filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated, “the company,” “we,” “our,” “us” and “Phillips 66” are used in this report to refer to the businesses of Phillips 66 and its consolidated subsidiaries.
Management’s Discussion and Analysis is the company’s analysis of its financial performance, financial condition, and 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 Annual Report on Form 10-K. It contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. 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 identify forward-looking statements. The company 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 company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”
The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to net income (loss) attributable to Phillips 66. The terms “pre-tax income” or “pre-tax loss” as used in Management’s Discussion and Analysis refer to income (loss) before income taxes.
EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT
Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. At December 31, 2019, we had total assets of $58.7 billion.
Executive Overview
In 2019, we reported earnings of $3.1 billion and generated $4.8 billion in cash from operating activities. In addition, Phillips 66 Partners LP (Phillips 66 Partners) had net debt issuances of $0.5 billion and received $0.4 billion from its joint venture partners to partially fund the Gray Oak Pipeline capital project. We used available cash primarily for capital expenditures and investments of $3.9 billion, repurchases of our common stock of $1.7 billion, and dividend payments on our common stock of $1.6 billion. We ended 2019 with $1.6 billion of cash and cash equivalents and approximately $5.7 billion of total committed capacity available under our credit facilities.
We continue to focus on the following strategic priorities:
| • | Operating Excellence. Our commitment to operating excellence guides everything we do. We are committed to protecting the health and safety of everyone who has a role in our operations and the communities in which we operate. Continuous improvement in safety, environmental stewardship, reliability and cost efficiency is a fundamental requirement for our company and employees. We employ rigorous training and audit programs to drive ongoing improvement in both personal and process safety as we strive for zero incidents. Since we cannot control commodity prices, controlling operating expenses and overhead costs, within the context of our commitment to safety and environmental stewardship, is a high priority. Senior management actively monitors these costs. We are committed to protecting the environment and strive to reduce our environmental footprint throughout our operations. Optimizing utilization rates at our refineries through reliable and safe operations enables us to capture the value available in the market in terms of prices and margins. During 2019, our worldwide refining crude oil capacity utilization rate was 94%. |
| • | Growth. A disciplined capital allocation process ensures we focus investments on projects that generate competitive returns through the business cycle. Our strategy focuses on investing in growth opportunities in the Midstream and Chemicals segments. Results from our Transportation and NGL businesses in our Midstream segment for 2019 were a reflection of this, as these businesses benefited from higher equity earnings and cash distributions from completed capital projects. In 2020, we have budgeted $2.4 billion for Midstream capital expenditures and investments, including $962 million for Phillips 66 Partners. Capital will be used to continue building out and maintaining our integrated logistics infrastructure network, including pipelines, storage, export and fractionation facilities. In Chemicals, our share of expected self-funded capital spending by Chevron Phillips Chemical Company LLC (CPChem) is $656 million. CPChem will fund continuing development of petrochemical projects on the U.S. Gulf Coast (USGC) and in Qatar, as well as debottlenecking opportunities on existing assets. |
| • | Returns. We plan to enhance Refining returns by increasing throughput of advantaged feedstocks, improving yields, portfolio optimization and an ongoing commitment to operating excellence. Our Refining segment maintained a strong clean product yield and optimized advantaged crude oil throughput at our U.S. refineries in 2019. For 2020, capital in Refining will be directed toward high-return projects to enhance the yield of higher-value products and other high-return, quick-payout projects. Marketing and Specialties (M&S) will continue to develop and enhance our retail network and brands in the United States and Europe. |
| • | Distributions. We believe shareholder value is enhanced through, among other things, consistent growth of regular dividends, complemented by share repurchases. We increased our quarterly dividend rate by 13% during 2019, and have increased it every year since the company’s inception in 2012. Regular dividends demonstrate the confidence our Board of Directors and management have in our capital structure and operations’ capability to generate free cash flow throughout the business cycle. In 2019, we repurchased $1.7 billion, or approximately 17 million shares, of our common stock. On October 4, 2019, our Board of Directors approved a new share repurchase program that authorizes us to repurchase up to $3 billion of our common stock, bringing the total amount of share repurchases authorized by our Board of Directors since July 2012 to an aggregate of $15 billion. At the discretion of our Board of Directors, we plan to increase dividends annually and fund our share repurchase programs while continuing to invest in the growth of our business. |
| • | High-Performing Organization. We strive to attract, develop and retain individuals with the knowledge and skills to implement our business strategy and who support our values and culture. Throughout the company, we focus on getting results in the right way, embrace our values as a common bond, and believe success is both what we do and how we do it. We encourage collaboration throughout our company, while valuing differences, respecting diversity, and creating a great place to work. We foster an environment of learning and development through structured programs focused on enhancing functional and technical skills where employees are engaged in our business and committed to their own, as well as the company’s, success. |
Business Environment
The Midstream segment includes our Transportation and Natural Gas Liquids (NGL) businesses. Our Transportation business contains fee-based operations that are not directly exposed to commodity price risk. Our NGL business is directly linked to NGL prices. The Midstream segment also includes our 50% equity investment in DCP Midstream, LLC (DCP Midstream). NGL prices were significantly lower in 2019, compared with 2018, due to higher inventory levels resulting from supply growth and weak winter demand.
The Chemicals segment consists of our 50% equity investment in CPChem. The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on supply and demand, as well as cost factors. During 2019, the benchmark high-density polyethylene chain margin further decreased, compared with 2018, due to recent capacity additions, the continued trade policy uncertainty and slower demand growth in Asia.
Our Refining segment results are driven by several factors, including refining margins, refinery throughput, feedstock costs, product yields, turnaround activity, and other operating costs. The price of U.S. benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, decreased to an average of $57.02 per barrel during 2019, compared with an average of $64.92 per barrel in 2018, due to continued growth in Permian Basin production and higher inventories as exports failed to keep pace with production growth. In addition, heavy Canadian crude differentials narrowed in 2019, compared with 2018, due primarily to production curtailments implemented by the Alberta Provincial government. Market crack spreads are used as indicators of refining margins and measure the difference between market prices for refined petroleum products and crude oil. During 2019, the market crack spreads slightly decreased in the Atlantic Basin/Europe, Gulf Coast and Central Corridor regions, but increased in the West Coast region, compared with 2018.
Results for our M&S segment depend largely on marketing fuel margins, lubricant margins, and other specialty product margins. While M&S margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are influenced by the trend in spot prices for refined petroleum products. Generally speaking, a downward trend of spot prices has a favorable impact on marketing fuel margins, while an upward trend of spot prices has an unfavorable impact on marketing fuel margins.
RESULTS OF OPERATIONS
Consolidated Results
A summary of income (loss) before income taxes by business segment with a reconciliation to net income attributable to Phillips 66 follows:
| Millions of Dollars | |||||||||
| Year Ended December 31 | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Midstream | $ | 684 | 1,181 | 638 | |||||
| Chemicals | 879 | 1,025 | 716 | ||||||
| Refining | 1,986 | 4,535 | 2,076 | ||||||
| Marketing and Specialties | 1,433 | 1,557 | 1,020 | ||||||
| Corporate and Other | (804 | ) | (853 | ) | (895 | ) | |||
| Income before income taxes | 4,178 | 7,445 | 3,555 | ||||||
| Income tax expense (benefit) | 801 | 1,572 | (1,693 | ) | |||||
| Net income | 3,377 | 5,873 | 5,248 | ||||||
| Less: net income attributable to noncontrolling interests | 301 | 278 | 142 | ||||||
| Net income attributable to Phillips 66 | $ | 3,076 | 5,595 | 5,106 |
2019 vs. 2018
Our earnings decreased $2,519 million, or 45%, in 2019, mainly reflecting:
| • | Lower realized refining and marketing margins. |
| • | Impairments associated with our investment in DCP Midstream. |
| • | Decreased equity in earnings of affiliates in our Refining and Chemicals segments. |
These decreases were partially offset by:
| • | Lower income tax expense. |
| • | Improved results from our NGL and transportation businesses. |
2018 vs. 2017
Our earnings increased $489 million, or 10%, in 2018, mainly reflecting:
| • | Higher realized refining and marketing margins. |
| • | Higher equity in earnings of affiliates in our Midstream and Chemicals segments. |
| • | A lower U.S. federal income tax rate beginning January 1, 2018, as a result of the U.S. Tax Cuts and Jobs Act (the Tax Act) enacted in December 2017. |
These increases were partially offset by:
| • | A $2,735 million provisional income tax benefit from the enactment of the Tax Act recognized in December 2017, primarily due to the revaluation of deferred income taxes. |
| • | A $261 million noncash, after-tax gain from the consolidation of Merey Sweeny, L.P., predecessor to Merey Sweeny LLC (both referred to herein as Merey Sweeny), in 2017. |
| • | Higher net income attributable to noncontrolling interests primarily due to the contribution of assets to Phillips 66 Partners in the fourth quarter of 2017. |
| • | Higher interest and debt expense. |
See the “Segment Results” section for additional information on our segment results.
Statement of Income Analysis
2019 vs. 2018
Sales and other operating revenues and purchased crude oil and products decreased 4% and 2%, respectively, in 2019. The decreases were mainly driven by lower prices for refined petroleum products, crude oil and NGL.
Equity in earnings of affiliates decreased 21% in 2019. The decrease was mainly due to lower margins at WRB Refining LP (WRB) and CPChem, partially offset by improved results from our Transportation and NGL joint venture assets. Lower equity earnings in 2019 also reflected lower-of-cost-or-market inventory write-downs at CPChem and higher goodwill and other asset impairments at DCP Midstream. See the “Segment Results” section for additional information.
Other income increased $58 million in 2019. The increase was mainly driven by trading activities not directly related to our physical business. See Note 15—Derivatives and Financial Instruments, in the Notes to Consolidated Financial Statements, for additional information associated with our commodity derivatives.
Impairments increased $853 million in 2019. The increase was driven by an $853 million pre-tax impairment associated with our investment in DCP Midstream recognized in the third quarter of 2019. See Note 7—Investments, Loans and Long-Term Receivables, and Note 16—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information associated with this impairment.
Interest and debt expense decreased 9% in 2019. The decrease was primarily attributable to higher capitalized interest associated with capital projects under development in our Midstream segment, partially offset by higher debt balances in 2019.
Income tax expense (benefit) decreased 49% in 2019. The decrease in income tax expense was primarily attributable to lower income before income taxes. See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes.
2018 vs. 2017
Sales and other operating revenues and purchased crude oil and products increased 9% and 23%, respectively, in 2018. The increases were mainly due to higher prices for refined petroleum products, crude oil and NGL. The increase in sales and other operating revenues was partially offset by a change in the presentation of excise taxes on sales of refined petroleum products resulting from our adoption of Financial Accounting Standard Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” on January 1, 2018. As part of our adoption of this ASU, prospectively from January 1, 2018, our presentation of excise taxes on sales of refined petroleum products changed to a net basis from a gross basis. As a result, the “Sales and other operating revenues” and “Taxes other than income taxes” line items on our consolidated statement of income for the year ended December 31, 2018, are not presented on a comparable basis to the year ended December 31, 2017. See Note 1—Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, for further information on our presentation of excise taxes on sales of refined petroleum products and our adoption of this ASU, respectively.
