Realized Refining Margins* | ||||||||||||||||||||
| Atlantic Basin/Europe | $ | 9.27 | 1.65 | 6.28 | 1.86 | |||||||||||||||
| Gulf Coast | 5.75 | (0.61) | 3.72 | 2.40 | ||||||||||||||||
| Central Corridor | 12.47 | 4.46 | 8.53 | 8.09 | ||||||||||||||||
| West Coast | 7.46 | 2.23 | 4.83 | 3.94 | ||||||||||||||||
| Worldwide | 8.57 | 1.78 | 5.68 | 3.91 | ||||||||||||||||
* 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 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||
| Refining operations* | ||||||||||||||||||||
| Atlantic Basin/Europe | ||||||||||||||||||||
| Crude oil capacity | 537 | 537 | 537 | 537 | ||||||||||||||||
| Crude oil processed | 487 | 432 | 479 | 424 | ||||||||||||||||
| Capacity utilization (percent) | 91 | % | 81 | 89 | 79 | |||||||||||||||
| Refinery production | 523 | 473 | 519 | 454 | ||||||||||||||||
| Gulf Coast | ||||||||||||||||||||
| Crude oil capacity | 784 | 769 | 784 | 769 | ||||||||||||||||
| Crude oil processed | 623 | 506 | 621 | 586 | ||||||||||||||||
| Capacity utilization (percent) | 80 | % | 66 | 79 | 76 | |||||||||||||||
| Refinery production | 700 | 563 | 689 | 647 | ||||||||||||||||
| Central Corridor | ||||||||||||||||||||
| Crude oil capacity | 531 | 530 | 531 | 530 | ||||||||||||||||
| Crude oil processed | 493 | 455 | 447 | 437 | ||||||||||||||||
| Capacity utilization (percent) | 93 | % | 86 | 84 | 82 | |||||||||||||||
| Refinery production | 510 | 469 | 461 | 451 | ||||||||||||||||
| West Coast | ||||||||||||||||||||
| Crude oil capacity | 364 | 364 | 364 | 364 | ||||||||||||||||
| Crude oil processed | 302 | 311 | 286 | 285 | ||||||||||||||||
| Capacity utilization (percent) | 83 | % | 85 | 78 | 78 | |||||||||||||||
| Refinery production | 329 | 334 | 308 | 307 | ||||||||||||||||
| Worldwide | ||||||||||||||||||||
| Crude oil capacity | 2,216 | 2,200 | 2,216 | 2,200 | ||||||||||||||||
| Crude oil processed | 1,905 | 1,704 | 1,833 | 1,732 | ||||||||||||||||
| Capacity utilization (percent) | 86 | % | 77 | 83 | 79 | |||||||||||||||
| Refinery production | 2,062 | 1,839 | 1,977 | 1,859 | ||||||||||||||||
| * Includes our share of equity affiliates. | ||||||||||||||||||||
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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 increased $777 million and $2,147 million in the third quarter and nine-month period of 2021, respectively. The increase in the third quarter was primarily due to improved realized refining margins, partially offset by higher impairments and increased utility, turnaround, maintenance and repair costs. The increase in the nine-month period was primarily due to improved realized refining margins and lower impairments, partially offset by higher utility, maintenance and repair costs. The improved realized refining margins in both periods were mainly attributable to increased market crack spreads, partially offset by higher RIN costs, lower clean product differentials, and decreased secondary products margins.
Our worldwide refining crude oil capacity utilization rate was 86% and 83% in the third quarter and nine-month period of 2021, respectively, compared with 77% and 79% in the third quarter and nine-month period of 2020, respectively. The increase in both periods was primarily driven by improved market demand for refined petroleum products following the administration of COVID-19 vaccines and the easing of pandemic restrictions since the beginning of 2021. During the third quarter of 2021, our Alliance Refinery sustained significant impacts from Hurricane Ida and is expected to remain shut down through the fourth quarter of 2021.
See Note 7—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments in our Refining segment.
See the “Executive Overview and Business Environment” section for information on market factors impacting this quarter’s results.
