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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
March 31, 2020
 
 
 
or
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from
 
to
 
 
Commission file number:
001-35349
 
Phillips 66
(Exact name of registrant as specified in its charter) 
Delaware
 
45-3779385
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

2331 CityWest Blvd., Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
281-293-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
 
 
Common Stock, $0.01 Par Value
 
PSX
 
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  
The registrant had 436,674,707 shares of common stock, $0.01 par value, outstanding as of March 31, 2020.



PHILLIPS 66

TABLE OF CONTENTS
 
 
Page
 
 
 
 
1
2
3
4
5
6
 
 
34
 
 
59
 
 
59
 
 
 
 
 
60
 
 
61
 
 
62
 
 
63
 
 
64





PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
 
Consolidated Statement of Operations
Phillips 66
 
Millions of Dollars
 
Three Months Ended
March 31
 
2020

 
2019

Revenues and Other Income
 
 
 
Sales and other operating revenues
$
20,878

 
23,103

Equity in earnings of affiliates
365

 
516

Net gain on dispositions
1

 
1

Other income

 
38

Total Revenues and Other Income
21,244

 
23,658

 
 
 
 
Costs and Expenses
 
 
 
Purchased crude oil and products
18,440

 
21,055

Operating expenses
1,341

 
1,307

Selling, general and administrative expenses
319

 
366

Depreciation and amortization
342

 
331

Impairments
3,006

 
1

Taxes other than income taxes
157

 
128

Accretion on discounted liabilities
6

 
6

Interest and debt expense
111

 
119

Foreign currency transaction losses

 
5

Total Costs and Expenses
23,722

 
23,318

Income (loss) before income taxes
(2,478
)
 
340

Income tax expense (benefit)
(51
)
 
70

Net Income (Loss)
(2,427
)
 
270

Less: net income attributable to noncontrolling interests
69

 
66

Net Income (Loss) Attributable to Phillips 66
$
(2,496
)
 
204

 
 
 
 
Net Income (Loss) Attributable to Phillips 66 Per Share of Common Stock (dollars)
 
 
 
Basic
$
(5.66
)
 
0.44

Diluted
(5.66
)
 
0.44

 
 
 
 
Weighted-Average Common Shares Outstanding (thousands)
 
 
 
Basic
441,345

 
457,599

Diluted
441,345

 
459,289

See Notes to Consolidated Financial Statements.
 
 
 

1


Consolidated Statement of Comprehensive Income (Loss)
Phillips 66
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2020

 
2019

 
 
 
 
Net Income (Loss)
$
(2,427
)
 
270

Other comprehensive income (loss)
 
 
 
Defined benefit plans
 
 
 
Amortization to income of net actuarial loss, net prior service credit and settlements
23

 
19

Plans sponsored by equity affiliates
2

 
4

Income taxes on defined benefit plans
(5
)
 
(5
)
Defined benefit plans, net of income taxes
20

 
18

Foreign currency translation adjustments
(222
)
 
57

Income taxes on foreign currency translation adjustments
1

 

Foreign currency translation adjustments, net of income taxes
(221
)
 
57

Cash flow hedges
(9
)
 
(4
)
Income taxes on hedging activities
2

 
1

Hedging activities, net of income taxes
(7
)
 
(3
)
Other Comprehensive Income (Loss), Net of Income Taxes
(208
)
 
72

Comprehensive Income (Loss)
(2,635
)
 
342

Less: comprehensive income attributable to noncontrolling interests
69

 
66

Comprehensive Income (Loss) Attributable to Phillips 66
$
(2,704
)
 
276

See Notes to Consolidated Financial Statements.

2


Consolidated Balance Sheet
Phillips 66
 
 
Millions of Dollars
 
March 31
2020

 
December 31
2019

Assets
 
 
 
Cash and cash equivalents
$
1,221

 
1,614

Accounts and notes receivable (net of allowances of $41 million in 2020 and 2019)
4,046

 
7,376

Accounts and notes receivable—related parties
513

 
1,134

Inventories
5,331

 
3,776

Prepaid expenses and other current assets
594

 
495

Total Current Assets
11,705

 
14,395

Investments and long-term receivables
13,635

 
14,571

Net properties, plants and equipment
24,051

 
23,786

Goodwill
1,425

 
3,270

Intangibles
880

 
869

Other assets
1,764

 
1,829

Total Assets
$
53,460

 
58,720

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
4,882

 
8,043

Accounts payable—related parties
440

 
532

Short-term debt
2,243

 
547

Accrued income and other taxes
703

 
979

Employee benefit obligations
301

 
710

Other accruals
1,960

 
835

Total Current Liabilities
10,529

 
11,646

Long-term debt
10,720

 
11,216

Asset retirement obligations and accrued environmental costs
635

 
638

Deferred income taxes
5,487

 
5,553

Employee benefit obligations
1,000

 
1,044

Other liabilities and deferred credits
1,450

 
1,454

Total Liabilities
29,821

 
31,551

 
 
