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Table of Contents

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, 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)
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, 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 444,357,576 shares of common stock, $0.01 par value, outstanding as of September 30, 2019.


Table of Contents

PHILLIPS 66

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
 
Consolidated Statement of Income
Phillips 66
 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$
27,218

29,788

 
78,168

82,363

Equity in earnings of affiliates
499

779

 
1,663

1,946

Net gain on dispositions
18

1

 
19

18

Other income
36

24

 
97

47

Total Revenues and Other Income
27,771

30,592

 
79,947

84,374

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products
23,806

26,385

 
69,415

73,270

Operating expenses
1,206

1,206

 
3,678

3,595

Selling, general and administrative expenses
416

440

 
1,190

1,258

Depreciation and amortization
336

346

 
1,001

1,019

Impairments
853

1

 
856

7

Taxes other than income taxes
105

109

 
330

328

Accretion on discounted liabilities
6

5

 
17

17

Interest and debt expense
109

125

 
343

383

Foreign currency transaction (gains) losses
(9
)

 
5

(30
)
Total Costs and Expenses
26,828

28,617

 
76,835

79,847

Income before income taxes
943

1,975


3,112

4,527

Income tax expense
150

407

 
545

970

Net Income
793

1,568

 
2,567

3,557

Less: net income attributable to noncontrolling interests
81

76

 
227

202

Net Income Attributable to Phillips 66
$
712

1,492

 
2,340

3,355

 
 
 
 
 
 
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
 
 
 
 
 
Basic
$
1.58

3.20

 
5.15

7.07

Diluted
1.58

3.18

 
5.13

7.03

 
 
 
 
 
 
Weighted-Average Common Shares Outstanding (thousands)
 
 
 
 
 
Basic
449,005

466,109

 
453,398

473,760

Diluted
451,001

469,440

 
455,810

477,220

See Notes to Consolidated Financial Statements.
 
 
 
 
 

1

Table of Contents

Consolidated Statement of Comprehensive Income
Phillips 66
 
 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
Net Income
$
793

1,568

 
2,567

3,557

Other comprehensive income (loss)
 
 
 
 
 
Defined benefit plans
 
 
 
 
 
Amortization to income of net actuarial loss, prior service credit and settlements
17

68

 
51

111

Plans sponsored by equity affiliates
2

4

 
7

13

Income taxes on defined benefit plans
(4
)
(18
)
 
(13
)
(30
)
Defined benefit plans, net of income taxes
15

54

 
45

94

Foreign currency translation adjustments
(119
)
(15
)
 
(124
)
(125
)
Income taxes on foreign currency translation adjustments
1

1

 

2

Foreign currency translation adjustments, net of income taxes
(118
)
(14
)
 
(124
)
(123
)
Cash flow hedges
(2
)
2

 
(13
)
10

Income taxes on hedging activities
1

(1
)
 
2

(3
)
Hedging activities, net of income taxes
(1
)
1

 
(11
)
7

Other Comprehensive Income (Loss), Net of Income Taxes
(104
)
41

 
(90
)
(22
)
Comprehensive Income
689

1,609

 
2,477

3,535

Less: comprehensive income attributable to noncontrolling interests
81

76

 
227

202

Comprehensive Income Attributable to Phillips 66
$
608

1,533

 
2,250

3,333

See Notes to Consolidated Financial Statements.

2

Table of Contents

Consolidated Balance Sheet
Phillips 66
 
 
Millions of Dollars
 
September 30
2019

 
December 31
2018

Assets
 
 
 
Cash and cash equivalents
$
2,268

 
3,019

Accounts and notes receivable (net of allowances of $41 million in 2019 and $22 million in 2018)
6,097

 
5,414

Accounts and notes receivable—related parties
989

 
759

Inventories
5,521

 
3,543

Prepaid expenses and other current assets
742

 
474

Total Current Assets
15,617

 
13,209

Investments and long-term receivables
14,147

 
14,421

Net properties, plants and equipment
22,954

 
22,018

Goodwill
3,270

 
3,270

Intangibles
872

 
869

Other assets
1,881

 
515

Total Assets
$
58,741

 
54,302

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
7,738

 
6,113

Accounts payable—related parties
635

 
473

Short-term debt
842

 
67

Accrued income and other taxes
1,128

 
1,116

Employee benefit obligations
624

 
724

Other accruals
1,116

 
442

Total Current Liabilities
12,083

 
8,935

Long-term debt
11,083

 
11,093

Asset retirement obligations and accrued environmental costs
617

 
624

Deferred income taxes
5,503

 
5,275

Employee benefit obligations
905

 
867

Other liabilities and deferred credits
1,458

 
355

Total Liabilities
31,649

 
27,149

 
 
 
 
Equity
 
 
 
Common stock (2,500,000,000 shares authorized at $0.01 par value)
     Issued (2019—647,050,977 shares; 2018—645,691,761 shares)
 
 
 
Par value
6

 
6

Capital in excess of par
20,253

 
19,873

Treasury stock (at cost: 2019—202,693,401 shares; 2018—189,526,331 shares)
(16,261
)
 
(15,023
)
Retained earnings
21,730

 
20,489

Accumulated other comprehensive loss
(871
)
 
(692
)
Total Stockholders’ Equity
24,857

 
24,653

Noncontrolling interests
2,235

 
2,500

Total Equity
27,092

 
27,153

Total Liabilities and Equity
$
58,741

 
54,302

See Notes to Consolidated Financial Statements.

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Table of Contents

Consolidated Statement of Cash Flows
Phillips 66
 
Millions of Dollars
 
Nine Months Ended
September 30
 
2019

 
2018

Cash Flows From Operating Activities
 
 
 
Net income
$
2,567

 
3,557

Adjustments to reconcile net income to net cash provided by operating
activities
 
 
 
Depreciation and amortization
1,001

 
1,019

Impairments
856

 
7

Accretion on discounted liabilities
17

 
17

Deferred income taxes
115

 
229

Undistributed equity earnings
(25
)
 
111

Net gain on dispositions
(19
)
 
(18
)
Other
(97
)
 
118

Working capital adjustments
 
 
 
Accounts and notes receivable
(909
)
 
(478
)
Inventories
(2,004
)
 
(2,178
)
Prepaid expenses and other current assets
(269
)
 
(509
)
Accounts payable
1,778

 
1,280

Taxes and other accruals
103

 
279

Net Cash Provided by Operating Activities
3,114

 
3,434

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Capital expenditures and investments
(2,595
)
 
(1,645
)
Proceeds from asset dispositions*
139

 
39

Advances/loans—related parties
(95
)
 
(1
)
Collection of advances/loans—related parties
95

 

Other
24

 
67

Net Cash Used in Investing Activities
(2,432
)
 
(1,540
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt
1,758

 
1,594

Repayment of debt
(1,004
)
 
(374
)
Issuance of common stock
15

 
39

Repurchase of common stock
(1,238
)
 
(4,148
)
Dividends paid on common stock
(1,172
)
 
(1,069
)
Distributions to noncontrolling interests
(176
)
 
(146
)
Net proceeds from issuance of Phillips 66 Partners LP common units
133

 
114

Other
282

 
(79
)
Net Cash Used in Financing Activities
(1,402
)
 
(4,069
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(31
)
 
(20
)
 
 
 
 
Net Change in Cash and Cash Equivalents
(751
)
 
(2,195
)
Cash and cash equivalents at beginning of period
3,019

 
3,119

Cash and Cash Equivalents at End of Period
$
2,268

 
924

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


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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, 2019
$
6

19,912

(15,822
)
21,423

(767
)
2,554

27,306

Net income



712


81

793

Other comprehensive loss




(104
)

(104
)
Dividends paid on common stock ($0.90 per share)



(402
)


(402
)
Repurchase of common stock


(439
)



(439
)
Benefit plan activity

22


(3
)


19

Issuance of Phillips 66 Partners LP common units

44




32

76

Impacts from Phillips 66 Partners GP/IDR restructuring transaction

275




(373
)
(98
)
Distributions to noncontrolling interests





(59
)
(59
)
September 30, 2019
$
6

20,253

(16,261
)
21,730

(871
)
2,235

27,092

 
 
 
 
 
 
 
 
June 30, 2018
$
6

19,831

(14,121
)
17,500

(680
)
2,424

24,960

Net income



1,492


76

1,568

Other comprehensive income




41


41

Dividends paid on common stock ($0.80 per share)



(370
)


(370
)
Repurchase of common stock


(405
)



(405
)
Benefit plan activity

13


(4
)


9

Issuance of Phillips 66 Partners LP common units

16




26

42

Distributions to noncontrolling interests





(50
)
(50
)
September 30, 2018
$
6

19,860

(14,526
)
18,618

(639
)
2,476

25,795



 
Shares in Thousands
 
Three Months Ended September 30
 
Common Stock Issued

Treasury Stock

 
 
 
June 30, 2019
646,828

198,287

Repurchase of common stock

4,406

Shares issued—share-based compensation
223


September 30, 2019
647,051

202,693

 
 
 
June 30, 2018
645,215

180,952

Repurchase of common stock

3,501

Shares issued—share-based compensation
364


September 30, 2018
645,579

184,453

See Notes to Consolidated Financial Statements.


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Table of Contents

 
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, 2018
$
6

19,873

(15,023
)
20,489

(692
)
2,500

27,153

Cumulative effect of accounting changes



81

(89
)
(1
)
(9
)
Net income



2,340


227

2,567

Other comprehensive loss




(90
)

(90
)
Dividends paid on common stock ($2.60 per share)



(1,172
)


(1,172
)
Repurchase of common stock


(1,238
)



(1,238
)
Benefit plan activity

56


(8
)


48

Issuance of Phillips 66 Partners LP common units

49




58

107

Impacts from Phillips 66 Partners GP/IDR restructuring transaction

275




(373
)
(98
)
Distributions to noncontrolling interests





(176
)
(176
)
September 30, 2019
$
6

20,253

(16,261
)
21,730

(871
)
2,235

27,092

 
 
 
 
 
 
 
 
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



3,355


202

3,557

Other comprehensive loss




(22
)

(22
)
Dividends paid on common stock ($2.30 per share)



(1,069
)


(1,069
)
Repurchase of common stock


(4,148
)



(4,148
)
Benefit plan activity

54


(10
)


44

Issuance of Phillips 66 Partners LP common units

38




64

102

Distributions to noncontrolling interests





(146
)
(146
)
September 30, 2018
$
6

19,860

(14,526
)
18,618

(639
)
2,476

25,795



 
Shares in Thousands
 
Nine Months Ended September 30
 
Common Stock Issued

Treasury Stock

 
 
 
December 31, 2018
645,692

189,526

Repurchase of common stock

13,167

Shares issued—share-based compensation
1,359


September 30, 2019
647,051

202,693

 
 
 
December 31, 2017
643,835

141,565

Repurchase of common stock

42,888

Shares issued—share-based compensation
1,744


September 30, 2018
645,579

184,453

See Notes to Consolidated Financial Statements.

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Table of Contents

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 and nine months ended September 30, 2019, are not necessarily indicative of the results 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.

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Table of Contents

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
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

Product Line and Services
 
 
 
 
 
Refined petroleum products
$
22,373

23,184

 
64,088

64,975

Crude oil resales
3,511

4,747

 
10,162

12,316

Natural gas liquids (NGL)
1,025

1,782

 
3,508

4,751

Services and other*
309

75

 
410

321

Consolidated sales and other operating revenues
$
27,218

29,788


78,168

82,363

 
 
 
 
 
 
Geographic Location**
 
 
 
 
 
United States
$
21,160

23,068

 
60,602

64,481

United Kingdom
2,375

3,085

 
7,318

7,623

Germany
1,025

1,135

 
3,074

3,174

Other foreign countries
2,658

2,500

 
7,174

7,085

Consolidated sales and other operating revenues
$
27,218

29,788


78,168

82,363

* 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 September 30, 2019, and December 31, 2018, receivables from contracts with customers were $5,585 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 September 30, 2019, and December 31, 2018, our asset balances related to such payments were $311 million and $248 million, respectively.

Our contract-related liabilities represent advances received from our customers prior to product or service delivery. At September 30, 2019, and December 31, 2018, contract liabilities were $218 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 September 30, 2019, the remaining performance obligations related to these minimum volume commitment contracts were not material.



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Table of Contents

Note 4—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 reconciliation, dispute resolution and payment confirmation. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

At September 30, 2019, we reported $7,086 million of accounts and notes receivable, net of allowances of $41 million. Changes in the allowance were not material for the three and nine months ended September 30, 2019. Based on an aging analysis at September 30, 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
 
September 30
2019

 
December 31
2018

 
 
 
 
Crude oil and petroleum products
$
5,208

 
3,238

Materials and supplies
313

 
305

 
$
5,521

 
3,543




Inventories valued on the last-in, first-out (LIFO) basis totaled $5,103 million and $3,123 million at September 30, 2019, and December 31, 2018, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $4.4 billion and $2.9 billion at September 30, 2019, and December 31, 2018, respectively.



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Table of Contents

Note 6—Investments, Loans and Long-Term Receivables

Equity Investments

Summarized 100% financial information for Chevron Phillips Chemical Company LLC (CPChem) was as follows:
 
 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
Revenues
$
2,369

3,195

 
7,209

8,773

Income before income taxes
475

552

 
1,522

1,819

Net income
456

531

 
1,464

1,766




DCP Midstream, LLC (DCP Midstream)
The fair value of our investment in DCP Midstream depends on the market value of DCP Midstream’s general partner interest in DCP Midstream, LP (DCP Partners) and the market value of DCP Partners’ common units.  At June 30, 2019, we estimated the fair value of our investment in DCP Midstream was below our book value, but we believed the condition was temporary.  The fair value of our investment in DCP Midstream further deteriorated in the third quarter as the market value of DCP Midstream’s general partner interest in DCP Partners and the market value of DCP Partners’ common units declined further.  We concluded the decline in fair value was no longer temporary due to the duration and magnitude of the decline.  Accordingly, we recorded an $853 million impairment in the third quarter of 2019. The impairment is included in the “Impairments” line on our consolidated statement of income and results in our investment in DCP Midstream having a book value of $1,358 million at September 30, 2019. See Note 13—Fair Value Measurements, for additional information on the techniques used to determine the fair value of our investment in DCP Midstream.

Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of $2,500 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 in Dakota Access 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. At September 30, 2019, Phillips 66 Partners’ effective ownership interest in the Gray Oak Pipeline was 42.25%.


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Table of Contents

In June 2019, Gray Oak entered into a third-party term loan facility with an initial borrowing capacity of $1,230 million, which was increased in July 2019 to $1,317 million. Borrowings under the facility are due on June 3, 2022. Phillips 66 Partners and its co-venturers provided a guarantee through an equity contribution agreement requiring proportionate equity contributions to Gray Oak up to the total outstanding loan amount. Under the agreement, Phillips 66 Partners’ maximum potential amount of future obligations is $556 million, plus any accrued interest and associated fees, which would be required if the term loan facility is fully utilized and Gray Oak defaults on its obligations. At September 30, 2019, Gray Oak had outstanding borrowings of $904 million, and Phillips 66 Partners’ 42.25% proportionate exposure under the equity contribution agreement was $382 million. The net proceeds from the term loan were used by Gray Oak for construction of the Gray Oak Pipeline and repayment of amounts borrowed under a related party loan agreement that Phillips 66 Partners and its co-venturers executed in March 2019 and terminated upon the repayment by Gray Oak in June. The total related party loan to and repayment received from Gray Oak was $95 million.

At September 30, 2019, Phillips 66 Partners’ maximum exposure to loss was $1,130 million, which represented the book value of the investment in Gray Oak of $748 million and the term loan guarantee of $382 million. See Note 21—Phillips 66 Partners LP, for additional information regarding Phillips 66 Partners’ ownership in Holdings LLC and Gray Oak.

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 Gray Oak’s economic performance.

OnCue Holdings, LLC (OnCue)
We hold a 50% interest in OnCue, a joint venture that owns and operates retail convenience stores. We fully guaranteed various debt agreements of OnCue and our co-venturer did not participate in the guarantees. This entity is considered a VIE because our debt guarantees resulted in OnCue not being exposed to all potential losses. We have determined we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact OnCue’s economic performance. At September 30, 2019, our maximum exposure to loss was $139 million, which represented the book value of our investment in OnCue of $76 million and guaranteed debt obligations of $63 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
 
September 30, 2019
 
December 31, 2018
 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
 
 
 
 
 
 
 
 
 
 
 
Midstream
$
10,759

 
2,316

 
8,443

 
9,663

 
2,100

 
7,563

Chemicals

 

 

 

 

 

Refining
23,189

 
10,084