Note 1—
Business and Basis of Presentation
Unless otherwise stated or the context otherwise indicates, all references to “Phillips 66 Partners,” “the Partnership,” “us,” “our,” “we,” or similar expressions refer to Phillips 66 Partners LP, including its consolidated subsidiaries. References to Phillips 66 may refer to Phillips 66 and/or its subsidiaries, depending on the context.
Description of the Business
We are a Delaware limited partnership formed in 2013 by Phillips 66 Company and Phillips 66 Partners GP LLC (our General Partner), both wholly owned subsidiaries of Phillips 66. On August 1, 2015, Phillips 66 Company transferred all of its limited partner interests in us and its
100 percent
interest in our General Partner to its wholly owned subsidiary, Phillips 66 Project Development Inc. (Phillips 66 PDI). We are a growth-oriented master limited partnership formed to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum products and natural gas liquids (NGL) pipelines, terminals and other transportation and midstream assets.
On October 6, 2017, we acquired a
25 percent
interest in each of Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC and a
100 percent
interest in Merey Sweeny, L.P. See
Note 4—
Acquisitions
for additional information.
Our assets consist of crude oil, refined petroleum products and NGL transportation, processing, terminaling and storage facilities and systems. We conduct our operations through both wholly owned and joint-venture operations. The majority of our wholly owned assets are associated with, and integral to the operation of,
nine
of Phillips 66’s owned or joint-venture refineries.
We primarily generate revenue by providing fee-based transportation, terminaling, processing, storage and NGL fractionation services to Phillips 66 and other customers. Our equity affiliates primarily generate revenue from transporting and terminaling NGL, refined petroleum products and crude oil. Since we do not own any of the NGL, crude oil and refined petroleum products we handle and do not engage in the trading of NGL, crude oil and refined petroleum products, we have limited direct exposure to risks associated with fluctuating commodity prices, although these risks indirectly influence our activities and results of operations over the long term.
Basis of Presentation
We have acquired assets from Phillips 66 that were considered transfers of businesses between entities under common control. This required the transactions to be accounted for as if the transfers had occurred at the beginning of the transfer period, with prior periods retrospectively adjusted to furnish comparative information. Accordingly, the accompanying financial statements and related notes have been retrospectively adjusted to include the historical results and financial position of the acquired businesses prior to the effective date of each acquisition. We refer to these pre-acquisition operations as those of our “Predecessors.”
The combined financial statements of our Predecessors were derived from the accounting records of Phillips 66 and reflect the combined historical results of operations, financial position and cash flows of our Predecessors as if such businesses had been combined for all periods presented.
All intercompany transactions and accounts within our Predecessors have been eliminated. The assets and liabilities of our Predecessors in these financial statements have been reflected on a historical cost basis because the transfer of the Predecessors to us took place within the Phillips 66 consolidated group. The consolidated statement of income also includes expense allocations for certain functions performed by Phillips 66, including operational support services such as engineering and logistics and allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, information technology and procurement. These allocations were based primarily on the relative carrying values of properties, plants and equipment and equity-method investments, or number of terminals and pipeline miles, and secondarily on activity-based cost allocations. Our management believes the assumptions underlying the allocation of expenses from Phillips 66 are reasonable. Nevertheless, the financial results of our Predecessors may not include all of the actual expenses that would have been incurred had our Predecessors been a stand-alone publicly traded partnership during the periods presented.
Note 2—
Summary of Significant Accounting Policies
Consolidation Principles and Investments
Our consolidated financial statements include the accounts of majority-owned subsidiaries. All intercompany transactions and accounts were eliminated. The equity method is used to account for investments in affiliates in which we have the ability to exert significant influence over the affiliates’ operating and financial policies. Undivided interests in pipelines are consolidated on a proportionate basis.
Net Investment—Predecessors
“Net Investment—Predecessors” represents Phillips 66’s historical investment in the contributed businesses, our accumulated net earnings after taxes, and the net effect of transactions with, and allocations from, Phillips 66 prior to the acquisition of the businesses from Phillips 66.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosures of contingent assets and liabilities. Actual results could differ from these estimates.
Common Control Transactions
Businesses acquired from Phillips 66 and its subsidiaries are accounted for as common control transactions whereby the net assets acquired are combined with ours at their carrying value. Any difference between carrying value and recognized consideration is treated as a capital transaction. To the extent that such transactions require prior-period financial information to be retrospectively adjusted to furnish comparative information, historical net equity amounts prior to the transaction date are reflected in “Net Investment—Predecessors.” Cash consideration up to the carrying value of net assets acquired is presented as an investing activity in our consolidated statement of cash flows. Cash consideration in excess of the carrying value of net assets acquired is presented as a financing activity in our consolidated statement of cash flows.
Revenue Recognition
Revenue is recognized for NGL, crude oil and refined petroleum product pipeline transportation based on the delivery of actual volumes transported at contractual tariff rates. Revenue is recognized for NGL, crude oil and refined petroleum product terminaling, storage, processing and fractionation services as performed based on contractual rates related to throughput volumes or capacity arrangements. A significant portion of our revenue is derived from Phillips 66.
Transportation contracts that are operating leases and include rentals with fixed escalation are generally recognized on a straight-line basis over the lease term. Any difference between the transportation fee recognized under the straight-line method and the transportation fee received in cash is deferred to the consolidated balance sheet as “Deferred rentals and other assets.” If the underlying transportation contract is amended to eliminate fixed escalation, the balance of deferred rentals is amortized over the remaining life of the contract.
Certain transportation services agreements, terminal services agreements, and processing and fractionation service agreements with Phillips 66 are considered operating leases under GAAP. Revenue from these agreements are recorded within “Operating revenues—related parties” on our consolidated statement of income. See
Note 14—Leases
for additional information on these operating leases and
Note 21—Related Party Transactions
for additional information on our agreements with Phillips 66.
Billings to Phillips 66 for shortfall volumes under its quarterly minimum volume commitments are recorded as “Deferred revenues” in our consolidated balance sheet, as Phillips 66 generally has the right to make up the shortfall volumes in the following four quarters. The deferred revenue will be recognized at the earlier of when shortfall volumes are made up, when the make-up rights contractually expire or when we determine the system will not have the necessary capacity to enable a customer to make up the shortfall volumes.
Billings for tolling services relating to maintenance turnaround activities are billed in advance of such activities. These billings are initially recorded as “Deferred revenue” in our consolidated balance sheet and are recognized when the maintenance turnaround activity commences. Deferred revenue relating to maintenance turnaround operating expenses is recognized in the period the work is performed. Deferred revenue relating to capital projects performed concurrently with a maintenance turnaround is recognized ratably over the remaining tolling services agreement once the equipment is placed into service.
At the time the Clemens Caverns commenced operations, the caverns had not reached total planned working capacity contracted under the storage agreement. During the build-out of the remaining capacity, a portion of the monthly storage fees was deferred. The deferred revenue is being recognized over the remaining term of the agreement as additional storage capacity was placed into service.
Cash Equivalents
Cash equivalents are highly liquid, short-term investments that are readily convertible to known amounts of cash and will mature within 90 days or less from the date of acquisition. We carry these at cost plus accrued interest, which approximates fair value.
Imbalances
We do not purchase or produce NGL, crude oil or refined petroleum product inventories. We experience imbalances as a result of variances in meter readings and in other measurement methods, and volume fluctuations within our NGL, crude oil and refined products systems due to pressure and temperature changes. Certain of our transportation contracts provide for the shipper to pay a contractual loss allowance, which is valued using quoted market prices of the applicable commodity being shipped. These contractual loss allowances, which are received from the shipper irrespective of, and independently calculated from, actual volumetric gains or losses, are recorded as revenue. Any actual volumetric gains or losses are valued using quoted market prices of the applicable commodities and are recorded as decreases or increases to operating and maintenance expenses, respectively.
Fair Value Measurements
We measure assets and liabilities requiring fair value presentation or disclosure using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability) and disclose such amounts according to the quality of valuation inputs under the following hierarchy:
|
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Level 1:
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Quoted prices in an active market for identical assets or liabilities.
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|
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Level 2:
|
Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs.
|
|
|
Level 3:
|
Unobservable inputs that are significant to the fair value of assets or liabilities.
|
We classify the fair value of an asset or liability based on the lowest level of input significant to its measurement. A fair value 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. Asset and liability fair values initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable.
The carrying amounts of our trade receivables and payables approximate fair value.
Nonrecurring Fair Value Measurements
Fair value measurements are applied with respect to our nonfinancial assets and liabilities measured on a nonrecurring basis, which primarily consist of asset retirement obligations. Nonrecurring fair value measurements are also applied, when applicable, to determine the fair value of our long-lived assets.
Properties, Plants and Equipment (PP&E)
PP&E is recorded at cost. Costs of maintenance and repairs, which are not significant improvements, are expensed when incurred. Depreciation of PP&E is determined by the individual-unit-straight-line method or the group-straight-line method (for those individual units that are highly integrated with other units).
Capitalized Interest
Interest from external borrowings is capitalized on major projects with an expected construction period of six months or longer. Capitalized interest is added to the cost of the underlying asset’s PP&E and is amortized over the useful life of the asset.
Major Maintenance Activities
Costs for planned integrity management projects are expensed in the period incurred. These types of costs include inspection services, contractor repair services, materials and supplies, equipment rentals and labor costs.
