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Phillips 66 - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
September 30, 2019
 
 
 
or
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from
 
to
 
 
Commission file number:
001-35349
 
Phillips 66
(Exact name of registrant as specified in its charter) 
Delaware
 
45-3779385
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

2331 CityWest Blvd., Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
281-293-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
 
 
Common Stock, $0.01 Par Value
 
PSX
 
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  
The registrant had 444,357,576 shares of common stock, $0.01 par value, outstanding as of September 30, 2019.


Table of Contents

PHILLIPS 66

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
 
Consolidated Statement of Income
Phillips 66
 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$
27,218

29,788

 
78,168

82,363

Equity in earnings of affiliates
499

779

 
1,663

1,946

Net gain on dispositions
18

1

 
19

18

Other income
36

24

 
97

47

Total Revenues and Other Income
27,771

30,592

 
79,947

84,374

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products
23,806

26,385

 
69,415

73,270

Operating expenses
1,206

1,206

 
3,678

3,595

Selling, general and administrative expenses
416

440

 
1,190

1,258

Depreciation and amortization
336

346

 
1,001

1,019

Impairments
853

1

 
856

7

Taxes other than income taxes
105

109

 
330

328

Accretion on discounted liabilities
6

5

 
17

17

Interest and debt expense
109

125

 
343

383

Foreign currency transaction (gains) losses
(9
)

 
5

(30
)
Total Costs and Expenses
26,828

28,617

 
76,835

79,847

Income before income taxes
943

1,975


3,112

4,527

Income tax expense
150

407

 
545

970

Net Income
793

1,568

 
2,567

3,557

Less: net income attributable to noncontrolling interests
81

76

 
227

202

Net Income Attributable to Phillips 66
$
712

1,492

 
2,340

3,355

 
 
 
 
 
 
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
 
 
 
 
 
Basic
$
1.58

3.20

 
5.15

7.07

Diluted
1.58

3.18

 
5.13

7.03

 
 
 
 
 
 
Weighted-Average Common Shares Outstanding (thousands)
 
 
 
 
 
Basic
449,005

466,109

 
453,398

473,760

Diluted
451,001

469,440

 
455,810

477,220

See Notes to Consolidated Financial Statements.
 
 
 
 
 

1

Table of Contents

Consolidated Statement of Comprehensive Income
Phillips 66
 
 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
Net Income
$
793

1,568

 
2,567

3,557

Other comprehensive income (loss)
 
 
 
 
 
Defined benefit plans
 
 
 
 
 
Amortization to income of net actuarial loss, prior service credit and settlements
17

68

 
51

111

Plans sponsored by equity affiliates
2

4

 
7

13

Income taxes on defined benefit plans
(4
)
(18
)
 
(13
)
(30
)
Defined benefit plans, net of income taxes
15

54

 
45

94

Foreign currency translation adjustments
(119
)
(15
)
 
(124
)
(125
)
Income taxes on foreign currency translation adjustments
1

1

 

2

Foreign currency translation adjustments, net of income taxes
(118
)
(14
)
 
(124
)
(123
)
Cash flow hedges
(2
)
2

 
(13
)
10

Income taxes on hedging activities
1

(1
)
 
2

(3
)
Hedging activities, net of income taxes
(1
)
1

 
(11
)
7

Other Comprehensive Income (Loss), Net of Income Taxes
(104
)
41

 
(90
)
(22
)
Comprehensive Income
689

1,609

 
2,477

3,535

Less: comprehensive income attributable to noncontrolling interests
81

76

 
227

202

Comprehensive Income Attributable to Phillips 66
$
608

1,533

 
2,250

3,333

See Notes to Consolidated Financial Statements.

2

Table of Contents

Consolidated Balance Sheet
Phillips 66
 
 
Millions of Dollars
 
September 30
2019

 
December 31
2018

Assets
 
 
 
Cash and cash equivalents
$
2,268

 
3,019

Accounts and notes receivable (net of allowances of $41 million in 2019 and $22 million in 2018)
6,097

 
5,414

Accounts and notes receivable—related parties
989

 
759

Inventories
5,521

 
3,543

Prepaid expenses and other current assets
742

 
474

Total Current Assets
15,617

 
13,209

Investments and long-term receivables
14,147

 
14,421

Net properties, plants and equipment
22,954

 
22,018

Goodwill
3,270

 
3,270

Intangibles
872

 
869

Other assets
1,881

 
515

Total Assets
$
58,741

 
54,302

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
7,738

 
6,113

Accounts payable—related parties
635

 
473

Short-term debt
842

 
67

Accrued income and other taxes
1,128

 
1,116

Employee benefit obligations
624

 
724

Other accruals
1,116

 
442

Total Current Liabilities
12,083

 
8,935

Long-term debt
11,083

 
11,093

Asset retirement obligations and accrued environmental costs
617

 
624

Deferred income taxes
5,503

 
5,275

Employee benefit obligations
905

 
867

Other liabilities and deferred credits
1,458

 
355

Total Liabilities
31,649

 
27,149

 
 
 
 
Equity
 
 
 
Common stock (2,500,000,000 shares authorized at $0.01 par value)
     Issued (2019—647,050,977 shares; 2018—645,691,761 shares)
 
 
 
Par value
6

 
6

Capital in excess of par
20,253

 
19,873

Treasury stock (at cost: 2019—202,693,401 shares; 2018—189,526,331 shares)
(16,261
)
 
(15,023
)
Retained earnings
21,730

 
20,489

Accumulated other comprehensive loss
(871
)
 
(692
)
Total Stockholders’ Equity
24,857

 
24,653

Noncontrolling interests
2,235

 
2,500

Total Equity
27,092

 
27,153

Total Liabilities and Equity
$
58,741

 
54,302

See Notes to Consolidated Financial Statements.

3

Table of Contents

Consolidated Statement of Cash Flows
Phillips 66
 
Millions of Dollars
 
Nine Months Ended
September 30
 
2019

 
2018

Cash Flows From Operating Activities
 
 
 
Net income
$
2,567

 
3,557

Adjustments to reconcile net income to net cash provided by operating
activities
 
 
 
Depreciation and amortization
1,001

 
1,019

Impairments
856

 
7

Accretion on discounted liabilities
17

 
17

Deferred income taxes
115

 
229

Undistributed equity earnings
(25
)
 
111

Net gain on dispositions
(19
)
 
(18
)
Other
(97
)
 
118

Working capital adjustments
 
 
 
Accounts and notes receivable
(909
)
 
(478
)
Inventories
(2,004
)
 
(2,178
)
Prepaid expenses and other current assets
(269
)
 
(509
)
Accounts payable
1,778

 
1,280

Taxes and other accruals
103

 
279

Net Cash Provided by Operating Activities
3,114

 
3,434

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Capital expenditures and investments
(2,595
)
 
(1,645
)
Proceeds from asset dispositions*
139

 
39

Advances/loans—related parties
(95
)
 
(1
)
Collection of advances/loans—related parties
95

 

Other
24

 
67

Net Cash Used in Investing Activities
(2,432
)
 
(1,540
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt
1,758

 
1,594

Repayment of debt
(1,004
)
 
(374
)
Issuance of common stock
15

 
39

Repurchase of common stock
(1,238
)
 
(4,148
)
Dividends paid on common stock
(1,172
)
 
(1,069
)
Distributions to noncontrolling interests
(176
)
 
(146
)
Net proceeds from issuance of Phillips 66 Partners LP common units
133

 
114

Other
282

 
(79
)
Net Cash Used in Financing Activities
(1,402
)
 
(4,069
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(31
)
 
(20
)
 
 
 
 
Net Change in Cash and Cash Equivalents
(751
)
 
(2,195
)
Cash and cash equivalents at beginning of period
3,019

 
3,119

Cash and Cash Equivalents at End of Period
$
2,268

 
924

* Includes return of investments in equity affiliates.
See Notes to Consolidated Financial Statements.


4

Table of Contents

Consolidated Statement of Changes in Equity
Phillips 66

 
Millions of Dollars
 
Three Months Ended September 30
 
Attributable to Phillips 66
 
 
 
Common Stock
 
 
 
 
 
Par
Value

Capital in Excess of Par

Treasury Stock

Retained
Earnings

Accum. Other
Comprehensive Loss

Noncontrolling
Interests

Total

 
 
 
 
 
 
 
 
June 30, 2019
$
6

19,912

(15,822
)
21,423

(767
)
2,554

27,306

Net income



712


81

793

Other comprehensive loss




(104
)

(104
)
Dividends paid on common stock ($0.90 per share)



(402
)


(402
)
Repurchase of common stock


(439
)



(439
)
Benefit plan activity

22


(3
)


19

Issuance of Phillips 66 Partners LP common units

44




32

76

Impacts from Phillips 66 Partners GP/IDR restructuring transaction

275




(373
)
(98
)
Distributions to noncontrolling interests





(59
)
(59
)
September 30, 2019
$
6

20,253

(16,261
)
21,730

(871
)
2,235

27,092

 
 
 
 
 
 
 
 
June 30, 2018
$
6

19,831

(14,121
)
17,500

(680
)
2,424

24,960

Net income



1,492


76

1,568

Other comprehensive income




41


41

Dividends paid on common stock ($0.80 per share)



(370
)


(370
)
Repurchase of common stock


(405
)



(405
)
Benefit plan activity

13


(4
)


9

Issuance of Phillips 66 Partners LP common units

16




26

42

Distributions to noncontrolling interests





(50
)
(50
)
September 30, 2018
$
6

19,860

(14,526
)
18,618

(639
)
2,476

25,795



 
Shares in Thousands
 
Three Months Ended September 30
 
Common Stock Issued

Treasury Stock

 
 
 
June 30, 2019
646,828

198,287

Repurchase of common stock

4,406

Shares issued—share-based compensation
223


September 30, 2019
647,051

202,693

 
 
 
June 30, 2018
645,215

180,952

Repurchase of common stock

3,501

Shares issued—share-based compensation
364


September 30, 2018
645,579

184,453

See Notes to Consolidated Financial Statements.


5

Table of Contents

 
Millions of Dollars
 
Nine Months Ended September 30
 
Attributable to Phillips 66
 
 
 
Common Stock
 
 
 
 
 
Par
Value

Capital in Excess of Par

Treasury Stock

Retained
Earnings

Accum. Other
Comprehensive Loss

Noncontrolling
Interests

Total

 
 
 
 
 
 
 
 
December 31, 2018
$
6

19,873

(15,023
)
20,489

(692
)
2,500

27,153

Cumulative effect of accounting changes



81

(89
)
(1
)
(9
)
Net income



2,340


227

2,567

Other comprehensive loss




(90
)

(90
)
Dividends paid on common stock ($2.60 per share)



(1,172
)


(1,172
)
Repurchase of common stock


(1,238
)



(1,238
)
Benefit plan activity

56


(8
)


48

Issuance of Phillips 66 Partners LP common units

49




58

107

Impacts from Phillips 66 Partners GP/IDR restructuring transaction

275




(373
)
(98
)
Distributions to noncontrolling interests





(176
)
(176
)
September 30, 2019
$
6

20,253

(16,261
)
21,730

(871
)
2,235

27,092

 
 
 
 
 
 
 
 
December 31, 2017
$
6

19,768

(10,378
)
16,306

(617
)
2,343

27,428

Cumulative effect of accounting changes



36


13

49

Net income



3,355


202

3,557

Other comprehensive loss




(22
)

(22
)
Dividends paid on common stock ($2.30 per share)



(1,069
)


(1,069
)
Repurchase of common stock


(4,148
)



(4,148
)
Benefit plan activity

54


(10
)


44

Issuance of Phillips 66 Partners LP common units

38




64

102

Distributions to noncontrolling interests





(146
)
(146
)
September 30, 2018
$
6

19,860

(14,526
)
18,618

(639
)
2,476

25,795



 
Shares in Thousands
 
Nine Months Ended September 30
 
Common Stock Issued

Treasury Stock

 
 
 
December 31, 2018
645,692

189,526

Repurchase of common stock

13,167

Shares issued—share-based compensation
1,359


September 30, 2019
647,051

202,693

 
 
 
December 31, 2017
643,835

141,565

Repurchase of common stock

42,888

Shares issued—share-based compensation
1,744


September 30, 2018
645,579

184,453

See Notes to Consolidated Financial Statements.