 
 
Equity
 
 
 
Common stock (2,500,000,000 shares authorized at $0.01 par value)
     Issued (2020—648,446,534 shares; 2019—647,416,633 shares)
 
 
 
Par value
6

 
6

Capital in excess of par
20,305

 
20,301

Treasury stock (at cost: 2020—211,771,827 shares; 2019—206,390,806 shares)
(17,116
)
 
(16,673
)
Retained earnings
19,168

 
22,064

Accumulated other comprehensive loss
(991
)
 
(788
)
Total Stockholders’ Equity
21,372

 
24,910

Noncontrolling interests
2,267

 
2,259

Total Equity
23,639

 
27,169

Total Liabilities and Equity
$
53,460

 
58,720

See Notes to Consolidated Financial Statements.

3


Consolidated Statement of Cash Flows
Phillips 66
 
Millions of Dollars
 
Three Months Ended
March 31
 
2020

 
2019

Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
(2,427
)
 
270

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
Depreciation and amortization
342

 
331

Impairments
3,006

 
1

Accretion on discounted liabilities
6

 
6

Deferred income taxes
(47
)
 
179

Undistributed equity earnings
(4
)
 
95

Net gain on dispositions
(1
)
 
(1
)
Other
(139
)
 
42

Working capital adjustments
 
 
 
Accounts and notes receivable
3,900

 
(1,170
)
Inventories
(1,620
)
 
(1,790
)
Prepaid expenses and other current assets
(90
)
 
(438
)
Accounts payable
(3,239
)
 
2,466

Taxes and other accruals
530

 
(469
)
Net Cash Provided by (Used in) Operating Activities
217

 
(478
)
 
 
 
 
Cash Flows From Investing Activities
 
 
 
Capital expenditures and investments
(923
)
 
(1,097
)
Return of investments in equity affiliates
38

 
21

Proceeds from asset dispositions
1

 
82

Advances/loans—related parties
(8
)
 

Other
15

 
(18
)
Net Cash Used in Investing Activities
(877
)
 
(1,012
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt
1,199

 
725

Repayment of debt
(7
)
 
(592
)
Issuance of common stock
6

 
8

Repurchase of common stock
(443
)
 
(344
)
Dividends paid on common stock
(396
)
 
(364
)
Distributions to noncontrolling interests
(61
)
 
(56
)
Net proceeds from issuance of Phillips 66 Partners LP common units
2

 
32

Other
(24
)
 
307

Net Cash Provided by (Used in) Financing Activities
276

 
(284
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(9
)
 
8

 
 
 
 
Net Change in Cash and Cash Equivalents
(393
)
 
(1,766
)
Cash and cash equivalents at beginning of period
1,614

 
3,019

Cash and Cash Equivalents at End of Period
$
1,221

 
1,253


See Notes to Consolidated Financial Statements.


4


Consolidated Statement of Changes in Equity
Phillips 66

 
Millions of Dollars
 
Three Months Ended March 31
 
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, 2019
$
6

20,301

(16,673
)
22,064

(788
)
2,259

27,169

Net income (loss)



(2,496
)

69

(2,427
)
Other comprehensive loss




(208
)

(208
)
Dividends paid on common stock ($0.90 per share)



(396
)


(396
)
Repurchase of common stock


(443
)



(443
)
Benefit plan activity

4


(2
)


2

Distributions to noncontrolling interests





(61
)
(61
)
Other



(2
)
5


3

March 31, 2020
$
6

20,305

(17,116
)
19,168

(991
)
2,267

23,639

 
 
 
 
 
 
 
 
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, 2019
647,417

206,391

Repurchase of common stock

5,381

Shares issued—share-based compensation
1,030


March 31, 2020
648,447

211,772

 
 
 
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 2019 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 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:

 
Millions of Dollars
 
Three Months Ended
March 31
 
2020

 
2019

Product Line and Services
 
 
 
Refined petroleum products
$
16,157

 
18,793

Crude oil resales
2,877

 
3,038

Natural gas liquids (NGL)
979

 
1,304

Services and other*
865

 
(32
)
Consolidated sales and other operating revenues
$
20,878

 
23,103

 
 
 
 
Geographic Location**
 
 
 
United States
$
15,710

 
17,575

United Kingdom
2,309

 
2,431

Germany
858

 
957

Other foreign countries
2,001

 
2,140

Consolidated sales and other operating revenues
$
20,878

 
23,103

* 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, 2020, and December 31, 2019, receivables from contracts with customers were $3,344 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 March 31, 2020, and December 31, 2019, our asset balances related to such payments were $357 million and $336 million, respectively.