Impairment of PP&E
PP&E used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in the future cash flows expected to be generated by an asset group. If, upon review, the sum of the undiscounted pretax cash flows is less than the carrying value of the asset group, including applicable liabilities, then the carrying value is written down to estimated fair value and reported as impairments in the period in which the determination of the impairment is made. Individual assets are grouped for impairment purposes at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets—generally at the pipeline system, terminal, or processing or fractionation system level. Since there usually is a lack of quoted market prices for our long-lived assets, the fair value of potentially impaired assets is typically determined based on the present value of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or based on a multiple of operating cash flow validated with historical market transactions of similar assets where possible.
The expected future cash flows used for impairment reviews and related fair value calculations are based on estimated future throughputs, tariffs and fees, operating costs and capital project decisions, considering all available evidence at the date of review.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized, but rather is tested for impairment annually and when events or changes in circumstances indicate that the fair value of the reporting unit with goodwill has been reduced below carrying value. The majority of our goodwill is related to acquisitions from Phillips 66. In these common control transactions, the net assets acquired are recorded at Phillips 66’s historical carrying value, including any associated goodwill. We have
one
reporting unit for goodwill impairment testing.
Asset Retirement Obligations and Environmental Costs
Fair values of legal obligations to abandon or remove long-lived assets are recorded in the period in which the obligation arises. When the liability is initially recorded, we capitalize this cost by increasing the carrying amount of the related PP&E. Over time, the liability is increased for the change in its present value, and the capitalized cost in PP&E is depreciated over the useful life of the related asset. Our estimate may change after initial recognition, in which case we record an adjustment to the liability and PP&E.
Environmental expenditures are expensed or capitalized, depending upon their future economic benefit. Expenditures relating to an existing condition caused by past operations, and those having no future economic benefit, are expensed.
Liabilities for environmental expenditures are recorded on an undiscounted basis (unless acquired in a business combination) when environmental assessments or cleanups are probable and the costs can be reasonably estimated.
Impairment of Investments in Nonconsolidated Entities
Investments in nonconsolidated entities are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred. When indicators exist, the fair value is estimated and compared to the investment carrying value. If any impairment is judgmentally determined to be other than temporary, the carrying value of the investment is written down to fair value. The fair value of the impaired investment is based on quoted market prices, if available, or upon the present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants and a market analysis of comparable assets, if appropriate.
Income Taxes
We follow the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of our assets and liabilities. Our operations are treated as a partnership for federal and state income tax purposes, with each partner being separately taxed on its share of taxable income. Therefore, we have excluded income taxes from these consolidated financial statements, except for the income tax provision resulting from state laws that apply to entities organized as partnerships. Our tax provision is computed as if we were a stand-alone tax paying entity. Any interest and penalties related to income taxes would be reported in interest and debt expense and operating and maintenance expenses, respectively, in our consolidated statement of income.
Note 3—
Changes in Accounting Principles
Effective January 1, 2017, we early adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the second step from the goodwill impairment test. Under the revised test, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. This ASU is applied prospectively to goodwill impairment tests performed on or after January 1, 2017.
Effective January 1, 2017, we early adopted ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The new update changes the classification and presentation of restricted cash in the statement of cash flows. The amendment requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Adoption of this ASU on a retrospective basis did not impact our financial statements.
As a result of the combination of businesses under common control as described in
Note 4—
Acquisitions
, our consolidated statement of cash flows reflects the receipt of restricted cash as part of the combination. See
Note 19—
Restricted Cash
for additional information.
Effective January 1, 2017, we early adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new update clarifies how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. In addition, the new update clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. Adoption of this ASU on a retrospective basis did not impact our financial statements.
In June 2014, the FASB issued ASU No. 2014-10, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities (VIE) Guidance in Topic 810,
Consolidation.” The new standard removed the definition of a development stage entity from the Master Glossary of the Accounting Standard Codification (ASC) and the related financial reporting requirements specific to development stage entities. This ASU is intended to reduce cost and complexity of financial reporting for entities that have not commenced planned principal operations. For financial reporting requirements other than the VIE guidance in ASC Topic 810, “Consolidation,” ASU No. 2014-10 was effective for annual and quarterly reporting periods of public entities beginning after December 15, 2014. For the financial reporting requirements related to VIEs in ASC Topic 810, “Consolidation,” ASU No. 2014-10 was effective for annual and quarterly reporting periods of public entities beginning after December 15, 2015. We adopted the provisions of this ASU related to the financial reporting requirements other than the VIE guidance effective January 1, 2015. We adopted the remaining provisions effective January 1, 2016.
Note 4—
Acquisitions
2017 Acquisition
Bakken Pipeline/MSLP Acquisition
On September 19, 2017, we entered into a Contribution, Conveyance and Assumption Agreement (CCAA) with subsidiaries of Phillips 66 to acquire a
25 percent
interest in each of Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (together, the Bakken Pipeline) and a
100 percent
interest in Merey Sweeny, L.P. (MSLP). Collectively, the assets acquired in the acquisition are referred to as the Bakken Pipeline/MSLP Acquisition. We paid Phillips 66 total consideration of
$1.65 billion
, consisting of
$372 million
in cash, the assumption of
$588 million
of promissory notes payable to Phillips 66 and a
$450 million
term loan under which Phillips 66 was the obligor, and the issuance of
4,713,113
common units to P66 PDI and
292,665
general partner units to our General Partner to maintain its
2 percent
general partner interest. The Bakken Pipeline/MSLP Acquisition closed on October 6, 2017.
In connection with the Bakken Pipeline/MSLP Acquisition, we entered into commercial agreements with Phillips 66 and amended the omnibus and operational services agreements with Phillips 66. See
Note 21—
Related Party Transactions
for additional information on our commercial and other agreements with Phillips 66. Pursuant to the tolling services agreement entered into with Phillips 66 and related to MSLP operations, we received
$53 million
from Phillips 66 for the prepayment of services related to MSLP’s next scheduled maintenance turnaround, which was recorded as deferred revenue in our consolidated balance sheet.
Common Control Transactions
The Bakken Pipeline/MSLP Acquisition was considered a transfer of businesses between entities under common control, and therefore the related acquired assets were transferred at historical carrying value. The aggregate net book value of the underlying acquired assets in the Bakken Pipeline/MSLP Acquisition, at the time of acquisition, was
$729 million
. Because the Bakken Pipeline/MSLP Acquisition was a common control transaction in which we acquired a business, our historical financial statements were retrospectively adjusted to reflect the results of operations, financial position, and cash flows of the acquired assets as if we owned the acquired assets for the period from February 1, 2017, through October 5, 2017. For periods prior to February 1, 2017, both the Bakken Pipeline and MSLP investments were accounted for under the equity method of accounting by Phillips 66 and, thus, were not subject to retrospective adjustments.
The following tables present our results of operations and cash flows giving effect to the Bakken Pipeline/MSLP Acquisition. In the consolidated statements of income and cash flows tables, the first column includes the consolidated results of the acquired assets from the effective date of the acquisition. The second column in all tables presents the retrospective adjustments made to our historical financial information for the related acquired assets prior to the effective date of the acquisition. The third column in all tables presents our consolidated financial information as retrospectively adjusted.