6

Table of Contents

Notes to Consolidated Financial Statements
Phillips 66
 
Note 1—Interim Financial Information

The unaudited interim financial information presented in the financial statements included in this report is prepared in accordance with generally accepted accounting principles in the United States (GAAP) and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2018 Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2019, are not necessarily indicative of the results expected for the full year. Certain prior period financial information has been recast to reflect the current year’s presentation.


Note 2—Changes in Accounting Principles

Effective January 1, 2019, we elected to adopt Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU permits the deferred income tax effects stranded in accumulated other comprehensive income (AOCI) resulting from the U.S. Tax Cuts and Jobs Act (the Tax Act) enacted in December 2017 to be reclassified to retained earnings. As of January 1, 2019, we recorded a cumulative effect adjustment to our opening consolidated balance sheet to reclassify an aggregate income tax benefit of $89 million, primarily related to our pension plans, from accumulated other comprehensive loss to retained earnings.

Effective January 1, 2019, we early adopted ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” using the modified retrospective transition method. This ASU amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables, and off-balance sheet credit exposures. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. We recorded a noncash cumulative effect adjustment to retained earnings of $9 million, net of $3 million of income taxes, on our opening consolidated balance sheet as of January 1, 2019. See Note 4—Credit Losses, for more information on our presentation of credit losses.

Effective January 1, 2019, we adopted ASU No. 2016-02, “Leases (Topic 842),” using the modified retrospective transition method. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated income statement.

We elected the package of practical expedients that allowed us to carry forward our determination of whether an arrangement contained a lease and lease classification, as well as our accounting for initial direct costs for existing contracts. We recorded a noncash cumulative effect adjustment to our opening consolidated balance sheet as of January 1, 2019, to record an aggregate operating lease ROU asset and corresponding lease liability of $1,415 million and immaterial adjustments to retained earnings and noncontrolling interests. See Note 14—Leases, for the new lease disclosures required by this ASU.

7

Table of Contents

Note 3—Sales and Other Operating Revenues

Disaggregated Revenues
The following tables present our disaggregated sales and other operating revenues:

 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

Product Line and Services
 
 
 
 
 
Refined petroleum products
$
22,373

23,184

 
64,088

64,975

Crude oil resales
3,511

4,747

 
10,162

12,316

Natural gas liquids (NGL)
1,025

1,782

 
3,508

4,751

Services and other*
309

75

 
410

321

Consolidated sales and other operating revenues
$
27,218

29,788


78,168

82,363

 
 
 
 
 
 
Geographic Location**
 
 
 
 
 
United States
$
21,160

23,068

 
60,602

64,481

United Kingdom
2,375

3,085

 
7,318

7,623

Germany
1,025

1,135

 
3,074

3,174

Other foreign countries
2,658

2,500

 
7,174

7,085

Consolidated sales and other operating revenues
$
27,218

29,788


78,168

82,363

* Includes derivatives-related activities. See Note 12—Derivatives and Financial Instruments, for additional information.
** Sales and other operating revenues are attributable to countries based on the location of the operations generating the revenues.



Contract-Related Assets and Liabilities
At September 30, 2019, and December 31, 2018, receivables from contracts with customers were $5,585 million and $4,993 million, respectively. Significant non-customer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.

Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At September 30, 2019, and December 31, 2018, our asset balances related to such payments were $311 million and $248 million, respectively.

Our contract-related liabilities represent advances received from our customers prior to product or service delivery. At September 30, 2019, and December 31, 2018, contract liabilities were $218 million and $99 million, respectively.

Remaining Performance Obligations
Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We do not disclose remaining performance obligations for these contracts as the expected duration is one year or less or because the variable consideration has been allocated entirely to an unsatisfied performance obligation. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing, most of which expire by 2021. At September 30, 2019, the remaining performance obligations related to these minimum volume commitment contracts were not material.



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Table of Contents

Note 4—Credit Losses
 
We are exposed to credit losses primarily through our sales of refined petroleum products, crude oil and NGL. We assess each counterparty’s ability to pay for the products we sell by conducting a credit review. The credit review considers our expected billing exposure and timing for payment and the counterparty’s established credit rating or our assessment of the counterparty’s creditworthiness based on our analysis of their financial statements when a credit rating is not available. We also consider contract terms and conditions, country and political risk, and business strategy in our evaluation. A credit limit is established for each counterparty based on the outcome of this review. We may require collateralized asset support or a prepayment to mitigate credit risk.

We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliation, dispute resolution and payment confirmation. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

At September 30, 2019, we reported $7,086 million of accounts and notes receivable, net of allowances of $41 million. Changes in the allowance were not material for the three and nine months ended September 30, 2019. Based on an aging analysis at September 30, 2019, 99% of our accounts receivable were outstanding less than 60 days, with the remainder outstanding less than 90 days.

We are also exposed to credit losses from off-balance sheet exposures, such as guarantees of joint venture debt, residual value guarantees of leased assets and standby letters of credit. See Note 10—Guarantees, and Note 11—Contingencies and Commitments, for more information on these off-balance sheet exposures.


Note 5—Inventories

Inventories consisted of the following:

 
Millions of Dollars
 
September 30
2019

 
December 31
2018

 
 
 
 
Crude oil and petroleum products
$
5,208

 
3,238

Materials and supplies
313

 
305

 
$
5,521

 
3,543




Inventories valued on the last-in, first-out (LIFO) basis totaled $5,103 million and $3,123 million at September 30, 2019, and December 31, 2018, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $4.4 billion and $2.9 billion at September 30, 2019, and December 31, 2018, respectively.



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Note 6—Investments, Loans and Long-Term Receivables

Equity Investments

Summarized 100% financial information for Chevron Phillips Chemical Company LLC (CPChem) was as follows:
 
 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
Revenues
$
2,369

3,195

 
7,209

8,773

Income before income taxes
475

552

 
1,522

1,819

Net income
456

531

 
1,464

1,766




DCP Midstream, LLC (DCP Midstream)
The fair value of our investment in DCP Midstream depends on the market value of DCP Midstream’s general partner interest in DCP Midstream, LP (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.  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 on our consolidated statement of income and results in our investment in DCP Midstream having a book value of $1,358 million at September 30, 2019. See Note 13—Fair Value Measurements, for additional information on the techniques used to determine the fair value of our investment in DCP Midstream.

Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of $2,500 million aggregate principal amount of unsecured senior notes. 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 LP (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, LLC (Gray Oak)
In February 2019, Gray Oak Holdings LLC (Holdings LLC), a consolidated subsidiary of Phillips 66 Partners, transferred a 10% ownership interest in Gray Oak to a third party that exercised a purchase option, for proceeds of $81 million. This transfer was accounted for as a sale and resulted in a decrease in Holdings LLC’s ownership interest in Gray Oak from 75% to 65% and the recognition of an immaterial gain. The proceeds received from this sale are presented as an investing cash inflow in the “Proceeds from asset dispositions” line on our consolidated statement of cash flows. At September 30, 2019, Phillips 66 Partners’ effective ownership interest in the Gray Oak Pipeline was 42.25%.


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In June 2019, Gray Oak entered into a third-party term loan facility with an initial borrowing capacity of $1,230 million, which was increased in July 2019 to $1,317 million. 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 up to the total outstanding loan amount. Under the agreement, Phillips 66 Partners’ maximum potential amount of future obligations is $556 million, plus any accrued interest and associated fees, which would be required if the term loan facility is fully utilized and Gray Oak defaults on its obligations. At September 30, 2019, Gray Oak had outstanding borrowings of $904 million, and Phillips 66 Partners’ 42.25% proportionate exposure under the equity contribution agreement was $382 million. The net proceeds from the term loan were used by Gray Oak for construction of the Gray Oak Pipeline and repayment of amounts borrowed under a related party loan agreement that Phillips 66 Partners and its co-venturers executed in March 2019 and terminated upon the repayment by Gray Oak in June. The total related party loan to and repayment received from Gray Oak was $95 million.

At September 30, 2019, Phillips 66 Partners’ maximum exposure to loss was $1,130 million, which represented the book value of the investment in Gray Oak of $748 million and the term loan guarantee of $382 million. See Note 21—Phillips 66 Partners LP, for additional information regarding Phillips 66 Partners’ ownership in Holdings LLC and Gray Oak.

Phillips 66 Partners accounts for the investment in Gray Oak under the equity method because it does not have sufficient voting rights over key governance provisions to assert control over Gray Oak. Gray Oak is considered a variable interest entity (VIE) because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. Phillips 66 Partners has determined it is not the primary beneficiary because it and its co-venturers jointly direct the activities of Gray Oak that most significantly impact Gray Oak’s economic performance.

OnCue Holdings, LLC (OnCue)
We hold a 50% interest in OnCue, a joint venture that owns and operates retail convenience stores. We fully guaranteed various debt agreements of OnCue and our co-venturer did not participate in the guarantees. This entity is considered a VIE because our debt guarantees resulted in OnCue not being exposed to all potential losses. We have determined we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact OnCue’s economic performance. At September 30, 2019, our maximum exposure to loss was $139 million, which represented the book value of our investment in OnCue of $76 million and guaranteed debt obligations of $63 million.


Note 7—Properties, Plants and Equipment

Our gross investment in properties, plants and equipment (PP&E) and the associated accumulated depreciation and amortization (Accum. D&A) balances were as follows:

 
Millions of Dollars
 
September 30, 2019
 
December 31, 2018
 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
 
 
 
 
 
 
 
 
 
 
 
Midstream
$
10,759

 
2,316

 
8,443

 
9,663

 
2,100

 
7,563

Chemicals

 

 

 

 

 

Refining
23,189

 
10,084

 
13,105

 
22,640

 
9,531

 
13,109

Marketing and Specialties
1,656

 
927

 
729

 
1,671

 
926

 
745

Corporate and Other
1,309

 
632

 
677

 
1,223

 
622

 
601

 
$
36,913

 
13,959

 
22,954

 
35,197

 
13,179

 
22,018





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Note 8—Earnings Per Share

The numerator of basic earnings per share (EPS) is net income attributable to Phillips 66, reduced by noncancelable dividends paid on unvested share-based employee awards during the vesting period (participating securities). The denominator of basic EPS is the sum of the daily weighted-average number of common shares outstanding during the periods presented and fully vested stock and unit awards that have not yet been issued as common stock. The numerator of diluted EPS is also based on net income attributable to Phillips 66, which is reduced only by dividend equivalents paid on participating securities for which the dividends are more dilutive than the participation of the awards in the earnings of the periods presented. To the extent unvested stock, unit or option awards and vested unexercised stock options are dilutive, they are included with the weighted-average common shares outstanding in the denominator. Treasury stock is excluded from the denominator in both basic and diluted EPS.
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019
 
2018
 
2019
 
2018
 
Basic

Diluted

 
Basic

Diluted

 
Basic

Diluted

 
Basic

Diluted

Amounts attributed to Phillips 66 Common Stockholders (millions):
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Phillips 66
$
712

712

 
1,492

1,492

 
2,340

2,340

 
3,355

3,355

Income allocated to participating securities
(2
)
(1
)
 
(1
)

 
(5
)
(1
)
 
(4
)

Net income available to common stockholders
$
710

711


1,491

1,492

 
2,335

2,339


3,351

3,355

 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (thousands):
446,498

449,005

 
463,002

466,109

 
450,836

453,398

 
470,471

473,760

Effect of share-based compensation
2,507

1,996

 
3,107

3,331

 
2,562

2,412

 
3,289

3,460

Weighted-average common shares outstanding—EPS
449,005

451,001

 
466,109

469,440

 
453,398

455,810

 
473,760

477,220

 
 
 
 
 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock (dollars)
$
1.58

1.58

 
3.20

3.18

 
5.15

5.13

 
7.07

7.03





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Note 9—Debt

2019 Activities

Debt Issuances and Repayments
On September 6, 2019, Phillips 66 Partners closed on a public offering of $900 million aggregate principal amount of unsecured notes consisting of:

$300 million aggregate principal amount of 2.450% Senior Notes due December 15, 2024.
$600 million aggregate principal amount of 3.150% Senior Notes due December 15, 2029.

