Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. References to our “General Partner” refer to Phillips 66 Partners GP LLC, and references to “Phillips 66 PDI” refer to Phillips 66 Project Development Inc., the Phillips 66 subsidiary that holds a limited partner interest in us and wholly owns our General Partner.
Management’s Discussion and Analysis is the Partnership’s analysis of its financial performance, financial condition, and of significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the Partnership’s plans, strategies, objectives, expectations and intentions. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions normally identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The Partnership does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the Partnership’s disclosures under the heading: “CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.”
EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT
Partnership Overview
We are a master limited partnership formed to own, operate, develop and acquire primarily fee-based midstream assets. Our operations consist of crude oil, refined petroleum products and natural gas liquids (NGL) transportation, terminaling, processing and storage assets. We conduct our operations through both wholly owned and joint venture operations. The majority of our wholly owned assets are associated with, and are 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 fractionation services to Phillips 66 and other customers. Our equity affiliates primarily generate revenue from transporting and terminaling crude oil, refined petroleum products and NGL.
Our common units trade on the New York Stock Exchange under the symbol PSXP.
How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our performance, including: (1) volumes handled; (2) operating and maintenance expenses; (3) net income before net interest expense, income taxes, depreciation and amortization (EBITDA); (4) adjusted EBITDA; and (5) distributable cash flow.
Volumes Handled
The amount of revenue we generate primarily depends on the volumes of crude oil, refined petroleum products and NGL that we handle in our pipeline, terminal, rail rack, processing, storage and fractionator systems. In addition, our equity affiliates generate revenue from transporting and terminaling crude oil, refined petroleum products and NGL. These volumes are primarily affected by the supply of, and demand for, crude oil, refined petroleum products and NGL in the markets served directly or indirectly by our assets, as well as the operational status of the refineries served by our assets. Phillips 66 has committed to minimum throughput volumes under many of our commercial agreements.
Operating and Maintenance Expenses
Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses primarily consist of labor expenses (including contractor services), utility costs, and repair and maintenance expenses. Operating and maintenance expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities, particularly maintenance activities, performed during the period. Our processing assets are periodically subject to major maintenance, or turnaround activities, which can significantly increase operating and maintenance expenses in a given year. Although we seek to manage our maintenance expenditures on our facilities to avoid significant variability in our quarterly cash flows, we balance this approach with our high standards of safety and environmental stewardship, such that critical maintenance is regularly performed.
Our operating and maintenance expenses are also affected by volumetric gains/losses resulting from variances in meter readings and other measurement methods, as well as volume fluctuations due to pressure and temperature changes. Under certain commercial agreements with Phillips 66, the value of any crude oil, refined petroleum product and NGL volumetric gains and losses are determined by reference to the monthly average reference price for the applicable commodity. Any gains/losses under these provisions decrease or increase, respectively, our operating and maintenance expenses in the period in which they are realized. These contractual volumetric gain/loss provisions could increase variability in our operating and maintenance expenses.
EBITDA, Adjusted EBITDA and Distributable Cash Flow
We define EBITDA as net income plus net interest expense, income taxes, depreciation and amortization.
Adjusted EBITDA is EBITDA attributable to the Partnership after deducting the adjusted EBITDA attributable to noncontrolling interest, further adjusted for:
•The proportional share of equity affiliates’ net interest expense, income taxes, depreciation and amortization, and impairments.
•Transaction costs associated with acquisitions.
•Certain other noncash items, including gains and losses on asset sales and asset impairments.
Distributable cash flow is defined as adjusted EBITDA less (i) equity affiliate distributions less than proportional adjusted EBITDA, (ii) maintenance capital expenditures, (iii) net interest expense, (iv) income taxes paid and (v) preferred unit distributions, plus adjustments for deferred revenue impacts.
EBITDA, adjusted EBITDA, and distributable cash flow are not presentations made in accordance with generally accepted accounting principles in the United States (GAAP). EBITDA, adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management believes external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may find useful to assess:
•Our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of EBITDA and adjusted EBITDA, financing methods.