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Marketing and Specialties
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Millions of Dollars | ||||||||||||||||||||
| Income Before Income Taxes | ||||||||||||||||||||
| Marketing and Other | $ | 452 | 365 | 1,052 | 1,091 | |||||||||||||||
| Specialties | 93 | 50 | 259 | 123 | ||||||||||||||||
| Total Marketing and Specialties | $ | 545 | 415 | 1,311 | 1,214 | |||||||||||||||
| Dollars Per Barrel | ||||||||||||||||||||
| Income Before Income Taxes | ||||||||||||||||||||
| U.S. | $ | 1.93 | 1.74 | 1.84 | 1.60 | |||||||||||||||
| International | 4.84 | 5.01 | 3.09 | 5.16 | ||||||||||||||||
| Realized Marketing Fuel Margins* | ||||||||||||||||||||
| U.S. | $ | 2.29 | 2.23 | 2.30 | 2.03 | |||||||||||||||
| International | 6.75 | 6.28 | 4.63 | 6.78 | ||||||||||||||||
* 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 | $ | 2.65 | 1.62 | 2.39 | 1.57 | |||||||||||||||
| Distillates | 2.48 | 1.41 | 2.25 | 1.45 | ||||||||||||||||
| * On third-party branded petroleum product sales, excluding excise taxes. | ||||||||||||||||||||
| Thousands of Barrels Daily | ||||||||||||||||||||
| Marketing Petroleum Products Sales Volumes | ||||||||||||||||||||
| Gasoline | 1,189 | 1,080 | 1,130 | 1,029 | ||||||||||||||||
| Distillates | 1,074 | 863 | 947 | 915 | ||||||||||||||||
| Other | 17 | 15 | 18 | 17 | ||||||||||||||||
| Total | 2,280 | 1,958 | 2,095 | 1,961 | ||||||||||||||||
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 increased $130 million and $97 million in the third quarter and nine-month period of 2021, respectively. The increase in the third quarter of 2021 was primarily due to higher realized U.S. marketing fuel margins and sales volumes, both driven by improved market demand for refined petroleum products, and increased equity earnings from Excel attributable to improved base oil margins. The increase in the nine-month period of 2021 was primarily driven by higher realized U.S. marketing fuel margins and increased equity earnings from Excel attributable to improved base oil margins. The increase in the nine-month period was partially offset by lower realized international marketing fuel margins resulting from rising spot prices, and decreased margins from chartered marine vessels.
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 | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||
| Loss Before Income Taxes | ||||||||||||||||||||
| Net interest expense | $ | (148) | (131) | (432) | (348) | |||||||||||||||
| Corporate overhead and other | (83) | (108) | (296) | (307) | ||||||||||||||||
| Total Corporate and Other | $ | (231) | (239) | (728) | (655) | |||||||||||||||
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 $17 million and $84 million in the third quarter and nine-month period of 2021, respectively. The increase in both periods was primarily driven by lower capitalized interest due to the completion of capital projects and the placement of assets into service, as well as higher average debt principal balances.
Corporate overhead and other decreased $25 million and $11 million in the third quarter and nine-month period of 2021, respectively. The decrease in both periods was primarily due to a property impairment charge of $25 million in the third quarter of 2020. The decrease in the nine-month period was partially offset by higher environmental costs.
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CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
| Millions of Dollars, Except as Indicated | |||||||||||
| September 30 2021 | December 31 2020 | ||||||||||
| Cash and cash equivalents | $ | 2,897 | 2,514 | ||||||||
| Short-term debt | 1,489 | 987 | |||||||||
| Total debt | 14,910 | 15,893 | |||||||||
| Total equity | 20,597 | 21,523 | |||||||||
| Percent of total debt to capital* | 42% | 42 | |||||||||
| Percent of floating-rate debt to total debt | 6% | 12 | |||||||||
| * 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 2021, we generated $4.2 billion of cash from operations, including a U.S. federal income tax refund of $1.1 billion. We used available cash primarily for capital expenditures and investments of $1.3 billion, dividend payments on our common stock of $1.2 billion, net debt repayment of $1.0 billion, and an additional member loan to an equity affiliate of $310 million. During the first nine months of 2021, cash and cash equivalents increased $383 million to $2.9 billion.
Significant Sources of Capital
Operating Activities
During the first nine months of 2021, cash generated by operating activities was $4.2 billion, compared with $1.5 billion for the first nine months of 2020. The increase was primarily due to improved realized refining margins, a U.S. federal income tax refund of $1.1 billion received in the second quarter of 2021, and higher cash distributions from our equity affiliates.