Interest on each series of senior notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2020. On September 13, 2019, Phillips 66 Partners used a portion of the net proceeds to repay the $400 million outstanding principal balance of its term loans due March 2020, and on October 15, 2019, Phillips 66 Partners used a portion of the net proceeds to repay the $300 million outstanding principal balance of its 2.646% Senior Notes due February 2020.

Credit Agreement Amendment and Restatement
On July 30, 2019, we amended and restated our 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 $5 billion with an option to increase the overall capacity to $6 billion, subject to certain conditions. 

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.

Phillips 66’s revolving credit facility had no outstanding balance at September 30, 2019, and December 31, 2018. Phillips 66 Partners’ revolving credit facility had no amount directly drawn at September 30, 2019, compared with borrowings of $125 million at December 31, 2018.

2018 Activities

Debt Issuances and Repayments
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 London Interbank Offered Rate (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.

These notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary. Phillips 66 used the net proceeds from the issuance of these notes and cash on hand to repay commercial paper borrowings during the three months ended March 31, 2018, and for general corporate purposes. The commercial paper borrowings during the three months ended March 31, 2018, were primarily used to fund a Stock Purchase and Sale Agreement (Purchase Agreement). See Note 17—Treasury Stock, for additional information.

In June 2018, Phillips 66 repaid $250 million of the $450 million outstanding under its three-year term loan facility due April 2020.

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Note 10—Guarantees

At September 30, 2019, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantees and expect future performance to be either immaterial or have only a remote chance of occurrence.

Guarantees of Joint Venture Obligations
In June 2019, Phillips 66 Partners issued a guarantee for 42.25% of Gray Oak’s third-party term loan facility. See Note 6—Investments, Loans and Long-Term Receivables, for additional information.

In addition, at September 30, 2019, we had other guarantees outstanding for our portion of certain joint venture debt obligations, which have remaining terms of up to six years. The maximum potential amount of future payments to third parties under these guarantees was approximately $135 million. Payment would be required if a joint venture defaults on its obligations.

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 September 30, 2019. The operating lease term ends in June 2021 and provides us the option, at the end of the lease term, 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 future exposures totaling $344 million at September 30, 2019, which have remaining terms of up to five years.

Indemnifications
Over the years, we entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnification. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses and employee claims, as well as real estate indemnity against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. At September 30, 2019, and December 31, 2018, the carrying amount of recorded indemnifications was $159 million and $171 million, respectively.

We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information to support that the liability was essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. At September 30, 2019, and December 31, 2018, environmental accruals for known contamination of $110 million and $101 million, respectively, were included in the carrying amount of recorded indemnifications. These environmental accruals were primarily included in the “Asset retirement obligations and accrued environmental costs” line on our consolidated balance sheet. For additional information about environmental liabilities, see Note 11—Contingencies and Commitments.

Indemnification and Release Agreement
In 2012, in connection with our separation from ConocoPhillips, we entered into the Indemnification and Release Agreement. This agreement governs the treatment between ConocoPhillips and us of matters relating to indemnification, insurance, litigation responsibility and management, and litigation document sharing and cooperation arising in connection with the separation. Generally, the agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of ConocoPhillips’ business with ConocoPhillips. The agreement also establishes procedures for handling claims subject to indemnification and related matters.



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Note 11—Contingencies and Commitments

A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

Environmental
We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using information available at the time. We measure estimates and base contingent liabilities on currently available facts, existing technology and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring contingent environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.

Although liability for environmental remediation costs is generally joint and several for federal sites and frequently so for state sites, we are usually only one of many companies alleged to have liability at a particular site. Due to such joint and several liabilities, we could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit, although some of the indemnifications are subject to dollar and time limits.

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At September 30, 2019, and December 31, 2018, our total environmental accrual was $447 million for both periods. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.


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Table of Contents

Legal Proceedings
Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required.

Other Contingencies
We have contingent liabilities not associated with financing arrangements resulting from throughput agreements with pipeline and processing companies. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized.

At September 30, 2019, we had performance obligations secured by letters of credit and bank guarantees of $644 million related to various purchase and other commitments incident to the ordinary conduct of business.


Note 12—Derivatives and Financial Instruments

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

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

Commodity Derivative Contracts—We sell into or receive supply from the worldwide crude oil, refined petroleum product, NGL, natural gas and electric power markets, exposing our revenues, purchases, cost of operating activities and cash flows to fluctuations in the prices for these commodities. Generally, our policy is to remain exposed to the market prices of commodities; however, we use futures, forwards, swaps and options in various markets to balance physical systems, meet customer needs, manage price exposures on specific transactions, and do a limited amount of trading not directly related to our physical business, all of which may reduce our exposure to fluctuations in market prices. We also use the market knowledge gained from these activities to capture market opportunities such as moving physical commodities to more profitable locations, storing commodities to capture seasonal or time premiums, and blending commodities to capture quality upgrades.

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The following table indicates the consolidated balance sheet line items that include the fair values of commodity derivative assets and liabilities. The balances in the following table are presented on a gross basis, before the effects of counterparty and collateral netting. However, we have elected to present our commodity derivative assets and liabilities with the same counterparty on a net basis on our consolidated balance sheet when the legal right of offset exists.

 
Millions of Dollars
 
September 30, 2019
 
December 31, 2018
 
Commodity Derivatives
Effect of Collateral Netting

Net Carrying Value Presented on the Balance Sheet

 
Commodity Derivatives
Effect of Collateral Netting

Net Carrying Value Presented on the Balance Sheet

 
Assets

Liabilities

 
Assets

Liabilities

 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
$
1,018

(856
)
(5
)
157

 
1,257

(1,070
)
(89
)
98

Other assets
4

(1
)

3

 
2



2

Liabilities
 
 
 
 
 
 
 
 
 
Other accruals
454

(542
)
70

(18
)
 

(23
)

(23
)
Other liabilities and deferred credits
35

(37
)

(2
)
 
5

(7
)

(2
)
Total
$
1,511

(1,436
)
65

140

 
1,264

(1,100
)
(89
)
75


 

At September 30, 2019, and December 31, 2018, there was no material cash collateral received or paid that was not offset on our consolidated balance sheet.

The realized and unrealized gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of income, were:
 
 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
Sales and other operating revenues
$
71

(98
)
 
(89
)
(227
)
Other income
20

3

 
33

(17
)
Purchased crude oil and products
60

(138
)
 
(41
)
(311
)
Net gain (loss) from commodity derivative activity
$
151

(233
)
 
(97
)
(555
)


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The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from non-derivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was at least 97% at September 30, 2019, and December 31, 2018.

 
Open Position
Long / (Short)
 
September 30
2019

 
December 31
2018

Commodity
 
 
 
Crude oil, refined petroleum products and NGL (millions of barrels)
(35
)
 
(17
)



Interest Rate Derivative Contracts—In 2016, we entered into interest rate swaps to hedge the variability of lease payments on our headquarters facility. These monthly lease payments vary based on monthly changes in the one-month LIBOR and changes, if any, in our credit rating over the five-year term of the lease. The pay-fixed, receive-floating interest rate swaps have an aggregate notional value of $650 million and end in April 2021. We have designated these swaps as cash flow hedges.

The aggregate net fair value of these swaps, which is included in the “Prepaid expenses and other current assets” and “Other assets” lines on our consolidated balance sheet, totaled $1 million and $15 million at September 30, 2019, and December 31, 2018, respectively.

We report the mark-to-market gains or losses on our interest rate swaps designated as highly effective cash flow hedges as a component of other comprehensive income (loss), and reclassify such gains and losses into earnings in the same period during which the hedged transaction affects earnings. Net realized gains and losses from settlements of the swaps were immaterial for the three and nine months ended September 30, 2019 and 2018.

We currently estimate that pre-tax gains of $1 million will be reclassified from accumulated other comprehensive loss into general and administrative expenses during the next 12 months as the hedged transactions settle; however, the actual amounts that will be reclassified will vary based on changes in interest rates.

Credit Risk from Derivative Instruments
The credit risk from our derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements, typically on a daily basis, until settled.

Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if our credit ratings fall below investment grade. Cash is the primary collateral in all contracts; however, many contracts also permit us to post letters of credit as collateral.

The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were immaterial at September 30, 2019, and December 31, 2018.



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Note 13—Fair Value Measurements

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

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

We classify the fair value of an asset or liability based on the significance of its observable or unobservable inputs to the measurement. However, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable. For the nine months ended September 30, 2019, derivative assets with an aggregate value of $117 million and derivative liabilities with an aggregate value of $82 million were transferred to Level 1 from Level 2, as measured from the beginning of the reporting period. The measurements were reclassified within the fair value hierarchy due to the availability of unadjusted quoted prices from an active market.

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

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

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Table of Contents

The following tables display the fair value hierarchy for our financial assets and liabilities either accounted for or disclosed at fair value on a recurring basis. These values are determined by treating each contract as the fundamental unit of account; therefore, derivative assets and liabilities with the same counterparty are shown on a gross basis in the hierarchy sections of these tables, before the effects of counterparty and collateral netting. The following tables also reflect the effect of netting derivative assets and liabilities with the same counterparty for which we have the legal right of offset and collateral netting.

The carrying values and fair values by hierarchy of our financial assets and liabilities, either carried or disclosed at fair value, including any effects of counterparty and collateral netting, were:

 
Millions of Dollars
 
September 30, 2019
 
Fair Value Hierarchy
 
Total Fair Value of Gross Assets & Liabilities

Effect of Counterparty Netting

Effect of Collateral Netting

Difference in Carrying Value and Fair Value

Net Carrying Value Presented on the Balance Sheet

 
Level 1

 
Level 2

 
Level 3

Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
788

 
657

 

 
1,445

(1,346
)
(5
)

94

OTC instruments

 
1

 

 
1




1

Physical forward contracts

 
64

 
1

 
65




65

Interest rate derivatives

 
1

 

 
1




1

Rabbi trust assets
122

 

 

 
122

N/A

N/A


122

 
$
910

 
723

 
1

 
1,634

(1,346
)
(5
)

283

 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
748

 
669

 

 
1,417

(1,346
)
(70
)

1

OTC instruments

 
3

 

 
3




3

Physical forward contracts

 
16

 

 
16




16

Floating-rate debt

 
1,075

 

 
1,075

N/A

N/A


1,075

Fixed-rate debt, excluding capital leases

 
12,050

 

 
12,050

N/A

N/A

(1,377
)
10,673

 
$
748

 
13,813

 

 
14,561

(1,346
)
(70
)
(1,377
)
11,768






20

Table of Contents

 
Millions of Dollars
 
December 31, 2018
 
Fair Value Hierarchy
 
Total Fair Value of Gross Assets & Liabilities

Effect of Counterparty Netting

Effect of Collateral Netting

Difference in Carrying Value and Fair Value

Net Carrying Value Presented on the Balance Sheet

 
Level 1

 
Level 2

 
Level 3

 
Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
674

 
547

 

 
1,221

(1,075
)
(89
)

57

Physical forward contracts

 
39

 
4

 
43




43

Interest rate derivatives

 
15

 

 
15




15

Rabbi trust assets
104

 

 

 
104

N/A

N/A


104

 
$
778

 
601

 
4

 
1,383

(1,075
)
(89
)

219

 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
605

 
472

 

 
1,077

(1,075
)


2

Physical forward contracts

 
20

 

 
20




20

OTC instruments

 
3

 

 
3




3

Floating-rate debt

 
1,200

 

 
1,200

N/A

N/A


1,200

Fixed-rate debt, excluding capital leases

 
9,727

 

 
9,727

N/A

N/A

49

9,776

 
$
605

 
11,422

 

 
12,027

(1,075
)

49

11,001



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

Nonrecurring Fair Value Measurements
The nonrecurring fair value measurement used to record an impairment of our DCP Midstream investment consisted of two valuations: 

The fair value of our share of DCP Midstream’s limited partner interest in DCP Partners was estimated based on an average market price of DCP Partners’ common units for a 20 day trading period encompassing September 30, 2019.
The fair value of our share of DCP Midstream’s general partner interest in DCP Partners was estimated using two primary inputs: 1) estimated future cash flows of distributions attributable to the incentive distribution rights (IDRs) from DCP Partners, and 2) a multiple of those cash flows based on internal estimates and observation of IDR conversion transactions by other master limited partnerships.

