10-Q 1 psx-2019331_10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
March 31, 2019
 

 
 
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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  [X]    No  [    ]
Indicate by check mark whether the registrant has submitted electronically 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  [X]    No  [    ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filer  [X]     Accelerated filer  [    ]  Non-accelerated filer  [    ]    
 Smaller reporting company  [    ] Emerging growth company  [    ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [    ]    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  [    ]    No  [X]
The registrant had 453,551,166 shares of common stock, $0.01 par value, outstanding as of March 31, 2019.



PHILLIPS 66

TABLE OF CONTENTS
 





PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
 
Consolidated Statement of Income
Phillips 66
 
Millions of Dollars
 
Three Months Ended
March 31
 
2019

 
2018

Revenues and Other Income
 
 
 
Sales and other operating revenues
$
23,103

 
23,595

Equity in earnings of affiliates
516

 
424

Net gain on dispositions
1

 
17

Other income
38

 
10

Total Revenues and Other Income
23,658

 
24,046

 
 
 
 
Costs and Expenses
 
 
 
Purchased crude oil and products
21,055

 
21,138

Operating expenses
1,307

 
1,246

Selling, general and administrative expenses
366

 
386

Depreciation and amortization
331

 
336

Impairments
1

 

Taxes other than income taxes
128

 
110

Accretion on discounted liabilities
6

 
6

Interest and debt expense
119

 
123

Foreign currency transaction (gains) losses
5

 
(16
)
Total Costs and Expenses
23,318

 
23,329

Income before income taxes
340

 
717

Income tax expense
70

 
132

Net Income
270

 
585

Less: net income attributable to noncontrolling interests
66

 
61

Net Income Attributable to Phillips 66
$
204

 
524

 
 
 
 
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
 
 
 
Basic
$
0.44

 
1.07

Diluted
0.44

 
1.07

 
 
 
 
Weighted-Average Common Shares Outstanding (thousands)
 
 
 
Basic
457,599

 
487,065

Diluted
459,289

 
489,668

See Notes to Consolidated Financial Statements.
 
 
 

1


Consolidated Statement of Comprehensive Income
Phillips 66
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2019

 
2018

 
 
 
 
Net Income
$
270

 
585

Other comprehensive income (loss)
 
 
 
Defined benefit plans
 
 
 
Amortization to income of net actuarial loss and settlements
19

 
22

Plans sponsored by equity affiliates
4

 
6

Income taxes on defined benefit plans
(5
)
 
(7
)
Defined benefit plans, net of income taxes
18

 
21

Foreign currency translation adjustments
57

 
91

Income taxes on foreign currency translation adjustments

 
(3
)
Foreign currency translation adjustments, net of income taxes
57

 
88

Cash flow hedges
(4
)
 
6

Income taxes on hedging activities
1

 
(2
)
Hedging activities, net of income taxes
(3
)
 
4

Other Comprehensive Income, Net of Income Taxes
72

 
113

Comprehensive Income
342

 
698

Less: comprehensive income attributable to noncontrolling interests
66

 
61

Comprehensive Income Attributable to Phillips 66
$
276

 
637

See Notes to Consolidated Financial Statements.

2


Consolidated Balance Sheet
Phillips 66
 
 
Millions of Dollars
 
March 31
2019

 
December 31
2018

Assets
 
 
 
Cash and cash equivalents
$
1,253

 
3,019

Accounts and notes receivable (net of allowances of $35 million in 2019 and $22 million in 2018)
6,476

 
5,414

Accounts and notes receivable—related parties
827

 
759

Inventories
5,344

 
3,543

Prepaid expenses and other current assets
915

 
474

Total Current Assets
14,815

 
13,209

Investments and long-term receivables
14,786

 
14,421

Net properties, plants and equipment
22,263

 
22,018

Goodwill
3,270

 
3,270

Intangibles
864

 
869

Other assets
1,857

 
515

Total Assets
$
57,855

 
54,302

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
8,310

 
6,113

Accounts payable—related parties
703

 
473

Short-term debt
30

 
67

Accrued income and other taxes
940

 
1,116

Employee benefit obligations
357

 
724

Other accruals
988

 
442

Total Current Liabilities
11,328

 
8,935

Long-term debt
11,268

 
11,093

Asset retirement obligations and accrued environmental costs
620

 
624

Deferred income taxes
5,456

 
5,275

Employee benefit obligations
875

 
867

Other liabilities and deferred credits
1,563

 
355

Total Liabilities
31,110

 
27,149

 
 
 
 
Equity
 
 
 
Common stock (2,500,000,000 shares authorized at $0.01 par value)
     Issued (2019—646,716,278 shares; 2018—645,691,761 shares)
 
 
 
Par value
6

 
6

Capital in excess of par
19,879

 
19,873

Treasury stock (at cost: 2019—193,165,112 shares; 2018—189,526,331 shares)
(15,367
)
 
(15,023
)
Retained earnings
20,408

 
20,489

Accumulated other comprehensive loss
(709
)
 
(692
)
Total Stockholders’ Equity
24,217

 
24,653

Noncontrolling interests
2,528

 
2,500

Total Equity
26,745

 
27,153

Total Liabilities and Equity
$
57,855

 
54,302

See Notes to Consolidated Financial Statements.