•The ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders.
•Our ability to incur and service debt and fund capital expenditures.
•The viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
The GAAP performance measure most directly comparable to EBITDA and adjusted EBITDA is net income. The GAAP liquidity measure most directly comparable to EBITDA and distributable cash flow is net cash provided by operating activities. These non-GAAP financial measures should not be considered alternatives to GAAP net income or net cash provided by operating activities. They have important limitations as analytical tools because they exclude some items that affect net income and net cash provided by operating activities. Additionally, because EBITDA, adjusted EBITDA, and distributable cash flow may be defined differently by other companies in our industry, our definition of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Business Environment
We do not own any of the crude oil, refined petroleum products and NGL we handle and do not engage in the trading of those commodities, and therefore 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.
Our throughput volumes primarily depend on the volume of crude oil processed and refined petroleum products produced at Phillips 66’s owned or operated refineries with which our assets are integrated. These volumes are primarily dependent on Phillips 66’s refining margins and maintenance schedules. Refining margins depend on the price of crude oil or other feedstocks and the price of refined petroleum products. These prices are affected by numerous factors beyond our or Phillips 66’s control, including the domestic and global supply of and demand for crude oil and refined petroleum products. Throughput volumes of our equity affiliates primarily depend on upstream drilling activities, refinery performance and product supply and demand.
The Coronavirus Disease 2019 (COVID-19) pandemic continues to impact global economic activity. Our results in the second quarter of 2021 reflect the gradual recovery of demand for refined petroleum products following the administration of COVID-19 vaccines and the easing of pandemic restrictions since the beginning of 2021. However, the adverse impacts of the COVID-19 pandemic may continue in the near term, and the depth and duration of the resulting economic consequences remain uncertain. We continuously monitor our asset and investment portfolio for impairments in this challenging business environment.
While we believe we and the majority of our joint ventures have substantially mitigated our indirect exposure to commodity price fluctuations through the minimum volume commitments included in our commercial agreements, our ability to execute our strategy will depend, in part, on the availability of attractively priced crude oil in the areas served by our crude oil pipelines and rail racks, demand for refined petroleum products in the markets served by our refined petroleum product pipelines and terminals, and the general demand for midstream services, including NGL transportation and fractionation.
RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three and six months ended June 30, 2021, is based on a comparison with the corresponding period of 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Revenues and Other Income
|
|
|
|
|
|
|
|
|
|
|
Operating revenues—related parties
|
$
|
274
|
|
|
236
|
|
|
519
|
|
494
|
|
|
|
|
|
Operating revenues—third parties
|
6
|
|
|
5
|
|
|
13
|
|
14
|
|
|
|
|
|
Equity in earnings of affiliates