6


Our contract liabilities represent advances from our customers prior to product or service delivery. At March 31, 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 March 31, 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 recent decline in commodity prices, weak petroleum product demand, and negative economic impacts associated with Coronavirus Disease 2019 (COVID-19) increase the probability that certain of our counterparties may not be able to fully 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 March 31, 2020, and December 31, 2019, we reported $4,559 million and $8,510 million of accounts and notes receivable, respectively, net of allowances of $41 million for both periods. Based on an aging analysis at March 31, 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 10—Guarantees, and Note 11—Contingencies and Commitments, for more information on these off-balance sheet exposures.



7


Note 4—Inventories

Inventories consisted of the following:

 
Millions of Dollars
 
March 31
2020

 
December 31
2019

 
 
 
 
Crude oil and petroleum products
$
5,008

 
3,452

Materials and supplies
323

 
324

 
$
5,331

 
3,776




Inventories valued on the last-in, first-out (LIFO) basis totaled $4,879 million and $3,331 million at March 31, 2020, and December 31, 2019, respectively. We performed a lower-of-cost-or-market evaluation for our crude oil and petroleum products inventory at March 31, 2020, and determined that a write-down was not required based on forward prices. Should crude oil and petroleum product forward prices have a sustained decline, a future lower-of-cost-or-market write‑down may be required.








8


Note 5—Investments, Loans and Long-Term Receivables

Equity Investments

DCP Midstream, LLC (DCP Midstream)
The fair value of our investment in DCP Midstream depends on the market value of DCP Midstream, LP (DCP Partners) common units. The market value of DCP Partners common units declined by approximately 85% in the first quarter of 2020.  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 its magnitude. Accordingly, we recorded a $1,161 million before-tax impairment of our investment in the first quarter of 2020. This charge is included in the “Impairments” line item on our consolidated statement of operations. Following the impairment, our investment in DCP Midstream had a book value of $245 million at March 31, 2020. The impairment increased the basis difference for our investment in DCP Midstream, which indicates the carrying value of our investment is lower than our share of DCP Midstream’s recorded net assets. The basis difference of $1,795 million is expected to be 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. See Note 13—Fair Value Measurements, for additional information on the techniques used to determine the fair value of our investment in DCP Midstream.

Gray Oak Pipeline, LLC
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.  Phillips 66 Partners LP (Phillips 66 Partners) and its 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 Phillips 66 Partners’ 42.25% proportionate exposure under the equity contribution agreement was $583 million

Gray Oak Pipeline, LLC 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-venturers jointly direct the activities of Gray Oak Pipeline, LLC that most significantly impact economic performance. 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. At March 31, 2020, Phillips 66 Partners’ effective ownership interest in the Gray Oak Pipeline was 42.25%, and Phillips 66 Partners’ maximum exposure to loss was $1,382 million, which represented the book value of the investment in Gray Oak Pipeline, LLC of $799 million and the term loan guarantee of $583 million. See Note 19—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 $2,500 million aggregate principal amount of unsecured senior notes. 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, 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. Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU is approximately $631 million. 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.






9


CF United LLC (United)
In the fourth quarter of 2019, we acquired a 50% voting interest and a 48% economic interest in United, a retail marketing joint venture with operations primarily on the U.S. West Coast. 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 is viewed as a variable interest as the purchase price on the exercise date may not represent the then-current fair value of United. We have determined that we are not the primary beneficiary because we and our co-venturer jointly direct the activities of United that most significantly impact economic performance. At March 31, 2020, our maximum exposure to loss was comprised of our $250 million investment in 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 United.

Liberty Pipeline LLC (Liberty)
Liberty is a 50%-owned 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. On March 2, 2020, Phillips 66 Partners closed a transaction to acquire our 50% interest in Liberty for $75 million. Phillips 66 Partners and its co-venturer subsequently deferred the development and construction of the Liberty Pipeline system as a result of the current challenging business environment. At March 31, 2020, our maximum exposure to loss was $216 million, which represented the book value of Phillips 66 Partners’ investment in Liberty of $103 million and our outstanding proportionate vendor guarantees of $113 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 March 31, 2020, our maximum exposure to loss was $148 million, which represented the book value of our investment in OnCue of $79 million and guaranteed debt obligations of $69 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 which, upon completion, will transport crude oil from Cushing, Oklahoma, and the Permian to multiple destinations along the Texas Gulf Coast, including Corpus Christi, Ingleside, Houston, and Beaumont, Texas. Red Oak 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 Red Oak that most significantly impact economic performance. The development and construction of the Red Oak Pipeline system have been deferred as a result of the current challenging business environment. At March 31, 2020, our maximum exposure to loss was $66 million, which represented the book value of our investment in Red Oak of $54 million and an outstanding member loan to Red Oak of $12 million.