Our short- and long-term operating cash flows are highly dependent upon refining and marketing margins, NGL prices and chemicals margins. Prices and margins in our industry are typically volatile, and are driven by market conditions over which we have little or no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows.
The level and quality of output from our refineries also 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 any variability in their operations typically has not been as significant to cash flows as that caused by margins and prices.
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 2021, cash from operations included distributions of $2.0 billion from our equity affiliates, compared with $1.1 billion during the same period of 2020. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these equity affiliates are not assured.
Tax Refunds
We received a U.S. federal income tax refund of $1.1 billion in the second quarter of 2021.
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Revolving Credit Facilities and Commercial Paper
At both September 30, 2021, and December 31, 2020, no amount had been drawn under Phillips 66’s $5 billion revolving credit facility or uncommitted $5 billion commercial paper program. At September 30, 2021, no borrowings were outstanding and $1 million in letters of credit had been drawn under Phillips 66 Partners’ $750 million revolving credit facility, compared with outstanding borrowings of $415 million and $1 million in letters of credit drawn under the facility at December 31, 2020.
Term Loan Agreement
On April 6, 2021, Phillips 66 Partners entered into a $450 million term loan agreement and borrowed the full amount. The term loan agreement has a maturity date of April 5, 2022, and the outstanding borrowings can be repaid at any time and from time to time, in whole or in part, without premium or penalty. Borrowings bear interest at a floating rate based on either a Eurodollar rate or a reference rate, plus a margin of 0.875%. Proceeds were primarily used to repay amounts borrowed under Phillips 66 Partners’ $750 million revolving credit facility.
Off-Balance Sheet Arrangements
Lease Residual Value Guarantees
Under the operating lease agreement for our headquarters facility in Houston, Texas, we have the option, at the end of the lease term in September 2025, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at September 30, 2021. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling $209 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 2020, the trial court presiding over litigation regarding the Dakota Access Pipeline ordered the U.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) relating to an easement under Lake Oahe in North Dakota and later vacated the easement. Although the easement has been vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS, which is expected to be completed in the second half of 2022. In May 2021, the court denied a request for an injunction to shut down the pipeline while the EIS is being prepared and in June 2021, dismissed the litigation. It is possible that the litigation could be reopened or new litigation challenging the EIS, once completed, could be filed. In September 2021, Dakota Access filed a writ of certiorari, requesting the U.S. Supreme Court to review the lower court’s judgment that ordered the EIS and vacated the easement.
Dakota Access and ETCO have guaranteed repayment of $2.5 billion aggregate principal amount of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access. 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 in certain circumstances relating to the litigation described above. At September 30, 2021, Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU was approximately $631 million.
If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, Phillips 66 Partners also could be required 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.
See Note 10—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.
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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, 2021, and December 31, 2020, was $14.9 billion and $15.9 billion, respectively. Our total debt-to-capital ratio was 42% at both September 30, 2021, and December 31, 2020.
In September 2021, Phillips 66 repaid the $500 million of outstanding borrowings under its 364-day delayed draw term loan facility due November 2023, and classified $1 billion of its debt due within a year to long-term debt based on its intent and ability to refinance the obligation with long-term debt.
In April 2021, Phillips 66 Partners repaid $50 million of its tax-exempt bonds upon maturity.
In February 2021, Phillips 66 repaid $500 million outstanding principal balance of its floating-rate senior notes upon maturity.
In the fourth quarter of 2021, we expect to repay approximately $500 million of debt.
Joint Venture Loans
We and our co-venturer provided member loans to WRB. At September 30, 2021, our 50% share of the outstanding member loan balance, including accrued interest, was $593 million. The need for additional loans to WRB in the remainder of 2021, as well as WRB’s repayment schedule, will depend on market conditions.
Pending Merger with Phillips 66 Partners
On October 26, 2021, we entered into a definitive merger agreement with Phillips 66 Partners to acquire all of the publicly held common units representing limited partner interests in Phillips 66 Partners not already owned by us on the closing date of the transaction. The agreement provides for an all-stock transaction in which each outstanding Phillips 66 Partners common unitholder would receive 0.50 shares of Phillips 66 common stock for each Phillips 66 Partners common unit. Phillips 66 Partners’ perpetual convertible preferred units will be converted into common units at a premium to the original issuance price prior to exchange for Phillips 66 common stock. This merger is expected to close in the first quarter of 2022, subject to customary closing conditions.