Equity in earnings of affiliates increased 55% in 2018, primarily resulting from higher equity in earnings from WRB, CPChem and affiliates in our Midstream segment.
| • | Equity in earnings of WRB increased $483 million, primarily due to higher realized margins driven by improved feedstock advantage. |
| • | Equity in earnings of CPChem increased $312 million, primarily due to commencement of full operations at CPChem’s new U.S. Gulf Coast petrochemicals assets and lower hurricane-related costs and downtime in 2018. |
| • | Equity in earnings for our Midstream segment increased $222 million, primarily due to higher volumes on affiliate pipelines, including the Bakken Pipeline, which operated for a full year in 2018. |
Other income decreased $460 million in 2018. We recognized a noncash, pre-tax gain of $423 million in February 2017 related to the consolidation of Merey Sweeny. See Note 6—Business Combinations, in the Notes to Consolidated Financial Statements, for additional information.
Taxes other than income taxes decreased 97% in 2018. The decrease was primarily attributable to the change in our presentation of excise taxes on sales of refined petroleum products resulting from our adoption of ASU No. 2014-09 on January 1, 2018. See the “Sales and other operating revenues” section above for further discussion.
Interest and debt expense increased 15% in 2018. The increase was due to higher average debt principal balances resulting from our issuance of senior notes totaling $1,500 million in March 2018 and Phillips 66 Partners’ issuance of senior notes totaling $650 million in October 2017.
Income tax expense (benefit) was an expense in 2018, compared with a benefit in 2017. The benefit in 2017 was due to the recognition of a provisional income tax benefit of $2,735 million from the enactment of the Tax Act in December 2017. The benefit from the Tax Act was primarily due to the revaluation of deferred income taxes. Excluding this benefit, income tax expense increased in 2018 due to higher income before income taxes, partially offset by the reduction of the U.S. federal corporate income tax rate from 35% to 21% beginning January 1, 2018, as a result of the Tax Act. See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes.
Net income attributable to noncontrolling interests increased $136 million in 2018, primarily due to the contribution of assets in the fourth quarter of 2017. In October 2017, we contributed to Phillips 66 Partners our 25% ownership interest in both Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO), and our 100% ownership interest in Merey Sweeny.
Segment Results
Midstream
| Year Ended December 31 | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Millions of Dollars | |||||||||
| Income (Loss) Before Income Taxes | |||||||||
| Transportation | $ | 946 | 770 | 530 | |||||
| NGL and Other | 522 | 305 | 32 | ||||||
| DCP Midstream | (784 | ) | 106 | 76 | |||||
| Total Midstream | $ | 684 | 1,181 | 638 |
| Thousands of Barrels Daily | ||||||||
| Transportation Volumes | ||||||||
| Pipelines* | 3,396 | 3,441 | 3,320 | |||||
| Terminals | 3,315 | 3,153 | 2,665 | |||||
| Operating Statistics | ||||||||
| NGL fractionated** | 224 | 216 | 186 | |||||
| NGL extracted*** | 417 | 413 | 374 |
** Pipelines represent the sum of volumes transported through each separately tariffed consolidated pipeline segment.*
*** Excludes DCP Midstream.*
**** Includes 100% of DCP Midstream’s volumes.*
| Dollars Per Gallon | |||||||||
| Weighted-Average NGL Price* | |||||||||
| DCP Midstream | $ | 0.51 | 0.75 | 0.62 |
** Based on index prices from the Mont Belvieu market hub, which are weighted by NGL component mix.*
The Midstream segment provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, fractionation, processing and marketing services, mainly in the United States. This segment includes our master limited partnership (MLP), Phillips 66 Partners, as well as our 50% equity investment in DCP Midstream, which includes the operations of its MLP, DCP Midstream, LP (DCP Partners).
2019 vs. 2018
Pre-tax income from the Midstream segment decreased $497 million in 2019, compared with 2018, mainly driven by an $853 million pre-tax impairment associated with our investment in DCP Midstream and lower equity earnings from DCP Midstream, partially offset by improved results from our Transportation and NGL and Other businesses.
Pre-tax income from our Transportation business increased $176 million in 2019, compared with 2018. The increase was mainly driven by higher volumes and pipeline tariffs from our portfolio of consolidated and joint venture assets.
Pre-tax income from our NGL and Other business increased $217 million in 2019, compared with 2018. The increase was mainly due to improved margins and volumes, primarily at the Sweeny Hub, and higher equity earnings from certain pipeline affiliates driven by higher volumes.
Pre-tax income from our investment in DCP Midstream decreased $890 million in 2019, compared with 2018. The decrease was primarily due to an $853 million pre-tax impairment associated with our investment in DCP Midstream and lower equity earnings driven by higher goodwill and other asset impairments at DCP Partners in 2019 as described below.
In the third quarter of 2019, DCP Partners performed goodwill and other asset impairment assessments based on internal discounted cash flow models that reflected various observable and nonobservable factors, such as prices, volumes, expenses and discount rates. As a result of these assessments, DCP Partners recorded goodwill and other asset impairments that reduced our equity earnings by $47 million, included in the “Equity in earnings of affiliates” line item on our consolidated statement of income.
The fair value of our investment in DCP Midstream at September 30, 2019, depended on the market value of DCP Midstream’s general partner interest in DCP Partners and the market value of DCP Partners’ common units. At June 30, 2019, we estimated the fair value of our investment in DCP Midstream was below our book value, but we believed the condition was temporary. The fair value of our investment in DCP Midstream further deteriorated in the third quarter as the market value of DCP Midstream’s general partner interest in DCP Partners and the market value of DCP Partners’ common units declined further. At that time, we concluded the decline in fair value was no longer temporary due to the duration and magnitude of the decline. Accordingly, we recorded an $853 million impairment in the third quarter of 2019. The impairment is included in the “Impairments” line item on our consolidated statement of income and results in our investment in DCP Midstream having a book value of $1,374 million at December 31, 2019.
The majority of the difference between the book value of our investment in DCP Midstream and our 50% share of the net assets reported by DCP Midstream is amortized over a 22-year estimated useful life as an annual increase of approximately $40 million to equity earnings. See Note 7—Investments, Loans and Long-Term Receivables, and Note 16—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information on our investment in DCP Midstream.
See the “Executive Overview and Business Environment” section for information on market factors impacting 2019 results.
2018 vs. 2017
Pre-tax income from the Midstream segment increased $543 million in 2018, compared with 2017, due to improved results across all business lines.
Pre-tax income from our Transportation business increased $240 million in 2018, compared with 2017. The increase was mainly driven by higher volumes, tariffs and storage rates from our portfolio of consolidated and joint venture assets. These increases were partially offset by a decrease in equity earnings from Rockies Express Pipeline LLC (REX) due to a favorable settlement recorded in 2017.
Pre-tax income from our NGL and Other business increased $273 million in 2018, compared with 2017. The increase was primarily due to the contribution of Merey Sweeny to Phillips 66 Partners in October 2017, inventory impacts, improved cargo margins and volumes, and higher equity earnings from pipeline affiliates due to increased volumes.
Pre-tax income from our investment in DCP Midstream increased $30 million in 2018, compared with 2017. The increase was primarily due to higher equity earnings from affiliates as a result of increased volumes, timing of incentive distribution income allocations from DCP Partners, and favorable hedging results. These increases were partially offset by higher asset impairments and operating costs in 2018.
Chemicals
| Year Ended December 31 | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Millions of Dollars | |||||||||
| Income Before Income Taxes | $ | 879 | 1,025 | 716 | |||||
| Millions of Pounds | |||||||||
| CPChem Externally Marketed Sales Volumes***** | |||||||||
| Olefins and Polyolefins | 18,788 | 18,435 | 15,870 | ||||||
| Specialties, Aromatics and Styrenics | 4,281 | 4,931 | 4,618 | ||||||
| 23,069 | 23,366 | 20,488 | |||||||
| ** Represents 100% of CPChem’s outside sales of produced petrochemical products, as well as commission sales from equity affiliates.* | |||||||||
| Olefins and Polyolefins Capacity Utilization (percent) | 97 | % | 94 | 87 |
The Chemicals segment consists of our 50% interest in CPChem, which we account for under the equity method. CPChem uses NGL and other feedstocks to produce petrochemicals. These products are then marketed and sold or used as feedstocks to produce plastics and other chemicals. We structure our reporting of CPChem’s operations around two primary business lines: Olefins and Polyolefins (O&P) and Specialties, Aromatics and Styrenics (SA&S). The O&P business line produces and markets ethylene and other olefin products. Ethylene produced is primarily consumed within CPChem for the production of polyethylene, normal alpha olefins and polyethylene pipe. The SA&S business line manufactures and markets aromatics and styrenics products, such as benzene, cyclohexane, styrene and polystyrene. SA&S also manufactures and/or markets a variety of specialty chemical products. Unless otherwise noted, amounts referenced below reflect our net 50% interest in CPChem.
2019 vs. 2018
Pre-tax income from the Chemicals segment decreased $146 million in 2019, compared with 2018. The decrease was mainly due to lower polyethylene margins attributable to additional industry capacity and slower demand growth in Asia. In addition, CPChem recorded lower-of-cost-or-market write-downs of LIFO-valued inventories during 2019, and our portion of the write-downs reduced our equity earnings from CPChem by $65 million, pre-tax. The decreases were partially offset by higher polyethylene sales volumes and lower turnaround and maintenance activity during 2019.
See the “Executive Overview and Business Environment” section for information on market factors impacting CPChem’s 2019 results.
2018 vs. 2017
Pre-tax income from the Chemicals segment increased $309 million in 2018, compared with 2017. The increased results reflected the commencement of full operations at CPChem’s new U.S. Gulf Coast petrochemicals assets in the second quarter of 2018, which resulted in higher production and sales of polyethylene and ethylene, partially offset by lower capitalized interest. Additionally, lower hurricane-related costs and downtime, as well as lower impairment charges, contributed to the increased results in 2018.