10


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:

 
Millions of Dollars
 
March 31, 2020
 
December 31, 2019
 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
 
 
 
 
 
 
 
 
 
 
 
Midstream
$
11,605

 
2,467

 
9,138

 
11,221

 
2,391

 
8,830

Chemicals

 

 

 

 

 

Refining
23,956

 
10,521

 
13,435

 
23,692

 
10,336

 
13,356

Marketing and Specialties (M&S)
1,660

 
917

 
743

 
1,847

 
959

 
888

Corporate and Other
1,352

 
617

 
735

 
1,311

 
599

 
712

 
$
38,573

 
14,522

 
24,051

 
38,071

 
14,285


23,786




Note 7— Goodwill

Our stock price declined significantly in the first quarter of 2020 due to the volatility in global commodity and equity markets related to the COVID-19 pandemic and other factors.  We assessed our goodwill for impairment due to the decline in our market capitalization and concluded that the carrying value of our Refining reporting unit at March 31, 2020, was greater than its fair value by an amount in excess of its goodwill balance. Accordingly, we recorded a goodwill impairment charge of $1,845 million in our Refining segment. This charge is included in the “Impairments” line item on our consolidated statement of operations. The fair value of our other reporting units continued to exceed their carrying values by a significant percentage. See Note 13—Fair Value Measurements for additional information on the techniques used to determine the fair value of our Refining reporting unit.

The carrying amount of goodwill by segment at March 31, 2020 was:

 
Millions of Dollars
 
Midstream

 
Refining

 
M&S

 
Total

 
 
 
 
 
 
 
 
Balance at January 1, 2020
$
626

 
1,845

 
799

 
3,270

Impairments

 
(1,845
)
 

 
(1,845
)
Balance at March 31, 2020
$
626

 

 
799

 
1,425





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Note 8—Earnings (Loss) Per Share

The numerator of basic earnings (loss) per share (EPS) is net income (loss) attributable to Phillips 66, 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 (loss) 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 (losses) 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
 
2020
 
2019
 
Basic

Diluted

 
Basic

Diluted

Amounts Attributed to Phillips 66 Common Stockholders (millions):
 
 
 
 
 
Net income (loss) attributable to Phillips 66
$
(2,496
)
(2,496
)
 
204

204

Income allocated to participating securities
(1
)
(1
)
 
(1
)
(1
)
Net income (loss) available to common stockholders
$
(2,497
)
(2,497
)

203

203

 
 
 
 
 
 
Weighted-average common shares outstanding (thousands):
439,014

441,345

 
454,886

457,599

Effect of share-based compensation
2,331


 
2,713

1,690

Weighted-average common shares outstanding—EPS
441,345

441,345

 
457,599

459,289

 
 
 
 
 
 
Earnings (Loss) Per Share of Common Stock (dollars)
$
(5.66
)
(5.66
)
 
0.44

0.44





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Note 9—Debt

Debt Issuances
On April 9, 2020, Phillips 66 closed on a public offering of $1 billion aggregate principal amount of senior unsecured notes consisting of:

$500 million aggregate principal amount of 3.700% Senior Notes due 2023.

$500 million aggregate principal amount of 3.850% Senior Notes due 2025.

Interest on the Senior Notes due 2023 is payable semiannually on April 6 and October 6 of each year, commencing on October 6, 2020. Interest on the Senior Notes due 2025 is payable semiannually on April 9 and October 9 of each year, commencing on October 9, 2020. Proceeds of $993 million, net of underwriters’ discounts and commissions and debt issuance costs, are being used for general corporate purposes.

On March 19, 2020, Phillips 66 entered into a $1 billion 364-day delayed draw term loan agreement (the Facility) and borrowed $1 billion under the Facility shortly thereafter. On April 6, 2020, Phillips 66 increased the size of the Facility to $2 billion, with $1 billion of capacity remaining undrawn. Borrowings under the Facility bear interest at a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by the credit rating of Phillips 66’s senior unsecured long‑term debt. Phillips 66 is using the proceeds from the debt issuance for general corporate purposes.
  