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|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
Year Ended December 31, 2017
|
Consolidated Statement of Income
|
Phillips 66
Partners LP
|
|
|
Acquired Bakken Pipeline/MSLP Predecessor
|
|
|
Consolidated
Results
|
|
Revenues and Other Income
|
|
|
|
|
|
Operating revenues—related parties
|
$
|
807
|
|
|
87
|
|
|
894
|
|
Operating revenues—third parties
|
40
|
|
|
—
|
|
|
40
|
|
Equity in earnings of affiliates
|
185
|
|
|
38
|
|
|
223
|
|
Other income
|
8
|
|
|
4
|
|
|
12
|
|
Total revenues and other income
|
1,040
|
|
|
129
|
|
|
1,169
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
Operating and maintenance expenses
|
269
|
|
|
52
|
|
|
321
|
|
Depreciation
|
110
|
|
|
6
|
|
|
116
|
|
General and administrative expenses
|
65
|
|
|
4
|
|
|
69
|
|
Taxes other than income taxes
|
31
|
|
|
2
|
|
|
33
|
|
Interest and debt expense
|
100
|
|
|
1
|
|
|
101
|
|
Other expenses
|
1
|
|
|
—
|
|
|
1
|
|
Total costs and expenses
|
576
|
|
|
65
|
|
|
641
|
|
Income before income taxes
|
464
|
|
|
64
|
|
|
528
|
|
Income tax expense
|
3
|
|
|
1
|
|
|
4
|
|
Net income
|
461
|
|
|
63
|
|
|
524
|
|
Less: Net income attributable to Predecessors
|
—
|
|
|
63
|
|
|
63
|
|
Net income attributable to the Partnership
|
461
|
|
|
—
|
|
|
461
|
|
Less: Preferred unitholders’ interest in net income attributable to the Partnership
|
9
|
|
|
—
|
|
|
9
|
|
Less: General partner’s interest in net income attributable to the Partnership
|
160
|
|
|
—
|
|
|
160
|
|
Limited partners’ interest in net income attributable to the Partnership
|
$
|
292
|
|
|
—
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
Year Ended December 31, 2017
|
Consolidated Statement of Cash Flows
|
Phillips 66
Partners LP
|
|
|
Acquired Bakken Pipeline/MSLP Predecessor
|
|
|
Consolidated
Results
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
Net income
|
$
|
461
|
|
|
63
|
|
|
524
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
Depreciation
|
110
|
|
|
6
|
|
|
116
|
|
Undistributed equity earnings
|
3
|
|
|
(4
|
)
|
|
(1
|
)
|
Deferred revenues and other liabilities
|
43
|
|
|
—
|
|
|
43
|
|
Other
|
11
|
|
|
1
|
|
|
12
|
|
Working capital adjustments
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Decrease (increase) in materials and supplies
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Decrease (increase) in prepaid expenses and other current assets
|
(6
|
)
|
|
1
|
|
|
(5
|
)
|
Increase (decrease) in accounts payable
|
14
|
|
|
—
|
|
|
14
|
|
Increase (decrease) in accrued interest
|
8
|
|
|
(1
|
)
|
|
7
|
|
Increase (decrease) in deferred revenues
|
21
|
|
|
—
|
|
|
21
|
|
Increase (decrease) in other accruals
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Net Cash Provided by Operating Activities
|
658
|
|
|
66
|
|
|
724
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
Bakken Pipeline/MSLP acquisition
|
(729
|
)
|
|
—
|
|
|
(729
|
)
|
Restricted cash received from combination of business
|
—
|
|
|
318
|
|
|
318
|
|
Collection of loan receivable
|
—
|
|
|
8
|
|
|
8
|
|
Cash capital expenditures and investments
|
(349
|
)
|
|
(82
|
)
|
|
(431
|
)
|
Return of investment from equity affiliates
|
48
|
|
|
4
|
|
|
52
|
|
Net Cash Provided by (Used in) Investing Activities
|
(1,030
|
)
|
|
248
|
|
|
(782
|
)
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
Net contributions to Phillips 66 from Predecessors
|
—
|
|
|
(179
|
)
|
|
(179
|
)
|
Issuance of debt
|
2,008
|
|
|
—
|
|
|
2,008
|
|
Repayment of debt
|
(2,017
|
)
|
|
(135
|
)
|
|
(2,152
|
)
|
Issuance of common units
|
468
|
|
|
—
|
|
|
468
|
|
Issuance of preferred units
|
737
|
|
|
—
|
|
|
737
|
|
Debt issuance costs
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
Distributions to General Partner associated with acquisitions
|
(234
|
)
|
|
—
|
|
|
(234
|
)
|
Quarterly distributions to common unitholders—public
|
(112
|
)
|
|
—
|
|
|
(112
|
)
|
Quarterly distributions to common unitholder—Phillips 66
|
(157
|
)
|
|
—
|
|
|
(157
|
)
|
Quarterly distributions to General Partner—Phillips 66
|
(139
|
)
|
|
—
|
|
|
(139
|
)
|
Other net cash contributions from Phillips 66
|
7
|
|
|
—
|
|
|
7
|
|
Net Cash Provided by (Used in) Financing Activities
|
555
|
|
|
(314
|
)
|
|
241
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash, Cash Equivalents and Restricted Cash
|
183
|
|
|
—
|
|
|
183
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
2
|
|
|
—
|
|
|
2
|
|
Cash, Cash Equivalents and Restricted Cash at End of Period
|
$
|
185
|
|
|
—
|
|
|
185
|
|
2016 Acquisitions
During 2016, we and a co-venturer formed STACK Pipeline LLC (STACK), a
50
/
50
joint venture. In addition, we acquired an additional
2.48
percent interest in Explorer Pipeline Company (Explorer). See
Note 5—Equity Investments
for information regarding our equity investments.
River Parish Acquisition
In November 2016, we acquired the River Parish NGL System, a non-affiliated party’s NGL logistics assets, located in southeast Louisiana, consisting of pipelines and storage caverns connecting multiple third-party fractionation facilities, refineries and a petrochemical plant. At the acquisition date, we recorded
$183 million
of PP&E and
$3 million
of goodwill. Our acquisition accounting was finalized in early 2017 with no change to the provisional amounts recorded in 2016.
Fractionator Acquisitions
Initial Fractionator Acquisition.
In February 2016, we entered into a CCAA with subsidiaries of Phillips 66 to acquire a
25 percent
controlling interest in Phillips 66 Sweeny Frac LLC (Sweeny Frac LLC) for total consideration of
$236 million
(the Initial Fractionator Acquisition). Total consideration consisted of the assumption of a
$212 million
note payable to a subsidiary of Phillips 66 and the issuance of
412,823
common units to Phillips 66 PDI and
8,425
general partner units to our General Partner to maintain its
2 percent
general partner interest. The Initial Fractionator Acquisition closed in March 2016.
Subsequent Fractionator Acquisition.
In May 2016, we entered into a CCAA with subsidiaries of Phillips 66 to acquire the remaining
75 percent
interest in Sweeny Frac LLC and
100 percent
of the Standish Pipeline for total consideration of
$775 million
(the Subsequent Fractionator Acquisition). Total consideration consisted of the assumption of
$675 million
of notes payable to a subsidiary of Phillips 66 and the issuance of
1,400,922
common units to Phillips 66 PDI and
286,753
general partner units to our General Partner to maintain its
2 percent
general partner interest in us after also taking into account the public offering we completed in May 2016. The Subsequent Fractionator Acquisition closed in May 2016.
Eagle Acquisition
In October 2016, we entered into a CCAA with subsidiaries of Phillips 66 to acquire certain pipeline and terminal assets supporting
four
Phillips 66-operated refineries (the Eagle Acquisition). We paid Phillips 66 total consideration of
$1,305 million
, consisting of
$1,109 million
in cash and the issuance of
3,884,237
common units to Phillips 66 PDI and
208,783
general partner units to our General Partner to maintain its
2 percent
general partner interest. The Eagle Acquisition closed in October 2016.
In connection with the 2016 Acquisitions, we entered into commercial agreements with Phillips 66 and amended the omnibus and operational services agreements with Phillips 66. See
Note 21—
Related Party Transactions
for additional information on our commercial and other agreements with Phillips 66.
2015 Acquisitions
During 2015, we entered into agreements to acquire Phillips 66’s equity interests in DCP Sand Hills Pipeline, LLC (Sand Hills), DCP Southern Hills Pipeline, LLC (Southern Hills), Explorer and Bayou Bridge Pipeline, LLC (Bayou Bridge). See
Note 5—Equity Investments
for information regarding our equity investments.
Note 5—
Equity Investments
Bakken Pipeline Joint Venture
On October 6, 2017, we entered into a CCAA with subsidiaries of Phillips 66 to acquire a
25 percent
interest in the Bakken Pipeline as part of the Bakken Pipeline/MSLP Acquisition. See
Note 4—
Acquisitions
for additional information.
STACK Pipeline Joint Venture
In August 2016, we and Plains All American Pipeline, L.P. (Plains) formed STACK, which owns and operates a crude storage terminal and a common carrier pipeline that transports crude oil from the Sooner Trend, Anadarko Basin, Canadian and Kingfisher Counties play in northwestern Oklahoma to Cushing, Oklahoma. Plains contributed the terminal and pipeline in exchange for its
50 percent
interest in the joint venture. We contributed
$50 million
in cash, which was distributed to Plains, in exchange for our
50 percent
interest in the joint venture.
Bakken Joint Ventures
In January 2015, we closed on agreements with Paradigm Energy Partners, LLC (Paradigm) to form
two
joint ventures to develop midstream logistics infrastructure in North Dakota. At closing, we contributed our Palermo Rail Terminal project in exchange for a
70 percent
ownership interest in Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal), and
$5 million
in cash in exchange for a
50 percent
ownership interest in Paradigm Pipeline LLC (Paradigm Pipeline). We account for both joint ventures under the equity method of accounting due to governance provisions that require supermajority or unanimous voting on all decisions that significantly impact the governance, management and economic performance of the joint ventures.
Sand Hills/Southern Hills/Explorer Pipeline Joint Ventures
In February 2015, we entered into a CCAA with subsidiaries of Phillips 66 to acquire 100 percent of Phillips 66’s
one-third
equity interests in Sand Hills and Southern Hills and its
19.46 percent
equity interest in Explorer. Total consideration for the transaction was
$1,010 million
, consisting of
$880 million
in cash, funded by a portion of the proceeds from a public offering of unsecured senior notes and a public offering of common units. In addition, we issued
1,587,376
common units to Phillips 66 Company and
139,538
general partner units to our General Partner to maintain its
2 percent
general partner interest. The transaction closed in March 2015.
In August 2016, we acquired an additional
2.48 percent
equity interest in Explorer from a third party. The acquisition increased our equity interest in Explorer to
21.94 percent
.
Bayou Bridge Joint Venture
In October 2015, we entered into a CCAA with Phillips 66 to acquire its
40 percent
interest in Bayou Bridge, a joint venture in which Energy Transfer Partners holds a
60 percent
interest. Bayou Bridge began operations on the segment of its pipeline from Nederland, Texas, to Lake Charles, Louisiana, in April 2016. Development continues on the section from Lake Charles, Louisiana to St. James, Louisiana.