Refining
| Year Ended December 31 | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Millions of Dollars | |||||||||
| Income (Loss) Before Income Taxes | |||||||||
| Atlantic Basin/Europe | $ | 608 | 567 | 448 | |||||
| Gulf Coast | 364 | 1,040 | 809 | ||||||
| Central Corridor | 1,338 | 2,817 | 755 | ||||||
| West Coast | (324 | ) | 111 | 64 | |||||
| Worldwide | $ | 1,986 | 4,535 | 2,076 | |||||
| Dollars Per Barrel | |||||||||
| Income (Loss) Before Income Taxes | |||||||||
| Atlantic Basin/Europe | $ | 3.11 | 3.05 | 2.25 | |||||
| Gulf Coast | 1.24 | 3.55 | 2.83 | ||||||
| Central Corridor | 12.95 | 26.50 | 8.19 | ||||||
| West Coast | (2.49 | ) | 0.81 | 0.48 | |||||
| Worldwide | 2.75 | 6.29 | 2.92 | ||||||
| Realized Refining Margins* | |||||||||
| Atlantic Basin/Europe | $ | 9.33 | 10.32 | 8.25 | |||||
| Gulf Coast | 7.42 | 9.48 | 7.07 | ||||||
| Central Corridor | 14.91 | 22.22 | 12.44 | ||||||
| West Coast | 9.18 | 11.20 | 10.49 | ||||||
| Worldwide | 9.91 | 12.99 | 9.13 |
** See the “Non-GAAP Reconciliations” section for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure, income (loss) before income taxes per barrel.*
| Thousands of Barrels Daily | ||||||||
| Year Ended December 31 | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Operating Statistics | ||||||||
| Refining operations* | ||||||||
| Atlantic Basin/Europe | ||||||||
| Crude oil capacity | 537 | 537 | 520 | |||||
| Crude oil processed | 497 | 477 | 494 | |||||
| Capacity utilization (percent) | 92 | % | 89 | 95 | ||||
| Refinery production | 541 | 514 | 553 | |||||
| Gulf Coast | ||||||||
| Crude oil capacity | 764 | 752 | 743 | |||||
| Crude oil processed | 725 | 717 | 709 | |||||
| Capacity utilization (percent) | 95 | % | 95 | 95 | ||||
| Refinery production | 804 | 808 | 789 | |||||
| Central Corridor | ||||||||
| Crude oil capacity | 515 | 493 | 493 | |||||
| Crude oil processed | 498 | 507 | 467 | |||||
| Capacity utilization (percent) | 97 | % | 103 | 95 | ||||
| Refinery production | 518 | 530 | 489 | |||||
| West Coast | ||||||||
| Crude oil capacity | 364 | 364 | 360 | |||||
| Crude oil processed | 323 | 343 | 342 | |||||
| Capacity utilization (percent) | 89 | % | 94 | 95 | ||||
| Refinery production | 354 | 373 | 368 | |||||
| Worldwide | ||||||||
| Crude oil capacity | 2,180 | 2,146 | 2,116 | |||||
| Crude oil processed | 2,043 | 2,044 | 2,012 | |||||
| Capacity utilization (percent) | 94 | % | 95 | 95 | ||||
| Refinery production | 2,217 | 2,225 | 2,199 | |||||
| ** Includes our share of equity affiliates.* |
The Refining segment refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates and aviation fuels, at 13 refineries in the United States and Europe.
2019 vs. 2018
Pre-tax income for the Refining segment decreased $2,549 million in 2019, compared with 2018. The decrease was primarily driven by lower realized refining margins and lower refinery production at certain refineries due to turnaround activities and unplanned downtime. In 2019, the decrease in realized refining margins was primarily due to lower feedstock advantage driven by narrowing heavy crude differentials.
See the “Executive Overview and Business Environment” section for information on industry crack spreads and other market factors impacting this year’s results.
Our worldwide refining crude oil capacity utilization rate was 94% and 95% in 2019 and 2018, respectively.
2018 vs. 2017
Pre-tax income for the Refining segment increased $2,459 million in 2018, compared with 2017. The increase was primarily due to higher realized refining margins, partially offset by a noncash gain of $423 million recognized from the consolidation of Merey Sweeny in February 2017.
The increased realized refining margins were primarily driven by higher feedstock advantage, improved premium coke margins, and increased optimization benefits from using our integrated logistics network to capture market opportunities related to widening Bakken, Canadian and other inland crude differentials. Improved clean product differentials and lower renewable identification number (RIN) costs also benefited margins. These items were partially offset by a decline in market crack spreads.
Our worldwide refining crude oil capacity utilization rate was 95% in both 2018 and 2017.
Marketing and Specialties
| Year Ended December 31 | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Millions of Dollars | |||||||||
| Income Before Income Taxes | |||||||||
| Marketing and Other | $ | 1,199 | 1,306 | 808 | |||||
| Specialties | 234 | 251 | 212 | ||||||
| Total Marketing and Specialties | $ | 1,433 | 1,557 | 1,020 | |||||
| Dollars Per Barrel | |||||||||
| Income Before Income Taxes | |||||||||
| U.S. | $ | 1.22 | 1.21 | 0.89 | |||||
| International | 3.58 | 5.00 | 2.23 | ||||||
| Realized Marketing Fuel Margins* | |||||||||
| U.S. | $ | 1.57 | 1.62 | 1.48 | |||||
| International | 4.90 | 6.87 | 4.21 | ||||||
| ***** See the “Non-GAAP Reconciliations” section for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure, income before income taxes per barrel. | |||||||||
| Dollars Per Gallon | |||||||||
| U.S. Average Wholesale Prices* | |||||||||
| Gasoline | $ | 2.12 | 2.20 | 1.87 | |||||
| Distillates | 2.12 | 2.29 | 1.85 | ||||||
| ***** On third-party branded refined petroleum product sales, excluding excise taxes. | |||||||||
| Thousands of Barrels Daily | |||||||||
| Marketing Refined Petroleum Product Sales | |||||||||
| Gasoline | 1,230 | 1,195 | 1,246 | ||||||
| Distillates | 1,104 | 975 | 931 | ||||||
| Other | 18 | 18 | 18 | ||||||
| 2,352 | 2,188 | 2,195 |
The M&S segment purchases for resale and markets refined petroleum products, such as gasoline, distillates and aviation fuels, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products, such as base oils and lubricants.
2019 vs. 2018
Pre-tax income from the M&S segment decreased $124 million in 2019, compared with 2018. The decrease was primarily due to lower realized marketing fuel margins, mainly driven by international marketing, partially offset by higher sales volumes.
See the “Executive Overview and Business Environment” section for information on marketing fuel margins and other market factors impacting 2019 results.
2018 vs. 2017
Pre-tax income from the M&S segment increased $537 million in 2018, compared with 2017. The increase was primarily due to higher realized marketing fuel margins, mainly driven by international marketing, benefits from the retroactive extension of the 2017 U.S. biodiesel blender’s tax incentive in early 2018, as well as improved specialty product service margins.
Corporate and Other
| Millions of Dollars | |||||||||
| Year Ended December 31 | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Income (Loss) Before Income Taxes | |||||||||
| Net interest expense | $ | (415 | ) | (459 | ) | (408 | ) | ||
| Corporate overhead and other | (389 | ) | (394 | ) | (487 | ) | |||
| Total Corporate and Other | $ | (804 | ) | (853 | ) | (895 | ) |
2019 vs. 2018
Net interest expense consists of interest and financing expense, net of interest income and capitalized interest. Net interest expense decreased $44 million in 2019, compared with 2018, primarily due to higher capitalized interest related to capital projects under development in our Midstream segment, partially offset by higher debt balances in 2019.
Corporate overhead and other includes general and administrative expenses, technology costs, environmental costs associated with sites no longer in operation, foreign currency transaction gains and losses and other costs not directly associated with an operating segment. During 2019, Corporate overhead and other decreased $5 million, compared with 2018.
2018 vs. 2017
Net interest expense increased $51 million in 2018, compared with 2017, mainly due to higher average debt principal balances from our issuance of senior notes totaling $1,500 million in March 2018 and Phillips 66 Partners’ issuance of senior notes totaling $650 million in October 2017. This increase was partially offset by higher interest income.
Corporate overhead and other decreased $93 million in 2018, compared with 2017, primarily due to lower environmental-related expenses and higher equity earnings from our share of income tax benefits recorded by equity affiliates due to the enactment of the Tax Act in December 2017.
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
| Millions of Dollars, Except as Indicated | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Cash and cash equivalents | $ | 1,614 | 3,019 | 3,119 | |||||
| Net cash provided by operating activities | 4,808 | 7,573 | 3,648 | ||||||
| Short-term debt | 547 | 67 | 41 | ||||||
| Total debt | 11,763 | 11,160 | 10,110 | ||||||
| Total equity | 27,169 | 27,153 | 27,428 | ||||||
| Percent of total debt to capital* | 30 | % | 29 | 27 | |||||
| Percent of floating-rate debt to total debt | 9 | % | 11 | 11 | |||||
| ** Capital includes total debt and total equity.* |
To meet our short- and long-term liquidity requirements, we look to a variety of funding sources but rely primarily on cash generated from operating activities. Additionally, Phillips 66 Partners has raised funds for its growth activities through debt and equity financings. During 2019, we generated $4.8 billion in cash from operations. In addition, Phillips 66 Partners had net debt issuances of $0.5 billion and received $0.4 billion from its joint venture partners to partially fund the Gray Oak Pipeline capital project. We used available cash primarily for capital expenditures and investments of $3.9 billion; repurchases of our common stock of $1.7 billion; and dividend payments on our common stock of $1.6 billion. During 2019, cash and cash equivalents decreased $1.4 billion to $1.6 billion.
In addition to cash flows from operating activities, we rely on our commercial paper and credit facility programs, asset sales and our ability to issue debt securities to support our short- and long-term liquidity requirements. We believe current cash and cash equivalents and cash generated by operations, together with access to external sources of funds as described below under “Significant Sources of Capital,” will be sufficient to meet our funding requirements in the near and long term, including our capital spending, dividend payments, defined benefit plan contributions, debt repayments and share repurchases.
Significant Sources of Capital
Operating Activities
During 2019, cash generated by operating activities was $4,808 million, a 37% decrease compared with 2018. The decrease was mainly driven by lower realized refining margins and decreased distributions from our equity affiliates, along with unfavorable working capital impacts, partially offset by improved results from our Transportation and NGL and Other businesses.
During 2018, cash of $7,573 million was provided by operating activities, a 108% increase compared with 2017. The increase was primarily attributable to higher realized refining and marketing margins, increased distributions from our equity affiliates and lower employee benefit plan contributions. These increases were partially offset by unfavorable working capital impacts primarily driven by the effects of changes in commodity prices and the timing of payments and collections.
Our short- and long-term operating cash flows are highly dependent upon refining and marketing margins, NGL prices and chemicals margins. Prices and margins in our industry are typically volatile, and are driven by market conditions over which we have little or no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows.
The level and quality of output from our refineries also impacts our cash flows. Factors such as operating efficiency, maintenance turnarounds, market conditions, feedstock availability and weather conditions can affect output. We actively manage the operations of our refineries, and any variability in their operations typically has not been as significant to cash flows as that caused by margins and prices. Our worldwide refining crude oil capacity utilization was 94% in 2019 and 95% in both 2018 and 2017.