3


Consolidated Statement of Cash Flows
Phillips 66
 
Millions of Dollars
 
Three Months Ended
March 31
 
2019

 
2018

Cash Flows From Operating Activities
 
 
 
Net income
$
270

 
585

Adjustments to reconcile net income to net cash provided by operating
activities
 
 
 
Depreciation and amortization
331

 
336

Impairments
1

 

Accretion on discounted liabilities
6

 
6

Deferred income taxes
179

 
101

Undistributed equity earnings
95

 
119

Net gain on dispositions
(1
)
 
(17
)
Other
42

 
173

Working capital adjustments
 
 
 
Accounts and notes receivable
(1,170
)
 
1,366

Inventories
(1,790
)
 
(1,330
)
Prepaid expenses and other current assets
(438
)
 
(51
)
Accounts payable
2,466

 
(552
)
Taxes and other accruals
(469
)
 
(248
)
Net Cash Provided by (Used in) Operating Activities
(478
)
 
488

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Capital expenditures and investments
(1,097
)
 
(328
)
Proceeds from asset dispositions*
103

 
17

Advances/loans—related parties

 
(1
)
Other
(18
)
 
(45
)
Net Cash Used in Investing Activities
(1,012
)
 
(357
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt
725

 
1,509

Repayment of debt
(592
)
 
(7
)
Issuance of common stock
8

 
10

Repurchase of common stock
(344
)
 
(3,513
)
Dividends paid on common stock
(364
)
 
(327
)
Distributions to noncontrolling interests
(56
)
 
(45
)
Net proceeds from issuance of Phillips 66 Partners LP common units
32

 
9

Other
307

 
(45
)
Net Cash Used in Financing Activities
(284
)
 
(2,409
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
8

 
1

 
 
 
 
Net Change in Cash and Cash Equivalents
(1,766
)
 
(2,277
)
Cash and cash equivalents at beginning of period
3,019

 
3,119

Cash and Cash Equivalents at End of Period
$
1,253

 
842

* Includes return of investments in equity affiliates.
See Notes to Consolidated Financial Statements.

4


Consolidated Statement of Changes in Equity
Phillips 66
 
 
Millions of Dollars
 
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, 2017
$
6

19,768

(10,378
)
16,306

(617
)
2,343

27,428

Cumulative effect of accounting changes



36


13

49

Net income



524


61

585

Other comprehensive income




113


113

Dividends paid on common stock ($0.70 per share)



(327
)


(327
)
Repurchase of common stock


(3,513
)



(3,513
)
Benefit plan activity

4


(2
)


2

Issuance of Phillips 66 Partners LP common units

3




5

8

Distributions to noncontrolling interests





(45
)
(45
)
March 31, 2018
$
6

19,775

(13,891
)
16,537

(504
)
2,377

24,300

 
 
 
 
 
 
 
 
December 31, 2018
$
6

19,873

(15,023
)
20,489

(692
)
2,500

27,153

Cumulative effect of accounting changes



81

(89
)
(1
)
(9
)
Net income



204


66

270

Other comprehensive income




72


72

Dividends paid on common stock ($0.80 per share)



(364
)


(364
)
Repurchase of common stock


(344
)



(344
)
Benefit plan activity

4


(2
)


2

Issuance of Phillips 66 Partners LP common units

2




19

21

Distributions to noncontrolling interests





(56
)
(56
)
March 31, 2019
$
6

19,879

(15,367
)
20,408

(709
)
2,528

26,745


 
Shares in Thousands
 
Common Stock Issued

Treasury Stock

 
 
 
December 31, 2017
643,835

141,565

Repurchase of common stock

37,325

Shares issued—share-based compensation
892


March 31, 2018
644,727

178,890

 
 
 
December 31, 2018
645,692

189,526

Repurchase of common stock

3,639

Shares issued—share-based compensation
1,024


March 31, 2019
646,716

193,165

See Notes to Consolidated Financial Statements.

 
 

5


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 2018 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of the results to be expected for the full year. Certain prior period financial information has been recast to reflect the current year’s presentation.


Note 2—Changes in Accounting Principles

Effective January 1, 2019, we elected to adopt Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU permits the deferred income tax effects stranded in accumulated other comprehensive income (AOCI) resulting from the U.S. Tax Cuts and Jobs Act (the Tax Act) enacted in December 2017 to be reclassified to retained earnings. As of January 1, 2019, we recorded a cumulative effect adjustment to our opening consolidated balance sheet to reclassify an aggregate income tax benefit of $89 million, primarily related to our pension plans, from accumulated other comprehensive loss to retained earnings.

Effective January 1, 2019, we early adopted ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” using the modified retrospective transition method. This ASU amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables, and off-balance sheet credit exposures. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. We recorded a noncash cumulative effect adjustment to retained earnings of $9 million, net of $3 million of income taxes, on our opening consolidated balance sheet as of January 1, 2019. See Note 4—Credit Losses, for more information on our presentation of credit losses.

Effective January 1, 2019, we adopted ASU No. 2016-02, “Leases (Topic 842),” using the modified retrospective transition method. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated income statement.

We elected the package of practical expedients that allowed us to carry forward our determination of whether an arrangement contained a lease and lease classification, as well as our accounting for initial direct costs for existing contracts. We recorded a noncash cumulative effect adjustment to our opening consolidated balance sheet as of January 1, 2019, to record an aggregate operating lease ROU asset and corresponding lease liability of $1,415 million and immaterial adjustments to retained earnings and noncontrolling interests. See Note 14—Leases, for the new lease disclosures required by this ASU.

6


Note 3—Sales and Other Operating Revenues

Disaggregated Revenues
The following tables present our disaggregated sales and other operating revenues:

 
Millions of Dollars
 
Three Months Ended
March 31
 
2019

 
2018

Product Line and Services
 
 
 
Refined petroleum products
$
18,793

 
18,780

Crude oil resales
3,038

 
3,188

Natural gas liquids (NGLs)
1,304

 
1,421

Services and other*
(32
)
 
206

Consolidated sales and other operating revenues
$
23,103

 
23,595

 
 
 
 
Geographic Location**
 
 
 
United States
$
17,575

 
18,511

United Kingdom
2,431

 
2,249

Germany
957

 
931

Other foreign countries
2,140

 
1,904

Consolidated sales and other operating revenues
$
23,103

 
23,595

* 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.