Taken together, we concluded the two valuations above resulted in an overall Level 3 nonrecurring fair value measurement. See Note 6—Investments, Loans and Long-Term Receivables, for additional information on the impairment.


21

Table of Contents

Note 14—Leases

We lease marine vessels, tugboats, barges, pipelines, storage tanks, railcars, service station sites, office buildings, corporate aircraft, land and other facilities and equipment. In determining whether an agreement contains a lease, we consider our ability to control the asset and whether there are limitations on our control through third-party participation or vendor substitution rights. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices, as well as renewal options and/or options to purchase the leased property. Renewal options have been included only when reasonably certain of exercise. There are no significant restrictions imposed on us in our lease agreements with regards to dividend payments, asset dispositions or borrowing ability. Certain leases have residual value guarantees, which may require additional payments at the end of the lease term if future fair values decline below contractual lease balances.

In our implementation of ASU No. 2016-02, we elected to discount lease obligations using our incremental borrowing rate. Furthermore, we elected to separate costs for lease and service components for contracts involving the following asset types: marine vessels, tugboats, barges and consignment service stations. For these contracts, we allocate the consideration payable between the lease and service components using the relative standalone prices of each component. For contracts involving all other asset types, we elected the practical expedient to account for the lease and service components on a combined basis. Our right-of-way agreements in effect prior to January 1, 2019, were not accounted for as leases as they were not initially determined to be leases at their commencement dates. However, modifications to these agreements or new agreements will be assessed and accounted for accordingly under ASU No. 2016-02. For short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that is reasonably certain to exercise, we elected to not recognize the ROU asset and corresponding lease liability on our consolidated balance sheet.

The following table indicates the consolidated balance sheet line items that include the ROU assets and lease liabilities for our finance and operating leases:
 
Millions of Dollars
 
September 30, 2019
 
Finance
Leases

 
Operating
Leases

Right-of-Use Assets
 
 
 
Net properties, plants and equipment
$
177

 

Other assets

 
1,338

Total right-of-use assets
$
177

 
1,338

 
 
 
 
Lease Liabilities
 
 
 
Short-term debt
$
13

 

Other accruals

 
468

Long-term debt
153

 

Other liabilities and deferred credits

 
820

Total lease liabilities
$
166

 
1,288





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Table of Contents

Future minimum lease payments at September 30, 2019, for finance and operating lease liabilities were:

 
Millions of Dollars
 
Finance
Leases

 
Operating
Leases

 
 
 
 
Remainder of 2019
$
4

 
126

2020
19

 
469

2021
18

 
245

2022
15

 
157

2023
15

 
102

Remaining years
135

 
355

Future minimum lease payments
206

 
1,454

Amount representing interest or discounts
(40
)
 
(166
)
Total lease liabilities
$
166

 
1,288




Our finance lease liabilities relate primarily to an oil terminal in the United Kingdom. The lease liability for this finance lease is subject to foreign currency translation adjustments each reporting period.

Components of net lease cost for the three and nine months ended September 30, 2019, were:

 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

 
2019

Finance lease cost
 
 
 
Amortization of right-of-use assets
$
5

 
15

Interest on lease liabilities
2

 
5

Total finance lease cost
7

 
20

Operating lease cost
126

 
386

Short-term lease cost
29

 
93

Variable lease cost
6

 
18

Sublease income
(4
)
 
(14
)
Total net lease cost
$
164

 
503




Cash paid for amounts included in the measurement of our lease liabilities for the nine months ended September 30, 2019, were:

 
Millions of Dollars

 
 
Operating cash outflows—finance leases
$
5

Operating cash outflows—operating leases
397

Financing cash outflows—finance leases
18




During the nine months ended September 30, 2019, we recorded noncash ROU assets and corresponding operating lease liabilities totaling $259 million related to new and modified lease agreements.


23

Table of Contents

At September 30, 2019, the weighted-average remaining lease term and discount rate for our lease liabilities were:

Weighted-average remaining lease term—finance leases (years)
12.7

Weighted-average remaining lease term—operating leases (years)
5.5

 
 
Weighted-average discount rate—finance leases (percent)
3.7
%
Weighted-average discount rate—operating leases (percent)
3.9




Note 15—Pension and Postretirement Plans

The components of net periodic benefit cost for the three and nine months ended September 30, 2019 and 2018, were as follows:
 
Millions of Dollars
 
Pension Benefits
 
Other Benefits
 
2019
 
2018
 
2019

 
2018

 
U.S.

 
Int’l.

 
U.S.

 
Int’l.

 
 
 
 
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
32

 
5

 
34

 
5

 
1

 
2

Interest cost
27

 
6

 
26

 
6

 
2

 
1

Expected return on plan assets
(36
)
 
(10
)
 
(42
)
 
(11
)
 

 

Amortization of prior service credit

 

 

 

 

 

Recognized net actuarial loss
14

 
2

 
14

 
5

 

 

Settlements
1

 

 
49

 

 

 

Net periodic benefit cost*
$
38


3


81


5


3


3

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
95

 
17

 
102

 
22

 
4

 
5

Interest cost
81

 
19

 
78

 
21

 
6

 
5

Expected return on plan assets
(107
)
 
(33
)
 
(127
)
 
(35
)
 

 

Amortization of prior service credit

 

 

 
(1
)
 
(1
)
 
(1
)
Recognized net actuarial loss
40

 
5

 
44

 
15

 

 

Settlements
7

 

 
54

 

 

 

Net periodic benefit cost*
$
116

 
8

 
151

 
22

 
9

 
9

* Included in the “Operating expenses” and “Selling, general and administrative expenses” lines on our consolidated statement of income.



During the nine months ended September 30, 2019, we contributed $50 million to our U.S. pension and other postretirement benefit plans and $21 million to our international pension plans. We currently expect to make additional contributions of approximately $8 million to our U.S. pension and other postretirement benefit plans and $7 million to our international pension plans during the remainder of 2019.

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Table of Contents

Note 16—Accumulated Other Comprehensive Loss

Changes in the balances of each component of accumulated other comprehensive loss were as follows:
 
Millions of Dollars
 
Defined Benefit Plans

 
Foreign Currency Translation

 
Hedging

 
Accumulated Other Comprehensive Loss

 
 
 
 
 
 
 
 
December 31, 2018
$
(472
)
 
(228
)
 
8

 
(692
)
Other comprehensive income (loss) before reclassifications
5

 
(124
)
 
(6
)
 
(125
)
Amounts reclassified from accumulated other comprehensive loss
 
 
 
 
 
 
 
Defined benefit plans*
 
 
 
 
 
 
 
Amortization of net actuarial loss, prior service credit and settlements
40

 

 

 
40

Foreign currency translation

 

 

 

Hedging

 

 
(5
)
 
(5
)
Net current period other comprehensive income (loss)
45

 
(124
)
 
(11
)
 
(90
)
Income taxes reclassified to retained earnings**
(93
)
 
2

 
2

 
(89
)
September 30, 2019
$
(520
)
 
(350
)
 
(1
)
 
(871
)
 
 
 
 
 
 
 
 
December 31, 2017
$
(598
)
 
(26
)
 
7

 
(617
)
Other comprehensive income (loss) before reclassifications
10

 
(113
)
 
9

 
(94
)
Amounts reclassified from accumulated other comprehensive loss
 
 
 
 
 
 
 
Defined benefit plans*
 
 
 
 
 
 
 
Amortization of net actuarial loss, prior service credit and settlements
84

 

 

 
84

Foreign currency translation

 
(10
)
 

 
(10
)
Hedging

 

 
(2
)
 
(2
)
Net current period other comprehensive income (loss)
94

 
(123
)
 
7

 
(22
)
September 30, 2018
$
(504
)
 
(149
)
 
14

 
(639
)
* Included in the computation of net periodic benefit cost. See Note 15—Pension and Postretirement Plans, for additional information.
** As of January 1, 2019, stranded income taxes related to the enactment of the Tax Act in December 2017 were reclassified to retained earnings upon adoption of ASU No. 2018-02. See Note 2—Changes in Accounting Principles, for additional information on our adoption of this ASU.



Note 17—Treasury Stock

In February 2018, we entered into a Purchase Agreement with Berkshire Hathaway Inc. and National Indemnity Company, a wholly owned subsidiary of Berkshire Hathaway Inc., to repurchase 35,000,000 shares of Phillips 66 common stock for an aggregate purchase price of $3,280 million. Pursuant to the Purchase Agreement, the purchase price per share of $93.725 was based on the volume-weighted-average price of our common stock on the New York Stock Exchange on February 13, 2018. The transaction closed in February 2018. We funded the repurchase with cash of $1,880 million and borrowings of $1,400 million under our commercial paper program. These borrowings were subsequently refinanced through a public offering of senior notes in March 2018. This specific share repurchase transaction was separately authorized by our Board of Directors and therefore did not impact previously announced authorizations to repurchase shares of Phillips 66 common stock under our share repurchase programs.

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.


25

Table of Contents

Note 18—Related Party Transactions

Significant transactions with related parties were:

 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
Operating revenues and other income (a)
$
756

955

 
2,235

2,717

Purchases (b)
2,842

3,667

 
8,770

9,534

Operating expenses and selling, general and administrative expenses (c)
8

12

 
25

44


(a)
We sold NGL and other petrochemical feedstocks, along with solvents, to CPChem, gas oil and hydrogen feedstocks to Excel Paralubes (Excel), and refined petroleum products to OnCue. We also sold certain feedstocks and intermediate products to WRB and acted as agent for WRB in supplying crude oil and other feedstocks for a fee. In addition, we charged several of our affiliates, including CPChem, for the use of common facilities, such as steam generators, waste and water treaters and warehouse facilities.

(b)
We purchased crude oil, refined petroleum products and NGL from WRB and also acted as agent for WRB in distributing solvents. We also purchased natural gas and NGL from DCP Midstream and CPChem, as well as other feedstocks from various affiliates, for use in our refinery and fractionation processes. In addition, we purchased base oils and fuel products from Excel for use in our specialty and refining businesses. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline affiliates for transporting crude oil, refined petroleum products and NGL.
 
(c)
We paid utility and processing fees to various affiliates.


26

Table of Contents

Note 19—Segment Disclosures and Related Information

During the fourth quarter of 2018, the segment performance measure used by our chief executive officer to assess performance and allocate resources was changed from “net income” to “income before income taxes.”  Prior-period segment information has been recast to conform to the current presentation.

Our operating segments are:

1)
Midstream—Provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, processing and marketing services, mainly in the United States. The Midstream segment includes our master limited partnership (MLP), Phillips 66 Partners, as well as our 50% equity investment in DCP Midstream.

2)
Chemicals—Consists of our 50% equity investment in CPChem, which manufactures and markets petrochemicals and plastics on a worldwide basis.

3)
Refining—Refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 13 refineries in the United States and Europe.

4)
Marketing and Specialties—Purchases for resale and markets refined petroleum products, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products, as well as power generation operations.

Corporate and Other includes general corporate overhead, interest expense, our investment in new technologies and various other corporate activities. Corporate assets include all cash, cash equivalents and income tax related assets.

Intersegment sales are at prices that we believe approximate market.

27

Table of Contents

Analysis of Results by Operating Segment

 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

Sales and Other Operating Revenues*
 
 
 
 
 
Midstream
 
 
 
 
 
Total sales
$
1,602

2,287

 
5,208

6,234

Intersegment eliminations
(482
)
(524
)
 
(1,526
)
(1,555
)
Total Midstream
1,120

1,763

 
3,682

4,679

Chemicals
1

1

 
3

4

Refining
 
 
 
 
 
Total sales
19,591

21,949

 
56,839

61,707

Intersegment eliminations
(11,452
)
(12,807
)
 
(34,008
)
(37,027
)
Total Refining
8,139

9,142

 
22,831

24,680

Marketing and Specialties
 
 
 
 
 
Total sales
18,535

19,332

 
53,464

54,471

Intersegment eliminations
(584
)
(457
)
 
(1,833
)
(1,492
)
Total Marketing and Specialties
17,951

18,875

 
51,631

52,979

Corporate and Other
7

7

 
21

21

Consolidated sales and other operating revenues
$
27,218

29,788

 
78,168

82,363

* See Note 3—Sales and Other Operating Revenues, for further details on our disaggregated sales and other operating revenues.
 
 
 
 
 
 
Income (Loss) Before Income Taxes
 
 
 
 
 
Midstream
$
(460
)
284

 
279

802

Chemicals
227

263

 
729

873

Refining
856

1,232

 
1,641

2,534

Marketing and Specialties
498

423

 
1,056

968

Corporate and Other
(178
)
(227
)
 
(593
)
(650
)
Consolidated income before income taxes
$
943

1,975

 
3,112

4,527




 
Millions of Dollars
 
September 30
2019

 
December 31
2018

Total Assets
 
 
 
Midstream
$
15,209

 
14,329

Chemicals
6,269

 
6,235

Refining
25,280

 
23,230

Marketing and Specialties
8,338

 
6,572

Corporate and Other
3,645

 
3,936

Consolidated total assets
$
58,741

 
54,302





28

Table of Contents

Note 20—Income Taxes

Our effective income tax rate for the three and nine months ended September 30, 2019, was 16% and 18%, respectively, compared with 21% for the corresponding periods of 2018. The decrease in our effective tax rate for the three months ended September 30, 2019, compared with the three months ended September 30, 2018, was primarily attributable to the impact of our foreign operations. The decrease in our effective tax rate for the nine months ended September 30, 2019, compared with the nine months ended September 30, 2018, was primarily attributable to an income tax benefit of $45 million recorded in the second quarter in connection with the Internal Revenue Service’s issuance of additional guidance related to the calculation of the one-time deemed repatriation tax on foreign-source earnings that were previously tax deferred, as well as the impact of our foreign operations.

The effective income tax rate for the three and nine months ended September 30, 2019, varies from the U.S. federal statutory income tax rate of 21%, primarily due to the impact of our foreign operations and income attributable to noncontrolling interests, partially offset by state income tax expense. For the nine months ended September 30, 2019, there was an additional reduction in the effective tax rate related to the aforementioned $45 million income tax benefit.


Note 21—Phillips 66 Partners LP

Phillips 66 Partners, headquartered in Houston, Texas, is a publicly traded MLP formed in 2013 to own, operate, develop and acquire primarily fee-based midstream assets. Phillips 66 Partners’ operations consist of crude oil, refined petroleum product and NGL transportation, terminaling, processing and storage assets.
 
We consolidate Phillips 66 Partners because we determined it is a VIE of which we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as well as the ability to direct the activities that most significantly impact its economic performance. As a result of this consolidation, the public common and perpetual convertible preferred unitholders’ ownership interests in Phillips 66 Partners are reflected as noncontrolling interests in our financial statements. At September 30, 2019, we owned a 75% limited partner interest in Phillips 66 Partners, while the public owned a 25% limited partner interest and 13.8 million perpetual convertible preferred units.

The most significant assets of Phillips 66 Partners that are available to settle only its obligations, along with its most significant liabilities for which its creditors do not have recourse to Phillips 66’s general credit, were:

 
Millions of Dollars
 
September 30
2019

 
December 31
2018

 
 
 
 
Cash and cash equivalents
$
655

 
1

Equity investments*
2,921

 
2,448

Net properties, plants and equipment
3,258

 
3,052

Short-term debt
325

 
50

Long-term debt
3,490

 
2,998

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



29

Table of Contents

2019 Activities
For the three and nine months ended September 30, 2019, on a settlement-date basis, Phillips 66 Partners generated net proceeds of $91 million and $133 million, respectively, from common units issued under its continuous offering of common units, or at-the-market (ATM) programs. For the three and nine months ended September 30, 2018, Phillips 66 Partners generated net proceeds of $47 million and $114 million, respectively, under its ATM programs.

Phillips 66 Partners holds an investment in the Gray Oak Pipeline through Holdings LLC. In December 2018, a third party exercised its option to acquire a 35% interest in Holdings LLC. Because Holdings LLC’s sole asset was its ownership interest in Gray Oak, which is considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in Holdings LLC during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP. As such, the contributions the third party is making to Holdings LLC to cover its share of previously incurred and future construction costs plus a premium to Phillips 66 Partners are reflected as a long-term obligation in the “Other liabilities and deferred credits” line on our consolidated balance sheet and financing cash inflows in the “Other” line on our consolidated statement of cash flows. After construction of the Gray Oak Pipeline is fully completed, these restrictions expire, and the sale will be recognized under GAAP. Phillips 66 Partners will continue to control and consolidate Holdings LLC after sale recognition, and therefore the third party’s 35% interest will be recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet at that time. Also at that time, the premium paid will be recharacterized from a long-term obligation to a gain in our consolidated statement of income. For the nine months ended September 30, 2019, the third party contributed an aggregate of $341 million into Holdings LLC, which Holdings LLC used to fund its portion of Gray Oak’s cash calls. See Note 6—Investments, Loans and Long-Term Receivables, for further discussion regarding Phillips 66 Partners’ investment in Gray Oak.

Restructuring Transaction
On August 1, 2019, Phillips 66 Partners completed a restructuring transaction to eliminate the IDRs held by us and convert our 2% economic general partner interest into a non-economic general partner interest in exchange for 101 million Phillips 66 Partners’ common units.  As a result of the restructuring transaction, the balance of “Noncontrolling interests” on our consolidated balance sheet decreased $373 million, with a $275 million increase to “Capital in excess of par,” a $91 million increase in “Deferred income taxes” and $7 million of transaction costs. No distributions will be made on the general partner interest after August 1, 2019. At September 30, 2019, we owned 170 million Phillips 66 Partners’ common units, representing 75% of Phillips 66 Partners’ outstanding common units. 


Note 22—Condensed Consolidating Financial Information

Phillips 66 has senior notes outstanding, the payment obligations of which are fully and unconditionally guaranteed by Phillips 66 Company, a 100% owned subsidiary. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:

Phillips 66 and Phillips 66 Company (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
All other nonguarantor subsidiaries.
The consolidating adjustments necessary to present Phillips 66’s results on a consolidated basis.

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.

30

Table of Contents

 
Millions of Dollars
 
Three Months Ended September 30, 2019
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

20,947

6,271


27,218

Equity in earnings of affiliates
781

214

147

(643
)
499

Net gain on dispositions

1

17


18

Other income

25

11


36

Intercompany revenues

837

3,704

(4,541
)

Total Revenues and Other Income
781

22,024

10,150

(5,184
)
27,771

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

19,383

8,866

(4,443
)
23,806

Operating expenses

959

264

(17
)
1,206

Selling, general and administrative expenses
1

324

94

(3
)
416

Depreciation and amortization

230

106


336

Impairments


853


853

Taxes other than income taxes

77

28


105

Accretion on discounted liabilities

4

2


6

Interest and debt expense
85

35

67

(78
)
109

Foreign currency transaction gains


(9
)

(9
)
Total Costs and Expenses
86

21,012

10,271

(4,541
)
26,828

Income (loss) before income taxes
695

1,012

(121
)
(643
)
943

Income tax expense (benefit)
(17
)
231

(64
)

150

Net Income (Loss)
712

781

(57
)
(643
)
793

Less: net income attributable to noncontrolling interests


81


81

Net Income (Loss) Attributable to Phillips 66
$
712

781

(138
)
(643
)
712

 
 
 
 
 
 
Comprehensive Income (Loss)
$
608

677

(170
)
(426
)
689


31

Table of Contents

 
Millions of Dollars
 
Three Months Ended September 30, 2018
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

22,866

6,922


29,788

Equity in earnings of affiliates
1,573

1,160

186

(2,140
)
779

Net gain on dispositions


1


1

Other income

23

1


24

Intercompany revenues

1,091

4,371

(5,462
)

Total Revenues and Other Income
1,573

25,140

11,481

(7,602
)
30,592

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

21,656

10,095

(5,366
)
26,385

Operating expenses

946

280

(20
)
1,206

Selling, general and administrative expenses
2

338

103

(3
)
440

Depreciation and amortization

232

114


346

Impairments

1



1

Taxes other than income taxes

84

25


109

Accretion on discounted liabilities

4

1


5

Interest and debt expense
100

36

62

(73
)
125

Total Costs and Expenses
102

23,297

10,680

(5,462
)
28,617

Income before income taxes
1,471

1,843

801

(2,140
)
1,975

Income tax expense (benefit)
(21
)
270

158


407

Net Income
1,492

1,573

643

(2,140
)
1,568

Less: net income attributable to noncontrolling interests


76


76

Net Income Attributable to Phillips 66
$
1,492

1,573

567

(2,140
)
1,492

 
 
 
 
 
 
Comprehensive Income
$
1,533

1,614

635

(2,173
)
1,609



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Millions of Dollars
 
Nine Months Ended September 30, 2019
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

60,060

18,108


78,168

Equity in earnings of affiliates
2,557

1,645

514

(3,053
)
1,663

Net gain on dispositions

1

18


19

Other income

67

30


97

Intercompany revenues

2,720

11,014

(13,734
)

Total Revenues and Other Income
2,557

64,493

29,684

(16,787
)
79,947

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

56,648

26,202

(13,435
)
69,415

Operating expenses

2,876

861

(59
)
3,678

Selling, general and administrative expenses
5

898

295

(8
)
1,190

Depreciation and amortization

686

315


1,001

Impairments

1

855


856

Taxes other than income taxes

242

88


330

Accretion on discounted liabilities

13

4


17

Interest and debt expense
267

108

200

(232
)
343

Foreign currency transaction losses


5


5

Total Costs and Expenses
272

61,472

28,825

(13,734
)
76,835

Income before income taxes
2,285

3,021

859

(3,053
)
3,112

Income tax expense (benefit)
(55
)
464

136


545

Net Income
2,340

2,557

723

(3,053
)
2,567

Less: net income attributable to noncontrolling interests


227


227

Net Income Attributable to Phillips 66
$
2,340

2,557

496

(3,053
)
2,340

 
 
 
 
 
 
Comprehensive Income
$
2,250

2,467

615

(2,855
)
2,477


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Table of Contents

 
Millions of Dollars
 
Nine Months Ended September 30, 2018
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

63,703

18,660


82,363

Equity in earnings of affiliates
3,600

2,638

566

(4,858
)
1,946

Net gain on dispositions

7

11


18

Other income

25

22


47

Intercompany revenues

2,456

11,386

(13,842
)

Total Revenues and Other Income
3,600

68,829

30,645

(18,700
)
84,374

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

59,724

27,113

(13,567
)
73,270

Operating expenses

2,771

875

(51
)
3,595

Selling, general and administrative expenses
6

966

294

(8
)
1,258

Depreciation and amortization

691

328


1,019

Impairments

2

5


7

Taxes other than income taxes

248

80


328

Accretion on discounted liabilities

13

4


17

Interest and debt expense
304

108

187

(216
)
383

Foreign currency transaction gains


(30
)

(30
)
Total Costs and Expenses
310

64,523

28,856

(13,842
)
79,847

Income before income taxes
3,290

4,306

1,789

(4,858
)
4,527

Income tax expense (benefit)
(65
)
706

329


970

Net Income
3,355

3,600

1,460

(4,858
)
3,557

Less: net income attributable to noncontrolling interests


202


202

Net Income Attributable to Phillips 66
$
3,355

3,600

1,258

(4,858
)
3,355

 
 
 
 
 
 
Comprehensive Income
$
3,333

3,578

1,357

(4,733
)
3,535



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Table of Contents

 
Millions of Dollars
 
September 30, 2019
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

576

1,692


2,268

Accounts and notes receivable

5,316

4,106

(2,336
)
7,086

Inventories

3,673

1,848


5,521

Prepaid expenses and other current assets

525

217


742

Total Current Assets

10,090

7,863

(2,336
)
15,617

Investments and long-term receivables
33,126

24,034

9,884

(52,897
)
14,147

Net properties, plants and equipment

13,350

9,604


22,954

Goodwill

2,853

417


3,270

Intangibles

732

140


872

Other assets
12

5,882

729

(4,742
)
1,881

Total Assets
$
33,138

56,941

28,637

(59,975
)
58,741

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
$

6,944

3,765

(2,336
)
8,373

Short-term debt
500

11

331


842

Accrued income and other taxes

672

456


1,128

Employee benefit obligations

569

55


624

Other accruals
133

1,310

262

(589
)
1,116

Total Current Liabilities
633

9,506

4,869

(2,925
)
12,083

Long-term debt
7,433

55

3,595


11,083

Asset retirement obligations and accrued environmental costs

453

164


617

Deferred income taxes

3,761

1,743

(1
)
5,503

Employee benefit obligations

725

180


905

Other liabilities and deferred credits
185

9,448

5,351

(13,526
)
1,458

Total Liabilities
8,251

23,948

15,902

(16,452
)
31,649

Common stock
3,998

25,802

9,239

(35,041
)
3,998

Retained earnings
21,760

8,062

1,662

(9,754
)
21,730

Accumulated other comprehensive loss
(871
)
(871
)
(401
)
1,272

(871
)
Noncontrolling interests


2,235


2,235

Total Liabilities and Equity
$
33,138

56,941

28,637

(59,975
)
58,741




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Table of Contents

 
Millions of Dollars
 
December 31, 2018
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

1,648

1,371


3,019

Accounts and notes receivable
9

4,255

3,202

(1,293
)
6,173

Inventories

2,489

1,054


3,543

Prepaid expenses and other current assets
2

373

99


474

Total Current Assets
11

8,765

5,726

(1,293
)
13,209

Investments and long-term receivables
32,712

22,799

9,829

(50,919
)
14,421

Net properties, plants and equipment

13,218

8,800


22,018

Goodwill

2,853

417


3,270

Intangibles

726

143


869

Other assets
9

335

173

(2
)
515

Total Assets
$
32,732

48,696

25,088

(52,214
)
54,302

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
$

5,415

2,464

(1,293
)
6,586

Short-term debt

11

56


67

Accrued income and other taxes

458

658


1,116

Employee benefit obligations

663

61


724

Other accruals
66

227

149


442

Total Current Liabilities
66

6,774

3,388

(1,293
)
8,935

Long-term debt
7,928

54

3,111


11,093

Asset retirement obligations and accrued environmental costs

458

166


624

Deferred income taxes
1

3,541

1,735

(2
)
5,275

Employee benefit obligations

676

191


867

Other liabilities and deferred credits
55

4,611

4,287

(8,598
)
355

Total Liabilities
8,050

16,114

12,878

(9,893
)
27,149

Common stock
4,856

24,960

8,754

(33,714
)
4,856

Retained earnings
20,518

8,314

1,249

(9,592
)
20,489

Accumulated other comprehensive loss
(692
)
(692
)
(293
)
985

(692
)
Noncontrolling interests


2,500


2,500

Total Liabilities and Equity
$
32,732

48,696

25,088

(52,214
)
54,302





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Table of Contents

 
Millions of Dollars
 
Nine Months Ended September 30, 2019
Statement of Cash Flows
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Cash Flows From Operating Activities
 
 
 
 
 
Net Cash Provided by (Used in) Operating Activities
$
(143
)
1,645

1,730

(118
)
3,114

 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Capital expenditures and investments

(803
)
(1,792
)

(2,595
)
Proceeds from asset dispositions*

352

137

(350
)
139

Intercompany lending activities
2,587

(2,245
)
(342
)


Advances/loans—related parties


(95
)

(95
)
Collection of advances/loans—related parties


95


95

Other

(3
)
27


24

Net Cash Provided by (Used in) Investing Activities
2,587

(2,699
)
(1,970
)
(350
)
(2,432
)
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Issuance of debt


1,758


1,758

Repayment of debt

(14
)
(990
)

(1,004
)
Issuance of common stock
15




15

Repurchase of common stock
(1,238
)



(1,238
)
Dividends paid on common stock
(1,172
)

(118
)
118

(1,172
)
Distributions to noncontrolling interests


(176
)

(176
)
Net proceeds from issuance of Phillips 66 Partners LP common units


133


133

Other
(49
)
(4
)
(15
)
350

282

Net Cash Provided by (Used in) Financing Activities
(2,444
)
(18
)
592

468

(1,402
)
 
 
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents


(31
)

(31
)
 
 
 
 
 
 
Net Change in Cash and Cash Equivalents

(1,072
)
321


(751
)
Cash and cash equivalents at beginning of period

1,648

1,371


3,019

Cash and Cash Equivalents at End of Period
$

576

1,692


2,268

* Includes return of investments in equity affiliates.



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Table of Contents

 
Millions of Dollars
 
Nine Months Ended September 30, 2018
Statement of Cash Flows
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Cash Flows From Operating Activities
 
 
 
 
 
Net Cash Provided by Operating Activities
$
3,094

3,070

1,425

(4,155
)
3,434

 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Capital expenditures and investments

(633
)
(1,012
)

(1,645
)
Proceeds from asset dispositions*

328

36

(325
)
39

Intercompany lending activities
904

(510
)
(394
)


Advances/loans—related parties

(1
)


(1
)
Other

(6
)
73


67

Net Cash Provided by (Used in) Investing Activities
904

(822
)
(1,297
)
(325
)
(1,540
)
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Issuance of debt
1,509


85


1,594

Repayment of debt
(250
)
(9
)
(115
)

(374
)
Issuance of common stock
39




39

Repurchase of common stock
(4,148
)



(4,148
)
Dividends paid on common stock
(1,069
)
(3,174
)
(981
)
4,155

(1,069
)
Distributions to noncontrolling interests


(146
)

(146
)
Net proceeds from issuance of Phillips 66 Partners LP common units


114


114

Other
(79
)

(325
)
325

(79
)
Net Cash Used in Financing Activities
(3,998
)
(3,183
)
(1,368
)
4,480

(4,069
)
 
 
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents


(20
)

(20
)
 
 
 
 
 
 
Net Change in Cash and Cash Equivalents

(935
)
(1,260
)

(2,195
)
Cash and cash equivalents at beginning of period

1,411

1,708


3,119

Cash and Cash Equivalents at End of Period
$

476

448


924

* Includes return of investments in equity affiliates.


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Table of Contents

Item 2.    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, its financial condition, and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. 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 September 30, 2019, we had total assets of $58.7 billion. Our common stock trades on the New York Stock Exchange under the symbol PSX.

Executive Overview
In the third quarter of 2019, we reported earnings of $712 million and generated cash from operating activities of $1.7 billion. We used available cash to fund capital expenditures and investments of $867 million, repurchase $439 million of our common stock and pay dividends of $402 million. We ended the third quarter of 2019 with $2.3 billion of cash and cash equivalents and approximately $5.7 billion of total committed capacity available under our revolving credit facilities.

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Table of Contents

Business Environment
The Midstream segment, which includes our 50% equity investment in DCP Midstream, LLC (DCP Midstream), contains fee-based operations that are not directly exposed to commodity price risk, as well as operations that are directly linked to natural gas liquids (NGL) prices, natural gas prices and crude oil prices. Average natural gas prices decreased in the third quarter of 2019, compared with the third quarter of 2018, due to continued supply growth. NGL prices were lower in the third quarter of 2019, compared with the third quarter of 2018, due to higher inventory levels resulting from supply growth.

The Chemicals segment consists of our 50% equity investment in Chevron Phillips Chemical Company LLC (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 the third quarter of 2019, the benchmark high-density polyethylene chain margin further decreased, compared with the third quarter of 2018, due to higher product availability driven by recent capacity additions, the continued trade uncertainty, and a demand slowdown in Asia.

Our Refining segment results are driven by several factors, including refining margins, cost control, refinery throughput, feedstock costs, product yields and turnaround activity. The price of U.S. benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, decreased to an average of $56.44 per barrel during the third quarter of 2019, compared with an average of $69.71 per barrel in the third quarter of 2018, due to continued growth in Permian Basin production and higher inventories resulting from numerous planned and unplanned refinery outages. Industry crack spread indicators, the difference between market prices for refined petroleum products and crude oil, are used to estimate refining margins. During the third quarter of 2019, the U.S. 3:2:1 crack spread (three barrels of crude oil producing two barrels of gasoline and one barrel of diesel) increased compared with the third quarter of 2018, following heavy planned and unplanned refinery maintenance across the United States. Northwest Europe crack spreads on average improved compared with the third quarter of 2018, due to higher diesel margins.

Results for our Marketing and Specialties (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.


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Table of Contents

RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three and nine months ended September 30, 2019, is based on a comparison with the corresponding periods of 2018.

Basis of Presentation

During the fourth quarter of 2018, the segment performance measure used by our chief executive officer to assess performance and allocate resources was changed from “net income” to “income before income taxes.”  Prior-period segment information has been recast to conform to the current presentation.

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
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
Midstream
$
(460
)
284

 
279

802

Chemicals
227

263

 
729

873

Refining
856

1,232

 
1,641

2,534

Marketing and Specialties
498

423

 
1,056

968

Corporate and Other
(178
)
(227
)
 
(593
)
(650
)
Income before income taxes
943

1,975

 
3,112

4,527

Income tax expense
150

407

 
545

970

Net income
793

1,568


2,567

3,557

Less: net income attributable to noncontrolling interests
81

76

 
227

202

Net income attributable to Phillips 66
$
712

1,492


2,340

3,355



Our earnings decreased $780 million, or 52%, in the third quarter of 2019, mainly reflecting:

Impairments associated with our investment in DCP Midstream.
Lower realized refining margins.

These decreases were partially offset by:

Lower income tax expense.
Improved margins from our NGL assets.
Higher U.S. margins and volumes from our M&S segment.


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Table of Contents

Our earnings decreased $1,015 million, or 30%, in the nine-month period of 2019, mainly reflecting:

Lower realized refining margins.
Impairments associated with our investment in DCP Midstream.
Decreased equity in earnings from CPChem.

These decreases were partially offset by:

Higher margins and volumes from our NGL and transportation assets.
Lower income tax expense.
Higher global margins and volumes from our M&S segment.

See the “Segment Results” section for additional information on our segment results.

Statement of Income Analysis

Sales and other operating revenues for the third quarter and nine-month period of 2019 decreased 9% and 5%, respectively, and purchased crude oil and products decreased 10% and 5%, respectively. These decreases were mainly driven by lower prices for refined petroleum products, crude oil and NGL.