Equity Affiliate Operating Distributions
Our operating cash flows are also impacted by distribution decisions made by our equity affiliates, including CPChem, DCP Midstream and WRB. Over the three years ended December 31, 2019, we received aggregate distributions from our equity affiliates of $6,097 million, including $280 million from DCP Midstream, $2,187 million from CPChem and $1,380 million from WRB. We cannot control the amount or timing of future dividends from equity affiliates; therefore, future dividend payments by these and other equity affiliates are not assured.
Phillips 66 Partners
In 2013, we formed Phillips 66 Partners, a publicly traded MLP, to own, operate, develop and acquire primarily fee-based midstream assets.
Ownership and Restructuring Transaction
On August 1, 2019, Phillips 66 Partners completed a restructuring transaction to eliminate the incentive distribution rights (IDRs) held by us and to convert our 2% economic general partner interest into a noneconomic general partner interest in exchange for 101 million Phillips 66 Partners common units. No distributions were made for the general partner interest after August 1, 2019. At December 31, 2019, we owned 170 million Phillips 66 Partners common units, representing 74% of Phillips 66 Partners’ limited partner units.
We consolidate Phillips 66 Partners as a variable interest entity for financial reporting purposes. See Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on why we consolidate the partnership. As a result of this consolidation, the public common and preferred unitholders’ interests in Phillips 66 Partners are reflected as noncontrolling interests of $2,228 million in our consolidated balance sheet at December 31, 2019.
Debt and Equity Financings
During the three years ended December 31, 2019, Phillips 66 Partners raised net proceeds of approximately $3 billion from the following third-party debt and equity offerings:
| • | Phillips 66 Partners has authorized an aggregate of $750 million under three $250 million continuous offerings of common units, or at-the-market (ATM) programs. Phillips 66 Partners completed the first two programs in June 2018 and December 2019, respectively, leaving $250 million available under the third program. For the three years ended December 31, 2019, net proceeds of $474 million have been received under these programs. |
| • | In September 2019, Phillips 66 Partners received net proceeds of $892 million from the issuance of $300 million of 2.450% Senior Notes due December 2024 and $600 million of 3.150% Senior Notes due December 2029. |
| • | In March 2019, Phillips 66 Partners entered into a senior unsecured term loan facility with a borrowing capacity of $400 million due March 20, 2020. Phillips 66 Partners borrowed an aggregate amount of $400 million under the facility during the first half of 2019, which was repaid in full in September 2019. |
| • | In October 2017, Phillips 66 Partners received net proceeds of $643 million from the issuance of $500 million of 3.750% Senior Notes due March 2028 and $150 million of 4.680% Senior Notes due February 2045. |
| • | In October 2017, Phillips 66 Partners received net proceeds of $737 million from a private placement of 13,819,791 perpetual convertible preferred units, at a price of $54.27 per unit. |
| • | In October 2017, Phillips 66 Partners received net proceeds of $295 million from a private placement of 6,304,204 common units, at a price of $47.59 per unit. |
Phillips 66 Partners primarily used these net proceeds to fund the cash portion of acquisitions of assets from Phillips 66 and for capital spending and investments. See Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on Phillips 66 Partners.
Transfers of Equity Interests
In December 2018, a third party exercised an option to acquire a 35% interest in Gray Oak Holdings LLC (Holdings LLC), a consolidated subsidiary of Phillips 66 Partners. This transfer did not qualify as a sale under generally accepted accounting principles in the United States (GAAP) because of certain restrictions placed on the acquirer. The contributions received by Holdings LLC from the third party to cover capital calls from Gray Oak Pipeline, LLC are presented as a long-term obligation on our consolidated balance sheet and as financing cash inflows on our consolidated statement of cash flows until construction of the Gray Oak Pipeline is fully completed and these restrictions expire. During 2019, the third party contributed an aggregate of $342 million into Holdings LLC, and Holdings LLC used these contributions to fund its portion of Gray Oak Pipeline, LLC’s cash calls.
In February 2019, Holdings LLC sold a 10% ownership interest in Gray Oak Pipeline, LLC to a third party that exercised a purchase option, for proceeds of $81 million. The proceeds received from this sale are presented as an investing cash inflow on our consolidated statement of cash flows.
See Note 7—Investments, Loans and Long-Term Receivables and Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information regarding Phillip 66 Partners’ investment in Gray Oak Pipeline, LLC.
Credit Facilities and Commercial Paper
Phillips 66 has a revolving credit facility that may be used for direct bank borrowings, as support for issuances of letters of credit, or as support for our commercial paper program. On July 30, 2019, this revolving credit agreement was amended and restated to extend the scheduled maturity from October 3, 2021, to July 30, 2024. No other material amendments were made to the agreement, and the overall capacity remains at $5 billion with an option to increase the overall capacity to $6 billion, subject to certain conditions. The facility is with a broad syndicate of financial institutions and contains covenants that are usual and customary for an agreement of this type for comparable commercial borrowers, including a maximum consolidated net debt-to-capitalization ratio of 65%. The agreement has customary events of default, such as nonpayment of principal when due; nonpayment of interest, fees or other amounts; violation of covenants; cross-payment default and cross-acceleration (in each case, to indebtedness in excess of a threshold amount); and a change of control. Borrowings under the facility will incur interest at the London Interbank Offered Rate (LIBOR) plus a margin based on the credit rating of our senior unsecured long-term debt as determined from time to time by Standard & Poor’s Financial Services LLC (S&P) and Moody’s Investors Service, Inc. (Moody’s). The facility also provides for customary fees, including administrative agent fees and commitment fees. At December 31, 2019 and 2018, no amount had been drawn under this revolving credit agreement.
Phillips 66 has a $5 billion commercial paper program for short-term working capital needs that is supported by our revolving credit facility. Commercial paper maturities are generally limited to 90 days. At December 31, 2019 and 2018, no borrowings were outstanding under the commercial paper program. At February 21, 2020, there was approximately $650 million in borrowings outstanding under the program.
Phillips 66 Partners has a revolving credit facility with a broad syndicate of financial institutions. The revolving credit facility contains covenants that are usual and customary for an agreement of this type for comparable commercial borrowers. At Phillips 66 Partners’ option, outstanding borrowings under this facility bear interest at either i) the Eurodollar rate plus a margin based on its credit rating; or ii) the base rate (as described in the facility agreement) plus a margin based on its credit rating. Eurodollar rate borrowings are due on the facility’s termination date, while base rate borrowings are due the earlier of the facility’s termination date or the fourteenth business day after such borrowings were made. On July 30, 2019, Phillips 66 Partners amended and restated its revolving credit agreement. The agreement extended the scheduled maturity from October 3, 2021, to July 30, 2024. No other material amendments were made to the agreement, and the overall capacity remains at $750 million with an option to increase the overall capacity to $1 billion, subject to certain conditions. At December 31, 2019, Phillips 66 Partners had no borrowings outstanding under this facility; however, $1 million in letters of credit had been issued that were supported by this facility. There was $125 million outstanding under this facility at December 31, 2018.
We had approximately $5.7 billion and $5.6 billion of total committed capacity available under our revolving credit facilities at December 31, 2019 and 2018, respectively.
Other Debt Issuances and Financings
On March 1, 2018, Phillips 66 closed on a public offering of $1,500 million aggregate principal amount of unsecured notes consisting of:
| • | $500 million of floating-rate Senior Notes due February 2021. Interest on these notes is equal to the three-month LIBOR plus 0.60% per annum and is payable quarterly in arrears on February 26, May 26, August 26 and November 26, beginning on May 29, 2018. |
| • | $800 million of 3.900% Senior Notes due March 2028. Interest on these notes is payable semiannually on March 15 and September 15 of each year, beginning on September 15, 2018. |
| • | An additional $200 million of our 4.875% Senior Notes due November 2044. Interest on these notes is payable semiannually on May 15 and November 15 of each year, beginning on May 15, 2018. |
Phillips 66 used the net proceeds from the issuance of these notes and cash on hand to repay commercial paper borrowings during the first quarter of 2018, and for general corporate purposes. The commercial paper borrowings during the first quarter of 2018, were primarily used to repurchase shares of our common stock. See Note 17—Equity, in the Notes to Consolidated Financial Statements, for additional information.
In addition, we have finance lease obligations primarily related to consignment agreements with a domestic retail marketing joint venture and an oil terminal in the United Kingdom. These leases mature within the next twenty years. The present value of our minimum finance lease payments for these obligations as of December 31, 2019, was $277 million.
Availability of Debt and Equity Financing
Our senior unsecured long-term debt has been rated investment grade by S&P (BBB+) and Moody’s (A3). We do not have any ratings triggers on any of our corporate debt that would cause an automatic default, and thereby impact our access to liquidity, in the event of a downgrade of our credit rating. If our credit rating deteriorated to a level prohibiting us from accessing the commercial paper market, we would expect to be able to access funds under our liquidity facilities mentioned above.
Off-Balance Sheet Arrangements
Lease Residual Value Guarantees
Under the operating lease agreement on our headquarters facility in Houston, Texas, we have a residual value guarantee with a maximum future exposure of $554 million at December 31, 2019. The operating lease term ends in June 2021 and provides us the option, at the end of the lease term, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future payments totaling $372 million at December 31, 2019. These leases have remaining terms of up to four years.
Dakota Access
In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of $2,500 million aggregate principal amount of unsecured senior notes. The net proceeds from the issuance of these notes were used to repay amounts outstanding under existing credit facilities of Dakota Access and ETCO. Dakota Access and ETCO have guaranteed repayment of the notes. In addition, Phillips 66 Partners and its co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, if Dakota Access receives an unfavorable court ruling related to certain disputed construction permits and Dakota Access determines that an equity contribution trigger event has occurred, the venturers may be severally required to make proportionate equity contributions to Dakota Access and ETCO up to an aggregate maximum of approximately $2,525 million. Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU is approximately $631 million.
Gray Oak Pipeline
In June 2019, Gray Oak Pipeline, LLC entered into a third-party term loan facility with an initial borrowing capacity of $1,230 million, which was increased to $1,317 million in July 2019, and $1,379 million in January 2020, inclusive of accrued interest. Borrowings under the facility are due on June 3, 2022. Phillips 66 Partners and its co-venturers provided a guarantee through an equity contribution agreement requiring proportionate equity contributions to Gray Oak Pipeline, LLC up to the total outstanding loan amount. Under the agreement, Phillips 66 Partners’ maximum potential amount of future obligations is $583 million, plus any additional accrued interest and associated fees, which would be required if the term loan facility is fully utilized and Gray Oak Pipeline, LLC defaults on certain of its obligations thereunder. At December 31, 2019, Gray Oak Pipeline, LLC had outstanding borrowings of $1,170 million, and Phillips 66 Partners’ 42.25% proportionate exposure under the equity contribution agreement was $494 million.
Other Guarantees
At December 31, 2019, we had other guarantees outstanding for our portion of certain joint venture debt obligations and purchase obligations that have remaining terms of up to six years. The maximum potential amount of future payments to third parties under these guarantees was approximately $263 million. Payment would be required if a joint venture defaults on its obligations.
See Note 13—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.