Contract-Related Assets and Liabilities
At March 31, 2019, and December 31, 2018, receivables from contracts with customers were $5,699 million and $4,993 million, respectively. Significant non-customer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.

Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At March 31, 2019, and December 31, 2018, our asset balances related to such payments were $259 million and $248 million, respectively.

Our contract liabilities represent advances from our customers prior to product or service delivery. At March 31, 2019, and December 31, 2018, contract liabilities were $158 million and $99 million, respectively.

Remaining Performance Obligations
Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We do not disclose remaining performance obligations for these contracts as the expected duration is one year or less or because the variable consideration has been allocated entirely to an unsatisfied performance obligation. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing, most of which expire by 2021. At March 31, 2019, the remaining performance obligations related to these minimum volume commitment contracts were not material.


7


Note 4—Credit Losses
 
We are exposed to credit losses primarily through our sales of refined petroleum products, crude oil and NGLs. 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 reconciliation, dispute resolution and payment confirmation. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

At March 31, 2019, we reported $7,303 million of accounts receivable, net of allowances of $35 million. Changes in the allowance were not material for the three months ended March 31, 2019. Based on an aging analysis at March 31, 2019, 99% of our accounts receivable were outstanding less than 60 days, with the remainder outstanding less than 90 days.

We are also exposed to credit losses from off-balance sheet exposures, such as guarantees of joint venture debt, residual value guarantees of leased assets and standby letters of credit. See Note 10—Guarantees, and Note 11—Contingencies and Commitments, for more information on these off-balance sheet exposures.


Note 5—Inventories

Inventories consisted of the following:

 
Millions of Dollars
 
March 31
2019

 
December 31
2018

 
 
 
 
Crude oil and petroleum products
$
5,039

 
3,238

Materials and supplies
305

 
305

 
$
5,344

 
3,543



Inventories valued on the last-in, first-out (LIFO) basis totaled $4,931 million and $3,123 million at March 31, 2019, and December 31, 2018, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $5.1 billion and $2.9 billion at March 31, 2019, and December 31, 2018, respectively.



8


Note 6—Investments, Loans and Long-Term Receivables

Equity Investments

Summarized 100% financial information for Chevron Phillips Chemical Company LLC (CPChem) and WRB Refining LP (WRB) was as follows:
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2019

 
2018

 
 
 
 
Revenues
$
5,139

 
5,366

Income before income taxes
555

 
393

Net income
534

 
378



Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In March 2019, a wholly owned subsidiary of Dakota Access closed on an offering of $2,500 million aggregate principal amount of unsecured senior notes. The net proceeds from the issuance of these notes were used to repay amounts outstanding under existing credit facilities of Dakota Access and ETCO. Dakota Access and ETCO have guaranteed repayment of the notes. In addition, Phillips 66 Partners LP (Phillips 66 Partners) and its co-venturers provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, if Dakota Access receives an unfavorable court ruling related to certain disputed construction permits and Dakota Access determines that an equity contribution trigger event has occurred, the venturers may be severally required to make proportionate equity contributions to Dakota Access and ETCO up to an aggregate maximum of approximately $2,525 million. Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU is approximately $631 million.

Gray Oak Pipeline, LLC (Gray Oak)
In February 2019, Gray Oak Holdings LLC (Holdings LLC), a consolidated subsidiary of Phillips 66 Partners, transferred a 10% ownership interest in Gray Oak to a third party that exercised a purchase option for proceeds of $81 million. This transfer was accounted for as a sale and resulted in a decrease in Holdings LLC’s ownership interest in Gray Oak from 75% to 65% and the recognition of an immaterial gain. The proceeds received from this sale are presented as an investing cash inflow in the “Proceeds from asset dispositions” line on our consolidated statement of cash flows.

Phillips 66 Partners accounts for the investment in Gray Oak under the equity method because it does not have sufficient voting rights over key governance provisions to assert control over Gray Oak. Gray Oak is considered a variable interest entity (VIE) because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. Phillips 66 Partners has determined it is not the primary beneficiary because it and its co-venturers jointly direct the activities of Gray Oak that most significantly impact economic performance. At March 31, 2019, Phillips 66 Partners’ maximum exposure to loss was $771 million, which represented the book value of the investment in Gray Oak of $741 million and guaranteed purchase obligations of $30 million.

See Note 21—Phillips 66 Partners LP, for additional information regarding Phillips 66 Partners’ ownership in Holdings LLC and Gray Oak.

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 March 31, 2019, our maximum exposure to loss was $124 million, which represented the book value of our investment in OnCue of $70 million and guaranteed debt obligations of $54 million.

9


Related Party Loan

On March 29, 2019, Phillips 66 Partners and its co-venturers executed an agreement to loan Gray Oak up to a maximum of $1,230 million to finance construction of the Gray Oak Pipeline. The amount loaned by each venturer is expected to be proportionate to its effective ownership interest. The maximum amount to be loaned by Phillips 66 Partners is $520 million. Loans under this agreement are due on March 31, 2022, with early repayment permitted. On April 1, 2019, Phillips 66 Partners and its co-venturers loaned Gray Oak a total of $125 million under this agreement, of which Phillips 66 Partners’ share was $53 million.


