Equity Investments and Loans

3 Months Ended

Mar. 31, 2020

Equity Method Investments and Joint Ventures [Abstract]

Equity Investments and Loans

Note 4—Equity Investments and Loans

Equity Investments

The following table summarizes the carrying value of our equity investments:

			Millions of Dollars
	Percentage Ownership		March 31 2020		December 31 2019
Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (Bakken Pipeline)	25.00	%	$	595	592
Bayou Bridge Pipeline, LLC (Bayou Bridge)	40.00		296		294
DCP Sand Hills Pipeline, LLC (Sand Hills)	33.34		598		595
DCP Southern Hills Pipeline, LLC (Southern Hills)	33.34		218		215
Explorer Pipeline Company (Explorer)	21.94		102		105
Gray Oak Pipeline, LLC	65.00		799		759
Liberty Pipeline LLC (Liberty)	50.00		103		—
Paradigm Pipeline LLC (Paradigm)	50.00		143		143
Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal)	70.00		67		70
South Texas Gateway Terminal LLC (South Texas Gateway Terminal)	25.00		102		74
STACK Pipeline LLC (STACK)	50.00		113		114
Total equity investments			$	3,136	2,961

Earnings from our equity investments were as follows:

	Millions of Dollars
	Three Months Ended March 31
	2020		2019
Bakken Pipeline	$	57	51
Bayou Bridge	10		4
Sand Hills	41		36
Southern Hills	11		13
Explorer	7		3
Gray Oak Pipeline, LLC	5		—
Liberty	—		—
Paradigm	4		3
Phillips 66 Partners Terminal	—		6
South Texas Gateway Terminal	—		—
STACK	1		3
Total equity in earnings of affiliates	$	136	119

Liberty

In February 2020, we entered into a Purchase and Sale Agreement with Phillips 66 PDI to acquire its 50% interest in the Liberty Pipeline joint venture for $75 million. The purchase price reflected the reimbursement of project costs incurred by Phillips 66 prior to the effective date of the transaction. The transaction was funded through a combination of cash on hand and our revolving credit facility and closed on March 2, 2020. Liberty was 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. On March 24, 2020, we and our co-venturer announced we are deferring the development and construction of the Liberty Pipeline system as a result of the current challenging business environment.

Liberty 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. 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. At March 31, 2020, our maximum exposure to loss was $103 million, which represented the aggregate book value of our equity investment in Liberty. At March 31, 2020, Phillips 66 had an outstanding guarantee of $113 million to vendors for our proportionate share of the payment of certain purchase obligations of Liberty.

Gray Oak Pipeline, LLC

We have a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. After deducting a co-venturer’s pending acquisition of a 35% interest in the consolidated holding company, we have an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC. Gray Oak Pipeline, LLC was formed to develop and construct the Gray Oak Pipeline which transports crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi and the Sweeny area, including the Phillips 66 Sweeny Refinery, as well as access to the Houston market. On April 1, 2020, the Gray Oak Pipeline commenced full operations from West Texas to Texas Gulf Coast destinations. The Eagle Ford segment of the pipeline commenced operations later in April. Accordingly, the co-venturer’s 35% interest in the holding company is expected to be recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet in the second quarter. Also at that time, the premium paid by the co-venturer will be recharacterized from a long-term obligation to a gain in our consolidated statement of income. For the three months ended March 31, 2020, the co-venturer contributed an aggregate of $23 million to the holding company to fund its portion of Gray Oak Pipeline, LLC’s cash calls.

Gray Oak Pipeline, LLC has a third-party term loan facility with a borrowing capacity of $1,379 million, inclusive of accrued interest. Borrowings under the facility are due on June 3, 2022. We and our co-venturers provided a guarantee through an equity contribution agreement requiring proportionate equity contributions to Gray Oak Pipeline, LLC up to the total outstanding loan amount, plus any additional accrued interest and associated fees, if the term loan facility is fully utilized and Gray Oak Pipeline, LLC defaults on certain of its obligations thereunder. At March 31, 2020, the term loan facility was fully utilized by Gray Oak Pipeline, LLC and our 42.25% proportionate exposure under the equity contribution agreement was $583 million.

Gray Oak Pipeline, LLC 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-venturers jointly direct the activities of Gray Oak Pipeline, LLC that most significantly impact economic performance. At March 31, 2020, our maximum exposure to loss was $1,382 million, which represented our guarantee of the third-party term loan facility of $583 million and the aggregate book value of our equity method investment in Gray Oak Pipeline, LLC of $799 million.

Bakken Pipeline

In March 2019, a wholly owned subsidiary of Dakota Access, LLC (Dakota Access) closed an offering of $2,500 million aggregate principal amount of unsecured senior notes. Dakota Access and Energy Transfer Crude Oil Company, LLC (ETCO) have guaranteed repayment of the notes.  In addition, we and our 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 in the litigation related to certain disputed construction permits and Dakota Access determines that an equity contribution trigger event has occurred, the co-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. Our share of the maximum potential equity contributions under the CECU is approximately $631 million at March 31, 2020. In March 2020, the court in such litigation requested an Environmental Impact Statement from the U.S. Army Corps of Engineers, and requested additional information to make a further decision regarding whether the

Dakota Access Pipeline should be shut down while the Environmental Impact Statement is being prepared. Currently, this ruling does not have any immediate impact on the operations of Dakota Access and ETCO.

Summarized financial information for 100% of Dakota Access is as follows:

	Millions of Dollars
	Three Months Ended March 31
	2020		2019
Revenues	$	258	236
Income before income taxes	186		157
Net income	186		157