Capital Requirements
Capital Expenditures and Investments
For information about our capital expenditures and investments, see the “Capital Spending” section below.
Debt Financing
Our debt balance at December 31, 2019, was $11.8 billion and our total debt-to-capital ratio was 30%.
See Note 12—Debt, in the Notes to Consolidated Financial Statements, for our annual debt maturities over the next five years and more information on debt repayments.
Dividends
On February 5, 2020, our Board of Directors declared a quarterly cash dividend of $0.90 per common share, payable March 2, 2020, to holders of record at the close of business on February 18, 2020. We forecast that our quarterly dividend will continue to increase in 2020.
Share Repurchases
On October 4, 2019, our Board of Directors approved a new share repurchase program that authorizes us to repurchase up to $3 billion of our common stock, bringing the total amount of share repurchases authorized by our Board of Directors since July 2012 to an aggregate of $15 billion. The authorizations do not have expiration dates. The share repurchases are expected to be funded primarily through available cash. The shares under these authorizations are repurchased from time to time in the open market at our discretion, subject to market conditions and other factors, and in accordance with applicable regulatory requirements. Since the inception of our share repurchase programs in 2012 through December 31, 2019, we have repurchased 154 million shares at an aggregate cost of $12 billion. Shares of stock repurchased are held as treasury shares.
Employee Benefit Plan Contributions
For the year ended December 31, 2019, we contributed $57 million to our U.S. employee benefit plans and $28 million to our international employee benefit plans. In 2020, we expect to contribute approximately $75 million to those plans.
Contractual Obligations
The following table summarizes our aggregate contractual fixed and variable obligations as of December 31, 2019:
| Millions of Dollars | |||||||||||||||
| Payments Due by Period | |||||||||||||||
| Total | Up to 1 Year | Years 2-3 | Years 4-5 | After 5 Years | |||||||||||
| Debt obligations (a) | $ | 11,576 | 525 | 2,550 | 300 | 8,201 | |||||||||
| Finance lease obligations | 277 | 19 | 30 | 30 | 198 | ||||||||||
| Software obligations | 10 | 3 | 5 | 2 | — | ||||||||||
| Total debt | 11,863 | 547 | 2,585 | 332 | 8,399 | ||||||||||
| Interest on debt | 7,323 | 497 | 914 | 779 | 5,133 | ||||||||||
| Operating lease obligations | 1,409 | 488 | 427 | 195 | 299 | ||||||||||
| Purchase obligations (b) | 83,449 | 40,666 | 7,519 | 4,382 | 30,882 | ||||||||||
| Other long-term liabilities (c) | |||||||||||||||
| Asset retirement obligations | 280 | 8 | 39 | 25 | 208 | ||||||||||
| Accrued environmental costs | 441 | 75 | 118 | 68 | 180 | ||||||||||
| Repatriation income tax liability (d) | 90 | 1 | 19 | 41 | 29 | ||||||||||
| Total | $ | 104,855 | 42,282 | 11,621 | 5,822 | 45,130 |
| (a) | For additional information, see Note 12—Debt, in the Notes to Consolidated Financial Statements. |
| (b) | Represents any agreement to purchase goods or services that is enforceable, legally binding and specifies all significant terms. We expect these purchase obligations will be fulfilled with operating cash flows in the applicable maturity period. The majority of the purchase obligations are market-based contracts, including exchanges and futures, for the purchase of products such as crude oil and raw NGL. The products are used to supply our refineries and fractionators and optimize our supply chain. Product purchase commitments with third parties totaled $36,271 million. In addition, $21,779 million are product purchases from CPChem, mostly for fuel gas and natural gasoline over the remaining contractual term of 80 years, and product purchases of $3,640 million from DCP Midstream for NGL over the remaining contractual term of nine years. |
Purchase obligations of $6,187 million are related to agreements to access and utilize the capacity of third-party equipment and facilities, including pipelines and product terminals, to transport, process, treat, and store products. The remainder is primarily our net share of purchase commitments for materials and services for jointly owned facilities where we are the operator.
| (c) | Excludes pensions and unrecognized income tax benefits. From 2020 through 2024, we expect to contribute an average of $110 million per year to our qualified and nonqualified pension and other postretirement benefit plans in the United States and an average of $25 million per year to our non-U.S. plans. The U.S. five-year average consists of approximately $50 million for 2020 and $120 million per year for the remaining four years. Our minimum funding in 2020 is expected to be $50 million in the United States and $25 million outside the United States. Unrecognized income tax benefits of $40 million and the associated interest and penalties of $10 million were excluded because the ultimate disposition and timing of any payments to be made with regard to such amounts are not reasonably estimable. Although unrecognized income tax benefits are not a contractual obligation, they represent potential demands on our liquidity. |
| (d) | We elected to pay the one-time deemed repatriation income tax on foreign-sourced earnings, recognized as a result of the Tax Act enacted in December 2017, in installments over eight years beginning in 2018. The amount represents the remaining income tax liability. |
Capital Spending
Our capital expenditures and investments represent consolidated capital spending. 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 our consolidated capital spending funded by certain joint venture partners.
| Millions of Dollars | ||||||||||||
| 2020 Budget | 2019 | 2018 | 2017 | |||||||||
| Capital Expenditures and Investments | ||||||||||||
| Midstream | $ | 2,390 | 2,292 | 1,548 | 771 | |||||||
| Chemicals | — | — | — | — | ||||||||
| Refining | 1,035 | 1,001 | 826 | 853 | ||||||||
| Marketing and Specialties | 161 | 374 | 125 | 108 | ||||||||
| Corporate and Other | 204 | 206 | 140 | 100 | ||||||||
| Total Capital Expenditures and Investments | 3,790 | 3,873 | 2,639 | 1,832 | ||||||||
| Less: capital spending funded by certain joint venture partners* | 469 | 423 | — | — | ||||||||
| Adjusted Capital Spending | $ | 3,321 | 3,450 | 2,639 | 1,832 | |||||||
| Selected Equity Affiliates** | ||||||||||||
| DCP Midstream | $ | 350 | 472 | 484 | 268 | |||||||
| CPChem | 656 | 382 | 339 | 776 | ||||||||
| WRB | 215 | 175 | 156 | 126 | ||||||||
| $ | 1,221 | 1,029 | 979 | 1,170 |
** Included in the Midstream segment.*
*** Our share of joint venture’s self-funded capital spending.*
Midstream
Capital spending in our Midstream segment during the three-year period ended December 31, 2019, included:
| • | Construction activities related to additional Gulf Coast fractionation capacity projects. |
| • | Contributions to Gray Oak Pipeline, LLC to progress construction of the pipeline system, of which Phillips 66 Partners had a 42.25% effective ownership interest at December 31, 2019. The Gray Oak Pipeline system will transport crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi, the Sweeny area, including our Sweeny Refinery, as well as access to the Houston market. |
| • | Construction activities related to increasing storage capacity at our crude oil and refined petroleum products terminal located near Beaumont, Texas. |
| • | Contributions to Bayou Bridge Pipeline, LLC (Bayou Bridge), a Phillips 66 Partners 40 percent-owned joint venture, for the construction of a pipeline from Nederland, Texas, to Lake Charles, Louisiana, and a pipeline segment from Lake Charles to St. James, Louisiana. |
| • | Completion of the construction of Phillips 66 Partners’ new isomerization unit at the Lake Charles Refinery. |
| • | Contributions to Dakota Access and ETCO, two Phillips 66 Partners 25 percent-owned joint ventures, for post-construction spending related to Bakken Pipeline. |
| • | Construction activities related to Phillips 66 Partners’ new ethane pipeline from the Clemens Caverns to petrochemical facilities in Gregory, Texas, near Corpus Christi (C2G Pipeline). |
| • | Construction activities related to increasing capacity on the Sweeny to Pasadena refined petroleum products pipeline. |
| • | Contributions to South Texas Gateway Terminal for construction activities related to the marine export terminal that connects to the Gray Oak Pipeline in Corpus Christi, Texas. |
| • | Formation of a 50/50 joint venture, Liberty Pipeline LLC, to construct the Liberty Pipeline, which will transport crude oil from the Rockies and Bakken production areas to Cushing, Oklahoma. |
| • | Formation of a 50/50 joint venture, Red Oak Pipeline, LLC, to construct the Red Oak Pipeline System, which will transport crude oil from Cushing, Oklahoma, and the Permian to multiple destinations along the Texas Gulf Coast. |
| • | Spending associated with other return, reliability and maintenance projects in our Transportation and NGL businesses. |
During the three-year period ended December 31, 2019, DCP Midstream’s self-funded capital expenditures and investments were $2.4 billion on a 100% basis. Capital spending during this period was primarily for expansion projects, including construction of the Mewbourn 3 and O’Connor 2 plants, and investments in the expansion of Sand Hills NGL pipeline and the Gulf Coast Express pipeline joint venture, as well as maintenance capital expenditures for existing assets.
Chemicals
During the three-year period ended December 31, 2019, CPChem had a self-funded capital program that totaled $3.0 billion on a 100% basis. The capital spending was primarily for the development of USGC petrochemical projects, debottlenecking projects on existing assets, and the development of a petrochemicals complex in Qatar.
Refining
Capital spending for the Refining segment during the three-year period ended December 31, 2019, was $2.7 billion, primarily for refinery upgrade projects to increase accessibility of advantaged crudes and improve product yields; improvements to the operating integrity of key processing units; and safety-related projects. Our equity affiliates in the Refining segment had self-funding capital programs in 2019. During this three-year period, on a 100% basis, WRB’s capital expenditures and investments were $913 million.
Key projects completed during the three-year period included:
| • | Installation of facilities to improve clean product yield at the Lake Charles, Ponca City, and Bayway refineries, as well as the jointly owned Borger and Wood River refineries. |
| • | Installation of facilities to improve processing of advantaged crudes at the Billings and Lake Charles refineries. |
| • | Installation of facilities to comply with the U.S. Environmental Protection Agency (EPA) Tier 3 gasoline regulations at the Bayway, Ferndale, and Sweeny refineries. |
Major construction activities in progress include:
| • | Installation of facilities to increase production of higher-value petrochemical products and higher-octane gasoline at the Sweeny Refinery. |
| • | Installation of facilities to produce biofuels at the Humber Refinery. |
| • | Installation of facilities to improve clean product yield at the Bayway and Ponca City refineries, as well as the jointly owned Borger Refinery. |
Marketing and Specialties
Capital spending for the M&S segment during the three-year period ended December 31, 2019, was primarily for the investment in a retail joint venture with operations primarily on the U.S. West Coast; acquisition, construction and improvement of our international retail sites; and safety and reliability projects at our lubricants facilities.
Corporate and Other
Capital spending for Corporate and Other during the three-year period ended December 31, 2019, was primarily for information technology and facilities.