Based on the closing market prices of Phillips 66 common stock and Phillips 66 Partners common units on October 26, 2021, we currently expect to issue approximately 42 million shares of our common stock with a value of approximately $3.4 billion on the closing date of this transaction. The number of shares of common stock we will issue and the value of those shares are subject to change until the merger is closed. See Note 19—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the pending merger transaction.
Dividends
On July 14, 2021, our board of directors declared a quarterly cash dividend of $0.90 per common share. The dividend was paid on September 1, 2021, to shareholders of record as of the close of business on August 18, 2021. On October 8, 2021, our board of directors declared a quarterly cash dividend of $0.92 per common share. This dividend is payable on December 1, 2021, to shareholders of record as of the close of business on November 17, 2021.
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 program 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 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 a joint venture partner.
| Millions of Dollars | |||||||||||
| Nine Months Ended September 30 | |||||||||||
| 2021 | 2020 | ||||||||||
| Capital Expenditures and Investments | |||||||||||
| Midstream | $ | 569 | 1,556 | ||||||||
| Chemicals | — | — | |||||||||
| Refining | 528 | 577 | |||||||||
| Marketing and Specialties | 72 | 139 | |||||||||
| Corporate and Other | 94 | 142 | |||||||||
| Total Capital Expenditures and Investments | 1,263 | 2,414 | |||||||||
| Less: capital spending funded by a joint venture partner* | — | 64 | |||||||||
| Adjusted Capital Spending | $ | 1,263 | 2,350 | ||||||||
Selected Equity Affiliates** | |||||||||||
| DCP Midstream | $ | 36 | 102 | ||||||||
| CPChem | 239 | 204 | |||||||||
| WRB | 167 | 110 | |||||||||
| $ | 442 | 416 | |||||||||
* Included in the Midstream segment.
** Our share of joint venture’s capital spending.
Midstream
During the first nine months of 2021, capital spending in our Midstream segment included:
•Investments in NOVONIX and a renewable feedstock processing plant.
•Construction activities on Phillips 66 Partners’ C2G Pipeline, a new 16-inch ethane pipeline that connects Phillips 66 Partners’ Clemens Caverns storage facility to petrochemical facilities in Gregory, Texas, near Corpus Christi, Texas.
•Contributions to Dakota Access by Phillips 66 Partners for a pipeline optimization project.
•Continued development of additional Gulf Coast fractionation capacity at the Sweeny Hub.
•Contributions by Phillips 66 Partners to complete the South Texas Gateway Terminal development activities.
•Spending associated with other return, reliability, and maintenance projects in our Transportation and NGL businesses.
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Chemicals
During the first nine months of 2021, on a 100% basis, CPChem’s capital expenditures and investments were $478 million. The capital spending was primarily for sustaining, debottlenecking and optimization projects on existing assets, as well as growth projects. CPChem’s capital program was self-funded, and we expect CPChem to continue self-funding its capital program for the remainder of 2021.
Refining
Capital spending for the Refining segment during the first nine months of 2021 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.
In the second quarter of 2021, we started up facilities to improve product value at our Ponca City Refinery and facilities to provide flexibility to produce renewable diesel at our San Francisco Refinery. Other major construction activities included installation of facilities to improve product value at the jointly owned Wood River Refinery.
Marketing and Specialties
Capital spending for the M&S segment during the first nine months of 2021 was primarily for an investment in a retail marketing joint venture in the Central region and the development and enhancement of retail sites in Europe.
Corporate and Other
Capital spending for Corporate and Other during the first nine months of 2021 was primarily for information technology and facilities.
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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 uncertain.
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.
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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 international and federal environmental laws and regulations to which we are subject, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report on Form 10-K.
We are required to purchase RINs in the open market to satisfy the portion of our obligation under the Renewable Fuel Standard (RFS) that is not fulfilled by blending renewable fuels into the motor fuels we produce. For the nine months ended September 30, 2021 and 2020, we incurred expenses of $584 million and $227 million, respectively, associated with our obligation to purchase RINs in the open market to comply with the RFS for our wholly owned refineries. These expenses are included in the “Purchased crude oil and products” line item on our consolidated statement of operations. Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $284 million and $88 million for the nine months ended September 30, 2021 and 2020, respectively. These expenses are included in the “Equity in earnings of affiliates” line item on our consolidated statement of operations. The amount of these expenses and fluctuations between periods is primarily driven by the market price of RINs, refinery production and blending activities.