Note 7—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
 
March 31, 2019
 
December 31, 2018
 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
 
 
 
 
 
 
 
 
 
 
 
Midstream
$
9,956

 
2,172

 
7,784

 
9,663

 
2,100

 
7,563

Chemicals

 

 

 

 

 

Refining
22,865

 
9,732

 
13,133

 
22,640

 
9,531

 
13,109

Marketing and Specialties
1,645

 
912

 
733

 
1,671

 
926

 
745

Corporate and Other
1,240

 
627

 
613

 
1,223

 
622

 
601

 
$
35,706

 
13,443

 
22,263

 
35,197

 
13,179

 
22,018




10


Note 8—Earnings Per Share

The numerator of basic earnings per share (EPS) is net income attributable to Phillips 66, reduced by noncancelable dividends paid on unvested share-based employee awards during the vesting period (participating securities). The denominator of basic EPS is the sum of the daily weighted-average number of common shares outstanding during the periods presented and fully vested stock and unit awards that have not yet been issued as common stock. The numerator of diluted EPS is also based on net income attributable to Phillips 66, which is reduced only by dividend equivalents paid on participating securities for which the dividends are more dilutive than the participation of the awards in the earnings of the periods presented. To the extent unvested stock, unit or option awards and vested unexercised stock options are dilutive, they are included with the weighted-average common shares outstanding in the denominator. Treasury stock is excluded from the denominator in both basic and diluted EPS.
  
 
Three Months Ended
March 31
 
2019
 
2018
 
Basic

Diluted

 
Basic

Diluted

Amounts attributed to Phillips 66 Common Stockholders (millions):
 
 
 
 
 
Net income attributable to Phillips 66
$
204

204

 
524

524

Income allocated to participating securities
(1
)
(1
)
 
(2
)
(1
)
Net income available to common stockholders
$
203

203


522

523

 
 
 
 
 
 
Weighted-average common shares outstanding (thousands):
454,886

457,599

 
483,585

487,065

Effect of share-based compensation
2,713

1,690

 
3,480

2,603

Weighted-average common shares outstanding—EPS
457,599

459,289

 
487,065

489,668

 
 
 
 
 
 
Earnings Per Share of Common Stock (dollars)
$
0.44

0.44

 
1.07

1.07




11


Note 9—Debt

2019 Activity
On March 22, 2019, Phillips 66 Partners entered into a senior unsecured term loan facility with a borrowing capacity of $400 million that matures on March 20, 2020. At March 31, 2019, term loans totaling $250 million were outstanding under this facility. Borrowings under this facility bear interest at a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by Phillips 66 Partners’ credit ratings. Proceeds from term loans made under this facility were used for general partnership purposes, including repayment of amounts borrowed under Phillips 66 Partners’ $750 million revolving credit facility. At March 31, 2019, borrowings of $15 million were outstanding under Phillips 66 Partners’ revolving credit facility, compared with borrowings of $125 million at December 31, 2018.

At March 31, 2019, $550 million of Phillips 66 Partners’ debt due within a year was classified as long-term debt based on Phillips 66 Partners’ intent to refinance these obligations on a long-term basis and ability to do so under its revolving credit facility.

2018 Activity
On March 1, 2018, Phillips 66 closed on a public offering of $1,500 million aggregate principal amount of unsecured notes consisting of:

$500 million of floating-rate Senior Notes due February 2021. Interest on these notes is equal to the three-month London Interbank Offered Rate (LIBOR) plus 0.60% per annum and is payable quarterly in arrears on February 26, May 26, August 26 and November 26, beginning on May 29, 2018.

$800 million of 3.900% Senior Notes due March 2028. Interest on these notes is payable semiannually on March 15 and September 15 of each year, beginning on September 15, 2018.

An additional $200 million of our 4.875% Senior Notes due November 2044. Interest on these notes is payable semiannually on May 15 and November 15 of each year, beginning on May 15, 2018.

These notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary. Phillips 66 used the net proceeds from the issuance of these notes and cash on hand to repay commercial paper borrowings during the three months ended March 31, 2018, and for general corporate purposes. The commercial paper borrowings during the three months ended March 31, 2018, were primarily used to repurchase shares of our common stock. See Note 17—Treasury Stock, for additional information.


Note 10—Guarantees

At March 31, 2019, 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.

Guarantees of Joint Venture Obligations
At March 31, 2019, we had guarantees outstanding for our portion of certain joint venture debt and purchase obligations, which have remaining terms of up to seven years. The maximum potential amount of future payments to third parties under these guarantees was approximately $207 million. Payment would be required if a joint venture defaults on its obligations.

Residual Value Guarantees
Under the operating lease agreement on our headquarters facility in Houston, Texas, we have a residual value guarantee with a maximum future exposure of $554 million. The operating lease term ends in June 2021 and provides us the option, at the end of the lease term, to request to renew the lease, purchase the facility or assist the lessor in marketing it

12


for resale. We also have residual value guarantees associated with railcar and airplane leases with maximum future exposures totaling $288 million, which have remaining terms of up to five years.

Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnification. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses and employee claims, as well as real estate indemnity against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. At March 31, 2019, and December 31, 2018, the carrying amount of recorded indemnifications was $173 million and $171 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 that the liability was essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. At March 31, 2019, and December 31, 2018, environmental accruals for known contamination of $104 million and $101 million, respectively, were included in the carrying amount of recorded indemnifications. These environmental accruals were primarily included in the “Asset retirement obligations and accrued environmental costs” line 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 (the Separation), we entered into the Indemnification and Release Agreement. This agreement governs the treatment between ConocoPhillips and us of matters relating to indemnification, insurance, litigation responsibility and management, and litigation document sharing and cooperation arising in connection with the Separation. Generally, the agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of ConocoPhillips’ business with ConocoPhillips. The agreement also establishes procedures for handling claims subject to indemnification and related matters.


Note 11—Contingencies and Commitments

A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

13


Environmental
We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using information available at the time. We measure estimates and base contingent liabilities on currently available facts, existing technology and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring contingent environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.

Although liability for environmental remediation costs is generally joint and several for federal sites and frequently so for state sites, we are usually only one of many companies alleged to have liability at a particular site. Due to such joint and several liabilities, we could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit, although some of the indemnifications are subject to dollar and time limits.

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a 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 March 31, 2019, our total environmental accrual was $446 million, compared with $447 million at December 31, 2018. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

Legal Proceedings
Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required.

Other Contingencies
We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized.

At March 31, 2019, we had performance obligations secured by letters of credit and bank guarantees of $553 million related to various purchase and other commitments incident to the ordinary conduct of business.

14


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 income. Gains and losses from derivative contracts held for trading not directly related to our physical business are reported net in the “Other income” line on our consolidated statement of income. Cash flows from all our derivative activity for the periods presented appear in the operating section on our consolidated statement of cash flows.

Purchase and sales contracts with firm minimum notional volumes for commodities that are readily convertible to cash are recorded on our consolidated balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception, whereby the contracts are recorded on an accrual basis. We generally apply the normal purchases and normal sales exception to eligible crude oil, refined petroleum product, NGL, natural gas and power commodity contracts to purchase or sell quantities we expect to use or sell in the normal course of business. All other derivative instruments are recorded at fair value on our consolidated balance sheet. For further information on the fair value of our 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 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.

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
 
March 31, 2019
 
December 31, 2018
 
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
$
52

(5
)

47

 
1,257

(1,070
)
(89
)
98

Other assets
1



1

 
2



2

Liabilities
 
 
 
 
 
 
 
 
 
Other accruals
614

(657
)
35

(8
)
 

(23
)

(23
)
Other liabilities and deferred credits
4

(5
)

(1
)
 
5

(7
)

(2
)
Total
$
671

(667
)
35

39

 
1,264

(1,100
)
(89
)
75

 

At March 31, 2019, and December 31, 2018, there was no material cash collateral received or paid that was not offset on our consolidated balance sheet.

15


The realized and unrealized gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of income, were:
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2019

 
2018

 
 
 
 
Sales and other operating revenues
$
(177
)
 
8

Other income
13

 
(5
)
Purchased crude oil and products
(155
)
 
(32
)
Net loss from commodity derivative activity
$
(319
)
 
(29
)


The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from non-derivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was at least 98% at March 31, 2019, and December 31, 2018.

 
Open Position
Long / (Short)
 
March 31
2019

 
December 31
2018

Commodity
 
 
 
Crude oil, refined petroleum products and NGL (millions of barrels)
(44
)
 
(17
)


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 LIBOR and changes, if any, in our credit rating over the five-year term of the lease. The pay-fixed, receive-floating interest rate swaps have an aggregate notional value of $650 million and end in April 2021. We have designated these swaps as cash flow hedges.

The aggregate net fair value of these swaps, which is included in the “Prepaid expenses and other current assets” and “Other assets” lines on our consolidated balance sheet, totaled $11 million and $15 million at March 31, 2019, and December 31, 2018, respectively.

We report the mark-to-market gains or losses on our interest rate swaps designated as highly effective cash flow hedges as a component of other comprehensive income (loss), and reclassify such gains and losses into earnings in the same period during which the hedged transaction affects earnings. Net realized gains and losses from settlements of the swaps were immaterial for the three months ended March 31, 2019 and 2018.

We currently estimate that pre-tax gains of $6 million will be reclassified from accumulated other comprehensive loss into general and administrative expenses during the next 12 months as the hedged transactions settle; however, the actual amounts that will be reclassified will vary based on changes in interest rates.

16


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 March 31, 2019, and December 31, 2018.


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. For the three months ended March 31, 2019, derivative assets with an aggregate value of $53 million and derivative liabilities with an aggregate value of $22 million were transferred to Level 1 from Level 2, as measured from the beginning of the reporting period. The measurements were reclassified within the fair value hierarchy due to the availability of unadjusted quoted prices from an active market.

We used the following methods and assumptions to estimate the fair value of financial instruments:

Cash and cash equivalents—The carrying amount reported on 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 non-exchange 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

17


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 mid-market pricing convention (the mid-point between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
We determine the fair value of our interest rate swaps based on observed market valuations for interest rate swaps that have notional amounts, terms and pay and reset frequencies similar to ours.
Rabbi trust assets—These deferred compensation investments are measured at fair value using unadjusted quoted prices available from national securities exchanges and are therefore categorized as Level 1 in the fair value hierarchy.
Debt—The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on observable market prices.

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
 
March 31, 2019
 
Fair Value Hierarchy
 
Total Fair Value of Gross Assets & Liabilities

Effect of Counterparty Netting

Effect of Collateral Netting

Difference in Carrying Value and Fair Value

Net Carrying Value Presented on the Balance Sheet

 
Level 1

 
Level 2

 
Level 3

Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
349

 
290

 

 
639

(623
)


16

Physical forward contracts

 
30

 
2

 
32




32

Interest rate derivatives

 
11

 

 
11




11

Rabbi trust assets
120

 

 

 
120

N/A

N/A


120

 
$
469

 
331

 
2

 
802

(623
)


179

 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
390

 
269

 

 
659

(623
)
(35
)

1

Physical forward contracts

 
8

 

 
8




8

Floating-rate debt

 
1,340

 

 
1,340

N/A

N/A


1,340

Fixed-rate debt, excluding capital leases

 
10,500

 

 
10,500

N/A

N/A

(723
)
9,777

 
$
390

 
12,117

 

 
12,507

(623
)
(35
)
(723
)
11,126





18


 
Millions of Dollars
 
December 31, 2018
 
Fair Value Hierarchy
 
Total Fair Value of Gross Assets & Liabilities

Effect of Counterparty Netting

Effect of Collateral Netting

Difference in Carrying Value and Fair Value

Net Carrying Value Presented on the Balance Sheet

 
Level 1

 
Level 2

 
Level 3

 
Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
674

 
547

 

 
1,221

(1,075
)
(89
)

57

Physical forward contracts

 
39

 
4

 
43




43

Interest rate derivatives

 
15

 

 
15




15

Rabbi trust assets
104

 

 

 
104

N/A

N/A


104

 
$
778

 
601

 
4

 
1,383

(1,075
)
(89
)

219

 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
605

 
472

 

 
1,077

(1,075
)


2

Physical forward contracts

 
20

 

 
20




20

OTC instruments

 
3

 

 
3




3

Floating-rate debt

 
1,200

 

 
1,200

N/A

N/A


1,200

Fixed-rate debt, excluding capital leases

 
9,727

 

 
9,727

N/A

N/A

49

9,776

 
$
605

 
11,422

 

 
12,027

(1,075
)

49

11,001



The rabbi trust assets are recorded in the “Investments and long-term receivables” line and floating-rate and fixed-rate debt are recorded in the “Short-term debt” and “Long-term debt” lines on our consolidated balance sheet. See Note 12—Derivatives and Financial Instruments, for information regarding where the assets and liabilities related to our commodity and interest rate derivatives are recorded on our consolidated balance sheet.


Note 14—Leases

We lease marine vessels, tugboats, barges, pipelines, storage tanks, railcars, service station sites, office buildings, corporate aircraft, land and other facilities and equipment. In determining whether an agreement contains a lease, we consider our ability to control the asset and whether there are limitations on our control through third-party participation or vendor substitution rights. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices, as well as renewal options and/or options to purchase the leased property. Renewal options have been included only when reasonably certain of exercise. There are no significant restrictions imposed on us in our lease agreements with regards to dividend payments, asset dispositions or borrowing ability. Certain leases have residual value guarantees, which may require additional payments at the end of the lease term if future fair values decline below contractual lease balances.

In our implementation of ASU No. 2016-02, we elected to discount lease obligations using our incremental borrowing rate. Furthermore, we elected to separate costs for lease and service components for contracts involving the following asset types: marine vessels, tugboats, barges and consignment service stations. For these contracts, we allocate the consideration payable between the lease and service components using the relative standalone prices of each component. For contracts involving all other asset types, we elected the practical expedient to account for the lease and service components on a combined basis. Our right-of-way agreements in effect prior to January 1, 2019, were not accounted for as leases as they were not initially determined to be leases at their commencement dates. However, modifications to these agreements or new agreements will be assessed and accounted for accordingly under ASU No. 2016-02. For short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that is reasonably certain to exercise, we elected to not recognize the ROU asset and corresponding lease liability on our consolidated balance sheet.

19


The following table indicates the consolidated balance sheet line items that include the ROU assets and lease liabilities for our finance and operating leases:
 
Millions of Dollars
 
March 31, 2019
 
Finance
Leases

 
Operating
Leases

Right-of-Use Assets
 
 
 
Net properties, plants and equipment
$
193

 

Other assets

 
1,376

Total Right-of-Use Assets
$
193

 
1,376

 
 
 
 
Lease Liabilities
 
 
 
Short-term debt
$
14

 

Other accruals

 
459

Long-term debt
166

 

Other liabilities and deferred credits

 
874

Total Lease Liabilities
$
180

 
1,333



Future minimum lease payments at March 31, 2019, for finance and operating lease liabilities were:

 
Millions of Dollars
 
Finance
Leases

 
Operating
Leases

 
 
 
 
Remainder of 2019
$
15

 
387

2020
19

 
412

2021
19

 
199

2022
16

 
134

2023
16

 
85

Remaining years
140

 
297

Future minimum lease payments
225

 
1,514

Amount representing interest or discounts
(45
)
 
(181
)
Total Lease Liabilities
$
180

 
1,333



Our finance lease liabilities relate primarily to an oil terminal in the United Kingdom. The lease liability for this finance lease is subject to foreign currency translation adjustments each reporting period.

20


Components of net lease cost for the three months ended March 31, 2019, were:

 
Millions of Dollars
Finance lease cost
 
Amortization of right-of-use assets
$
5

Interest on lease liabilities
2

Total finance lease cost
7

Operating lease cost
129

Short-term lease cost
32

Variable lease cost
7

Sublease income
(5
)
Total net lease cost
$
170



Cash paid for amounts included in the measurement of our lease liabilities for the three months ended March 31, 2019, were:

 
Millions of Dollars
 
 
Operating cash outflows—finance leases
$
2

Operating cash outflows—operating leases
144

Financing cash outflows—finance leases
4



During the three months ended March 31, 2019, we recorded noncash ROU assets and corresponding operating lease liabilities totaling $36 million related to new and modified lease agreements.

At March 31, 2019, the weighted-average remaining lease term and discount rate for our lease liabilities were:

Weighted-average remaining lease term—finance leases (years)
13.1

Weighted average remaining lease term—operating leases (years)
5.4

 
 
Weighted-average discount rate—finance leases (percent)
3.8
%
Weighted-average discount rate—operating leases (percent)
4.0


21


Note 15—Pension and Postretirement Plans

The components of net periodic benefit cost for the three months ended March 31, 2019 and 2018, were as follows:
 
Millions of Dollars
 
Pension Benefits
 
Other Benefits
 
2019
 
2018
 
2019

 
2018

 
U.S.

 
Int’l.

 
U.S.

 
Int’l.

 
 
 
 
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
32

 
6

 
34

 
7

 
1

 
1

Interest cost
27

 
6

 
26

 
7

 
2

 
2

Expected return on plan assets
(36
)
 
(11
)
 
(42
)
 
(12
)
 

 

Recognized net actuarial loss
13

 
2

 
15

 
5

 

 

Settlements
4

 

 
2

 

 

 

Net periodic benefit cost*
$
40


3


35


7


3


3

* Included in the “Operating expenses” and “Selling, general and administrative expenses” lines on our consolidated statement of income.


During the three months ended March 31, 2019, we contributed $10 million to our U.S. employee benefit plans and $8 million to our international employee benefit plans. We currently expect to make additional contributions of approximately $30 million to our U.S. employee benefit plans and $22 million to our international employee benefit plans during the remainder of 2019.

22


Note 16—Accumulated Other Comprehensive Loss

Changes in the balances of each component of accumulated other comprehensive loss were as follows:
 
Millions of Dollars
 
Defined Benefit Plans

 
Foreign Currency Translation

 
Hedging

 
Accumulated Other Comprehensive Loss

 
 
 
 
 
 
 
 
December 31, 2017
$
(598
)
 
(26
)
 
7

 
(617
)
Other comprehensive income before reclassifications
5

 
88

 
4

 
97

Amounts reclassified from accumulated other comprehensive loss
 
 
 
 
 
 
 
Defined benefit plans*
 
 
 
 
 
 
 
Amortization of net actuarial loss and settlements
16

 

 

 
16

Foreign currency translation

 

 

 

Hedging

 

 

 

Net current period other comprehensive income
21

 
88

 
4

 
113

March 31, 2018
$
(577
)
 
62

 
11

 
(504
)
 
 
 
 
 
 
 
 
December 31, 2018
$
(472
)
 
(228
)
 
8

 
(692
)
Other comprehensive income (loss) before reclassifications
3

 
57

 
(1
)
 
59

Amounts reclassified from accumulated other comprehensive loss
 
 
 
 
 
 


Defined benefit plans*
 
 
 
 
 
 
 
Amortization of net actuarial loss and settlements
15

 

 

 
15

Foreign currency translation

 

 

 

Hedging

 

 
(2
)
 
(2
)
Net current period other comprehensive income (loss)
18

 
57

 
(3
)
 
72

Income taxes reclassified to retained earnings**
(93
)
 
2

 
2

 
(89
)
March 31, 2019
$
(547
)
 
(169
)
 
7

 
(709
)
* Included in the computation of net periodic benefit cost. See Note 15—Pension and Postretirement Plans, for additional information.
** As of January 1, 2019, stranded income taxes related to the enactment of the Tax Act in December 2017 were reclassified to retained earnings upon adoption of ASU No. 2018-02. See Note 2—Changes in Accounting Principles, for additional information on our adoption of this ASU.


Note 17—Treasury Stock

In February 2018, we entered into a Stock Purchase and Sale Agreement (Purchase Agreement) with Berkshire Hathaway Inc. and National Indemnity Company, a wholly owned subsidiary of Berkshire Hathaway, to repurchase 35,000,000 shares of Phillips 66 common stock for an aggregate purchase price of $3,280 million. Pursuant to the Purchase Agreement, the purchase price per share of $93.725 was based on the volume-weighted-average price of our common stock on the New York Stock Exchange on February 13, 2018. The transaction closed in February 2018. We funded the repurchase with cash of $1,880 million and borrowings of $1,400 million under our commercial paper program. These borrowings were subsequently refinanced through a public offering of senior notes in March 2018. This specific share repurchase transaction was separately authorized by our Board of Directors and therefore does not impact previously announced authorizations to repurchase shares of Phillips 66 common stock under our share repurchase program, which total up to $12 billion.



23


Note 18—Related Party Transactions

Significant transactions with related parties were:

 
Millions of Dollars
 
Three Months Ended
March 31
 
2019

 
2018

 
 
 
 
Operating revenues and other income (a)
$
683

 
818

Purchases (b)
2,668

 
2,554

Operating expenses and selling, general and administrative expenses (c)
9

 
16


(a)
We sold NGL and other petrochemical feedstocks, along with solvents, to CPChem, gas oil and hydrogen feedstocks to Excel Paralubes (Excel), and refined petroleum products to OnCue. We also sold certain feedstocks and intermediate products to WRB and acted as agent for WRB in supplying crude oil and other feedstocks for a fee. In addition, we charged several of our affiliates, including CPChem, for the use of common facilities, such as steam generators, waste and water treaters and warehouse facilities.

(b)
We purchased crude oil, refined petroleum products and NGL from WRB and also acted as agent for WRB in distributing solvents. We also purchased natural gas and NGL from DCP Midstream, LLC (DCP Midstream) and CPChem, as well as other feedstocks from various affiliates, for use in our refinery and fractionation processes. In addition, we purchased base oils and fuel products from Excel for use in our specialty and refining businesses. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline affiliates for transporting crude oil, refined petroleum products and NGL.
 
(c)
We paid utility and processing fees to various affiliates.


24


Note 19—Segment Disclosures and Related Information

During the fourth quarter of 2018, the segment performance measure used by our chief executive officer to assess performance and allocate resources was changed from “net income” to “income before income taxes.”  Prior-period segment information has been recast to conform to the current presentation.

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, processing and marketing services, mainly in the United States. The Midstream segment includes our master limited partnership (MLP), Phillips 66 Partners, as well as our 50% equity investment in DCP Midstream.

2)
Chemicals—Consists of our 50% equity investment in CPChem, which manufactures and markets petrochemicals and plastics on a worldwide basis.

3)
Refining—Refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 13 refineries in the United States and Europe.

4)
Marketing and Specialties—Purchases for resale and markets refined petroleum products, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products, as well as power generation operations.

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.

25


Analysis of Results by Operating Segment

 
Millions of Dollars
 
Three Months Ended
March 31
 
2019

 
2018

Sales and Other Operating Revenues*
 
 
 
Midstream
 
 
 
Total sales
$
1,897

 
1,951

Intersegment eliminations
(584
)
 
(533
)
Total Midstream
1,313

 
1,418

Chemicals
1

 
1

Refining
 
 
 
Total sales
16,861

 
17,632

Intersegment eliminations
(9,768
)
 
(10,615
)
Total Refining
7,093

 
7,017

Marketing and Specialties
 
 
 
Total sales
15,242

 
15,617

Intersegment eliminations
(553
)
 
(464
)
Total Marketing and Specialties
14,689

 
15,153

Corporate and Other
7

 
6

Consolidated sales and other operating revenues
$
23,103

 
23,595

* See Note 3—Sales and Other Operating Revenues, for further details on our disaggregated sales and other operating revenues.
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
Midstream
$
316

 
280

Chemicals
227

 
286

Refining
(198
)
 
112

Marketing and Specialties
205

 
235

Corporate and Other
(210
)
 
(196
)
Consolidated income before income taxes
$
340

 
717


 
Millions of Dollars
 
March 31
2019

 
December 31
2018

Total Assets
 
 
 
Midstream
$
15,347

 
14,329

Chemicals
6,261

 
6,235

Refining
25,900

 
23,230

Marketing and Specialties
7,949

 
6,572

Corporate and Other
2,398

 
3,936

Consolidated total assets
$
57,855

 
54,302




26


Note 20—Income Taxes

Our effective income tax rate for the three months ended March 31, 2019, was 21%, compared with 18% for the corresponding period of 2018. The increase in our effective tax rate was primarily attributable to the impact of our foreign operations.

The effective income tax rate in the first quarter of 2019 did not vary from the U.S. federal statutory income tax rate of 21% as the effect of state income tax expense was primarily offset by excess tax benefits associated with share-based compensation and income attributable to noncontrolling interests.


Note 21—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, processing, terminaling and storage assets.
 
We consolidate Phillips 66 Partners because we determined it is a VIE of which we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as well as the ability to direct the activities that most significantly impact its economic performance. As a result of this consolidation, the public common and perpetual convertible preferred unitholders’ ownership interests in Phillips 66 Partners are reflected as noncontrolling interests in our financial statements. At March 31, 2019, we owned a 54% limited partner interest and a 2% general partner interest in Phillips 66 Partners, while the public owned a 44% limited partner interest and 13.8 million perpetual convertible preferred units.

The most significant assets of Phillips 66 Partners that are available to settle only its obligations, along with its most significant liabilities for which its creditors do not have recourse to Phillips 66’s general credit, were:

 
Millions of Dollars
 
March 31
2019

 
December 31
2018

 
 
 
 
Equity investments*
$
2,897

 
2,448

Net properties, plants and equipment
3,104

 
3,052

Long-term debt
3,173

 
2,998

* Included in “Investments and long-term receivables” line on the Phillips 66 consolidated balance sheet.


2019 Activities
For the three months ended March 31, 2019 and 2018, on a settlement-date basis, Phillips 66 Partners generated net proceeds of $32 million and $9 million, respectively, from common units issued under its continuous offering of common units, or at-the-market (ATM) programs. Since inception in June 2016 through March 31, 2019, the ATM programs generated net proceeds of $352 million.

Phillips 66 Partners holds an investment in the Gray Oak Pipeline through Holdings LLC. In December 2018, a third party exercised its option to acquire a 35% interest in Holdings LLC. Because Holdings LLC’s sole asset was its ownership interest in Gray Oak, which is considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in Holdings LLC during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP. As such, the contributions the third party is making to Holdings LLC to cover its share of previously incurred and future construction costs plus a premium to Phillips 66 Partners are reflected as a long-term obligation in the “Other liabilities and deferred credits” line on our consolidated balance sheet and financing cash inflows in the “Other” line on our consolidated statement of cash flows. The sale will be recognized under GAAP after construction of the Gray Oak Pipeline is completed and the restrictions expire. Phillips 66 Partners will continue to control and consolidate Holdings LLC after sale recognition, and therefore the third party’s 35% interest will be recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance

27


sheet at that time. Also at that time, the premium paid will be recharacterized from a long-term obligation to a gain in our consolidated statement of income. For the three months ended March 31, 2019, the third party contributed an aggregate of $341 million into Holdings LLC, which Holdings LLC used to fund its portion of Gray Oak’s cash calls. See Note 6—Investments, Loans and Long-Term Receivables, for further discussion regarding Phillip 66 Partners’ investment in Gray Oak.


Note 22—Condensed Consolidating Financial Information

Phillips 66 has senior notes outstanding, the payment obligations of which are fully and unconditionally guaranteed by Phillips 66 Company, a 100% owned subsidiary. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:

Phillips 66 and Phillips 66 Company (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
All other nonguarantor subsidiaries.
The consolidating adjustments necessary to present Phillips 66’s results on a consolidated basis.

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.
 
Millions of Dollars
 
Three Months Ended March 31, 2019
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

17,415

5,688


23,103

Equity in earnings of affiliates
281

431

165

(361
)
516

Net gain on dispositions


1


1

Other income

20

18


38

Intercompany revenues

1,161

3,215

(4,376
)

Total Revenues and Other Income
281

19,027

9,087

(4,737
)
23,658

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

17,080

8,254

(4,279
)
21,055

Operating expenses

1,000

326

(19
)
1,307

Selling, general and administrative expenses
3

255

110

(2
)
366

Depreciation and amortization

227

104


331

Impairments


1


1

Taxes other than income taxes

95

33


128

Accretion on discounted liabilities

4

1

1

6

Interest and debt expense
93

36

67

(77
)
119

Foreign currency transaction losses


5


5

Total Costs and Expenses
96

18,697

8,901

(4,376
)
23,318

Income before income taxes
185

330

186

(361
)
340

Income tax expense (benefit)
(19
)
49

40


70

Net Income
204

281

146

(361
)
270

Less: net income attributable to noncontrolling interests


66


66

Net Income Attributable to Phillips 66
$
204

281

80

(361
)
204

 
 
 
 
 
 
Comprehensive Income
$
276

353

211

(498
)
342


28


 
Millions of Dollars
 
Three Months Ended March 31, 2018
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

18,276

5,319


23,595

Equity in earnings of affiliates
600

614

195

(985
)
424

Net gain on dispositions

7

10


17

Other income (loss)

(1
)
11


10

Intercompany revenues

579

2,879

(3,458
)

Total Revenues and Other Income
600

19,475