2020 Budget
Our 2020 capital budget is $3.8 billion, including $469 million of capital expected to be funded by prospective joint venture partners. Our projected $3.8 billion capital budget excludes our portion of planned capital spending by our major joint ventures DCP Midstream, CPChem and WRB totaling $1.2 billion, all of which is expected to be self-funded. Phillips 66 Partners’ planned capital spending of $962 million, which includes $95 million of capital expected to be funded by joint venture partners, is included in the $3.8 billion capital budget.
The Midstream capital budget of $2.4 billion, of which $469 million will be funded by joint venture partners, includes funding for the Liberty and Red Oak crude oil pipeline joint ventures and 450,000 BPD of additional fractionation capacity at the Sweeny Hub. The Midstream capital budget also includes growth capital at Phillips 66 Partners to support organic projects, including the Gray Oak Pipeline, the C2G Pipeline, the South Texas Gateway Terminal, and the Bakken Pipeline, as well as sustaining capital. Refining’s capital budget of $1.0 billion is primarily directed toward reliability, safety and environmental projects, as well as high-return projects to enhance the yield of higher-value products, including upgrades to the fluid catalytic cracking units at the Ponca City and Sweeny refineries, renewable diesel projects and other high-return, quick-payout projects designed to enhance margins. In M&S, our budgeted spending includes approximately $160 million of growth and sustaining capital, primarily to develop and enhance our retail sites in Europe. In Corporate and Other, we plan to fund approximately $205 million in projects primarily related to information technology projects, including an investment in a new enterprise resource planning system.
Contingencies
A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.
Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.
Legal and Tax Matters
Our legal and tax matters are handled by our legal and tax organizations. These organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions. We employ a litigation management process to manage and monitor the legal proceedings. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required. In the case of income tax-related contingencies, we monitor tax legislation and court decisions, the status of tax audits and the statute of limitations within which a taxing authority can assert a liability. See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information about income tax-related contingencies.
Environmental
We are subject to international, federal, state and local environmental laws and regulations. Among the most significant of these international and federal environmental laws and regulations are the:
| • | U.S. Federal Clean Air Act, which governs air emissions. |
| • | U.S. Federal Clean Water Act, which governs discharges into water bodies. |
| • | European Union Regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), which governs production, marketing and use of chemicals. |
| • | U.S. Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which imposes liability on generators, transporters and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur. |
| • | U.S. Federal Resource Conservation and Recovery Act (RCRA), which governs the treatment, storage and disposal of solid waste. |
| • | U.S. Federal Emergency Planning and Community Right-to-Know Act (EPCRA), which requires facilities to report toxic chemical inventories to local emergency planning committees and response departments. |
| • | U.S. Federal Oil Pollution Act of 1990 (OPA90), under which owners and operators of onshore facilities and pipelines as well as owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States. |
| • | European Union Trading Directive resulting in the European Union Emissions Trading Scheme (EU ETS), which uses a market-based mechanism to incentivize the reduction of greenhouse gas (GHG) emissions. |
These laws and their implementing regulations set limits on emissions and, in the case of discharges to water, establish water quality limits. They also, in most cases, require permits in association with new or modified operations. These permits can require an applicant to collect substantial information in connection with the application process, which can be expensive and time consuming. In addition, there can be delays associated with notice and comment periods and the agency’s processing of the application. Many of the delays associated with the permitting process are beyond the control of the applicant.
Many states and foreign countries where we operate also have, or are developing, similar environmental laws and regulations governing these same types of activities. While similar, in some cases these regulations may impose additional, or more stringent, requirements that can add to the cost and difficulty of developing infrastructure and marketing and transporting products across state and international borders. For example, in California the South Coast Air Quality Management District (SCAQMD) approved amendments to the Regional Clean Air Incentives Market (RECLAIM) that became effective in 2016, which require a phased reduction of nitrogen oxide emissions through 2022, affecting refineries in the Los Angeles metropolitan area. In 2017, SCAQMD required additional nitrogen dioxide emissions reductions through 2025 and is now promulgating new regulations to replace the RECLAIM program with a traditional command and control regulatory regime.
The ultimate financial impact arising from environmental laws and regulations is neither clearly known nor easily determinable as new standards, such as air emission standards, water quality standards and stricter fuel regulations, continue to evolve. However, environmental laws and regulations, including those that may arise to address concerns about global climate change, are expected to continue to have an increasing impact on our operations in the United States and in other countries in which we operate. Notable areas of potential impacts include air emissions compliance and remediation obligations in the United States.
An example of this in the fuels area is the Energy Independence and Security Act of 2007 (EISA). It requires fuel producers and importers to provide additional renewable fuels for transportation motor fuels and stipulates a mix of various types. RINs form the mechanism used by the EPA to record compliance with the Renewable Fuel Standard. If an obligated party has more RINs than it needs to meet its obligation, it may sell or trade the extra RINs, or instead choose to “bank” them for use the following year. We have met the stringent requirements to date while establishing implementation, operating and capital strategies, along with advanced technology development, to address projected future requirements. It is uncertain how various future requirements contained in EISA, and the regulations promulgated thereunder, may be implemented and what their full impact may be on our operations. For the 2020 compliance year, the EPA has set volumes of advanced and total renewable fuel at higher levels than in previous years; it is uncertain if these increased obligations will be achievable by fuel producers and shippers without drawing on the RIN bank. Additionally, we may experience a decrease in demand for refined petroleum products due to the regulatory program as currently promulgated. This program continues to be the subject of possible Congressional review and re-promulgation in revised form, and the EPA’s regulations pertaining to the 2014 through 2019 compliance years are subject to legal challenge, further creating uncertainty regarding renewable fuel volume requirements and obligations. Compliance with the regulation has been further complicated as the market for RINs has been the subject of fraudulent third-party activity, and it is possible that some RINs that we have purchased may be determined to be invalid. Should that occur, we could incur costs to replace those fraudulent RINs. Although the cost for replacing any fraudulently marketed RINs is not reasonably estimable at this time, we would not expect to incur the full financial impact of fraudulent RINs replacement costs in any single interim or annual period, and would not expect such costs to have a material impact on our results of operations or financial condition.
We also are subject to certain laws and regulations relating to environmental remediation obligations associated with current and past operations. Such laws and regulations include CERCLA and RCRA and their state equivalents. Remediation obligations include cleanup responsibility arising from petroleum releases from underground storage tanks located at numerous previously and currently owned and/or operated petroleum-marketing outlets throughout the United States. Federal and state laws require contamination caused by such underground storage tank releases be assessed and remediated to meet applicable standards. In addition to other cleanup standards, many states have adopted cleanup criteria for methyl tertiary-butyl ether for both soil and groundwater.
At RCRA-permitted facilities, we are required to assess environmental conditions. If conditions warrant, we may be required to remediate contamination caused by prior operations. In contrast to CERCLA, which is often referred to as “Superfund,” the cost of corrective action activities under RCRA corrective action programs typically is borne solely by us. We anticipate increased expenditures for RCRA remediation activities may be required, but such annual expenditures for the near term are not expected to vary significantly from the range of such expenditures we have experienced over the past few years. Longer-term expenditures are subject to considerable uncertainty and may fluctuate significantly.
We occasionally receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging that we are a potentially responsible party under CERCLA or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. As of December 31, 2018, we reported that we had been notified of potential liability under CERCLA and comparable state laws at 27 sites within the United States. During 2019, there were no new sites for which we received notice of potential liability nor were any existing sites deemed resolved and closed, leaving 27 unresolved sites with potential liability at December 31, 2019.
For the majority of Superfund sites, our potential liability will be less than the total site remediation costs because the percentage of waste attributable to us, versus that attributable to all other potentially responsible parties, is relatively low. Although liability of those potentially responsible is generally joint and several for federal sites and frequently so for state sites, other potentially responsible parties at sites where we are a party typically have had the financial strength to meet their obligations, and where they have not, or where potentially responsible parties could not be located, our share of liability has not increased materially. Many of the sites for which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or attain a settlement of liability. Actual cleanup costs generally occur after the parties obtain the EPA or equivalent state agency approval of a remediation plan. There are relatively few sites where we are a major participant, and given the timing and amounts of anticipated expenditures, neither the cost of remediation at those sites nor such costs at all CERCLA sites, in the aggregate, is expected to have a material adverse effect on our competitive or financial condition.
Expensed environmental costs were $691 million in 2019 and are expected to be approximately $765 million and $760 million in 2020 and 2021, respectively. Capitalized environmental costs were $133 million in 2019 and are expected to be approximately $155 million and $180 million, in 2020 and 2021, respectively. This amount does not include capital expenditures made for another purpose that have an indirect benefit on environmental compliance.
Accrued liabilities for remediation activities are not reduced for potential recoveries from insurers or other third parties and are not discounted (except those assumed in a business combination, which we record on a discounted basis).
Many of these liabilities result from CERCLA, RCRA and similar state laws that require us to undertake certain investigative and remedial activities at sites where we conduct, or once conducted, operations or at sites where our generated waste was disposed. We also have accrued for a number of sites we identified that may require environmental remediation, but which are not currently the subject of CERCLA, RCRA or state enforcement activities. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the future, we may incur significant costs under both CERCLA and RCRA. Remediation activities vary substantially in duration and cost from site to site, depending on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, and the presence or absence of potentially liable third parties. Therefore, it is difficult to develop reasonable estimates of future site remediation costs.
Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in certain of our operations and products, and there can be no assurance that those costs and liabilities will not be material. However, we currently do not expect any material adverse effect on our results of operations or financial position as a result of compliance with current environmental laws and regulations.
Climate Change
There has been a broad range of proposed or promulgated state, national and international laws focusing on GHG emissions reduction, including various regulations proposed or issued by the EPA. These proposed or promulgated laws apply or could apply in states and/or countries where we have interests or may have interests in the future. Laws regulating GHG emissions continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws potentially could have a material impact on our results of operations and financial condition as a result of increasing costs of compliance, lengthening project implementation and agency reviews, or reducing demand for certain hydrocarbon products. Examples of legislation or precursors for possible regulation that do or could affect our operations include:
| • | EU ETS, which is part of the European Union’s policy to combat climate change and is a key tool for reducing industrial GHG emissions. EU ETS impacts factories, power stations and other installations across all EU member states. |
| • | California’s Senate Bill No. 32, which requires reduction of California's GHG emissions to 40% below the 1990 emission level by 2030, and Assembly Bills 398, which extends the California GHG emission cap-and-trade program through 2030. Other GHG emissions programs in the western U.S. states have been enacted or are under consideration or development, including amendments to California's Low Carbon Fuel Standard, Oregon's Low Carbon Fuel Standard, and Washington's carbon reduction programs. |
| • | The U.S. Supreme Court decision in Massachusetts v. EPA, 549 U.S. 497, 127 S. Ct. 1438 (2007), confirming that the EPA has the authority to regulate carbon dioxide as an “air pollutant” under the Federal Clean Air Act. |
| • | The EPA’s announcement on March 29, 2010 (published as “Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs,” 75 Fed. Reg. 17004 (April 2, 2010)), and the EPA’s and U.S. Department of Transportation’s joint promulgation of a Final Rule on April 1, 2010, that triggers regulation of GHGs under the Clean Air Act. These collectively may lead to more climate-based claims for damages, and may result in longer agency review time for development projects to determine the extent of potential climate change. |
| • | The EPA's 2015 Final Rule regulating GHG emissions from existing fossil fuel-fired electrical generating units under the Federal Clean Air Act, commonly referred to as the Clean Power Plan. The EPA commenced rulemaking in 2017 to rescind the Clean Power Plan and, in August 2018, the EPA proposed the Affordable Clean Energy (ACE) rule as its replacement. The ACE rule has been judicially challenged by environmental organizations and several states and municipalities. |
| • | Carbon taxes in certain jurisdictions. |
| • | GHG emission cap and trade programs in certain jurisdictions. |
In the EU, the first phase of the EU ETS completed at the end of 2007 and Phase II was undertaken from 2008 through 2012. The current phase (Phase III) runs from 2013 through to 2020, with the main changes being reduced allocation of free allowances and increased auctioning of new allowances. Phillips 66 has assets that are subject to the EU ETS, and the company is actively engaged in minimizing any financial impact from the EU ETS.