Total consideration for the transaction was
$70 million
, consisting of the assumption of a
$35 million
note payable to Phillips 66 that was immediately paid in full; the issuance of
606,056
common units to Phillips 66 PDI; and the issuance of
12,369
general partner units to our General Partner to maintain its
2 percent
general partner interest. The transaction closed in December 2015.
The acquisitions of interests in the Sand Hills, Southern Hills, Explorer and Bayou Bridge joint ventures represented transfers of investments between entities under common control. Accordingly, these equity investments were transferred at historical carrying value and are included in the financial statements prospectively from the effective date of each acquisition. Since MSLP was acquired as part of the Bakken Pipeline/MSLP Acquisition, the overall transaction was considered an acquisition of a business; therefore the Bakken Pipeline’s equity earnings from February 1, 2017, through the acquisition date are included in our Predecessor results for the year ended December 31, 2017. See
Note 4—
Acquisitions
for additional information.
The following table summarizes our equity investments at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
Percentage Ownership
|
|
|
Carrying Value
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Bakken Pipeline
|
25.00
|
%
|
|
$
|
621
|
|
—
|
|
Bayou Bridge Pipeline, LLC (Bayou Bridge)
|
40.00
|
|
|
173
|
|
115
|
|
DCP Sand Hills Pipeline, LLC (Sand Hills)
|
33.34
|
|
|
515
|
|
445
|
|
DCP Southern Hills Pipeline, LLC (Southern Hills)
|
33.34
|
|
|
209
|
|
212
|
|
Explorer Pipeline Company (Explorer)
|
21.94
|
|
|
118
|
|
126
|
|
Paradigm Pipeline LLC (Paradigm)
|
50.00
|
|
|
131
|
|
117
|
|
Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal)
|
70.00
|
|
|
53
|
|
72
|
|
STACK Pipeline LLC (STACK)
|
50.00
|
|
|
112
|
|
55
|
|
Total equity investments
|
|
|
$
|
1,932
|
|
1,142
|
|
Southern Hills has a negative basis difference of
$94 million
, which originated when the pipeline, formerly known as Seaway Products, was sold by Phillips 66 to a related party. The negative basis difference represents a deferred gain and is being amortized over
44
years. Explorer has a positive basis difference of $
91 million
, which represents fair value adjustments attributable to ownership increases in the pipeline. The positive basis difference is being amortized over periods between
10
and
18
years. STACK has a positive basis difference of
$41 million
which is due to the contributed assets being recorded at their historical book value. The positive basis difference is being amortized over
44
years. Bakken Pipeline has a positive basis difference of
$53 million
, which represents capitalized interest incurred during construction of the pipeline and a capital contribution disbursed to the co-venturer. The positive basis difference is being amortized over periods between
20
and
45
years.
Earnings (losses) from our equity investments for the years ended
December 31, 2017
and
2016
, were as follows:
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
2016
|
|
|
|
|
Bakken Pipeline
|
$
|
69
|
|
—
|
|
Bayou Bridge
|
12
|
|
3
|
|
Explorer
|
21
|
|
23
|
|
Paradigm
|
(1
|
)
|
(2
|
)
|
Phillips 66 Partners Terminal
|
8
|
|
—
|
|
Sand Hills
|
81
|
|
62
|
|
Southern Hills
|
27
|
|
26
|
|
STACK
|
6
|
|
2
|
|
Total equity in earnings of affiliates
|
$
|
223
|
|
114
|
|
Summarized 100 percent financial information for all equity investments is presented on a combined basis below:
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
Revenues
|
$
|
1,406
|
|
840
|
|
596
|
|
Income before income taxes
|
853
|
|
494
|
|
322
|
|
Net income
|
778
|
|
408
|
|
321
|
|
Current assets
|
525
|
|
243
|
|
269
|
|
Noncurrent assets
|
7,020
|
|
3,437
|
|
3,106
|
|
Current liabilities
|
302
|
|
396
|
|
180
|
|
Noncurrent liabilities
|
2,997
|
|
231
|
|
446
|
|
From acquisition date forward.
On June 1, 2017, the Bakken Pipeline commenced operations. Prior to June 1, 2017, the Bakken Pipeline did not have sufficient equity at risk to fully fund the construction of all assets required for principal operations, and thus represented variable interest entities until operations commenced. The Bakken Pipeline was not consolidated as our Predecessor was not the primary beneficiary.
Distributions received from our equity affiliates were
$274 million
and
$131 million
in
2017
and
2016
, respectively.
Note 6—
Major Customer and Concentration of Credit Risk
Phillips 66 accounted for
95 percent
,
95 percent
, and
94 percent
of our total operating revenues for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Through our wholly owned and joint-venture operations, we provide crude oil, refined petroleum products and NGL pipeline transportation, terminaling and storage, and crude oil gathering, NGL fractionation, crude oil processing, and rail-unloading services to Phillips 66 and other related parties.
We are potentially exposed to concentration of credit risk primarily through our accounts receivable with Phillips 66. These receivables have payment terms of 30 days or less and are settled against any existing payables we may have to Phillips 66 through Phillips 66’s interaffiliate settlement process. We monitor the credit worthiness of Phillips 66, which has an investment grade credit rating.
Note 7—
Properties, Plants and Equipment
Our investment in PP&E, with the associated accumulated depreciation, at December 31 was:
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Lives
|
|
Millions of Dollars
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
Land
|
|
|
$
|
19
|
|
|
19
|
|
Buildings and improvements
|
3 to 30 years
|
|
88
|
|
|
88
|
|
Pipelines and related assets
†
|
10 to 45 years
|
|
1,372
|
|
|
1,335
|
|
Terminals and related assets
†
|
25 to 45 years
|
|
671
|
|
|
610
|
|
Rail racks and related assets
†
|
33 years
|
|
137
|
|
|
137
|
|
Processing and related assets
†
|
25 years
|
|
837
|
|
|
615
|
|
Caverns and related assets
†
|
25 to 45 years
|
|
583
|
|
|
569
|
|
Construction-in-progress
|
|
|
47
|
|
|
27
|
|
Gross PP&E
|
|
|
3,754
|
|
|
3,400
|
|
Less: Accumulated depreciation
|
|
|
836
|
|
|
725
|
|
Net PP&E
|
|
|
$
|
2,918
|
|
|
2,675
|
|
†
Assets for which we are the lessor. See
Note 14—Leases
.
Note 8—
Goodwill
The carrying amount of goodwill was as follows:
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
|
|
|
Beginning balance January 1
|
$
|
185
|
|
|
182
|
|
Goodwill assigned to acquisitions
|
—
|
|
|
3
|
|
Ending balance December 31
|
$
|
185
|
|
|
185
|
|
Note 9—
Asset Retirement Obligations and Accrued Environmental Costs
Asset retirement obligations and accrued environmental costs at December 31 were:
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
|
|
|
Asset retirement obligations
|
$
|
10
|
|
|
9
|
|
Accrued environmental costs
|
1
|
|
|
2
|
|
Total asset retirement obligations and accrued environmental costs
|
11
|
|
|
11
|
|
Less: Asset retirement obligations and accrued environmental costs due within one year
|
—
|
|
|
—
|
|
Long-term asset retirement obligations and accrued environmental costs
|
$
|
11
|
|
|
11
|
|
Asset Retirement Obligations
We have asset retirement obligations we are required to perform under law or contract once an asset is permanently taken out of service. These obligations primarily relate to the abandonment or removal of certain pipelines. Most of these obligations are not expected to be paid until many years in the future.
During
2017
and
2016
, our asset retirement obligations changed as follows:
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
|
|
|
Balance at January 1
|
$
|
9
|
|
|
11
|
|
Accretion of discount
|
1
|
|
|
—
|
|
New obligations
|
—
|
|
|
—
|
|
Changes in estimates of existing obligations
|
—
|
|
|
(2
|
)
|
Balance at December 31
|
$
|
10
|
|
|
9
|
|
Accrued Environmental Costs
Pursuant to the terms of our amended omnibus agreement, Phillips 66 indemnifies us for the environmental liabilities associated with the assets contributed to us in connection with our Initial Public Offering (the Offering) and which arose prior to the closing of the Offering. Pursuant to the terms of various agreements under which we acquired assets from Phillips 66 since the Offering, Phillips 66 retained the responsibility for environmental liabilities associated with the acquired assets arising prior to the effective date of each acquisition.
In April 2015, our pipeline that transports products from the Hartford Terminal to a dock on the Mississippi River experienced a diesel fuel release of approximately
800
barrels. The release was halted on the same day, and cleanup and remediation efforts followed. Costs recognized during 2015 associated with cleanup and remediation of the release were
$5 million
. We continue to work with the appropriate authorities and costs are subject to change if additional information regarding the extent of the environmental impact of the release becomes known. We carry property and third-party liability insurance, each in excess of
$5 million
self-insured retentions.
In the future, we may be involved in additional environmental assessments, cleanups and proceedings.
Note 10—
Net Income Per Limited Partner Unit
Net income per limited partner unit applicable to common and subordinated units (for the period subordinated units were outstanding) is computed by dividing these limited partners’ respective interests in net income attributable to the Partnership by the weighted-average number of common units and subordinated units, respectively, outstanding for the period. Because we have more than
one
class of participating securities, we use the two-class method to calculate the net income per unit applicable to the limited partners. As of
December 31, 2017
, the classes of participating securities included common units, general partner units and incentive distribution rights (IDRs). For the years ended December 31, 2016 and 2015, basic and diluted net income per unit are the same for all periods presented because we did not have potentially dilutive common or subordinated units outstanding. For the year ended December 31, 2017, the preferred units are potentially dilutive securities and were dilutive to net income per limited partner unit. See
Note 12—
Equity
for additional information related to our preferred units.
Net income earned by the Partnership is allocated between the limited partners and the General Partner (including the General Partner’s IDRs) in accordance with our partnership agreement, after giving effect to priority income allocations to the holders of the preferred units. First, earnings are allocated based on actual cash distributions declared to our unitholders, including those attributable to the General Partner’s IDRs. To the extent net income attributable to the Partnership exceeds or is less than cash distributions, this difference is allocated based on the unitholders’ respective ownership percentages, after consideration of any priority allocations of earnings. For the diluted net income per limited partner unit calculation, the preferred units are assumed to be converted at the later of issuance date or beginning of period into limited partner units on a one-for-one basis, and the distribution formula for available cash in our partnership agreement is recalculated, using the original available cash amount increased only for the preferred distributions which would not have been paid after conversion.
When our financial statements are retrospectively adjusted after a dropdown transaction, the earnings of the acquired business, prior to the closing of the transaction, are allocated entirely to our General Partner and presented as net income (loss) attributable to Predecessors. The earnings per unit of our limited partners prior to the close of the transaction do not change as a result of a dropdown transaction. After the closing of a dropdown transaction, the earnings of the acquired business are allocated in accordance with our partnership agreement as previously described.
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
Net income attributable to the Partnership
|
$
|
461
|
|
|
301
|
|
|
194
|
|
Less: General partner’s distributions declared (including IDRs)*
|
158
|
|
|
91
|
|
|
39
|
|
Limited partners’ distributions declared on preferred units*
|
9
|
|
|
—
|
|
|
—
|
|
Limited partners’ distributions declared on common units*
|
291
|
|
|
205
|
|
|
123
|
|
Limited partner’s distributions declared on subordinated units*
|
—
|
|
|
—
|
|
|
13
|
|
Distributions less than net income attributable to the Partnership
|
$
|
3
|
|
|
5
|
|
|
19
|
|
*Distributions declared are attributable to the indicated periods.
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Limited Partners’ Common Units
|
|
General Partner (including IDRs)
|
|
Limited Partners’ Preferred Units
|
|
Total
|
|
Net income attributable to the Partnership
(millions):
|
|
|
|
|
Distributions declared
|
$
|
291
|
|
158
|
|
9
|
|
458
|
|
Distributions less than net income attributable to the Partnership
|
1
|
|
2
|
|
—
|
|
3
|
|
Net income attributable to the Partnership (basic)
|
292
|
|
160
|
|
9
|
|
461
|
|
Dilutive effect of preferred units
(1)
|
7
|
|
|
|
|
Net income attributable to the Partnership (diluted)
|
$
|
299
|
|
|
|
|
|
|
|
|
|
Weighted-average units outstanding—basic
|
112,044,824
|
|
|
|
|
Dilutive effect of preferred units
(1)
|
3,294,032
|
|
|
|
|
Weighted-average units outstanding—diluted
|
115,338,856
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Partnership per limited partner unit—basic
(dollars)
|
$
|
2.60
|
|
|
|
|
Net income attributable to the Partnership per limited partner unit—diluted
(dollars)
|
2.59
|
|
|
|
|
(1)
The dilutive effect of the preferred units assumes the reallocation of net income to the limited and general partners, including a reallocation associated with IDRs, pursuant to the available cash formula in the partnership agreement.
|
|
|
|
|
|
|
|
|
|
2016
|
|
Limited Partners’ Common Units
|
|
General Partner (including IDRs)
|
|
Total
|
|
Net income attributable to the Partnership
(millions):
|
|
|
|
Distributions declared
|
205
|
|
91
|
|
296
|
|
Distributions less than net income attributable to the Partnership
|
4
|
|
1
|
|
5
|
|
Net income attributable to the Partnership
|
209
|
|
92
|
|
301
|
|
|
|
|
|
Weighted-average units outstanding—basic and diluted
|
95,239,901
|
|
|
|
|
|
|
|
Net income attributable to the Partnership per limited partner unit—basic and diluted
(dollars)
|
$
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Limited Partners’ Common Units
|
|
Limited Partner’s Subordinated Units
|
|
General Partner (including IDRs)
|
|
Total
|
|
Net income attributable to the Partnership
(millions):
|
|
|
|
|
Distributions declared
|
123
|
|
13
|
|
39
|
|
175
|
|
Distributions less than net income attributable to the Partnership
|
14
|
|
3
|
|
2
|
|
19
|
|
Net income attributable to the Partnership
|
137
|
|
16
|
|
41
|
|
194
|
|
|
|
|
|
|
Weighted-average units outstanding—basic and diluted
|
68,173,891
|
|
12,736,051
|
|
|
|
|
|
|
|
|
Net income attributable to the Partnership per limited partner unit—basic and diluted
(dollars)
|
$
|
2.02
|
|
1.24
|
|
|
|
On
January 17, 2018
, the Board of Directors of our General Partner declared a quarterly cash distribution of
$0.678
per common unit attributable to the fourth quarter of
2017
. This distribution was paid
February 13, 2018
, to unitholders of record as of
January 31, 2018
.
Subordinated Unit Conversion
Following the May 12, 2015, payment of the cash distribution attributable to the first quarter of 2015, the requirements under the partnership agreement for the conversion of all subordinated units into common units were satisfied. As a result, in the second quarter of 2015, the
35,217,112
subordinated units held by Phillips 66 converted into common units on a one-for-one basis, and thereafter participate on terms equal with all other common units in distributions of available cash. The conversion of the subordinated units did not impact the amount of cash distributions paid by us or the total number of outstanding units.
Note 11—
Debt
Debt at December 31 was:
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
|
2.646% Senior Notes due 2020
|
$
|
300
|
|
|
300
|
|
3.605% Senior Notes due 2025
|
500
|
|
|
500
|
|
3.550% Senior Notes due 2026
|
500
|
|
|
500
|
|
3.750% Senior Notes due 2028
|
500
|
|
|
—
|
|
4.680% Senior Notes due 2045
|
450
|
|
|
300
|
|
4.900% Senior Notes due 2046
|
625
|
|
|
625
|
|
Tax-exempt bonds
|
100
|
|
|
—
|
|
Revolving credit facility at 1.98% at December 31, 2016
|
—
|
|
|
210
|
|
Total
|
2,975
|
|
|
2,435
|
|
Net unamortized discounts and debt issuance costs
|
(30
|
)
|
|
(24
|
)
|
Debt at face value
|
2,945
|
|
|
2,411
|
|
Less: Short-term debt
|
25
|
|
|
15
|
|
Long-term debt
|
$
|
2,920
|
|
|
2,396
|
|
The fair value of our fixed-rate and floating-rate debt is estimated based on observable market prices and is classified in level 2 of the fair value hierarchy. The fair value of our fixed-rate debt amounted to
$2,918 million
and
$2,147 million
at December 31, 2017 and 2016, respectively. The fair value of our floating-rate debt approximated carrying value of
$100 million
and
$210 million
at December 31, 2017 and 2016, respectively.
Maturities of borrowings outstanding at December 31, 2017, inclusive of net unamortized discounts and debt issuance costs, for the five-year period ending 2022 were
$25 million
in 2018,
$324 million
in 2020 and
$50 million
in 2021.
2017 Senior Notes
In October 2017, we closed on a notes offering (2017 Notes Offering) of
$650 million
aggregate principal amount of unsecured senior notes consisting of:
|
|
•
|
$500 million
of
3.750%
Senior Notes due March 1, 2028.
|
|
|
•
|
An additional
$150 million
of our
4.680%
Senior Notes due February 15, 2045.
|
Interest on the Senior Notes due 2028 is payable semiannually in arrears on March 1 and September 1 of each year, commencing on March 1, 2018. The Senior Notes due 2045 are an additional issuance of our Senior Notes due 2045, and interest is payable semiannually in arrears on February 15 and August 15 of each year. Total proceeds received from the 2017 Notes Offering were
$643 million
, net of underwriting discounts. We utilized the net proceeds to repay the remaining balances on the promissory notes and term loan assumed in the Bakken Pipeline/MSLP Acquisition and for general partnership purposes.
2016 Senior Notes
In October 2016, we closed on a notes offering (2016 Notes Offering) of
$1,125 million
aggregate principal amount of unsecured senior notes consisting of:
|
|
•
|
$500 million
of
3.550%
Senior Notes due October 1, 2026.
|
|
|
•
|
$625 million
of
4.900%
Senior Notes due October 1, 2046.
|
Interest on the 2016 Senior Notes is payable semiannually in arrears on April 1 and October 1 of each year, commencing on April 1, 2017. Total proceeds received from the 2016 Notes Offering were
$1,111 million
, net of underwriting discounts. We utilized the net proceeds to fund the cash consideration for the Eagle Acquisition and for general partnership purposes.
Revolving Credit Facility
At
December 31, 2017
, we had
no
borrowings outstanding under our
$750 million
revolving credit facility established by our Credit Agreement dated June 7, 2013, as amended (the Credit Agreement). At December 31, 2016, we had an aggregate of
$210 million
borrowed and outstanding under our
$750 million
revolving credit facility.
We have the option to increase the overall capacity of the Credit Agreement by up to an additional
$250 million
for a total of
$1 billion
, subject to, among other things, the consent of the existing lenders whose commitments will be increased or any additional lenders providing such additional capacity. We also have the option to extend the Credit Agreement for
two
additional
one
-year terms after its October 3, 2021, maturity date, subject to, among other things, the consent of the lenders holding the majority of the commitments and of each lender extending its commitment.
Outstanding borrowings under the Credit Agreement bear interest, at our option, at either: (a) the Eurodollar rate in effect from time to time plus the applicable margin; or (b) the base rate (as described in the Credit Agreement) plus the applicable margin. The pricing levels for the commitment fee and interest-rate margins are determined based on our credit ratings in effect from time to time. Outstanding borrowings bearing interest at the Eurodollar rate become due and payable on the revolving credit facility’s termination date. Outstanding borrowings bearing interest at the base rate plus the applicable margin become due and payable on the earlier of the revolving credit facility’s termination date or the fourteenth business day after such borrowings were made. We may at any time and from time to time prepay outstanding borrowings under the Credit Agreement, in whole or in part, without premium or penalty. The Credit Agreement requires that the Partnership’s ratio of total debt to EBITDA for the prior four fiscal quarters must be no greater than
5.0
:1.0 as of the last day of each fiscal quarter (and
5.5
:1.0 during the period following certain specified acquisitions).
Tax-Exempt Bonds
In connection with the Bakken Pipeline/MSLP Acquisition, we assumed four tranches of tax-exempt bonds issued by the Brazos River Harbor Navigation District. Each of the four tranches was issued in the amount of
$25 million
, with tranches maturing in 2018, 2020 and two tranches in 2021.
All four tranches accrue interest monthly based on a daily rate derived by the remarketing agent for the bonds. The interest rates are designed to represent the lowest rate acceptable by the tax-exempt, variable-rate bond market and approximate the tax-exempt bonds trading at par. At December 31, 2017, the rate for all four tranches averaged
1.94 percent
.
Senior Bonds
In May 2017 and prior to their maturity, we repaid MSLP senior bonds assumed in the Bakken Pipeline/MSLP Acquisition with a carrying value of
$136 million
on the repayment date, which resulted in an immaterial gain.
Notes Payable
In March 2016, in connection with the Initial Fractionator Acquisition, we entered into an Assignment and Assumption of Note agreement with subsidiaries of Phillips 66, pursuant to which we assumed the obligations under a term promissory note (the Initial Note) with a
$212 million
principal balance. In August 2016, using proceeds from a unit offering, we repaid the Initial Note in its entirety.
In May 2016, in connection with the Subsequent Fractionator Acquisition, we entered into
three
separate Assignment and Assumption of Note agreements with subsidiaries of Phillips 66, pursuant to which we assumed the obligations under
three
term promissory notes (the Subsequent Notes), each with a
$225 million
principal balance. Also in May 2016, using proceeds from a unit offering, we repaid
two
of the Subsequent Notes in their entirety, and reduced the outstanding balance on the remaining Subsequent Note to
$19 million
, which was subsequently repaid in June 2016.
Because the Initial Note, Subsequent Notes and MSLP tax-exempt bonds and senior bonds were held by entities we acquired in common control transactions, prior period debt balances were retrospectively presented as if we had held the notes and bonds since their inception in January 2014 in the case of the notes, and February 2017 in the case of the bonds.
Note 12—
Equity
ATM Programs
In June 2016, we filed a prospectus supplement to the shelf registration statement for our continuous offering program that became effective with the Securities and Exchange Commission in May 2016, related to the continuous issuance of up to an aggregate of
$250 million
of common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the time of our offerings (such continuous offering program, or at-the-market program, is referred to as our ATM Program). During the year ended
December 31, 2017
, on a settlement-date basis, we issued an aggregate of
3,372,716
common units under our ATM Program, generating net proceeds of
$173 million
, after broker commissions. During the year ended
December 31, 2016
, on a settlement-date basis, we issued an aggregate of
346,152
common units under our ATM Program, generating net proceeds of
$19 million
after broker commissions.
We filed a new shelf registration statement for a second continuous offering program that became effective with the Securities and Exchange Commission on
January 23, 2018
, related to the continuous offering of up to an aggregate of
$250 million
of common units, in amounts, at prices and on terms to be determined by the market conditions and other factors at the time of our offerings.
The net proceeds from sales under the ATM Programs are used for general partnership purposes, which may include debt repayment, acquisitions, capital expenditures and additions to working capital.
Common Unit Offerings
In October 2017, we completed a private placement of
6,304,204
common units representing limited partner interests at a price of
$47.59
per common unit, for total proceeds of
$295 million
, net of underwriting discounts and commissions. The net proceeds were used in part to fund the cash portion of the Bakken Pipeline/MSLP Acquisition. See
Note 4—Acquisitions
for additional information.
In August 2016, we completed a public offering of
6,000,000
common units representing limited partner interests at a price of
$50.22
per common unit. We received proceeds of
$299 million
from the offering, net of underwriting discounts and commissions. We utilized the net proceeds to repay the Initial Note assumed as part of the Initial Fractionator Acquisition and to repay other short-term borrowings incurred to fund our acquisition of an additional interest in Explorer and our contribution to form STACK.
See
Note 4—Acquisitions
and
Note 11—Debt
for additional information.
In May 2016, we completed a public offering, consisting of an aggregate of
12,650,000
common units representing limited partner interests at a price of
$52.40
per common unit. We received proceeds of
$656 million
from the offering, net of underwriting discounts and commissions. We utilized the net proceeds to partially repay debt assumed as part of the Subsequent Fractionator Acquisition. See
Note 4—Acquisitions
and
Note 11—Debt
for additional information.
In February 2015, we completed the public offering of an aggregate of
5,250,000
common units representing limited partner interests at a price of
$75.50
per common unit. We received proceeds of
$384 million
from the offering, net of underwriting discounts and commissions. We utilized a portion of the net proceeds to partially fund the acquisition of the Sand Hills, Southern Hills and Explorer equity investments and to repay amounts outstanding under our revolving credit facility. We used the remaining proceeds to fund expansion capital expenditures and for general partnership purposes. See
Note 5—Equity Investments
for additional information on the Sand Hills, Southern Hills and Explorer acquisition.
Preferred Unit Offering
In October 2017, we completed the private placement of
13,819,791
perpetual convertible preferred units (preferred units) representing limited partner interests at a price of
$54.27
per preferred unit. We received proceeds of
$737 million
from the offering, net of offering and transaction expenses. The net proceeds were used in part to fund the cash portion of the Bakken Pipeline/MSLP Acquisition.
The preferred units rank senior to all common units with respect to distributions and rights upon liquidation. The holders of the preferred units are entitled to receive cumulative quarterly distributions equal to
$0.678375
per unit, beginning for the quarter ended December 31, 2017, with a prorated amount from the date of issuance. Following the third anniversary of the issuance of the preferred units, the holders of the preferred units will receive as a quarterly distribution the greater of
$0.678375
per unit or the amount of per-unit distributions paid to common unitholders as if such preferred units had converted into common units immediately prior to the record date.
The holders of the preferred units may convert their preferred units into common units, on a one-for-one basis, at any time after the second anniversary of the issuance date, in full or in part, subject to minimum conversion amounts and conditions. After the third anniversary of the issuance date, we may convert the preferred units into common units at any time, in whole or in part, subject to certain minimum conversion amounts and conditions, if the arithmetic average of the volume-weighted trading price of our common units is greater than
$73.2645
per unit for the
20
day trading period immediately preceding the conversion notice date and the average trading volume of the common units is at least
100,000
for the preceding
20
trading days. The conversion rate for the preferred units shall be the quotient of (a) the sum of (i)
$54.27
, plus (ii) any unpaid cash distributions on the applicable preferred unit, divided by (b)
$54.27
. The holders of the preferred units are entitled to vote on an as-converted basis with the common unitholders and have certain other class voting rights with respect to any amendment to our partnership agreement that would adversely affect any rights, preferences or privileges of the preferred units. In addition, upon certain events involving a change in control, the holders of preferred units may elect, among other potential elections, to convert their preferred units to common units at the then change of control conversion rate.
Note 13—
Contingencies
From time to time, lawsuits involving a variety of claims that arise in the ordinary course of business are filed against 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 sites. We regularly assess the need for accounting 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 any 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 federal, state and local environmental laws and regulations. We record accruals for contingent environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring 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 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.
In the future, we may be involved in additional environmental assessments, cleanups and proceedings. See
Note 9—Asset Retirement Obligations and Accrued Environmental Costs
, for a summary of our accrued environmental liabilities.
Legal Proceedings
Under our amended omnibus agreement, Phillips 66 provides certain services for our benefit, including legal support services, and we pay an operational and administrative support fee for these services. Phillips 66’s 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. The process facilitates the early evaluation and quantification of potential exposures in individual cases and enables 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, Phillips 66’s legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required. At
December 31, 2017
and
2016
, we did not have any material accrued contingent liabilities associated with litigation matters.
Indemnification and Excluded Liabilities
Under our amended omnibus agreement and pursuant to the terms of various agreements under which we acquired assets from Phillips 66, Phillips 66 will indemnify us, or assume responsibility, for certain environmental liabilities, tax liabilities, litigation and any other liabilities attributable to the ownership or operation of the assets contributed to us and that arose prior to the effective date of each acquisition. These indemnifications and exclusions from liability have, in some cases, time limits and deductibles. When Phillips 66 performs under any of these indemnifications or exclusions from liability, we recognize non-cash expenses and associated non-cash capital contributions from our General Partner, as these are considered liabilities paid for by a principal unitholder.
Note 14—
Leases
Lessor
We have certain services agreements with Phillips 66 that are considered operating leases under GAAP. These agreements include escalation clauses to adjust transportation tariffs and terminaling and storage fees to reflect changes in price indices. Revenues from these agreements are recorded within “Operating revenues—related parties” on our consolidated statement of income. As of
December 31, 2017
, future minimum payments to be received related to these agreements were estimated to be:
|
|
|
|
|
|
Millions of Dollars
|
|
|
|
2018
|
$
|
562
|
|
2019
|
530
|
|
2020
|
527
|
|
2021
|
516
|
|
2022
|
505
|
|
Thereafter
|
1,584
|
|
Total
|
$
|
4,224
|
|
Lessee
We have operating lease agreements with Phillips 66 for the land underlying or associated with certain assets. Due to the economic infeasibility of canceling these leases, we consider them non-cancellable. For the year ended December 31, 2017, total operating lease rental expense was
$3 million
. As of
December 31, 2017
, the future minimum lease payments for our operating lease obligations were:
|
|
|
|
|
|
Millions of Dollars
|
|
|
|
2018
|
$
|
3
|
|
2019
|
3
|
|
2020
|
3
|
|
2021
|
3
|
|
2022
|
3
|
|
Thereafter
|
93
|
|
Total minimum lease payments
|
$
|
108
|
|
Note 15—
Employee Benefit Plans
Pension and Retirement Savings Plans
Neither we nor our subsidiaries have any employees. Our General Partner has the sole responsibility for providing the employees and other personnel necessary to conduct our operations. All of the employees that conduct our wholly owned businesses are employed by Phillips 66. Those employees participate in the pension, postretirement health insurance and defined contribution benefit plans sponsored by Phillips 66. Most employees of Phillips 66 who provide direct support to our operations do so under the provisions of the amended and restated operational services agreement, which fees include a burden for benefit costs.
Note 16—
Unit-Based Compensation
In 2013, the Board of Directors of our General Partner adopted the Phillips 66 Partners LP 2013 Incentive Compensation Plan (the ICP). Awards under the ICP are available for officers, directors and employees of our General Partner or its affiliates, and any consultants or other individuals who perform services for the Partnership. The ICP allows for the grant of unit awards, restricted units, phantom units, unit options, unit appreciation rights, distribution equivalent rights, profits interest units and other unit-based awards. The ICP limits the number of common units that may be delivered pursuant to awards to
2,500,000
, subject to proportionate adjustment in the event of unit splits and similar events.
From the closing of our initial public offering through
December 31, 2017
, we have only issued phantom units to non-employee directors under the ICP. A phantom unit entitles the recipient to receive cash equal to the fair market value of a common unit on the date the phantom unit is settled after the vesting period (settlement date), and to also receive a distribution equivalent each quarter between the grant date and the settlement date in an amount equal to any cash distributions paid on a common unit during that time. During the years ended
December 31, 2017
,
2016
, and
2015
, we granted a total of
4,794
,
4,880
and
2,343
phantom units, respectively, to
three
non-employee directors of the Partnership. On the grant date, phantom units awarded to non-employee directors become non-forfeitable; therefore, we immediately recognize expense equal to the grant-date fair value of the award. Phantom units awarded under the ICP do not have voting rights.
Note 17—
Income Taxes
We are not a taxable entity for U.S. federal income tax purposes or for the majority of states that impose an income tax. Taxes on our net income are generally borne by our partners through the allocation of taxable income. Our income tax provision results from state laws that apply to entities organized as partnerships. For us, this is primarily Texas. Our effective tax rate was less than
one
percent for the years ended
December 31, 2017
,
2016
and
2015
.
At
December 31, 2017
and
2016
, we had a deferred tax liability of
$5 million
and
$2 million
, respectively. The net deferred tax liability was primarily associated with PP&E and equity investments.
As of
December 31, 2017
and
2016
, we had
no
liability reported for uncertain tax positions, and we did
not
have any interest or penalties related to income taxes for the years ended
December 31, 2017
,
2016
and
2015
. Texas tax returns for the years 2013 and forward are subject to examination.
Note 18—
Cash Flow Information
The acquisitions discussed below had cash and noncash elements. The common and general partner units issued to Phillips 66 in the Bakken Pipeline/MSLP, Eagle and Sand Hills/Southern Hills/Explorer acquisitions were assigned
no
value, because the cash consideration and any debt assumed exceeded the historical net book value of the acquired assets for each acquisition. Accordingly, the units issued for these acquisitions had no impact on partner capital balances, other than changing ownership percentages.
Bakken Pipeline/MSLP Acquisition
The historical book value of the net assets acquired in the Bakken Pipeline/MSLP Acquisition was
$729 million
. Total cash consideration and assumed debt immediately repaid to Phillips 66 at acquisition totaled
$963 million
. Of this total,
$729 million
was an investing cash outflow, and the remaining
$234 million
was deemed a cash distribution to our General Partner (a financing cash outflow). The remaining balance of debt assumed in the acquisition of
$447 million
was a noncash financing activity that increased debt and decreased our General Partner’s capital account.
Eagle Acquisition
We attributed
$990 million
of the total
$1,109 million
cash consideration paid to the historical book value of the assets acquired (an investing cash outflow). The remaining
$119 million
of excess cash consideration was deemed a distribution to our General Partner (a financing cash outflow).
Subsequent Fractionator Acquisition
The historical book value of the net assets acquired in the Subsequent Fractionator Acquisition was
$871 million
. Of this amount,
$656 million
was a financing cash outflow, representing the acquisition of the noncontrolling interest in Sweeny Frac LLC, through the repayment of a portion of the debt assumed in the transaction. The remaining debt financing balance of
$19 million
represented a noncash investing and financing activity. The remaining
$196 million
of book value was attributed to the common and general partner units issued (a noncash investing and financing activity).
Initial Fractionator Acquisition
The Initial Fractionator Acquisition was a noncash transaction. The historical book value of the net assets of our
25 percent
interest acquired was
$283 million
. Of this amount,
$212 million
was attributed to the note payable assumed (a noncash investing and financing activity). The remaining
$71 million
was attributed to the common and general partner units issued (a noncash investing and financing activity).
Bayou Bridge Joint Venture Acquisition
Total consideration paid for the transaction was
$70 million
, consisting of the assumption of a
$35 million
note payable to Phillips 66 that was immediately paid in full (an investing cash outflow). The remaining
$35 million
of book value was attributed to the common and general partner units issued (a noncash investing and financing activity).
Sand Hills, Southern Hills and Explorer Acquisition
We attributed
$734 million
of the total
$880 million
cash consideration paid to the investment balance of the Sand Hills, Southern Hills and Explorer equity investments acquired (an investing cash outflow). The remaining
$146 million
of excess cash consideration was deemed a distribution to our General Partner (a financing cash outflow).
Our capital expenditures and investments consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Capital Expenditures and Investments
|
|
|
|
|
|
Capital expenditures attributable to Predecessors
|
$
|
82
|
|
|
96
|
|
|
690
|
|
Capital expenditures and investments attributable to the Partnership
|
352
|
|
|
461
|
|
|
205
|
|
Total capital expenditures and investments
|
$
|
434
|
|
|
557
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Capital Expenditures and Investments
|
|
|
|
|
|
Cash capital expenditures and investments
|
$
|
431
|
|
|
584
|
|
|
948
|
|
Change in capital expenditure accruals
|
3
|
|
|
(27
|
)
|
|
(53
|
)
|
Total capital expenditures and investments
|
$
|
434
|
|
|
557
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Other Noncash Investing and Financing Activities
|
|
|
|
|
|
Dividend of loan receivable to Phillips 66 by Predecessor
|
$
|
51
|
|
|
—
|
|
|
—
|
|
Certain liabilities of acquired assets retained by Phillips 66
(1)
|
—
|
|
|
50
|
|
|
—
|
|
Contributions of net assets into joint ventures
|
—
|
|
|
—
|
|
|
43
|
|
|
|
|
|
|
|
Cash Payments
|
|
|
|
|
|
Interest and debt expense
|
$
|
96
|
|
|
40
|
|
|
18
|
|
(1)
Certain liabilities of acquisitions were retained by Phillips 66, pursuant to the terms of various agreements under which we acquired assets from Phillips 66 since our initial public offering. See
Note 13—Contingencies
for additional information on these excluded liabilities associated with acquisitions.
Note 19—
Restricted Cash
At
December 31, 2017
, the Partnership did
not
have any restricted cash. The restrictions on the cash received in February 2017, as a result of the retrospective adjustment for the Bakken Pipeline/MSLP Acquisition, were fully removed in the second quarter of 2017 when MSLP’s outstanding debt that contained lender restrictions on the use of cash was paid in full. See
Note 4—
Acquisitions
for additional information.
Note 20—
Other Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Interest and Debt Expense
|
|
|
|
|
|
Incurred
|
|
|
|
|
|
Debt
|
$
|
100
|
|
|
56
|
|
|
65
|
|
Other
|
2
|
|
|
1
|
|
|
1
|
|
|
102
|
|
|
57
|
|
|
66
|
|
Capitalized
|
(1
|
)
|
|
(5
|
)
|
|
(32
|
)
|
Expensed
|
$
|
101
|
|
|
52
|
|
|
34
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
Co-venturer contractual make-whole payments
|
$
|
7
|
|
|
—
|
|
|
5
|
|
Interest income
|
3
|
|
|
—
|
|
|
—
|
|
Other
|
2
|
|
|
1
|
|
|
1
|
|
Total other income
|
$
|
12
|
|
|
1
|
|
|
6
|
|
Note 21—
Related Party Transactions
Commercial Agreements
We have entered into multiple commercial agreements with Phillips 66, including transportation services agreements, terminal services agreements, storage services agreements, stevedoring services agreements, a fractionation service agreement, a tolling services agreement, and rail terminal services agreements. Under these long-term, fee-based agreements, we provide transportation, terminaling, storage, stevedoring, fractionation, processing, and rail terminal services to Phillips 66, and Phillips 66 commits to provide us with minimum quarterly throughput volumes of crude oil, NGL, feedstock, and refined petroleum products or minimum monthly service fees. Under our transportation, processing, and terminaling services agreements, if Phillips 66 fails to transport, throughput or store its minimum throughput volume during any quarter, then Phillips 66 will pay us a deficiency payment based on the calculation described in the agreement.
Amended and Restated Operational Services Agreement
Under our amended and restated operational services agreement, we reimburse Phillips 66 for providing certain operational services to us in support of our pipelines and terminaling, processing, and storage facilities. These services include routine and emergency maintenance and repair services, routine operational activities, routine administrative services, construction and related services and such other services as we and Phillips 66 may mutually agree upon from time to time.
Amended Omnibus Agreement
The amended omnibus agreement addresses our payment of an operating and administrative support fee and our obligation to reimburse Phillips 66 for all other direct or allocated costs and expenses incurred by Phillips 66 in providing general and administrative services. Additionally, the omnibus agreement addresses Phillips 66’s indemnification to us and our indemnification to Phillips 66 for certain environmental and other liabilities. Further, it addresses the granting of a license from Phillips 66 to us with respect to the use of certain Phillips 66 trademarks.
Tax Sharing Agreement
Under our tax sharing agreement, we reimburse Phillips 66 for our share of state and local income and other taxes incurred by Phillips 66 due to our results of operations being included in a combined or consolidated tax return filed by Phillips 66. Any reimbursement is limited to the tax that we (and our subsidiaries) would have paid had we not been included in a combined group with Phillips 66. Phillips 66 may use its tax attributes to cause its combined or consolidated group to owe
no
tax; however, we would nevertheless reimburse Phillips 66 for the tax we would have owed, even though Phillips 66 had
no
cash expense for that period.
Related Party Transactions
Significant related party transactions included in operating and maintenance expenses, general and administrative expenses and interest and debt expense were:
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
Operating and maintenance expenses
|
$
|
189
|
|
|
104
|
|
|
95
|
|
General and administrative expenses
|
64
|
|
|
56
|
|
|
58
|
|
Interest and debt expense
|
—
|
|
|
3
|
|
|
2
|
|
Total
|
$
|
253
|
|
|
163
|
|
|
155
|
|
We pay Phillips 66 a monthly operational and administrative support fee under the terms of our amended omnibus agreement in the amount of
$8 million
. In prior periods, the monthly fee paid to Phillips 66 was
$1 million
from July 26, 2013 through February 28, 2014,
$2 million
from March 1, 2014, to March 1, 2015,
$3 million
from March 2, 2015, to October 13, 2016, and
$7 million
from October 14, 2016 to October 6, 2017 reflecting the growth in our operations.
The operational and administrative support fee is for the provision of certain services, including: logistical services; asset oversight, such as operational management and supervision; corporate engineering services, including asset integrity and regulatory services; business development services; executive services; financial and administrative services (including treasury and accounting); information technology; legal services; corporate health, safety and environmental services; facility services; human resources services; procurement services; investor relations; tax matters; and public company reporting services. We also reimburse Phillips 66 for all other direct or allocated costs incurred on behalf of us, pursuant to the terms of our amended omnibus agreement. The classification of these charges between operating and maintenance expenses and general and administrative expenses is based on the functional nature of the services performed for our operations. Under our amended and restated operational services agreement, we reimburse Phillips 66 for the provision of certain operational services to us in support of our pipeline, rail rack, fractionator, processing, terminaling, and storage facilities. Additionally, we pay Phillips 66 for insurance services provided to us. Operating and maintenance expenses also include volumetric gains and losses associated with volumes transported by Phillips 66.
Other related party balances in our consolidated balance sheet at December 31 consisted of the following, all of which were related to Phillips 66:
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
2017
|
|
|
2016
|
|
|
|
|
|
Deferred rentals and other assets
|
$
|
5
|
|
|
5
|
|
Deferred revenues
|
33
|
|
|
14
|
|
Deferred revenues and other liabilities
|
61
|
|
|
19
|
|
Note 22—
New Accounting Standards
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations: Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendment provides a screen for determining when a transaction involves an acquisition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the transaction is not considered an acquisition of a business. If the screen is not met, then the amendment requires that, to be considered a business, the operation must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output. The guidance may reduce the number of transactions accounted for as business acquisitions. Public business entities should apply the guidance in ASU No. 2017-01 to annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The amendments should be applied prospectively, and no disclosures are required at the effective date. We are currently evaluating the provisions of ASU No. 2017-01.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. Public business entities should apply the guidance in ASU No. 2016-02 for annual periods beginning after December 15, 2018, including interim periods within those annual periods, early adoption is permitted. Entities are required to adopt the ASU using a modified retrospective approach, subject to certain optional practical expedients, and apply its provisions to leasing arrangements existing at or entered into after the earliest comparative period presented in the financial statements. We are currently evaluating the provisions of ASU No. 2016-02 and assessing its impact on our financial statements. As part of our assessment work-to-date, we have formed an implementation team, commenced identification of our lease population and selected a lease software package.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” to meet its objective of providing more decision-useful information about financial instruments. The majority of this ASU’s provisions amend only the presentation or disclosures of financial instruments; however, one provision affects net income. Equity investments carried under the cost method or lower of cost or fair value method of accounting, in accordance with current GAAP, will have to be carried at fair value upon adoption of ASU No. 2016-01, with changes in fair value recorded in net income. For equity investments that do not have readily determinable fair values, a company may elect to carry such investments at cost less impairments, if any, adjusted up or down for price changes in similar financial instruments issued by the investee, when and if observed. Public business entities should apply the guidance in ASU No. 2016-01 for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption prohibited. We are currently evaluating the provisions of ASU No. 2016-01. Our initial review indicates that ASU No. 2016-01 will have a limited impact on our financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU and other related updates issued are intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets and expand disclosure requirements. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Our assessment work included the formation of an implementation work team, training on the new ASU’s revenue recognition model, contract review and documentation, and the monitoring of industry interpretative issues. We adopted the standard on January 1, 2018, using the modified retrospective application. Our evaluation of the ASU is near completion, which includes understanding the impact of adoption on earnings from equity method investments and revenue within lease arrangements. Based on our analysis to-date, we expect to record a noncash cumulative effect increase to total equity ranging from
$20 million
to
$25 million
, primarily related to accelerated revenue recognition on contracts with minimum volume commitments. We also expect increased disclosures on revenue recognition.
|
|
|
|
|
|
Selected Quarterly Financial Data
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
Per Common Unit
|
|
Total Revenues and Other Income
|
|
Income Before Income Taxes
|
|
Net Income
|
|
Net Income Attributable to the Partnership
|
|
Limited Partners’ Interest in Net Income Attributable to the Partnership
|
|
|
Net Income Attributable to the Partnership
|
|
Basic
|
|
Diluted
|
|
2017
|
|
|
|
|
|
|
|
|
First*
|
$
|
262
|
|
110
|
|
110
|
|
97
|
|
65
|
|
|
0.60
|
|
0.60
|
|
Second*
|
277
|
|
120
|
|
119
|
|
103
|
|
66
|
|
|
0.61
|
|
0.61
|
|
Third*
|
299
|
|
132
|
|
131
|
|
99
|
|
56
|
|
|
0.51
|
|
0.51
|
|
Fourth
|
331
|
|
166
|
|
164
|
|
162
|
|
105
|
|
|
0.86
|
|
0.83
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
First
|
$
|
204
|
|
94
|
|
94
|
|
52
|
|
36
|
|
|
0.44
|
|
0.44
|
|
Second
|
219
|
|
101
|
|
100
|
|
68
|
|
47
|
|
|
0.51
|
|
0.51
|
|
Third
|
222
|
|
112
|
|
112
|
|
83
|
|
57
|
|
|
0.57
|
|
0.57
|
|
Fourth
|
228
|
|
103
|
|
102
|
|
98
|
|
69
|
|
|
0.65
|
|
0.65
|
|
*Financial information has been retrospectively adjusted for acquisitions of businesses under common control.