|
142
|
|
|
104
|
|
|
266
|
|
240
|
|
|
|
|
|
Gain from equity interest transfer
|
—
|
|
|
84
|
|
|
—
|
|
84
|
|
|
|
|
|
Other income
|
1
|
|
|
1
|
|
|
1
|
|
2
|
|
|
|
|
|
Total revenues and other income
|
423
|
|
|
430
|
|
|
799
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses
|
93
|
|
|
84
|
|
|
188
|
|
172
|
|
|
|
|
|
Depreciation
|
34
|
|
|
31
|
|
|
68
|
|
61
|
|
|
|
|
|
Impairments
|
—
|
|
|
—
|
|
|
198
|
|
—
|
|
|
|
|
|
General and administrative expenses
|
18
|
|
|
17
|
|
|
35
|
|
34
|
|
|
|
|
|
Taxes other than income taxes
|
11
|
|
|
10
|
|
|
21
|
|
21
|
|
|
|
|
|
Interest and debt expense
|
32
|
|
|
28
|
|
|
65
|
|
57
|
|
|
|
|
|
Other expenses
|
—
|
|
|
5
|
|
|
—
|
|
7
|
|
|
|
|
|
Total costs and expenses
|
188
|
|
|
175
|
|
|
575
|
|
352
|
|
|
|
|
|
Income before income taxes
|
235
|
|
|
255
|
|
|
224
|
|
482
|
|
|
|
|
|
Income tax expense
|
1
|
|
|
—
|
|
|
1
|
|
1
|
|
|
|
|
|
Net Income
|
234
|
|
|
255
|
|
|
223
|
|
481
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interest
|
9
|
|
|
—
|
|
|
16
|
|
—
|
|
|
|
|
|
Net Income Attributable to the Partnership
|
225
|
|
|
255
|
|
|
207
|
|
481
|
|
|
|
|
|
Less: Preferred unitholders’ interest in net income attributable to the Partnership
|
12
|
|
|
9
|
|
|
24
|
|
19
|
|
|
|
|
|
Limited Partners’ Interest in Net Income Attributable to the Partnership
|
$
|
213
|
|
|
246
|
|
|
183
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
$
|
286
|
|
|
215
|
|
|
513
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
337
|
|
|
269
|
|
|
626
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Cash Flow
|
$
|
267
|
|
|
218
|
|
|
500
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Wholly Owned Operating Data
|
|
|
|
|
|
|
|
|
|
|
Pipelines
|
|
|
|
|
|
|
|
|
|
|
Pipeline revenues (millions of dollars)
|
$
|
121
|
|
|
97
|
|
|
225
|
|
208
|
|
|
|
|
|
Pipeline volumes(1) (thousands of barrels daily)
|
|
|
|
|
|
|
|
|
|
|
Crude oil
|
957
|
|
|
806
|
|
|
877
|
|
873
|
|
|
|
|
|
Refined petroleum products and NGL
|
1,029
|
|
|
825
|
|
|
920
|
|
846
|
|
|
|
|
|
Total
|
1,986
|
|
|
1,631
|
|
|
1,797
|
|
1,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average pipeline revenue per barrel (dollars)
|
$
|
0.66
|
|
|
0.65
|
|
|
0.68
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminals
|
|
|
|
|
|
|
|
|
|
|
Terminal revenues (millions of dollars)
|
$
|
43
|
|
|
33
|
|
|
82
|
|
76
|
|
|
|
|
|
Terminal throughput (thousands of barrels daily)
|
|
|
|
|
|
|
|
|
|
|
Crude oil(2)
|
397
|
|
|
380
|
|
|
386
|
|
420
|
|
|
|
|
|
Refined petroleum products
|
827
|
|
|
690
|
|
|
743
|
|
719
|
|
|
|
|
|
Total
|
1,224
|
|
|
1,070
|
|
|
1,129
|
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average terminaling revenue per barrel (dollars)
|
$
|
0.38
|
|
|
0.33
|
|
|
0.39
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage, processing and other revenues (millions of
dollars)
|
$
|
116
|
|
|
111
|
|
|
225
|
|
224
|
|
|
|
|
|
Total Operating Revenues (millions of dollars)
|
$
|
280
|
|
|
241
|
|
|
532
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint Venture Operating Data(3)
|
|
|
|
|
|
|
|
|
|
|
Crude oil, refined petroleum products and NGL (thousands
of barrels daily)
|
1,327
|
|
|
942
|
|
|
1,190
|
|
890
|
|
|
|
|
(1) Represents the sum of volumes transported through each separately tariffed pipeline segment.
(2) Bayway and Ferndale rail rack volumes included in crude oil terminals.
(3) Proportional share of total pipeline and terminal volumes of joint ventures consistent with recognized equity in earnings of affiliates.
The following tables present reconciliations of EBITDA and adjusted EBITDA to net income, and EBITDA and distributable cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
2020
|
|
|
|
|
Reconciliation to Net Income Attributable to the
Partnership
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to the Partnership
|
$
|
225
|
|
|
255
|
|
|
207
|
|
481
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
9
|
|
|
—
|
|
|
16
|
|
—
|
|
|
|
|
|
Net Income
|
234
|
|
|
255
|
|
|
223
|
|
481
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
34
|
|
|
31
|
|
|
68
|
|
61
|
|
|
|
|
|
Net interest expense
|
32
|
|
|
29
|
|
|
65
|
|
57
|
|
|
|
|
|
Income tax expense
|
1
|
|
|
—
|
|
|
1
|
|
1
|
|
|
|
|
|
EBITDA
|
301
|
|
|
315
|
|
|
357
|
|
600
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
Proportional share of equity affiliates’ net interest, taxes, depreciation and amortization, and impairments
|
51
|
|
|
38
|
|
|
100
|
|
73
|
|
|
|
|
|
Expenses indemnified or prefunded by Phillips 66
|
1
|
|
|
—
|
|
|
1
|
|
—
|
|
|
|
|
|
Transaction costs associated with acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
1
|
|
|
|
|
|
Impairments
|
—
|
|
|
—
|
|
|
198
|
|
—
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Gain from equity interest transfer
|
—
|
|
|
84
|
|
|
—
|
|
84
|
|
|
|
|
|
Adjusted EBITDA attributable to noncontrolling interest
|
16
|
|
|
—
|
|
|
30
|
|
—
|
|
|
|
|
|
Adjusted EBITDA
|
337
|
|
|
269
|
|
|
626
|
|
590
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue impacts*†
|
(4)
|
|
|
5
|
|
|
5
|
|
7
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Equity affiliate distributions less than (more than) proportional adjusted EBITDA
|
3
|
|
|
(10)
|
|
|
17
|
|
(9)
|
|
|
|
|
|
Maintenance capital expenditures†
|
17
|
|
|
28
|
|
|
23
|
|
43
|
|
|
|
|
|
Net interest expense
|
32
|
|
|
29
|
|
|
65
|
|
57
|
|
|
|
|
|
Preferred unit distributions
|
12
|
|
|
9
|
|
|
24
|
|
19
|
|
|
|
|
|
Income taxes paid
|
2
|
|
|
—
|
|
|
2
|
|
—
|
|
|
|
|
|
Distributable Cash Flow
|
$
|
267
|
|
|
218
|
|
|
500
|
|
487
|
|
|
|
|
*Difference between cash receipts and revenue recognition.
†Excludes Merey Sweeny capital reimbursements and turnaround impacts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
2020
|
|
|
|
|
Reconciliation to Net Cash Provided by Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
$
|
286
|
|
|
215
|
|
513
|
|
489
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
32
|
|
|
29
|
|
|
65
|
|
57
|
|
|
|
|
|
Income tax expense
|
1
|
|
|
—
|
|
|
1
|
|
1
|
|
|
|
|
|
Changes in working capital
|
(11)
|
|
|
(3)
|
|
|
(22)
|
|
(15)
|
|
|
|
|
|
Undistributed equity earnings
|
(7)
|
|
|
(5)
|
|
|
(2)
|
|
(9)
|
|
|
|
|
|
Impairments
|
—
|
|
|
—
|
|
|
(198)
|
|
—
|
|
|
|
|
|
Gain from equity interest transfer
|
—
|
|
|
84
|
|
|
—
|
|
84
|
|
|
|
|
|
Deferred revenues and other liabilities
|
2
|
|
|
2
|
|
|
2
|
|
2
|
|
|
|
|
|
Other
|
(2)
|
|
|
(7)
|
|
|
(2)
|
|
(9)
|
|
|
|
|
|
EBITDA
|
301
|
|
|
315
|
|
|
357
|
|
600
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
Proportional share of equity affiliates’ net interest, taxes, depreciation and amortization, and impairments
|
51
|
|
|
38
|
|
|
100
|
|
73
|
|
|
|
|
|
Expenses indemnified or prefunded by Phillips 66
|
1
|
|
|
—
|
|
|
1
|
|
—
|
|
|
|
|
|
Transaction costs associated with acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
1
|
|
|
|
|
|
Impairments
|
—
|
|
|
—
|
|
|
198
|
|
—
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Gain from equity interest transfer
|
—
|
|
|
84
|
|
|
—
|
|
84
|
|
|
|
|
|
Adjusted EBITDA attributable to noncontrolling interest
|
16
|
|
|
—
|
|
|
30
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
337
|
|
|
269
|
|
|
626
|
|
590
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue impacts*†
|
(4)
|
|
|
5
|
|
|
5
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Equity affiliate distributions less than (more than) proportional adjusted EBITDA
|
3
|
|
|
(10)
|
|
|
17
|
|
(9)
|
|
|
|
|
|
Maintenance capital expenditures†
|
17
|
|
|
28
|
|
|
23
|
|
43
|
|
|
|
|
|
Net interest expense
|
32
|
|
|
29
|
|
|
65
|
|
57
|
|
|
|
|
|
Preferred unit distributions
|
12
|
|
|
9
|
|
|
24
|
|
19
|
|
|
|
|
|
Income taxes paid
|
2
|
|
|
—
|
|
|
2
|
|
—
|
|
|
|
|
|
Distributable Cash Flow
|
$
|
267
|
|
|
218
|
|
|
500
|
|
487
|
|
|
|
|
*Difference between cash receipts and revenue recognition.
†Excludes Merey Sweeny capital reimbursements and turnaround impacts.
Statement of Income Analysis
Operating revenues increased $39 million, or 16%, and increased $24 million, or 5%, in the second quarter and six-month period of 2021, respectively. The increases in both periods were primarily attributable to increased volumes resulting from market demand. Additionally, the increase in the six-month period was partially offset by the effects of winter storms impacting the Central and Gulf Coast regions in the first quarter of 2021.
Equity in earnings of affiliates increased $38 million, or 37%, and increased $26 million, or 11%, in the second quarter and six-month period of 2021, respectively. The increases in both periods were primarily due to higher volumes, including volumes from Gray Oak Pipeline, LLC, which commenced full operations during the second quarter of 2020, and South Texas Gateway Terminal LLC (South Texas Gateway), which commenced full operations in the first quarter of 2021. The increases in both periods were partially offset by a decrease in earnings from DCP Sand Hills Pipeline, LLC. See Note 4—Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.
Gain on equity interest transfer reflects the second-quarter 2020 gain recognition related to a co-venturer’s acquisition of a 35% interest in the consolidated holding company that owns an interest in Gray Oak Pipeline, LLC. See Note 4—Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.
Operating and maintenance expenses increased $9 million, or 11%, and increased $16 million, or 9%, in the second quarter and six-month period of 2021, respectively. The increases in both periods were primarily due to higher utility costs.
Interest and debt expense increased $4 million, or 14%, and increased $8 million, or 14%, in the second quarter and six-month period of 2021, respectively. The increases in both periods were due to lower capitalized interest and increased debt.
Impairments reflects the first-quarter 2021 impairment of our investment in Liberty Pipeline LLC (Liberty). See Note 4—Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.
CAPITAL RESOURCES AND LIQUIDITY
Significant Sources of Capital
Our sources of liquidity include cash generated from operations, distributions from our equity affiliates, borrowings from related parties and under our revolving credit facility, issuances of additional debt and equity securities, and funding from joint venture partners. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements, long-term capital expenditure requirements and our quarterly cash distributions.
Operating Activities
We generated $513 million in cash from operations during the first six months of 2021, an increase of $24 million compared with the corresponding period of 2020. The increase was primarily driven by higher operating revenues and higher operating distributions from equity affiliates.
Equity Affiliate Distributions
Our operating and investing cash flows are impacted by distribution decisions made by our equity affiliates. During the first six months of 2021, we received aggregate distributions from our equity affiliates of $345 million, compared with $335 million during the same period of 2020. We cannot control the amount or timing of future distributions from equity affiliates; therefore, future distributions are not assured.
Revolving Credit Facility
At June 30, 2021, and December 31, 2020, borrowings of $15 million and $415 million, respectively, were outstanding under our $750 million revolving credit facility. At both June 30, 2021, and December 31, 2020, $1 million in letters of credit had been issued that were supported by this facility.
Term Loan Agreement
On April 6, 2021, we entered into a $450 million term loan agreement and borrowed the full amount. The term loan agreement has a maturity date of April 5, 2022, and the outstanding borrowings can be repaid at any time and from time to time, in whole or in part, without premium or penalty. Borrowings bear interest at a floating rate based on either a Eurodollar rate or a reference rate, plus a margin of 0.875%. Proceeds were primarily used to repay amounts borrowed under our $750 million revolving credit facility.
Transfer of Equity Interest
In April 2021, we transferred our 50% ownership interest in Liberty to our co-venturer for cash and certain pipeline assets with a value that approximated our book value of $46 million at March 31, 2021. See Note 4—Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.
ATM Program
At June 30, 2021, we have $248 million of available capacity under our $250 million continuous offering of common units, or at-the-market (ATM) program. We suspended issuances under the ATM program in the first quarter of 2020 due to low common unit prices. We did not issue any common units under the ATM program during the three and six months ended June 30, 2021.
Off-Balance Sheet Arrangements
Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In 2020, the trial court presiding over litigation regarding the Dakota Access Pipeline ordered the U.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) relating to an easement under Lake Oahe in North Dakota and later vacated the easement. Although the easement has been vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS, which is expected to be completed in 2022. In May 2021, the court denied a request for an injunction to shut down the pipeline while the EIS is being prepared and in June 2021, dismissed the litigation. It is possible that the litigation could be reopened or new litigation challenging the EIS, once completed, could be filed.
Dakota Access and ETCO have guaranteed repayment of $2.5 billion aggregate principal amount of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access. In addition, we and our co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access in certain circumstances relating to the litigation described above. At June 30, 2021, our share of the maximum potential equity contributions under the CECU was approximately $631 million.
If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we also could be required to support our share of the ongoing expenses, including scheduled interest payments on the notes of approximately $25 million annually, in addition to the potential obligations under the CECU. If we are required to perform under the CECU, we would expect to fund such performance with cash, capacity available under our revolving credit facility, third-party debt financing, and/or sponsor loans from Phillips 66.
Capital Requirements
Capital Expenditures and Investments
Our operations are capital intensive and require investments to expand, upgrade, maintain or enhance existing operations and to meet environmental and operational requirements of our wholly owned and joint venture entities. Our capital requirements consist of maintenance and expansion capital expenditures, as well as contributions to our joint ventures. Maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or to maintain existing system volumes and related cash flows. In contrast, expansion capital expenditures are those made to expand and upgrade our systems and facilities and to construct or acquire new systems or facilities to grow our business, including contributions to joint ventures that are using the contributed funds for such purposes.
Our capital expenditures and investments represent the total spending for our capital requirements. Our adjusted capital spending is a non-GAAP financial measure that demonstrates our net share of capital spending, and reflects an adjustment for the portion of consolidated capital spending funded by certain joint venture partners. Additionally, the disaggregation of adjusted capital spending between expansion and maintenance is not a distinction recognized under GAAP. We disaggregate adjusted capital spending because our partnership agreement requires that we treat expansion and maintenance capital differently for operating and capital surplus determinations. Further, we generally fund expansion capital spending with both operating and financing cash flows and fund maintenance capital spending with operating cash flows.
Our capital expenditures and investments were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Dollars
|
|
|
Six Months Ended
June 30
|
|
|
2021
|
|
|
2020
|
|
|
Capital Expenditures and Investments
|
|
|
|
|
Capital expenditures and investments
|
$
|
119
|
|
|
611
|
|
|
Capital expenditures and investments funded by certain joint venture partners
|
—
|
|
|
(61)
|
|
|
Adjusted Capital Spending
|
$
|
119
|
|
|
550
|
|
|
|
|
|
|
|
Expansion
|
$
|
96
|
|
|
507
|
|
|
Maintenance
|
23
|
|
|
43
|
|
Our capital expenditures and investments for the first six months of 2021 were primarily associated with the following activities:
•Construction activities related to the C2G Pipeline, a new 16-inch ethane pipeline that connects our Clemens Caverns storage facility to petrochemical facilities in Gregory, Texas, near Corpus Christi, Texas.
•Contributions to Dakota Access for a pipeline optimization project.
•Contributions to complete the South Texas Gateway Terminal development activities.
•Spending associated with other return, reliability and maintenance projects.
Cash Distributions
On July 20, 2021, the Board of Directors of our General Partner declared a quarterly cash distribution of $0.875 per common unit, which will result in a total distribution of $199 million attributable to the second quarter of 2021. This distribution is payable on August 13, 2021, to common unitholders of record as of July 30, 2021.
Beginning with the distribution to preferred unitholders attributable to the fourth quarter of 2020, the preferred unitholders at the record date are entitled to receive cumulative quarterly distributions equal to the greater of $0.678375 per unit, or the per-unit distribution amount paid to the common unitholders. Preferred unitholders will receive $12 million of distributions attributable to the second quarter of 2021. This distribution is payable August 13, 2021, to preferred unitholders of record as of July 30, 2021.
Repurchase of Preferred Units
On June 29, 2021, we repurchased 368,528 of the outstanding Series A Perpetual Convertible Preferred Units with an aggregate carrying value of $20 million for $24 million in cash, or $65.124 per unit. Upon the repurchase, these preferred units were canceled and are no longer outstanding. At June 30, 2021, there were 13,451,263 preferred units outstanding.
Debt Repayment
On April 1, 2021, we repaid the two remaining $25 million tranches of tax-exempt bonds due April 2021, totaling $50 million.
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 uncertain.
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.
Regulatory Matters
Our interstate common carrier crude oil and refined petroleum products pipeline operations are subject to rate regulation by the Federal Energy Regulatory Commission under the Interstate Commerce Act and Energy Policy Act of 1992, and certain of our pipeline systems providing intrastate service are subject to rate regulation by applicable state authorities under their respective laws and regulations. Our pipeline, rail rack and terminal operations are also subject to safety regulations adopted by the Department of Transportation, as well as to state regulations.
Legal and Tax Matters
Under our amended omnibus agreement, Phillips 66 provides certain services for our benefit, including legal and tax support services, and we pay an operational and administrative support fee for these services. Phillips 66’s legal and tax organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions. Phillips 66’s legal organization employs 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 recommends if adjustment of existing accruals, or establishment of new accruals, is required. As of June 30, 2021, and December 31, 2020, we did not have any material accrued contingent liabilities associated with litigation matters.
Environmental
We are subject to extensive federal, state and local environmental laws and regulations. These requirements, which frequently change, regulate the discharge of materials into the environment or otherwise relate to protection of the environment. Compliance with these laws and regulations may require us to remediate environmental damage from any discharge of petroleum or chemical substances from our facilities or require us to install additional pollution control equipment at or on our facilities. Our failure to comply with these or any other environmental or safety-related regulations could result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of governmental orders that may subject us to additional operational constraints. Future expenditures may be required to comply with the Federal Clean Air Act and other federal, state and local requirements in respect of our various sites, including our pipelines and storage assets. The impact of legislative and regulatory developments, if enacted or adopted, could result in increased compliance costs and additional operating restrictions on our business, each of which could have an adverse impact on our financial position, results of operations and liquidity.
As with all costs, if these expenditures are not ultimately recovered in the tariffs and other fees we receive for our services, our operating results will be adversely affected. We believe that substantially all similarly situated parties and holders of comparable assets must comply with similar environmental laws and regulations. However, the specific impact on each may vary depending on a number of factors, including, but not limited to, the age and location of its operating facilities.
We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. New or expanded environmental requirements, which could increase our environmental costs, may arise in the future. We believe we are in substantial compliance with all legal obligations regarding the environment and have established the environmental accruals that are currently required; however, it is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed, because not all of the costs are fixed or presently determinable (even under existing legislation) and the costs may be affected by future legislation or regulations.
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. You can normally identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions, although the absence of these words does not mean that statement is not forward-looking.
We based the forward-looking statements on our current expectations, estimates and projections about us, our operations, the operations of our joint ventures and the entities in which we own equity interests, as well as the industries in which we and they operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:
•The continuing effects of the COVID-19 pandemic and its negative impact on the demand for crude oil and refined petroleum products, as well as the extent and duration of recovery of economies and the demand for crude oil and refined petroleum products after the pandemic subsides.
•Reductions in the volume of crude oil, refined petroleum products and NGL we or our equity affiliates transport, fractionate, process, terminal and store.
•The continued ability of Phillips 66 to satisfy its obligations under our commercial and other agreements.
•Fluctuations in the prices and demand for crude oil, refined petroleum products and NGL, including as a result of actions taken by OPEC and other countries impacting supply and demand and, correspondingly, commodity prices.
•Changes in governmental policies relating to crude oil, refined petroleum products or NGL pricing, regulation, taxation, or exports.
•Potential liabilities associated with the risks and operational hazards inherent in transporting, fractionating, processing, terminaling and storing crude oil, refined petroleum products and NGL.
•Curtailment of operations due to severe weather (including as a result of climate change) disruption or natural disasters; riots, strikes, lockouts or other industrial disturbances.
•Accidents or other unscheduled shutdowns affecting our pipelines, processing, fractionating, terminaling, and storage facilities or equipment, or those of our equity affiliates, suppliers or customers.
•Our, and our equity affiliates’, inability to obtain or maintain permits, in a timely manner, or at all, and the possibility of the revocation or modification of such permits.
•The operation, financing and distribution decisions of our joint ventures, which we may not control.
•The inability to comply with government regulations or make capital expenditures required to maintain compliance.
•The failure to complete construction of announced and future capital projects in a timely manner, cost overruns associated with such projects, and the ability to obtain or maintain permits necessary for such projects.
•Costs or liabilities associated with federal, state, and local laws and regulations relating to environmental protection and safety, including spills, releases and pipeline integrity.
•Failure of information technology systems due to various causes, including unauthorized access or attack.
•Changes to the tariff rates with respect to volumes transported through regulated assets, which rates are subject to review and possible adjustment by federal and state regulators.
•Changes in revenues we realize under the loss allowance provisions of our regulated tariffs resulting from changes in underlying commodity prices.
•Costs associated with compliance with evolving environmental laws and regulations on climate change.
•Costs associated with compliance with safety regulations, including pipeline integrity management program testing and related repairs.
•Changes in the cost or availability of third-party vessels, pipelines, railcars and other means of delivering and transporting crude oil, refined petroleum products and NGL.
•General domestic and international economic and political developments including armed hostilities, expropriation of assets, social unrest, insurrections, and other political, economic or diplomatic developments, including those caused by public health issues and outbreaks of diseases and pandemics.
•Direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war.
•Our ability to comply with the terms of our credit facility, indebtedness and other financing arrangements, which, if accelerated, we may not be able to repay.
•Our ability to incur additional indebtedness or our ability to obtain financing on terms that we deem acceptable, including the refinancing of our current obligations; higher interest rates and costs of financing would increase our expenses.
•Changes in tax, environmental and other laws and regulations.
•The factors generally described in Item 1A. Risk Factors in our 2020 Annual Report on Form 10-K.