From November 30 to December 12, 2015, more than 190 countries, including the United States, participated in the United Nations Climate Change Conference in Paris, France. The conference culminated in what is known as the “Paris Agreement,” which, upon certain conditions being met, entered into force on November 4, 2016. The Paris Agreement establishes a commitment by signatory parties to pursue domestic GHG emission reductions. In 2017, the President of the United States announced his intention to withdraw the United States from the Paris Agreement. On November 4, 2019, the United States submitted formal notification of its withdrawal to the United Nations, triggering a one-year waiting period to final withdrawal.
In the United States, some additional form of regulation is likely to be forthcoming in the future at the state or federal levels with respect to GHG emissions. Such regulation could take any of several forms that may result in additional financial burden in the form of taxes, the restriction of output, investments of capital to maintain compliance with laws and regulations, or required acquisition or trading of emission allowances.
Compliance with changes in laws and regulations that create a GHG emission trading program, GHG reduction requirements or carbon taxes could significantly increase our costs, reduce demand for fossil energy derived products, impact the cost and availability of capital and increase our exposure to litigation. Such laws and regulations could also increase demand for less carbon intensive energy sources.
An example of one such program is California’s cap and trade program, which was promulgated pursuant to the State’s Global Warming Solutions Act. The program had been limited to certain stationary sources, which include our refineries in California, but beginning in January 2015 was expanded to include emissions from transportation fuels distributed in California. Inclusion of transportation fuels in California’s cap and trade program as currently promulgated has increased our cap and trade program compliance costs. The ultimate impact on our financial performance, either positive or negative, from this and similar programs, will depend on a number of factors, including, but not limited to:
| • | Whether and to what extent legislation or regulation is enacted. |
| • | The nature of the legislation or regulation, such as a cap and trade system or a tax on emissions. |
| • | The GHG reductions required. |
| • | The price and availability of offsets. |
| • | The demand for, and amount and allocation of allowances. |
| • | Technological and scientific developments leading to new products or services. |
| • | Any potential significant physical effects of climate change, such as increased severe weather events, changes in sea levels and changes in temperature. |
| • | Whether, and the extent to which, increased compliance costs are ultimately reflected in the prices of our products and services. |
We consider and take into account anticipated future GHG emissions in designing and developing major facilities and projects, and implement energy efficiency initiatives to reduce GHG emissions. Data on our GHG emissions, legal requirements regulating such emissions, and the possible physical effects of climate change on our coastal assets are incorporated into our planning, investment, and risk management decision-making. We are working to continuously improve operational and energy efficiency through resource and energy conservation throughout our operations.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to select appropriate accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. See Note 1—Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, for descriptions of our major accounting policies. Some of these accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts would have been reported under different conditions, or if different assumptions had been used. The following discussion of critical accounting estimates, along with the discussion of contingencies in this report, address all important accounting areas where the nature of accounting estimates or assumptions could be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change.
Impairments
Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in future expected cash flows. If the sum of the undiscounted expected future pre-tax cash flows of an asset group is less than the carrying value, including applicable liabilities, the carrying value is written down to estimated fair value. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets (for example, at a refinery complex level). Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined using one or more of the following methods: 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; a market multiple for similar assets; or historical market transactions including similar assets, adjusted using principal market participant assumptions when necessary. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments, including future volumes, commodity prices, operating costs, margins, discount rates and capital project decisions, considering all available information at the date of review.
Investments in nonconsolidated entities accounted for under the equity method are assessed for impairment when there are indicators of a loss in value, such as a lack of sustained earnings capacity or a current fair value less than the investment’s carrying amount. When it is determined that an indicated impairment is other than temporary, a charge is recognized for the difference between the investment’s carrying value and its estimated fair value.
When determining whether a decline in value is other than temporary, management considers factors such as the duration and extent of the decline, the investee’s financial condition and near-term prospects, and our ability and intention to retain our investment for a period that allows for recovery. When quoted market prices are not available, the fair value is usually based on 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 observed market earnings multiples of comparable companies, if appropriate. Different assumptions could affect the timing and the amount of an impairment of an investment in any period.
Asset Retirement Obligations
Under various contracts, permits and regulations, we have legal obligations to remove tangible equipment and restore the land at the end of operations at certain operational sites. Our largest asset removal obligations involve asbestos abatement at refineries. Estimating the timing and cost of future asset removals is difficult. Most of these removal obligations are many years, or decades, in the future, and the contracts and regulations often have vague descriptions of what removal practices and criteria must be met when the removal event actually occurs. Asset removal technologies and costs, regulatory and other compliance considerations, expenditure timing, and other inputs into valuation of the obligation, including discount and inflation rates, are also subject to change.
Environmental Costs
In addition to asset retirement obligations discussed above, we have certain obligations to complete environmental-related projects. These projects are primarily related to cleanup at domestic refineries, underground storage sites and nonoperated sites. Future environmental remediation costs are difficult to estimate because they are subject to change due to such factors as the uncertain magnitude of cleanup costs, timing and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties.
Intangible Assets and Goodwill
At December 31, 2019, we had $752 million of intangible assets that we have determined to have indefinite useful lives, and therefore do not amortize. The judgmental determination that an intangible asset has an indefinite useful life is continuously evaluated. If, due to changes in facts and circumstances, management determines these intangible assets have finite useful lives, amortization will commence at that time on a prospective basis. As long as these intangible assets are determined to have indefinite lives, they will be subject to at least annual impairment tests that require management’s judgment of their estimated fair value.
At December 31, 2019, we had $3.3 billion of goodwill recorded in conjunction with past business combinations. Goodwill is not amortized. Instead, goodwill is subject to at least annual tests for impairment at a reporting unit level. A reporting unit is an operating segment or a component that is one level below an operating segment and they are determined primarily based on the manner in which the business is managed.
We perform our annual goodwill impairment test using a qualitative assessment and a quantitative assessment, if one is deemed necessary. As part of our qualitative assessment, we evaluate relevant events and circumstances that could affect the fair value of our reporting units, including macroeconomic conditions, overall industry and market considerations and regulatory changes, as well as company-specific market metrics, performance and events. The evaluation of company-specific events and circumstances includes evaluating changes in our stock price and cost of capital, actual and forecasted financial performance, as well as the effect of significant asset dispositions. If our qualitative assessment indicates it is likely the fair value of a reporting unit has declined below its carrying value (including goodwill), a quantitative assessment is performed.
When a quantitative assessment is performed, management applies judgment in determining the estimated fair values of the reporting units because quoted market prices for our reporting units are not available. Management uses available information to make this fair value determination, including estimated future cash flows, cost of capital, observed market earnings multiples of comparable companies, our common stock price and associated total company market capitalization.
We completed our annual qualitative assessment of goodwill as of October 1, 2019, and concluded that the fair values of our reporting units continued to exceed their respective carrying values (including goodwill) by significant percentages. A decline in the estimated fair value of one or more of our reporting units in the future could result in an impairment. As such, we continue to monitor for indicators of impairment until our next annual impairment test is performed.
Tax Assets and Liabilities
Our operations are subject to various taxes, including federal, state and foreign income taxes, property taxes, and transactional taxes such as excise, sales/use, value-added and payroll taxes. We record tax liabilities based on our assessment of existing tax laws and regulations. The recording of tax liabilities requires significant judgment and estimates. We recognize the financial statement effects of an income tax position when it is more likely than not that the position will be sustained upon examination by a taxing authority. A contingent liability related to a transactional tax claim is recorded if the loss is both probable and reasonably estimable. Actual incurred tax liabilities can vary from our estimates for a variety of reasons, including different interpretations of tax laws and regulations and different assessments of the amount of tax due.
In determining our income tax expense (benefit), we assess the likelihood our deferred tax assets will be recovered through future taxable income. Valuation allowances reduce deferred tax assets to an amount that will, more likely than not, be realized. Judgment is required in estimating the amount of valuation allowance, if any, that should be recorded against our deferred tax assets. Based on our historical taxable income, our expectations for the future, and available tax-planning strategies, we expect the net deferred tax assets will more likely than not be realized as offsets to reversing deferred tax liabilities and as reductions to future taxable income. If our actual results of operations differ from such estimates or our estimates of future taxable income change, the valuation allowance may need to be revised.
New tax laws and regulations, as well as changes to existing tax laws and regulations, are continuously being proposed or promulgated. The implementation of future legislative and regulatory tax initiatives could result in increased income tax liabilities that cannot be predicted at this time.
Projected Benefit Obligations
Calculation of the projected benefit obligations for our defined benefit pension and postretirement plans impacts the obligations on the balance sheet and the amount of benefit expense in the income statement. The actuarial calculation of projected benefit obligations and company contribution requirements involves judgment about uncertain future events, including estimated retirement dates, salary levels at retirement, mortality rates, lump-sum election rates, rates of return on plan assets, future interest rates, future health care cost-trend rates, and rates of utilization of health care services by retirees. We engage outside actuarial firms to assist in the calculation of these projected benefit obligations and company contribution requirements due to the specialized nature of these calculations. As financial accounting rules and the pension plan funding regulations promulgated by governmental agencies have different objectives and requirements, the actuarial methods and assumptions for the two purposes differ in certain important respects. Ultimately, we will be required to fund all promised benefits under pension and postretirement benefit plans not funded by plan assets or investment returns, but the judgmental assumptions used in the actuarial calculations significantly affect periodic financial statements and funding patterns over time. Benefit expense is particularly sensitive to the discount rate and return on plan assets assumptions. A one percentage-point decrease in the discount rate assumption used for the plan obligation would increase annual benefit expense by an estimated $55 million, while a one percentage-point decrease in the return on plan assets assumption would increase annual benefit expense by an estimated $35 million. In determining the discount rate, we use yields on high-quality fixed income investments with payments matched to the estimated distributions of benefits from our plans.