We occasionally receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging that we are a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. At September 30, 2021, and December 31, 2020, we had been notified of potential liability under CERCLA and comparable state laws at 25 sites within the United States.
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 those costs and liabilities could 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 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 2020 Annual Report on Form 10-K.
In September 2021, we announced a set of company-wide GHG emissions reduction targets that are impactful, attainable and measurable. By 2030, we expect to reduce GHG emissions intensity by 30% for Scope 1 and 2 emissions from our operations and by 15% for Scope 3 emissions from our energy products, below 2019 levels.
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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GUARANTOR FINANCIAL INFORMATION
At September 30, 2021, Phillips 66 had $10.8 billion of senior unsecured notes outstanding guaranteed by Phillips 66 Company, a direct, wholly owned operating subsidiary of Phillips 66. Phillips 66 conducts substantially all of its operations through subsidiaries, including Phillips 66 Company, and those subsidiaries generate substantially all of its operating income and cash flow. The guarantees (1) are unsecured obligations of Phillips 66 Company, (2) rank equally with all of Phillips 66 Company’s other unsecured and unsubordinated indebtedness, and (3) are full and unconditional.
Summarized financial information of Phillips 66 and Phillips 66 Company (the Obligor Group) is presented on a combined basis. Intercompany transactions among the members of the Obligor Group have been eliminated. The financial information of non-guarantor subsidiaries has been excluded from the summarized financial information. Significant intercompany transactions and receivable/payable balances between the Obligor Group and non-guarantor subsidiaries are presented separately in the summarized financial information.
The summarized results of operations for the nine months ended September 30, 2021, and the summarized financial position at September 30, 2021, and December 31, 2020, for the Obligor Group on a combined basis were:
| Summarized Combined Statement of Operations | Millions of Dollars | ||||
| Nine Months Ended September 30, 2021 | |||||
| Sales and other operating revenues | $ | 61,089 | |||
| Revenues and other income—non-guarantor subsidiaries | 3,527 | ||||
| Purchased crude oil and products—third parties | 38,250 | ||||
| Purchased crude oil and products—related parties | 9,659 | ||||
| Purchased crude oil and products—non-guarantor subsidiaries | 12,620 | ||||
| Impairments | 1,288 | ||||
| Loss before income taxes | (677) | ||||
| Net loss | (413) | ||||
| Millions of Dollars | ||||||||||||||
| Summarized Combined Balance Sheet | September 30 2021 | December 31 2020 | ||||||||||||
| Accounts and notes receivable—third parties | $ | 4,176 | 4,060 | |||||||||||
| Accounts and notes receivable—related parties | 1,420 | 804 | ||||||||||||
| Due from non-guarantor subsidiaries, current | 316 | 288 | ||||||||||||
| Total current assets | 10,685 | 8,965 | ||||||||||||
| Investments and long-term receivables | 10,052 | 9,229 | ||||||||||||
| Net properties, plants and equipment | 11,499 | 12,815 | ||||||||||||
| Goodwill | 1,047 | 1,047 | ||||||||||||
| Due from non-guarantor subsidiaries, noncurrent | 5,647 | 6,173 | ||||||||||||
| Other assets associated with non-guarantor subsidiaries | 2,664 | 2,870 | ||||||||||||
| Total noncurrent assets | 32,750 | 34,034 | ||||||||||||
| Total assets | 43,435 | 42,999 | ||||||||||||
| Due to non-guarantor subsidiaries, current | $ | 2,167 | 2,203 | |||||||||||
| Total current liabilities | 11,062 | 7,938 | ||||||||||||
| Long-term debt | 9,830 | 11,330 | ||||||||||||
| Due to non-guarantor subsidiaries, noncurrent | 9,533 | 9,316 | ||||||||||||
| Total noncurrent liabilities | 24,408 | 26,044 | ||||||||||||
| Total liabilities | 35,470 | 33,982 | ||||||||||||
| Total equity | 7,965 | 9,017 | ||||||||||||
| Total liabilities and equity | 43,435 | 42,999 | ||||||||||||
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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) 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 “Executive Overview and Business Environment—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 refining 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, 2021 | |||||||||||||||||
| Income (loss) before income taxes | $ | 90 | (1,333) | 229 | (112) | (1,126) | |||||||||||
| Plus: | |||||||||||||||||
| Taxes other than income taxes | 15 | 13 | 12 | 4 | 44 | ||||||||||||
| Depreciation, amortization and impairments | 52 | 1,361 | 34 | 57 | 1,504 | ||||||||||||
| Selling, general and administrative expenses | 19 | 15 | 10 | 11 | 55 | ||||||||||||
| Operating expenses | 239 | 312 | 126 | 266 | 943 | ||||||||||||
| Equity in (earnings) losses of affiliates | 3 | 1 | (31) | — | (27) | ||||||||||||
| Other segment (income) expense, net | 6 | (1) | — | 2 | 7 | ||||||||||||
| Proportional share of refining gross margins contributed by equity affiliates | 19 | — | 201 | — | 220 | ||||||||||||
| Realized refining margins | $ | 443 | 368 | 581 | 228 | 1,620 | |||||||||||
Total processed inputs (thousands of barrels) | 47,792 | 64,016 | 26,373 | 30,558 | 168,739 | ||||||||||||
Adjusted total processed inputs (thousands of barrels)* | 47,792 | 64,016 | 46,592 | 30,558 | 188,958 | ||||||||||||
Income (loss) before income taxes per barrel (dollars per barrel)** | $ | 1.88 | (20.82) | 8.68 | (3.67) | (6.67) | |||||||||||
Realized refining margins (dollars per barrel)*** | 9.27 | 5.75 | 12.47 | 7.46 | 8.57 | ||||||||||||
| 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 | ||||||||||||
| * 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, 2021 | |||||||||||||||||
| Loss before income taxes | $ | (173) | (1,850) | (101) | (771) | (2,895) | |||||||||||
| Plus: | |||||||||||||||||
| Taxes other than income taxes | 53 | 65 | 38 | 49 | 205 | ||||||||||||
| Depreciation, amortization and impairments | 156 | 1,515 | 102 | 168 | 1,941 | ||||||||||||
| Selling, general and administrative expenses | 51 | 39 | 24 | 32 | 146 | ||||||||||||
| Operating expenses | 686 | 932 | 456 | 929 | 3,003 | ||||||||||||
| Equity in losses of affiliates | 7 | 4 | 151 | — | 162 | ||||||||||||
| Other segment (income) expense, net | (2) | (7) | (10) | 2 | (17) | ||||||||||||
| Proportional share of refining gross margins contributed by equity affiliates | 104 | — | 412 | — | 516 | ||||||||||||
| Realized refining margins | $ | 882 | 698 | 1,072 | 409 | 3,061 | |||||||||||
Total processed inputs (thousands of barrels) | 140,597 | 187,940 | 69,593 | 84,633 | 482,763 | ||||||||||||
Adjusted total processed inputs (thousands of barrels)* | 140,597 | 187,940 | 125,492 | 84,633 | 538,662 | ||||||||||||
Loss before income taxes per barrel (dollars per barrel)** | $ | (1.23) | (9.84) | (1.45) | (9.11) | (6.00) | |||||||||||
Realized refining margins (dollars per barrel)*** | 6.28 | 3.72 | 8.53 | 4.83 | 5.68 | ||||||||||||
| 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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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) 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:
| Millions of Dollars, Except as Indicated | |||||||||||||||||
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | ||||||||||||||||
| U.S. | International | U.S. | International | ||||||||||||||
| Realized Marketing Fuel Margins | |||||||||||||||||
| Income before income taxes | $ | 354 | 128 | 271 | 121 | ||||||||||||
| Plus: | |||||||||||||||||
| Taxes other than income taxes | 2 | 1 | — | 1 | |||||||||||||
| Depreciation and amortization | 3 | 18 | 3 | 18 | |||||||||||||
| Selling, general and administrative expenses | 201 | 64 | 174 | 62 | |||||||||||||
| Equity in earnings of affiliates | (18) | (30) | (10) | (31) | |||||||||||||
| Other operating (revenues) expenses* | (120) | 9 | (90) | (7) | |||||||||||||
| Other segment (income) expense, net | — | 1 | — | (1) | |||||||||||||
| Marketing margins | 422 | 191 | 348 | 163 | |||||||||||||
| Less: margin for nonfuel related sales | — | 13 | — | 11 | |||||||||||||
| Realized marketing fuel margins | $ | 422 | 178 | 348 | 152 | ||||||||||||
Total fuel sales volumes (thousands of barrels) | 183,332 | 26,427 | 155,948 | 24,164 | |||||||||||||
Income before income taxes per barrel (dollars per barrel) | $ | 1.93 | 4.84 | 1.74 | 5.01 | ||||||||||||
Realized marketing fuel margins (dollars per barrel)** | 2.29 | 6.75 | 2.23 | 6.28 | |||||||||||||
| * Includes other nonfuel revenues and expenses. | |||||||||||||||||
| ** 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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| Millions of Dollars, Except as Indicated | |||||||||||||||||
| Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | ||||||||||||||||
| U.S. | International | U.S. | International | ||||||||||||||
| Realized Marketing Fuel Margins | |||||||||||||||||
| Income before income taxes | $ | 919 | 224 | 749 | 360 | ||||||||||||
| Plus: | |||||||||||||||||
| Taxes other than income taxes | 8 | 4 | 4 | 4 | |||||||||||||
| Depreciation and amortization | 11 | 56 | 9 | 51 | |||||||||||||
| Selling, general and administrative expenses | 564 | 184 | 452 | 182 | |||||||||||||
| Equity in earnings of affiliates | (35) | (85) | (21) | (81) | |||||||||||||
| Other operating revenues* | (316) | (6) | (245) | (9) | |||||||||||||
| Other segment income, net | — | (1) | — | — | |||||||||||||
| Marketing margins | 1,151 | 376 | 948 | 507 | |||||||||||||
| Less: margin for nonfuel related sales | — | 41 | — | 34 | |||||||||||||
| Realized marketing fuel margins | $ | 1,151 | 335 | 948 | 473 | ||||||||||||
Total fuel sales volumes (thousands of barrels) | 499,354 | 72,440 | 467,643 | 69,726 | |||||||||||||
Income before income taxes per barrel (dollars per barrel) | $ | 1.84 | 3.09 | 1.60 | 5.16 | ||||||||||||
Realized marketing fuel margins (dollars per barrel)** | 2.30 | 4.63 | 2.03 | 6.78 | |||||||||||||
| * Includes other nonfuel revenues and expenses. | |||||||||||||||||
| ** 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 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, civil unrest, insurrections, political events, terrorism or cyberattacks.
•Potential disruption or damage to our facilities as a result of significant storms or other destructive climate events.
•The inability to meet our sustainability goals, including reducing our emissions intensity, developing and protecting new technologies, and commercializing lower-carbon opportunities.
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•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.
•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 or other developments with respect to our asset portfolio that cause impairment charges.
•The timing and completion of the agreement to purchase all of the outstanding common units of Phillips 66 Partners not already owned.
•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 2020 Annual Report on Form 10-K.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our commodity price risk and interest rate risk at September 30, 2021, did not differ materially from the risks disclosed under Item 7A of our 2020 Annual Report on Form 10-K.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission (SEC) rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2021, 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, 2021.
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, 2021, 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
Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not a party to any reportable litigation. Additionally, Item 103 of Regulation S-K promulgated by the 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 $300,000. There were no such new matters that arose during the third quarter of 2021 and there were no material developments that occurred with respect to matters previously reported. 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 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.
See Note 11—Contingencies and Commitments, in the Notes to Consolidated Financial Statements, for additional information.
Item 1A. RISK FACTORS
There were no material changes from the risk factors disclosed in Item 1A of our 2020 Annual Report on Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
In March 2020, we announced that we had temporarily suspended our share repurchases. As of September 30, 2021, we had $2,514 million remaining on our existing share repurchase authorization, which has no expiration date. Any future share repurchases will be made at the discretion of management and will depend on various factors including our share price, results of operations, financial condition and cash required for future business plans.
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Item 6. EXHIBITS
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | Exhibit Number | Filing Date | SEC File No. | |||||||||||||||||||||||||||
| 8-K | 2.1 | 10/27/2021 | 001-35349 | |||||||||||||||||||||||||||||
22* | ||||||||||||||||||||||||||||||||
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/ J. Scott Pruitt | ||||||||
J. Scott Pruitt Vice President and Controller (Chief Accounting and Duly Authorized Officer) | ||||||||
Date: October 29, 2021
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