At March 31, 2020, borrowings of $200 million were outstanding under Phillips 66’s uncommitted $5 billion commercial paper program, compared with no borrowings outstanding under the commercial paper program at December 31, 2019. At March 31, 2020, and December 31, 2019, no amount had been directly drawn under Phillips 66 Partners’ $750 million revolving credit facility; however, $3 million and $1 million in letters of credit had been issued under this facility at March 31, 2020, and December 31, 2019, respectively.

Debt Repayments
In April 2020, Phillips 66 repaid the $300 million outstanding principal balance of its floating-rate notes due April 2020 and the $200 million outstanding principal balance of its term loan facility due April 2020. Also in April 2020, Phillips 66 Partners repaid the $25 million outstanding principal balance of its tax-exempt bonds due April 2020.




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Note 10—Guarantees

At March 31, 2020, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantees and expect future performance to be either immaterial or have only a remote chance of occurrence.

Lease Residual Value Guarantees
Under the operating lease agreement on our headquarters facility in Houston, Texas, we have a residual value guarantee with a maximum future exposure of $554 million at March 31, 2020. 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 for resale. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future payments totaling $362 million. These leases have remaining terms of up to four years.

Contingent Equity Contribution Undertaking
In March 2019, Phillips 66 Partners and its co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking in conjunction with an unsecured senior notes offering. See Note 5—Investments, Loans and Long-Term Receivables, for additional information on Dakota Access.

Guarantees of Joint Venture Obligations
In June 2019, Phillips 66 Partners issued a guarantee through an equity contribution agreement for 42.25% of Gray Oak Pipeline, LLC’s third-party term loan facility. See Note 5—Investments, Loans and Long-Term Receivables, for additional information on Gray Oak Pipeline, LLC.
 
In addition, at March 31, 2020, we had other guarantees outstanding for our portion of certain joint venture debt obligations and purchase obligations, which have remaining terms of up to eight years. The maximum potential amount of future payments to third parties under these guarantees was approximately $331 million. Payment would be required if a joint venture defaults on its obligations.

Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnification. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses 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, 2020, and December 31, 2019, the carrying amount of recorded indemnifications was $159 million and $153 million, respectively.

We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information to support the reversal. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. At March 31, 2020, and December 31, 2019, environmental accruals for known contamination of $111 million and $105 million, respectively, were included in the carrying amount of recorded indemnifications noted above. These environmental accruals were primarily included in the “Asset retirement obligations and accrued environmental costs” line item on our consolidated balance sheet. For additional information about environmental liabilities, see Note 11—Contingencies and Commitments.


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Indemnification and Release Agreement
In 2012, in connection with our separation from ConocoPhillips, 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.

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.


15


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, 2020, our total environmental accruals were $442 million, compared with $441 million at December 31, 2019. 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, 2020, we had performance obligations secured by letters of credit and bank guarantees of $463 million related to various purchase and other commitments incident to the ordinary conduct of business.


Note 12—Derivatives and Financial Instruments

Derivative Instruments
We use financial and commodity-based derivative contracts to manage exposures to fluctuations in commodity prices, interest rates and foreign currency exchange rates, or to capture market opportunities. Because we do not apply hedge accounting for commodity derivative contracts, all realized and unrealized gains and losses from commodity derivative contracts are recognized in our consolidated statement of operations. Gains and losses from derivative contracts held for trading not directly related to our physical business are reported net in the “Other income” line item on our consolidated statement of operations. Cash flows from all our derivative activity for the periods presented appear in the operating section on our consolidated statement of cash flows.

Purchase and sales contracts with firm minimum notional volumes for commodities that are readily convertible to cash are recorded on our consolidated balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception, whereby the contracts are recorded on an accrual basis. We generally apply the normal purchases and normal sales exception to eligible crude oil, refined petroleum product, NGL, natural gas and power commodity contracts to purchase or sell quantities we expect to use or sell in the normal course of business. All other derivative instruments are recorded at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 13—Fair Value Measurements.

Commodity Derivative Contracts—We sell into or receive supply from the worldwide crude oil, refined petroleum product, NGL, natural gas 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.

16


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, 2020
 
December 31, 2019
 
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
$
6,826

(6,173
)
(455
)
198

 
23



23

Other assets
10

(6
)

4

 
3



3

Liabilities
 
 
 


 
 
 
 


Other accruals

(36
)

(36
)
 
1,188

(1,281
)
80

(13
)
Other liabilities and deferred credits




 

(1
)

(1
)
Total
$
6,836

(6,215
)
(455
)
166

 
1,214

(1,282
)
80

12


 

At March 31, 2020, and December 31, 2019, there was no material cash collateral received or paid that was not offset on our consolidated balance sheet.

The realized and unrealized gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of operations, were:
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2020

 
2019

 
 
 
 
Sales and other operating revenues
$
679

 
(177
)
Other income
3

 
13

Purchased crude oil and products
441

 
(155
)
Net gain (loss) from commodity derivative activity
$
1,123

 
(319
)


17


The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from nonderivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward purchase and sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was at least 98% at March 31, 2020, and December 31, 2019.

 
Open Position
Long / (Short)
 
March 31
2020

 
December 31
2019

Commodity
 
 
 
Crude oil, refined petroleum products and NGL (millions of barrels)
(33
)
 
(16
)



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 was immaterial at March 31, 2020, and December 31, 2019. 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, 2020 and 2019.

We currently estimate that before-tax losses of $7 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.

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, 2020, and December 31, 2019.



18


Note 13—Fair Value Measurements

Recurring Fair Value Measurements
We carry certain assets and liabilities at fair value, which we measure at the reporting date using the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price), and disclose the quality of these fair values based on the valuation inputs used in these measurements under the following hierarchy:

Level 1: Fair value measured with unadjusted quoted prices from an active market for identical assets or liabilities.
Level 2: Fair value measured either with: (1) adjusted quoted prices from an active market for similar assets or liabilities; or (2) other valuation inputs that are directly or indirectly observable.
Level 3: Fair value measured with unobservable inputs that are significant to the measurement.

We classify the fair value of an asset or liability based on the significance of its observable or unobservable inputs to the measurement. However, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable.

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

Cash and cash equivalents—The carrying amount reported on our consolidated balance sheet approximates fair value.
Accounts and notes receivable—The carrying amount reported on our consolidated balance sheet approximates fair value.
Derivative instruments—We fair value our exchange-traded contracts based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange or other exchanges, and classify them as Level 1 in the fair value hierarchy. When exchange-cleared contracts lack sufficient liquidity, or are valued using either adjusted exchange-provided prices or nonexchange quotes, we classify those contracts as Level 2.
Physical commodity forward purchase and sales contracts and over-the-counter (OTC) financial swaps are generally valued using forward quotes provided by brokers and price index developers, such as Platts and Oil Price Information Service. We corroborate these quotes with market data and classify the resulting fair values as Level 2. When forward market prices are not available, we estimate fair value using the forward price of a similar commodity, adjusted for the difference in quality or location. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, physical commodity purchase and sales contracts and OTC swaps are valued using internally developed methodologies that consider historical relationships among various commodities that result in management’s best estimate of fair value. We classify these contracts as Level 3. Physical and OTC commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines whether the options are classified as Level 2 or 3. We use a midmarket pricing convention (the midpoint between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
We determine the fair value of our interest rate swaps based on observable market valuations for interest rate swaps that have notional amounts, terms and pay and reset frequencies similar to ours.
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.

19


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, 2020
 
Fair Value Hierarchy
 
Total Fair Value of Gross Assets & Liabilities

Effect of Counterparty Netting

Effect of Collateral Netting

Difference in Carrying Value and Fair Value

Net Carrying Value Presented on the Balance Sheet

 
Level 1

 
Level 2

 
Level 3

Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
5,251

 
1,545

 

 
6,796

(6,179
)
(455
)

162

Physical forward contracts

 
40

 

 
40




40

Rabbi trust assets
116

 

 

 
116

N/A

N/A


116

 
$
5,367

 
1,585

 

 
6,952

(6,179
)
(455
)

318

 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
4,589

 
1,590

 

 
6,179

(6,179
)



OTC instruments

 
4

 

 
4




4

Physical forward contracts

 
32

 

 
32




32

Interest rate derivatives

 
8

 

 
8




8

Floating-rate debt

 
2,097

 

 
2,097

N/A

N/A


2,097

Fixed-rate debt, excluding finance leases

 
10,560

 

 
10,560

N/A

N/A

17

10,577

 
$
4,589

 
14,291

 

 
18,880

(6,179
)

17

12,718





 
Millions of Dollars
 
December 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
$
820

 
368

 

 
1,188

(1,188
)



Physical forward contracts

 
26

 

 
26




26

Interest rate derivatives

 
1

 

 
1




1

Rabbi trust assets
127

 

 

 
127

N/A

N/A


127

 
$
947

 
395

 

 
1,342

(1,188
)


154

 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
884

 
385

 

 
1,269

(1,188
)
(80
)

1

OTC instruments

 
1

 

 
1




1

Physical forward contracts

 
12

 

 
12




12

Floating-rate debt

 
1,100

 

 
1,100

N/A

N/A


1,100

Fixed-rate debt, excluding finance leases

 
11,813

 

 
11,813

N/A

N/A

(1,438
)
10,375

 
$
884

 
13,311

 

 
14,195

(1,188
)
(80
)
(1,438
)
11,489




20


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

Nonrecurring Fair Value Measurements

The nonrecurring fair value measurement used to record an impairment of our DCP Midstream investment was the fair value of our share of DCP Midstream’s limited partner interest in DCP Partners, which was estimated based on average market prices of DCP Partners common units for a 15-day trading period encompassing March 31, 2020. This valuation resulted in a Level 2 nonrecurring fair value measurement. See Note 5—Investments, Loans and Long-Term Receivables, for additional information on the impairment.

The carrying value of the Refining reporting unit’s goodwill was remeasured to fair value on a nonrecurring basis in the first quarter of 2020.  The fair value of the Refining reporting unit was calculated by weighting the results from the income approach and the market approach.  The income approach uses a discounted cash flow model that requires various observable and nonobservable inputs, such as prices, volumes, expenses, capital expenditures, discount rates and projected long‑term growth rates and terminal values. The market approach uses peer company enterprise values relative to current and future net income (loss) before net interest expense, income taxes, depreciation and amortization (EBITDA) projections to arrive at an average multiple.  This multiple was applied to the reporting unit’s current and projected EBITDA, with consideration for an estimated market participant acquisition premium.  The resulting fair value Level 3 estimate was less than the Refining reporting unit’s carrying value by an amount that exceeded the existing goodwill balance of the reporting unit.  As a result, the Refining reporting unit’s goodwill was impaired to zero.  As part of our impairment analysis, the fair value of all reporting units was reconciled to the company’s market capitalization. See Note 7—Goodwill, for additional information on the goodwill impairment.


Note 14—Pension and Postretirement Plans

The components of net periodic benefit cost for the three months ended March 31, 2020 and 2019, were as follows:
 
Millions of Dollars
 
Pension Benefits
 
Other Benefits
 
2020
 
2019
 
2020

 
2019

 
U.S.

 
Int’l.

 
U.S.

 
Int’l.

 
 
 
 
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
33

 
7

 
32

 
6

 
1

 
1

Interest cost
25

 
6

 
27

 
6

 
2

 
2

Expected return on plan assets
(41
)
 
(13
)
 
(36
)
 
(11
)
 

 

Amortization of prior service credit

 

 

 

 
(1
)
 

Recognized net actuarial loss
14

 
4

 
13

 
2

 

 

Settlements

 

 
4

 

 

 

Net periodic benefit cost*
$
31


4


40


3


2


3

* Included in the “Operating expenses” and “Selling, general and administrative expenses” line items on our consolidated statement of operations.



During the three months ended March 31, 2020, we contributed $4 million to our U.S. pension and other postretirement benefit plans and $7 million to our international pension plans. We currently expect to make additional contributions of approximately $42 million to our U.S. pension and other postretirement benefit plans and $20 million to our international pension plans during the remainder of 2020.

21


Note 15—Accumulated Other Comprehensive Loss

Changes in the balances of each component of accumulated other comprehensive loss were as follows:

 
Millions of Dollars
 
Defined Benefit Plans

 
Foreign Currency Translation

 
Hedging

 
Accumulated Other Comprehensive Loss

 
 
 
 
 
 
 
 
December 31, 2019
$
(656
)
 
(131
)
 
(1
)
 
(788
)
Other comprehensive income (loss) before reclassifications
1

 
(221
)
 
(7
)
 
(227
)
Amounts reclassified from accumulated other comprehensive loss
 
 
 
 
 
 
 
Defined benefit plans*
 
 
 
 
 
 
 
Amortization of net actuarial loss and net prior service credit
19

 

 

 
19

Foreign currency translation

 

 

 

Hedging

 

 

 

Net current period other comprehensive income (loss)
20

 
(221
)
 
(7
)
 
(208
)
Other

 
5

 

 
5

March 31, 2020
$
(636
)
 
(347
)
 
(8
)
 
(991
)
 
 
 
 
 
 
 
 
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 14—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.




22


Note 16—Related Party Transactions

Significant transactions with related parties were:

 
Millions of Dollars
 
Three Months Ended
March 31
 
2020

 
2019

 
 
 
 
Operating revenues and other income (a)
$
534

 
683

Purchases (b)
2,126

 
2,668

Operating expenses and selling, general and administrative expenses (c)
51

 
9


(a)
We sold NGL, other petrochemical feedstocks and solvents to Chevron Phillips Chemical Company LLC (CPChem), gas oil and hydrogen feedstocks to Excel Paralubes (Excel), and refined petroleum products to several of our affiliates in the M&S segment, including OnCue and United. We also sold certain feedstocks and intermediate products to WRB Refining LP (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 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 consignment fees to United, and utility and processing fees to various affiliates.



23


Note 17—Segment Disclosures and Related Information

Our operating segments are:

1)
Midstream—Provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, fractionation, processing, and marketing services, mainly in the United States. The Midstream segment includes our master limited partnership (MLP), Phillips 66 Partners, 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.

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.


24


Analysis of Results by Operating Segment

 
Millions of Dollars
 
Three Months Ended
March 31
 
2020

 
2019

Sales and Other Operating Revenues*
 
 
 
Midstream
 
 
 
Total sales
$
1,538

 
1,897

Intersegment eliminations
(495
)
 
(584
)
Total Midstream
1,043

 
1,313

Chemicals
1

 
1

Refining
 
 
 
Total sales
13,781

 
16,861

Intersegment eliminations
(7,633
)
 
(9,768
)
Total Refining
6,148

 
7,093

Marketing and Specialties
 
 
 
Total sales
14,249

 
15,242

Intersegment eliminations
(570
)
 
(553
)
Total Marketing and Specialties
13,679

 
14,689

Corporate and Other
7

 
7

Consolidated sales and other operating revenues
$
20,878

 
23,103

* See Note 2—Sales and Other Operating Revenues, for further details on our disaggregated sales and other operating revenues.
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
Midstream
$
(702
)
 
316

Chemicals
169

 
227

Refining
(2,261
)
 
(198
)
Marketing and Specialties
513

 
205

Corporate and Other
(197
)
 
(210
)
Consolidated income (loss) before income taxes
$
(2,478
)
 
340



 
Millions of Dollars
 
March 31
2020

 
December 31
2019

Total Assets
 
 
 
Midstream
$
14,846

 
15,716

Chemicals
6,376

 
6,249

Refining
22,516

 
25,150

Marketing and Specialties
7,108

 
8,659

Corporate and Other
2,614

 
2,946

Consolidated total assets
$
53,460

 
58,720





25


Note 18—Income Taxes

Our effective income tax rate for the three months ended March 31, 2020, was 2%, compared with 21% for the corresponding period of 2019. The decrease in our effective tax rate was primarily attributable to the impact of our foreign operations, income attributable to noncontrolling interests, a nondeductible goodwill impairment and a net operating loss carryback to a year with a 35% tax rate.

The effective income tax rate for the three months ended March 31, 2020, varied from the U.S. federal statutory income tax rate of 21%, primarily due to the impact of our foreign operations, income attributable to noncontrolling interests, a nondeductible goodwill impairment and a net operating loss carryback to a year with a 35% tax rate. These items have a disproportionate impact on our effective income tax rate in a period with a before-tax loss.


Note 19—Phillips 66 Partners LP

Phillips 66 Partners, headquartered in Houston, Texas, is a publicly traded MLP formed in 2013 to own, operate, develop and acquire primarily fee-based midstream assets. Phillips 66 Partners’ operations currently consist of crude oil, refined petroleum product and NGL transportation, fractionation, processing, terminaling, and storage assets.
 
We consolidate Phillips 66 Partners because we determined it is a VIE of which we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as well as the ability to direct the activities that most significantly impact its economic performance. As a result of this consolidation, the public common and perpetual convertible preferred unitholders’ ownership interests in Phillips 66 Partners are reflected as noncontrolling interests in our financial statements. At March 31, 2020, we owned 170 million Phillips 66 Partners common units, representing a 74% limited partner interest in Phillips 66 Partners, while the public owned a 26% limited partner interest and 13.8 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
2020

 
December 31
2019

 
 
 
 
Cash and cash equivalents
$
92

 
286

Equity investments*
3,136

 
2,961

Net properties, plants and equipment
3,410

 
3,349

Short-term debt
25

 
25

Long-term debt
3,491

 
3,491

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



For the three months ended March 31, 2020 and 2019, on a settlement-date basis, Phillips 66 Partners generated net proceeds of $2 million and $32 million, respectively, from common units issued under its continuous offering of common units, or at-the-market (ATM) programs. Since inception in June 2016 and through March 31, 2020, the ATM programs have generated net proceeds of $494 million.


26


Phillips 66 Partners has 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, Phillips 66 Partners has 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 operations. 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. See Note 5—Investments, Loans and Long-Term Receivables, for further discussion regarding Phillips 66 Partners’ investment in Gray Oak Pipeline, LLC.


Note 20—Condensed Consolidating Financial Information