The expected weighted-average long-term rate of return for worldwide pension plan assets was approximately 6% for both 2019 and 2018, while the actual weighted-average rate of return was 18% in 2019 and negative 4% in 2018. For the past ten years, our actual weighted-average rate of return for worldwide pension plan assets was 9%.
NON-GAAP RECONCILIATIONS
Refining
Our realized refining margins measure the difference between a) sales and other operating revenues derived from the sale of petroleum products manufactured at our refineries and b) purchase costs of feedstocks, primarily crude oil, used to produce the petroleum products. The realized refining margins are adjusted to include our proportional share of our joint venture refineries’ realized margins, as well as to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized refining margins are converted to a per-barrel basis by dividing them by total refinery processed inputs (primarily crude oil) measured on a barrel basis, including our share of inputs processed by our joint venture refineries. Our realized refining margin per barrel is intended to be comparable with industry refining margins, which are known as “crack spreads.” As discussed in “Business Environment,” industry crack spreads measure the difference between market prices for refined petroleum products and crude oil. We believe realized refining margin per barrel calculated on a similar basis as industry crack spreads provides a useful measure of how well we performed relative to benchmark industry refining margins.
The GAAP performance measure most directly comparable to realized refining margin per barrel is the Refining segment’s “income (loss) before income taxes per barrel.” Realized refining margin per barrel excludes items that are typically included in a manufacturer’s gross margin, such as depreciation and operating expenses, and other items used to determine income (loss) before income taxes, such as general and administrative expenses. It also includes our proportional share of joint venture refineries’ realized refining margins and excludes special items. Because realized refining margin per barrel is calculated in this manner, and because realized refining margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. Following are reconciliations of income (loss) before income taxes to realized refining margins:
| Millions of Dollars, Except as Indicated | |||||||||||
| Realized Refining Margins | Atlantic Basin/Europe | Gulf Coast | Central Corridor | West Coast | Worldwide | ||||||
| Year Ended December 31, 2019 | |||||||||||
| Income (loss) before income taxes | $ | 608 | 364 | 1,338 | (324 | ) | 1,986 | ||||
| Plus: | |||||||||||
| Taxes other than income taxes | 52 | 73 | 40 | 85 | 250 | ||||||
| Depreciation, amortization and impairments | 198 | 271 | 135 | 253 | 857 | ||||||
| Selling, general and administrative expenses | 39 | 23 | 22 | 31 | 115 | ||||||
| Operating expenses | 863 | 1,449 | 550 | 1,143 | 4,005 | ||||||
| Equity in (earnings) losses of affiliates | 11 | 2 | (331 | ) | — | (318 | ) | ||||
| Other segment (income) expense, net | (16 | ) | (3 | ) | — | 5 | (14 | ) | |||
| Proportional share of refining gross margins contributed by equity affiliates | 69 | — | 1,073 | — | 1,142 | ||||||
| Special items: | |||||||||||
| Pending claims and settlements | — | — | (21 | ) | — | (21 | ) | ||||
| Realized refining margins | $ | 1,824 | 2,179 | 2,806 | 1,193 | 8,002 | |||||
| Total processed inputs (thousands of barrels) | 195,506 | 293,666 | 103,294 | 130,014 | 722,480 | ||||||
| Adjusted total processed inputs (thousands of barrels)* | 195,506 | 293,666 | 188,045 | 130,014 | 807,231 | ||||||
| Income (loss) before income taxes per barrel (dollars per barrel)** | $ | 3.11 | 1.24 | 12.95 | (2.49 | ) | 2.75 | ||||
| Realized refining margins (dollars per barrel)*** | 9.33 | 7.42 | 14.91 | 9.18 | 9.91 | ||||||
| Year Ended December 31, 2018 | |||||||||||
| Income before income taxes | $ | 567 | 1,040 | 2,817 | 111 | 4,535 | |||||
| Plus: | |||||||||||
| Taxes other than income taxes | 56 | 88 | 43 | 100 | 287 | ||||||
| Depreciation, amortization and impairments | 201 | 268 | 135 | 237 | 841 | ||||||
| Selling, general and administrative expenses | 63 | 57 | 34 | 50 | 204 | ||||||
| Operating expenses | 950 | 1,312 | 488 | 1,040 | 3,790 | ||||||
| Equity in (earnings) losses of affiliates | 10 | 6 | (812 | ) | — | (796 | ) | ||||
| Other segment (income) expense, net | (11 | ) | 3 | (13 | ) | (9 | ) | (30 | ) | ||
| Proportional share of refining gross margins contributed by equity affiliates | 87 | — | 1,565 | — | 1,652 | ||||||
| Special items: | |||||||||||
| Certain tax impacts | (5 | ) | — | — | — | (5 | ) | ||||
| Realized refining margins | $ | 1,918 | 2,774 | 4,257 | 1,529 | 10,478 | |||||
| Total processed inputs (thousands of barrels) | 186,042 | 292,665 | 106,299 | 136,332 | 721,338 | ||||||
| Adjusted total processed inputs (thousands of barrels)* | 186,042 | 292,665 | 191,561 | 136,332 | 806,600 | ||||||
| Income before income taxes per barrel (dollars per barrel)** | $ | 3.05 | 3.55 | 26.50 | 0.81 | 6.29 | |||||
| Realized refining margins (dollars per barrel)*** | 10.32 | 9.48 | 22.22 | 11.20 | 12.99 | ||||||
| ** Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate.* | |||||||||||
| *** Income (loss) before income taxes divided by total processed inputs.* | |||||||||||
| **** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may slightly differ from the presented per barrel amounts.* |
| Millions of Dollars, Except as Indicated | |||||||||||
| Realized Refining Margins | Atlantic Basin/Europe | Gulf Coast | Central Corridor | West Coast | Worldwide | ||||||
| Year Ended December 31, 2017 | |||||||||||
| Income before income taxes | $ | 448 | 809 | 755 | 64 | 2,076 | |||||
| Plus: | |||||||||||
| Taxes other than income taxes | 56 | 97 | 46 | 64 | 263 | ||||||
| Depreciation, amortization and impairments | 192 | 273 | 129 | 244 | 838 | ||||||
| Selling, general and administrative expenses | 61 | 55 | 34 | 48 | 198 | ||||||
| Operating expenses | 847 | 1,212 | 593 | 982 | 3,634 | ||||||
| Equity in (earnings) losses of affiliates | 11 | (4 | ) | (329 | ) | — | (322 | ) | |||
| Other segment (income) expense, net | (10 | ) | (421 | ) | 13 | 5 | (413 | ) | |||
| Proportional share of refining gross margins contributed by equity affiliates | 59 | 1 | 959 | — | 1,019 | ||||||
| Special items: | |||||||||||
| Certain tax impacts | (23 | ) | — | — | — | (23 | ) | ||||
| Realized refining margins | $ | 1,641 | 2,022 | 2,200 | 1,407 | 7,270 | |||||
| Total processed inputs (thousands of barrels) | 199,068 | 285,951 | 92,146 | 134,089 | 711,254 | ||||||
| Adjusted total processed inputs (thousands of barrels)* | 199,068 | 285,951 | 176,823 | 134,089 | 795,931 | ||||||
| Income before income taxes per barrel (dollars per barrel)** | $ | 2.25 | 2.83 | 8.19 | 0.48 | 2.92 | |||||
| Realized refining margins (dollars per barrel)*** | 8.25 | 7.07 | 12.44 | 10.49 | 9.13 | ||||||
| ** Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate.* | |||||||||||
| *** Income before income taxes divided by total processed inputs.* | |||||||||||
| **** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may slightly differ from the presented per barrel amounts.* |
Marketing
Our realized marketing fuel margins measure the difference between a) sales and other operating revenues derived from the sale of fuels in our M&S segment and b) purchase costs of those fuels. The realized marketing fuel margins are adjusted to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized marketing fuel margins are converted to a per-barrel basis by dividing them by sales volumes measured on a barrel basis. We believe realized marketing fuel margin per barrel demonstrates the value uplift our marketing operations provide by optimizing the placement and ultimate sale of our refineries’ fuel production.
Within the M&S segment, the GAAP performance measure most directly comparable to realized marketing fuel margin per barrel is the marketing business’ “income before income taxes per barrel.” Realized marketing fuel margin per barrel excludes items that are typically included in gross margin, such as depreciation and operating expenses, and other items used to determine income before income taxes, such as general and administrative expenses. Because realized marketing fuel margin per barrel excludes these items, and because realized marketing fuel margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. Following are reconciliations of income before income taxes to realized marketing fuel margins:
| Millions of Dollars, Except as Indicated | ||||||||||||||
| U.S. | International | |||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||
| Realized Marketing Fuel Margins | ||||||||||||||
| Income before income taxes | $ | 916 | 843 | 628 | 380 | 505 | 217 | |||||||
| Plus: | ||||||||||||||
| Taxes other than income taxes* | 5 | (2 | ) | 5,481 | 6 | 2 | 7,579 | |||||||
| Depreciation, amortization and impairment | 10 | 13 | 14 | 65 | 71 | 67 | ||||||||
| Selling, general and administrative expenses | 743 | 763 | 751 | 249 | 280 | 264 | ||||||||
| Equity in earnings of affiliates | (27 | ) | (8 | ) | (5 | ) | (99 | ) | (91 | ) | (83 | ) | ||
| Other operating revenues* | (379 | ) | (379 | ) | (5,815 | ) | (37 | ) | (32 | ) | (7,594 | ) | ||
| Other segment (income) expense, net | — | — | (15 | ) | 1 | 2 | 2 | |||||||
| Special items: | ||||||||||||||
| Certain tax impacts | (90 | ) | (100 | ) | — | — | — | — | ||||||
| Marketing margins | 1,178 | 1,130 | 1,039 | 565 | 737 | 452 | ||||||||
| Less: margin for nonfuel related sales | — | — | — | 44 | 44 | 42 | ||||||||
| Realized marketing fuel margins | $ | 1,178 | 1,130 | 1,039 | 521 | 693 | 410 | |||||||
| Total fuel sales volumes (thousands of barrels) | 752,064 | 697,696 | 703,928 | 106,263 | 100,949 | 97,346 | ||||||||
| Income before income taxes per barrel (dollars per barrel) | $ | 1.22 | 1.21 | 0.89 | 3.58 | 5.00 | 2.23 | |||||||
| Realized marketing fuel margins (dollars per barrel)** | 1.57 | 1.62 | 1.48 | 4.90 | 6.87 | 4.21 | ||||||||
| ** Includes excise taxes on sales of refined petroleum products for the year ended December 31, 2017, prior to our adoption of ASU No. 2014-09 on January 1, 2018. See Note 1—Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, for further information on our adoption of this ASU. Other operating revenues also includes other nonfuel revenues.* | ||||||||||||||
| *** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may slightly differ from the presented per barrel amounts.* |
Previous: Item 6. SELECTED FINANCIAL DATA · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK