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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the quarterly period ended | September 30, 2020 | |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the transition period from | | to | | |
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Commission file number: | 001-35349 | |
Phillips 66
(Exact name of registrant as specified in its charter)
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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)
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Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered | |
| Common Stock, $0.01 Par Value | | PSX | | New York Stock Exchange | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ |
Smaller reporting company | ☐ | Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had 436,800,185 shares of common stock, $0.01 par value, outstanding as of September 30, 2020.
PHILLIPS 66
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
| | | | | |
Consolidated Statement of Operations | Phillips 66 |
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2020 | | 2019 | | | 2020 | | 2019 | |
Revenues and Other Income | | | | | |
Sales and other operating revenues | $ | 15,929 | | 27,218 | | | 47,720 | | 78,168 | |
Equity in earnings of affiliates | 349 | | 499 | | | 871 | | 1,663 | |
Net gain on dispositions | 1 | | 18 | | | 87 | | 19 | |
Other income | 20 | | 36 | | | 48 | | 97 | |
Total Revenues and Other Income | 16,299 | | 27,771 | | | 48,726 | | 79,947 | |
| | | | | |
Costs and Expenses | | | | | |
Purchased crude oil and products | 14,509 | | 23,806 | | | 42,557 | | 69,415 | |
Operating expenses | 1,016 | | 1,206 | | | 3,383 | | 3,678 | |
Selling, general and administrative expenses | 384 | | 416 | | | 1,112 | | 1,190 | |
Depreciation and amortization | 352 | | 336 | | | 1,037 | | 1,001 | |
Impairments | 1,140 | | 853 | | | 4,146 | | 856 | |
Taxes other than income taxes | 106 | | 105 | | | 377 | | 330 | |
Accretion on discounted liabilities | 6 | | 6 | | | 17 | | 17 | |
Interest and debt expense | 132 | | 109 | | | 360 | | 343 | |
Foreign currency transaction (gains) losses | 4 | | (9) | | | 10 | | 5 | |
Total Costs and Expenses | 17,649 | | 26,828 | | | 52,999 | | 76,835 | |
Income (loss) before income taxes | (1,350) | | 943 | | | (4,273) | | 3,112 | |
Income tax expense (benefit) | (624) | | 150 | | | (1,053) | | 545 | |
Net Income (Loss) | (726) | | 793 | | | (3,220) | | 2,567 | |
Less: net income attributable to noncontrolling interests | 73 | | 81 | | | 216 | | 227 | |
Net Income (Loss) Attributable to Phillips 66 | $ | (799) | | 712 | | | (3,436) | | 2,340 | |
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Net Income (Loss) Attributable to Phillips 66 Per Share of Common Stock (dollars) | | | | | |
Basic | $ | (1.82) | | 1.58 | | | (7.83) | | 5.15 | |
Diluted | (1.82) | | 1.58 | | | (7.83) | | 5.13 | |
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| | | | | |
| | | | | |
Weighted-Average Common Shares Outstanding (thousands) | | | | | |
Basic | 438,916 | | 449,005 | | | 439,670 | | 453,398 | |
Diluted | 438,916 | | 451,001 | | | 439,670 | | 455,810 | |
| | | | | |
See Notes to Consolidated Financial Statements. | | | | | |
| | | | | |
Consolidated Statement of Comprehensive Income (Loss) | Phillips 66 |
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2020 | | 2019 | | | 2020 | | 2019 | |
| | | | | |
Net Income (Loss) | $ | (726) | | 793 | | | (3,220) | | 2,567 | |
Other comprehensive income (loss) | | | | | |
Defined benefit plans | | | | | |
| | | | | |
Actuarial loss arising during the period | — | | — | | | (300) | | — | |
Amortization to income of net actuarial loss, prior service credit and settlements | 34 | | 17 | | | 112 | | 51 | |
| | | | | |
| | | | | |
Plans sponsored by equity affiliates | 4 | | 2 | | | 9 | | 7 | |
Income taxes on defined benefit plans | (10) | | (4) | | | 44 | | (13) | |
Defined benefit plans, net of income taxes | 28 | | 15 | | | (135) | | 45 | |
Foreign currency translation adjustments | 155 | | (119) | | | (41) | | (124) | |
Income taxes on foreign currency translation adjustments | (4) | | 1 | | | (3) | | — | |
Foreign currency translation adjustments, net of income taxes | 151 | | (118) | | | (44) | | (124) | |
Cash flow hedges | 2 | | (2) | | | (7) | | (13) | |
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Income taxes on hedging activities | — | | 1 | | | 2 | | 2 | |
Hedging activities, net of income taxes | 2 | | (1) | | | (5) | | (11) | |
Other Comprehensive Income (Loss), Net of Income Taxes | 181 | | (104) | | | (184) | | (90) | |
Comprehensive Income (Loss) | (545) | | 689 | | | (3,404) | | 2,477 | |
Less: comprehensive income attributable to noncontrolling interests | 73 | | 81 | | | 216 | | 227 | |
Comprehensive Income (Loss) Attributable to Phillips 66 | $ | (618) | | 608 | | | (3,620) | | 2,250 | |
See Notes to Consolidated Financial Statements.
| | | | | |
Consolidated Balance Sheet | Phillips 66 |
| | | | | | | | | | | |
| Millions of Dollars |
| September 30 2020 | | December 31 2019 |
Assets | | | |
Cash and cash equivalents | $ | 1,462 | | | 1,614 | |
Accounts and notes receivable (net of allowances of $37 million in 2020 and $41 million in 2019) | 5,195 | | | 7,376 | |
Accounts and notes receivable—related parties | 768 | | | 1,134 | |
Inventories | 4,897 | | | 3,776 | |
Prepaid expenses and other current assets | 500 | | | 495 | |
Total Current Assets | 12,822 | | | 14,395 | |
Investments and long-term receivables | 13,767 | | | 14,571 | |
Net properties, plants and equipment | 23,489 | | | 23,786 | |
Goodwill | 1,425 | | | 3,270 | |
Intangibles | 849 | | | 869 | |
Other assets | 1,929 | | | 1,829 | |
Total Assets | $ | 54,281 | | | 58,720 | |
| | | |
Liabilities | | | |
Accounts payable | $ | 4,905 | | | 8,043 | |
Accounts payable—related parties | 552 | | | 532 | |
Short-term debt | 1,860 | | | 547 | |
Accrued income and other taxes | 1,229 | | | 979 | |
Employee benefit obligations | 443 | | | 710 | |
Other accruals | 1,524 | | | 835 | |
Total Current Liabilities | 10,513 | | | 11,646 | |
Long-term debt | 12,666 | | | 11,216 | |
Asset retirement obligations and accrued environmental costs | 644 | | | 638 | |
Deferred income taxes | 5,507 | | | 5,553 | |
Employee benefit obligations | 1,394 | | | 1,044 | |
Other liabilities and deferred credits | 1,252 | | | 1,454 | |
Total Liabilities | 31,976 | | | 31,551 | |
| | | |
Equity | | | |
Common stock (2,500,000,000 shares authorized at $0.01 par value) Issued (2020—648,572,012 shares; 2019—647,416,633 shares) | | | |
Par value | 6 | | | 6 | |
Capital in excess of par | 20,363 | | | 20,301 | |
Treasury stock (at cost: 2020—211,771,827 shares; 2019—206,390,806 shares) | (17,116) | | | (16,673) | |
Retained earnings | 17,436 | | | 22,064 | |
Accumulated other comprehensive loss | (967) | | | (788) | |
Total Stockholders’ Equity | 19,722 | | | 24,910 | |
Noncontrolling interests | 2,583 | | | 2,259 | |
Total Equity | 22,305 | | | 27,169 | |
Total Liabilities and Equity | $ | 54,281 | | | 58,720 | |
See Notes to Consolidated Financial Statements.
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Consolidated Statement of Cash Flows | Phillips 66 |
| | | | | | | | | | | |
| Millions of Dollars |
| Nine Months Ended September 30 |
| 2020 | | | 2019 | |
Cash Flows From Operating Activities | | | |
Net income (loss) | $ | (3,220) | | | 2,567 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities | | | |
Depreciation and amortization | 1,037 | | | 1,001 | |
Impairments | 4,146 | | | 856 | |
Accretion on discounted liabilities | 17 | | | 17 | |
Deferred income taxes | 2 | | | 115 | |
Undistributed equity earnings | 254 | | | (25) | |
Net gain on dispositions | (87) | | | (19) | |
| | | |
| | | |
Other | 52 | | | (97) | |
Working capital adjustments | | | |
Accounts and notes receivable | 2,684 | | | (909) | |
Inventories | (1,134) | | | (2,004) | |
Prepaid expenses and other current assets | (40) | | | (269) | |
Accounts payable | (2,985) | | | 1,778 | |
Taxes and other accruals | 746 | | | 103 | |
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Net Cash Provided by Operating Activities | 1,472 | | | 3,114 | |
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Cash Flows From Investing Activities | | | |
Capital expenditures and investments | (2,414) | | | (2,595) | |
Return of investments in equity affiliates | 139 | | | 55 | |
Proceeds from asset dispositions | 3 | | | 84 | |
Advances/loans—related parties | (251) | | | (95) | |
Collection of advances/loans—related parties | 44 | | | 95 | |
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Other | (87) | | | 24 | |
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Net Cash Used in Investing Activities | (2,566) | | | (2,432) | |
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Cash Flows From Financing Activities | | | |
Issuance of debt | 3,305 | | | 1,758 | |
Repayment of debt | (546) | | | (1,004) | |
Issuance of common stock | 6 | | | 15 | |
Repurchase of common stock | (443) | | | (1,238) | |
Dividends paid on common stock | (1,182) | | | (1,172) | |
Distributions to noncontrolling interests | (201) | | | (176) | |
Net proceeds from issuance of Phillips 66 Partners LP common units | 2 | | | 133 | |
Other | (22) | | | 282 | |
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Net Cash Provided by (Used in) Financing Activities | 919 | | | (1,402) | |
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Effect of Exchange Rate Changes on Cash and Cash Equivalents | 23 | | | (31) | |
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Net Change in Cash and Cash Equivalents | (152) | | | (751) | |
Cash and cash equivalents at beginning of period | 1,614 | | | 3,019 | |
Cash and Cash Equivalents at End of Period | $ | 1,462 | | | 2,268 | |
See Notes to Consolidated Financial Statements.
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Consolidated Statement of Changes in Equity | Phillips 66 |
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| 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 |
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June 30, 2020 | $ | 6 | | 20,342 | | (17,116) | | 18,631 | | (1,148) | | 2,580 | | 23,295 | |
Net income (loss) | — | | — | | — | | (799) | | — | | 73 | | (726) | |
Other comprehensive income | — | | — | | — | | — | | 181 | | — | | 181 | |
Dividends paid on common stock ($0.90 per share) | — | | — | | — | | (393) | | — | | — | | (393) | |
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Benefit plan activity | — | | 21 | | — | | (3) | | — | | — | | 18 | |
Net distributions to noncontrolling interests | — | | — | | — | | — | | — | | (70) | | (70) | |
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September 30, 2020 | $ | 6 | | 20,363 | | (17,116) | | 17,436 | | (967) | | 2,583 | | 22,305 | |
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June 30, 2019 | $ | 6 | | 19,912 | | (15,822) | | 21,423 | | (767) | | 2,554 | | 27,306 | |
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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 | |
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| Shares |
| Three Months Ended September 30 |
| Common Stock Issued | Treasury Stock |
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June 30, 2020 | 648,468,487 | | 211,771,827 | |
Repurchase of common stock | — | | — | |
Shares issued—share-based compensation | 103,525 | | — | |
September 30, 2020 | 648,572,012 | | 211,771,827 | |
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June 30, 2019 | 646,828,397 | | 198,286,700 | |
Repurchase of common stock | — | | 4,406,701 | |
Shares issued—share-based compensation | 222,580 | | — | |
September 30, 2019 | 647,050,977 | | 202,693,401 | |
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Consolidated Statement of Changes in Equity | Phillips 66 |
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| Millions of Dollars |
| Nine Months Ended September 30, 2020 |
| Attributable to Phillips 66 | | |
| Common Stock | | | | |
| Par Value | Capital in Excess of Par | Treasury Stock | Retained Earnings | Accum. Other Comprehensive Loss | Noncontrolling Interests | Total |
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December 31, 2019 | $ | 6 | | 20,301 | | (16,673) | | 22,064 | | (788) | | 2,259 | | 27,169 | |
Net income (loss) | — | | — | | — | | (3,436) | | — | | 216 | | (3,220) | |
Other comprehensive loss | — | | — | | — | | — | | (184) | | — | | (184) | |
Dividends paid on common stock ($2.70 per share) | — | | — | | — | | (1,182) | | — | | — | | (1,182) | |
Repurchase of common stock | — | | — | | (443) | | — | | — | | — | | (443) | |
Benefit plan activity | — | | 62 | | — | | (8) | | — | | — | | 54 | |
Transfer of equity interest | — | | — | | — | | — | | — | | 305 | | 305 | |
Net distributions to noncontrolling interests | — | | — | | — | | — | | — | | (197) | | (197) | |
Other | — | | — | | — | | (2) | | 5 | | — | | 3 | |
September 30, 2020 | $ | 6 | | 20,363 | | (17,116) | | 17,436 | | (967) | | 2,583 | | 22,305 | |
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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 | |
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| Nine Months Ended September 30 |
| Common Stock Issued | Treasury Stock |
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December 31, 2019 | 647,416,633 | | 206,390,806 | |
Repurchase of common stock | — | | 5,381,021 | |
Shares issued—share-based compensation | 1,155,379 | | — | |
September 30, 2020 | 648,572,012 | | 211,771,827 | |
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December 31, 2018 | 645,691,761 | | 189,526,331 | |
Repurchase of common stock | — | | 13,167,070 | |
Shares issued—share-based compensation | 1,359,216 | | — | |
September 30, 2019 | 647,050,977 | | 202,693,401 | |
See Notes to Consolidated Financial Statements. |
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Notes to Consolidated Financial Statements | Phillips 66 |
Note 1—Interim Financial Information
The unaudited interim financial information presented in the financial statements included in this report is prepared in accordance with generally accepted accounting principles in the United States (GAAP) and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2019 Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of the results expected for the full year.
Note 2—Sales and Other Operating Revenues
Disaggregated Revenues
The following tables present our disaggregated sales and other operating revenues:
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| Millions of Dollars |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2020 | | | 2019 | | | 2020 | | 2019 | |
Product Line and Services | | | | | | |
Refined petroleum products | $ | 12,573 | | | 22,373 | | | 37,431 | | 64,088 | |
Crude oil resales | 2,198 | | | 3,511 | | | 6,565 | | 10,162 | |
Natural gas liquids (NGL) | 966 | | | 1,025 | | | 2,645 | | 3,508 | |
Services and other* | 192 | | | 309 | | | 1,079 | | 410 | |
Consolidated sales and other operating revenues | $ | 15,929 | | | 27,218 | | | 47,720 | | 78,168 | |
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Geographic Location** | | | | | | |
United States | $ | 12,125 | | | 21,160 | | | 36,212 | | 60,602 | |
United Kingdom | 1,850 | | | 2,375 | | | 5,131 | | 7,318 | |
Germany | 805 | | | 1,025 | | | 2,276 | | 3,074 | |
Other foreign countries | 1,149 | | | 2,658 | | | 4,101 | | 7,174 | |
Consolidated sales and other operating revenues | $ | 15,929 | | | 27,218 | | | 47,720 | | 78,168 | |
* Includes derivatives-related activities. See Note 13—Derivatives and Financial Instruments, for additional information. |
** Sales and other operating revenues are attributable to countries based on the location of the operations generating the revenues. |
Contract-Related Assets and Liabilities
At September 30, 2020, and December 31, 2019, receivables from contracts with customers were $3,410 million and $6,902 million, respectively. Significant noncustomer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.
Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At September 30, 2020, and December 31, 2019, our asset balances related to such payments were $389 million and $336 million, respectively.
Our contract liabilities represent advances from our customers prior to product or service delivery. At September 30, 2020, and December 31, 2019, contract liabilities were not material.
Remaining Performance Obligations
Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We do not disclose remaining performance obligations for these contracts as the expected duration is one year or less, or because the variable consideration has been allocated entirely to an unsatisfied performance obligation. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing, which mostly expire by 2021. At September 30, 2020, the remaining performance obligations related to these minimum volume commitment contracts were not material.
Note 3—Credit Losses
We are exposed to credit losses primarily through our sales of refined petroleum products, crude oil and NGL. We assess each counterparty’s ability to pay for the products we sell by conducting a credit review. The credit review considers our expected billing exposure and timing for payment and the counterparty’s established credit rating or our assessment of the counterparty’s creditworthiness based on our analysis of their financial statements when a credit rating is not available. We also consider contract terms and conditions, country and political risk, and business strategy in our evaluation. A credit limit is established for each counterparty based on the outcome of this review. We may require collateralized asset support or a prepayment to mitigate credit risk.
We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliations, dispute resolution and payment confirmations. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.
The negative economic impacts associated with Coronavirus Disease 2019 (COVID-19) increase the probability that certain of our counterparties may not be able to completely fulfill their obligations in a timely manner. In response, we have enhanced our credit monitoring, sought collateral to support some transactions, and required prepayments from higher-risk counterparties.
At September 30, 2020, and December 31, 2019, we reported $5,963 million and $8,510 million of accounts and notes receivable, net of allowances of $37 million and $41 million, respectively. Based on an aging analysis at September 30, 2020, more than 98% of our accounts receivable were outstanding less than 60 days.
We are also exposed to credit losses from off-balance sheet exposures, such as guarantees of joint venture debt and standby letters of credit. See Note 11—Guarantees, and Note 12—Contingencies and Commitments, for more information on these off-balance sheet exposures.
Note 4—Inventories
Inventories consisted of the following:
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| Millions of Dollars |
| September 30 2020 | | December 31 2019 |
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Crude oil and petroleum products | $ | 4,561 | | | 3,452 | |
Materials and supplies | 336 | | | 324 | |
| $ | 4,897 | | | 3,776 | |
Inventories valued on the last-in, first-out (LIFO) basis totaled $4,436 million and $3,331 million at September 30, 2020, and December 31, 2019, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $1.6 billion and $4.3 billion at September 30, 2020, and December 31, 2019, respectively.
Note 5—Investments, Loans and Long-Term Receivables
Equity Investments
Gray Oak Pipeline, LLC
Phillips 66 Partners LP (Phillips 66 Partners) has a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. Phillips 66 Partners has an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC, after considering a co-venturer’s 35% interest in the consolidated holding company.
In September 2020, Gray Oak Pipeline, LLC closed its offering of $1.4 billion aggregate principal amount of senior unsecured notes with maturities ranging from 2023 to 2027. These senior notes are not guaranteed by Phillips 66 Partners or any of its co-venturers. Net proceeds from the offering were used to repay a third-party term loan of $1,379 million, and for general company purposes. Concurrent with the full repayment of the third-party term loan facility, the associated equity contribution agreement was terminated.
During its development phase, Gray Oak Pipeline, LLC was considered a variable interest entity (VIE) because it did not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We determined we were not the primary beneficiary because we and our co-venturers jointly directed the activities of Gray Oak Pipeline, LLC that most significantly impacted economic performance. The Gray Oak Pipeline commenced full operations in the second quarter of 2020 and ceased being a VIE. At September 30, 2020, Phillips 66 Partners’ investment in the Gray Oak Pipeline had a book value of $896 million. See Note 20—Phillips 66 Partners LP, for additional information regarding Phillips 66 Partners’ ownership in Gray Oak Pipeline, LLC.
Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of $2.5 billion aggregate principal amount of senior unsecured notes, consisting of:
•$650 million aggregate principal amount of 3.625% Senior Notes due 2022.
•$1.0 billion aggregate principal amount of 3.900% Senior Notes due 2024.
•$850 million aggregate principal amount of 4.625% Senior Notes due 2029.
Dakota Access and ETCO have guaranteed repayment of the notes. In addition, Phillips 66 Partners and its co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the ongoing litigation related to an easement granted by the U.S. Army Corps of Engineers (USACE) to allow the pipeline to be constructed under Lake Oahe in North Dakota. Contributions may be required if Dakota Access determines that the issues included in any such final judgment cannot be remediated and Dakota Access has or is projected to have insufficient funds to satisfy repayment of the notes. If Dakota Access undertakes remediation to cure issues raised in a final judgment, contributions may be required if any series of the notes become due, whether by acceleration or at maturity, during such time, to the extent Dakota Access has or is projected to have insufficient funds to pay such amounts. At September 30, 2020, Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU was approximately $631 million.
In March 2020, the trial court presiding over this litigation ordered the USACE to prepare an Environmental Impact Statement (EIS), and requested additional information to enable a decision on whether the Dakota Access Pipeline should be shut down while the EIS is being prepared. On July 6, 2020, the trial court ordered the Dakota Access Pipeline to be shut down and emptied of crude oil within 30 days, and that the pipeline should remain shut down pending the preparation of the EIS by the USACE, which the USACE has indicated is expected to take approximately 13 months. Dakota Access filed an appeal and a request for a stay of the order, which was granted. The case is now on an expedited appellate track and oral arguments regarding whether the pipeline easement is valid and whether the USACE must prepare an EIS are set for early November 2020, with a decision expected in late 2020 or early 2021. In addition to the proceedings in the appellate court, the trial court has been asked to issue an injunction to shut down the pipeline until the USACE completes the EIS, which could be ruled on as early as late December 2020. If the pipeline is required to cease operations pending the preparation of the EIS, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, Phillips 66 Partners also could be asked to support its share of the ongoing expenses, including scheduled interest payments on the notes of approximately $25 million annually, in addition to the potential obligations under the CECU.
CF United LLC (CF United)
We hold a 50% voting interest and a 48% economic interest in CF United, a retail marketing joint venture with operations primarily on the U.S. West Coast. CF United is considered a VIE because our co-venturer has an option to sell its interest to us based on a fixed multiple. The put option becomes effective July 1, 2023, and expires on March 31, 2024. The put option is viewed as a variable interest as the purchase price on the exercise date may not represent the then-current fair value of CF United. We have determined that we are not the primary beneficiary because we and our co-venturer jointly direct the activities of CF United that most significantly impact economic performance. At September 30, 2020, our maximum exposure to loss was comprised of our $326 million investment in CF United and any potential future loss resulting from the put option, if the purchase price based on a fixed multiple exceeds the then-current fair value of CF United.
DCP Midstream, LLC (DCP Midstream)
At September 30, 2019, we estimated the fair value of our investment in DCP Midstream was below our book value due to a decline in the market values of DCP Midstream, LP (DCP Partners) common units and its then general partner interest. Accordingly, we recorded an $853 million before-tax impairment in the third quarter of 2019. After the elimination of its general partner’s economic interests in November 2019, the fair value of our investment in DCP Midstream depends solely on the market value of DCP Partners common units. In the first quarter of 2020, the market value of DCP Partners common units further declined by approximately 85%. As a result, at March 31, 2020, the fair value of our investment in DCP Midstream was significantly lower than its book value. We concluded the difference between its fair value and book value was not temporary primarily due to the magnitude of the difference. Accordingly, we recorded a $1.2 billion before-tax impairment of our investment in the first quarter of 2020. These charges are included in the “Impairments” line item on our consolidated statement of operations. These impairments increased the basis difference for our investment in DCP Midstream to $1.8 billion at March 31, 2020, which indicated the carrying value of our investment was lower than our share of DCP Midstream’s recorded net assets at March 31, 2020. The basis difference is being amortized and recognized as a benefit to equity earnings over a period of 22 years, which was the estimated remaining useful life of DCP Midstream’s properties, plants and equipment (PP&E) at March 31, 2020. Equity earnings for the three and nine months ended September 30, 2020, were increased by approximately $20 million and $50 million, respectively, due to the amortization of the basis difference. See Note 14—Fair Value Measurements, for additional information on the techniques used to determine the fair value of our investment in DCP Midstream. At September 30, 2020, our investment in DCP Midstream had a book value of $281 million.
Liberty Pipeline LLC (Liberty)
Phillips 66 Partners holds a 50% interest in Liberty, a joint venture formed to develop and construct the Liberty Pipeline system which, upon completion, will transport crude oil from the Rockies and Bakken production areas to Cushing, Oklahoma. Liberty is considered a VIE because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of Liberty that most significantly impact economic performance. The development and construction of the Liberty Pipeline system have been deferred as a result of the current challenging business environment. At September 30, 2020, our maximum exposure to loss was $252 million, which represented the book value of Phillips 66 Partners’ investment in Liberty of $239 million and our outstanding proportionate vendor guarantees of $13 million.
OnCue Holdings, LLC (OnCue)
We hold a 50% interest in OnCue, a joint venture that owns and operates retail convenience stores. We fully guaranteed various debt agreements of OnCue and our co-venturer did not participate in the guarantees. This entity is considered a VIE because our debt guarantees resulted in OnCue not being exposed to all potential losses. We have determined we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact OnCue’s economic performance. At September 30, 2020, our maximum exposure to loss was $165 million, which represented the book value of our investment in OnCue of $92 million and guaranteed debt obligations of $73 million.
Red Oak Pipeline LLC (Red Oak)
We hold a 50% interest in a joint venture formed to develop and construct the Red Oak Pipeline system. In the third quarter of 2020, the Red Oak Pipeline project was canceled. As a result, we assessed our investment for impairment and concluded that the carrying value of our investment at September 30, 2020, was greater than its fair value. Accordingly, we recorded a before-tax impairment of $84 million in the Midstream segment, which is included in the “Impairments” line item on our consolidated statement of operations for the three and nine months ended September 30, 2020. See Note 14—Fair Value Measurements, for additional information on the techniques used to determine the fair value of our investment in Red Oak. At September 30, 2020, the remaining book value of our investment in Red Oak was $20 million.
Related Party Loan
In the second and third quarters of 2020, we and our co-venturer provided a short-term member loan to WRB Refining LP (WRB). At September 30, 2020, the outstanding loan balance to WRB was approximately $420 million, of which our share was approximately $210 million.
Note 6—Properties, Plants and Equipment
Our gross investment in PP&E and the associated accumulated depreciation and amortization (Accum. D&A) balances were as follows:
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| September 30, 2020 | | December 31, 2019 |
| Gross PP&E | | Accum. D&A | | Net PP&E | | Gross PP&E | | Accum. D&A | | Net PP&E |
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Midstream | $ | 12,154 | | | 2,727 | | | 9,427 | | | 11,221 | | | |