Equity in earnings of affiliates decreased 36% and 15% in the third quarter and nine-month period of 2019. The decrease in both periods reflected lower margins at WRB Refining LP (WRB) and CPChem, as well as maintenance activities at Wood River and Borger refineries during the third quarter of 2019. Lower equity earnings in the third quarter of 2019 also reflected asset and goodwill impairments at DCP Midstream and a lower-of-cost-or-market inventory write-down at CPChem. See the “Segment Results” section for additional information.

Other income increased $50 million in the nine-month period of 2019. The increase was mainly driven by trading activities not directly related to our physical business. See Note 12—Derivatives and Financial Instruments, for additional information associated with our commodity derivatives.

Impairments increased $852 million and $849 million in the third quarter and nine-month period of 2019, respectively. The increase in both periods was mainly driven by an $853 million before-tax impairment associated with our investment in DCP Midstream. See Note 6—Investments, Loans and Long-Term Receivables, and Note 13—Fair Value Measurements, for additional information associated with this impairment.
 
Interest and debt expense decreased 13% and 10% in the third quarter and nine-month period of 2019, respectively. The decrease in both periods was primarily attributable to higher capitalized interest associated with capital projects under development in our Midstream segment.

Income tax expense decreased 63% and 44% in the third quarter and nine-month period of 2019, respectively. The decrease in both periods was primarily due to lower income before income taxes and the impact of our foreign operations. See Note 20—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our effective income tax rates.



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Table of Contents

Segment Results

Midstream

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
 
Millions of Dollars
Income (Loss) Before Income Taxes
 
 
 
 
 
Transportation
$
248

209

 
696

536

NGL and Other
169

46

 
402

185

DCP Midstream
(877
)
29

 
(819
)
81

Total Midstream
$
(460
)
284

 
279

802


 
Thousands of Barrels Daily
Transportation Volumes
 
 
 
 
 
Pipelines*
3,443

3,517

 
3,346

3,378

Terminals
3,381

3,179

 
3,236

3,021

Operating Statistics
 
 
 
 
 
NGL fractionated**
203

227

 
223

213

NGL production***
409

426

 
420

412

* Pipelines represent the sum of volumes transported through each separately tariffed consolidated pipeline segment. Prior-period volumes have been recast to exclude our share of equity volumes from Yellowstone Pipe Line Company and Lake Charles Pipe Line Company.
** Excludes DCP Midstream.
*** Includes 100% of DCP Midstream’s volumes.

 
Dollars Per Gallon
Weighted-Average NGL Price*
 
 
 
 
 
DCP Midstream
$
0.44

0.87

 
0.52

0.78

* Based on index prices from the Mont Belvieu market hub, which are weighted by NGL component.


The Midstream segment provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, 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).

Pre-tax income (loss) from the Midstream segment decreased $744 million in the third quarter of 2019 and $523 million in the nine-month period of 2019.

Pre-tax income from our Transportation business increased $39 million in the third quarter of 2019 and $160 million in the nine-month period of 2019. The increased results in both periods were mainly driven by higher volumes and pipeline tariffs from our portfolio of consolidated and joint venture assets. In addition, the increase in the nine-month period of 2019 also reflected lower maintenance cost.

Pre-tax income from our NGL and Other business increased $123 million in the third quarter of 2019 and $217 million in the nine-month period of 2019. The increased results in both periods were mainly due to improved margins and volumes, primarily at the Sweeny Hub, and favorable impacts from our trading activities associated with NGL inventory management, as well as the absence of a contingency accrual recorded in the third quarter of 2018. In addition, the increase in the nine-month period of 2019 also reflected higher equity earnings from certain pipeline affiliates driven by increased volumes.

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Pre-tax income (loss) from our investment in DCP Midstream decreased $906 million in the third quarter of 2019 and $900 million in the nine-month period of 2019. The decrease in both periods was mainly driven by $900 million of impairments related to our investment in DCP Midstream. 

In September 2019, DCP Partners performed goodwill and other asset impairment assessments based on internal discounted cash flow models that reflect various observable and non-observable 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 on our consolidated statement of income.

The fair value of our investment in DCP Midstream depends 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.  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 on our consolidated statement of income and results in our investment in DCP Midstream having a book value of $1,358 million at September 30, 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 will be amortized on a straight-line basis over a 22-year estimated useful life as an increase to equity earnings. See Note 6—Investments, Loans and Long-Term Receivables, and Note 13—Fair Value Measurements, for additional information on our investment in DCP Midstream.

See the “Executive Overview and Business Environment” section for information on market factors impacting this quarter’s results.


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Chemicals

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
 
Millions of Dollars
 
 
 
 
 
 
Income Before Income Taxes
$
227

263

 
729

873

 
 
Millions of Pounds
CPChem Externally Marketed Sales Volumes*
 
 
 
 
 
Olefins and Polyolefins
4,990

4,883

 
14,274

14,048

Specialties, Aromatics and Styrenics
1,322

1,385

 
3,360

3,993

 
6,312

6,268

 
17,634

18,041

* 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
%
91
 
97
94


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).

Pre-tax income from the Chemicals segment decreased $36 million in the third quarter of 2019 and $144 million in the nine-month period of 2019. The decrease in both periods included a lower-of-cost-or-market write-down of LIFO-valued inventories, primarily resulting from lower polyethylene prices.  Our portion of the write-down reduced our equity earnings from CPChem by $42 million, pre-tax.  In addition, the decreased results in the nine-month period were due to lower margins, partially offset by higher polyethylene sales volume.

See the “Executive Overview and Business Environment” section for information on market factors impacting this quarter’s results.

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Refining
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
 
Millions of Dollars
Income (Loss) Before Income Taxes
 
 
 
 
 
Atlantic Basin/Europe
$
296

209

 
547

265

Gulf Coast
184

210

 
288

576

Central Corridor
408

839

 
1,005

1,632

West Coast
(32
)
(26
)
 
(199
)
61

Worldwide
$
856

1,232

 
1,641

2,534


 
Dollars Per Barrel
Income (Loss) Before Income Taxes
 
 
 
 
 
Atlantic Basin/Europe
$
5.93

4.62

 
3.83

2.00

Gulf Coast
2.46

3.01

 
1.32

2.67

Central Corridor
15.26

31.33

 
13.07

20.60

West Coast
(0.93
)
(0.74
)
 
(2.03
)
0.59

Worldwide
4.60

6.96

 
3.07

4.77

 
 
 
 
 
 
Realized Refining Margins*
 
 
 
 
 
Atlantic Basin/Europe
$
11.48

11.48

 
10.17

9.82

Gulf Coast
8.34

9.09

 
7.42

8.64

Central Corridor
15.99

23.61

 
14.91

19.26

West Coast
10.11

9.53

 
8.84

10.25

Worldwide
11.18

13.36

 
10.06

11.72

* See the “Non-GAAP Reconciliations” section for a reconciliation of this non-GAAP measure to the most directly comparable measure under generally accepted accounting principles in the United States (GAAP), income (loss) before income taxes per barrel.

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Thousands of Barrels Daily
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
Operating Statistics
2019

2018

 
2019

2018

Refining operations*
 
 
 
 
 
Atlantic Basin/Europe
 
 
 
 
 
Crude oil capacity
537

537

 
537

537

Crude oil processed
509

465

 
485

460

Capacity utilization (percent)
95
%
87

 
90

86

Refinery production
545

494

 
527

488

Gulf Coast
 
 
 
 
 
Crude oil capacity
764

752

 
764

752

Crude oil processed
729

656

 
714

706

Capacity utilization (percent)
95
%
87

 
93

94

Refinery production
817

765

 
797

797

Central Corridor
 
 
 
 
 
Crude oil capacity
515

493

 
515

493

Crude oil processed
517

531

 
495

501

Capacity utilization (percent)
100
%
108

 
96

102

Refinery production
535

553

 
515

523

West Coast
 
 
 
 
 
Crude oil capacity
364

364

 
364

364

Crude oil processed
351

354

 
325

352

Capacity utilization (percent)
97
%
97

 
89

97

Refinery production
371

381

 
357

379

Worldwide
 
 
 
 
 
Crude oil capacity
2,180

2,146

 
2,180

2,146

Crude oil processed
2,106

2,006

 
2,019

2,019

Capacity utilization (percent)
97
%
93

 
93

94

Refinery production
2,268

2,193

 
2,196

2,187

* 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.

Pre-tax income for the Refining segment decreased $376 million in the third quarter of 2019 and $893 million in the nine-month period of 2019, primarily driven by lower realized refining margins.

In the third quarter of 2019, the decrease in realized refining margins was mainly due to lower feedstock advantage, partially offset by favorable inventory impacts and higher secondary product margins.

In the nine-month period of 2019, the decrease in realized refining margins was primarily due to lower feedstock advantage and market crack spreads, partially offset by higher secondary product margins and lower renewable identification number costs.

See the “Executive Overview and Business Environment” section for information on market factors impacting this quarter’s results.

Our worldwide refining crude oil capacity utilization rate was 97% and 93% in the third quarter and nine-month period of 2019, respectively, compared with 93% and 94% in the third quarter and nine-month period of 2018, respectively. The increase in the third quarter of 2019 was primarily due to lower unplanned downtime.



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Marketing and Specialties

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

 
 
 
 
 
 
 
Millions of Dollars
Income Before Income Taxes
 
 
 
 
 
Marketing and Other
$
440

361

 
872

781

Specialties
58

62

 
184

187

Total Marketing and Specialties
$
498

423

 
1,056

968


 
Dollars Per Barrel
Income Before Income Taxes
 
 
 
 
 
U.S.
$
1.66

1.48

 
1.14

1.14

International
5.19

4.80

 
4.10

3.23

 
 
 
 
 
 
Realized Marketing Fuel Margins*
 
 
 
 
 
U.S.
$
2.11

1.80

 
1.59

1.50

International
6.37

6.58

 
5.42

5.07

* 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. Prior period U.S. realized marketing fuel margins have been revised to exclude the effects of special items on fuel margins.

 
Dollars Per Gallon
U.S. Average Wholesale Prices*
 
 
 
 
 
Gasoline
$
2.14

2.35

 
2.11

2.25

Distillates
2.07

2.40

 
2.10

2.31

* On third-party branded petroleum product sales, excluding excise taxes.
 
 
 
 
 

 
Thousands of Barrels Daily
Marketing Petroleum Products Sales Volumes
 
 
 
 
 
Gasoline
1,222

1,187

 
1,205

1,163

Distillates
1,099

955

 
1,041

949

Other
16

17

 
18

18

Total
2,337

2,159

 
2,264

2,130



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), as well as power generation operations.

Pre-tax income from the M&S segment increased $75 million in the third quarter of 2019 and $88 million in the nine-month period of 2019. The improved results in the third quarter of 2019 were primarily due to higher U.S. margins, driven by favorable market conditions, as well as higher sales volumes.  The improved results in the nine-month period were mainly driven by higher global margins and sales volumes. In addition, both 2018 periods reflected a benefit related to biodiesel blender’s tax incentives.

See the “Executive Overview and Business Environment” section for information on marketing fuel margins and other market factors impacting this quarter’s results.

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Corporate and Other

 
Millions of Dollars
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2019

2018

 
2019

2018

Loss Before Income Taxes
 
 
 
 
 
Net interest expense
$
(98
)
(114
)
 
(311
)
(354
)
Corporate overhead and other
(80
)
(113
)
 
(282
)
(296
)
Total Corporate and Other
$
(178
)
(227
)
 
(593
)
(650
)


Net interest consists of interest and financing expense, net of interest income and capitalized interest. Net interest decreased in the third quarter and nine-month period of 2019, mainly due to higher capitalized interest related to capital projects under development in our Midstream segment.

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. Corporate overhead and other expenses decreased in both periods, primarily driven by lower accrued environmental expenses and technology costs. The decrease in the nine-month period of 2019 was partially offset by a one-time income tax benefit recognized by our equity affiliates in 2018 related to U.S. tax reform.


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CAPITAL RESOURCES AND LIQUIDITY

Financial Indicators

 
Millions of Dollars,
Except as Indicated
 
September 30
2019

 
December 31
2018

 
 
 
 
Cash and cash equivalents
$
2,268

 
3,019

Short-term debt
842

 
67

Total debt
11,925

 
11,160

Total equity
27,092

 
27,153

Percent of total debt to capital*
31
%
 
29

Percent of floating-rate debt to total debt
9
%
 
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 the ability to fund its growth activities through debt and equity offerings. During the first nine months of 2019, we generated $3.1 billion in cash from operations. Available cash was primarily used to fund capital expenditures and investments of $2.6 billion; repurchase $1.2 billion of our common stock; and pay dividends on our common stock of $1.2 billion. In addition, Phillips 66 Partners received $422 million from its joint venture partners to partially fund the Gray Oak capital project. Phillips 66 Partners also received net proceeds of $773 million from borrowings during the period. During the first nine months of 2019, cash and cash equivalents decreased by $0.8 billion to $2.3 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 the first nine months of 2019, cash generated by operating activities was $3,114 million, compared with $3,434 million for the first nine months of 2018. The decrease was mainly driven by lower refining margins, partially offset by improved results from our transportation and NGL assets along with working capital impacts. The working capital impacts were primarily driven by lower inventory builds in 2019.

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.


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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. During the first nine months of 2019, cash from operations included distributions of $1,638 million from our equity affiliates, compared with $2,057 million during the same period of 2018. The lower distributions from our equity affiliates for the first nine months of 2019 were mainly driven by lower equity earnings. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these companies are not assured.

Phillips 66 Partners LP

Unit Issuances
During the first nine months of 2019, on a settlement-date basis, Phillips 66 Partners generated net proceeds of $133 million from common units issued under its active continuous offering of common units, or at-the-market (ATM) program.

Debt Issuances and Repayments
On September 6, 2019, Phillips 66 Partners closed on a public offering of $900 million aggregate principal amount of unsecured notes consisting of:

$300 million aggregate principal amount of 2.450% Senior Notes due December 15, 2024.
$600 million aggregate principal amount of 3.150% Senior Notes due December 15, 2029.

Interest on each series of senior notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2020. On September 13, 2019, Phillips 66 Partners used a portion of the net proceeds to repay the $400 million outstanding principal balance of its term loans due March 2020, and on October 15, 2019, Phillips 66 Partners used a portion of the net proceeds to repay the $300 million outstanding principal balance of its 2.646% Senior Notes due February 2020.

Revolving Credit Agreement Amendment and Restatement
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 September 30, 2019, no amount had been directly drawn under Phillips 66 Partners’ revolving credit facility, compared with borrowings of $125 million at December 31, 2018.

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 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 (Gray Oak) are presented as a long-term obligation on our consolidated balance sheet and 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 the first nine months of 2019, the third party contributed an aggregate of $341 million into Holdings LLC, which Holdings LLC used to fund its portion of Gray Oak’s cash calls. See Note 21—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information regarding this transaction.

In February 2019, Holdings LLC sold a 10% ownership interest in Gray Oak 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 6—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding this transaction.



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Restructuring Transaction
On August 1, 2019, Phillips 66 Partners completed a restructuring transaction to eliminate the IDRs held by us and convert our 2% economic general partner interest into a non-economic general partner interest in exchange for 101 million Phillips 66 Partners’ common units.  As a result of the restructuring transaction, the balance of “Noncontrolling interests” on our consolidated balance sheet decreased $373 million, with a $275 million increase to “Capital in excess of par,” a $91 million increase in “Deferred income taxes” and $7 million of transaction costs. No distributions will be made on the general partner interest after August 1, 2019. At September 30, 2019, we owned 170 million Phillips 66 Partners’ common units, representing 75% of Phillips 66 Partners’ outstanding common units.
 
Revolving Credit Facilities and Commercial Paper
On July 30, 2019, we amended and restated our 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 $5 billion with an option to increase the overall capacity to $6 billion, subject to certain conditions. 

At September 30, 2019, no amount had been directly drawn under our $5 billion revolving credit facility or our $5 billion commercial paper program supported by our revolving credit facility. In addition, at September 30, 2019, Phillips 66 Partners had no borrowings outstanding under its $750 million revolving credit facility. As a result, we had approximately $5.7 billion of total committed capacity available under our revolving credit facilities at September 30, 2019.


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Off-Balance Sheet Arrangements

Contingent Equity Affiliate Contributions
In March 2019, a wholly owned subsidiary of Dakota Access, LLC (Dakota Access) closed an offering of $2,500 million aggregate principal amount of unsecured senior notes. The net proceeds from the issuance of these notes were used to repay amounts outstanding under existing credit facilities of Dakota Access and Energy Transfer Crude Oil Company, LLC (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.

Lease Residual Value and Joint Venture Obligation 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 September 30, 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 future exposures totaling $344 million at September 30, 2019, which have remaining terms of up to five years.

In June 2019, Phillips 66 Partners issued a guarantee for 42.25% of Gray Oak’s third-party term loan facility. See Note 6—Investments, Loans and Long-Term Receivables, for additional information.

In addition, at September 30, 2019, we had other guarantees outstanding for our portion of certain joint venture debt obligations, which have remaining terms of up to six years. The maximum potential amount of future payments to third parties under these guarantees was approximately $135 million. Payment would be required if a joint venture defaults on its obligations.

Capital Requirements

Capital Expenditures and Investments
For information about our capital expenditures and investments, see the “Capital Spending” section below.

Debt Financing
Our total debt balance at September 30, 2019, and December 31, 2018, was $11,925 million and $11,160 million, respectively. Our total debt-to-capital ratio was 31% and 29% at September 30, 2019, and December 31, 2018, respectively.

Dividends
On July 10, 2019, our Board of Directors declared a quarterly cash dividend of $0.90 per common share. The dividend was paid on September 3, 2019, to shareholders of record at the close of business on August 20, 2019. On October 4, 2019, our Board of Directors declared a quarterly cash dividend of $0.90 per common share. This dividend is payable on December 2, 2019, to shareholders of record at the close of business on November 18, 2019.

Share Repurchase Programs
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 share repurchases are expected to be funded primarily through available cash. The shares will be 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 September 30, 2019, we have repurchased 150,270,786 shares at an aggregate cost of $11.6 billion. Shares of stock repurchased are held as treasury shares.

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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 Gray Oak joint venture partners.
 
 
Millions of Dollars
 
Nine Months Ended
September 30
 
2019

 
2018

Capital Expenditures and Investments
 
 
 
Midstream
$
1,724

 
978

Chemicals

 

Refining
645

 
525

Marketing and Specialties
76

 
65

Corporate and Other
150

 
77

Total Capital Expenditures and Investments
$
2,595

 
1,645

Less: capital spending funded by certain Gray Oak joint venture partners*
422

 

Adjusted Capital Spending
$
2,173

 
1,645

 


 


Selected Equity Affiliates**
 
 
 
DCP Midstream
$
355

 
342

CPChem
252

 
284

WRB
135

 
116

 
$
742

 
742

* Included in the Midstream segment.
** Our share of joint venture’s self-funded capital spending.


Midstream
During the first nine months of 2019, capital spending in our Midstream segment included continued development of additional Gulf Coast fractionation capacity, construction activities related to increasing storage capacity at our crude oil and refined petroleum products terminal located near Beaumont, Texas, as well as other return, reliability and maintenance projects in our Transportation and NGL businesses. Phillips 66 Partners progressed several major capital projects, including the Gray Oak Pipeline and related ventures, a new ethane pipeline from Clemens Caverns to Gregory, Texas, and capacity expansion on the Sweeny to Pasadena refined petroleum products pipeline. Phillips 66 Partners also completed a new isomerization unit at the Lake Charles Refinery and the eastern leg of its 40% owned Bayou Bridge Pipeline.

In June 2019, we formed a 50/50 joint venture, Liberty Pipeline LLC, to construct the Liberty Pipeline, which will provide crude oil transportation from the Rockies and Bakken production areas to Cushing, Oklahoma. We will lead project construction on behalf of the joint venture and will operate the pipeline. The estimated project cost, on a gross basis, is approximately $1.6 billion. In addition, in June 2019, we formed a 50/50 joint venture, Red Oak Pipeline LLC, to construct the Red Oak Pipeline System, which will provide crude oil transportation from Cushing and the Permian Basin to multiple destinations along the Texas Gulf Coast, including Corpus Christi, Ingleside, Houston and Beaumont. Our co-venturer will lead project construction on behalf of the joint venture and we will operate the pipeline. The estimated project spending, on a gross basis, is approximately $2.5 billion. Initial services for both projects are targeted for the first half of 2021.

During the first nine months of 2019, DCP Midstream had a self-funded capital program. During this period, on a 100% basis, DCP Midstream’s capital expenditures and investments were $710 million. The capital spending was primarily for expansion projects, including construction of the O’Connor 2 plant and investments in the Gulf Coast Express joint venture pipeline, as well as maintenance capital expenditures for existing assets. We expect DCP Midstream to continue self-funding its capital program for the remainder of 2019.

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Chemicals
During the first nine months of 2019, CPChem had a self-funded capital program. During this period, on a 100% basis, CPChem’s capital expenditures and investments were $503 million. The capital spending was primarily for the continued development of its second U.S. Gulf Coast (USGC) Petrochemicals Project and debottlenecking projects on existing assets. In June 2019, CPChem signed an agreement with a co-venturer to jointly pursue the development of a second USGC Petrochemicals Project, and an agreement with a co-venturer to jointly pursue the development of a petrochemical complex in Qatar. We expect CPChem to continue self-funding its capital program for the remainder of 2019.

Refining
Capital spending for the Refining segment during the first nine months of 2019 was 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-funded capital programs during the first nine months of 2019 and we expect them to continue self-funding their capital programs for the remainder of 2019.

Major construction activities included:

Installation of facilities to improve product value at the Sweeny Refinery.
Installation of facilities to produce biofuels at the Humber Refinery.

A facility installed at the Borger Refinery to increase distillate yields started up in the third quarter of 2019.

Marketing and Specialties
Capital spending for the M&S segment during the first nine months of 2019 was primarily for the acquisition, development and improvement of our international retail sites, and safety and reliability projects at our lubricants and power generation facilities.

Corporate and Other
Capital spending for Corporate and Other during the first nine months of 2019 was primarily for information technology and facilities.

2019 Budget Update
We are forecasting our total 2019 capital spending to range from $3.7 billion to $4.0 billion, including $1.2 billion for Phillips 66 Partners.  Excluding $0.4 billion funded by our Gray Oak joint venture partners, we expect our adjusted capital spending to range from $3.3 billion to $3.6 billion.  The increase in our expected capital spending reflects higher spending on Midstream growth projects, domestic retail marketing and other planned expenditures across our portfolio.

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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 against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required. 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.

Environmental
Like other companies in our industry, we are subject to numerous international, federal, state and local environmental laws and regulations. For a discussion of the most significant of these international and federal environmental laws and regulations, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K.

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 the Federal Comprehensive Environmental Response, Compensation and Liability Act (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. At September 30, 2019, and December 31, 2018, we had been notified of potential liability under CERCLA and comparable state laws at 27 sites within the United States.

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 material costs and liabilities will not be incurred. 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.

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Climate Change
There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (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. We continue to monitor legislative and regulatory actions and legal proceedings globally relating to GHG emissions for potential impacts on our operations.

For examples of legislation and regulation or precursors for possible regulation that do or could affect our operations, see the “Climate Change” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K.

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.


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 margins.

The GAAP performance measure most directly comparable to realized refining margin per barrel is the Refining segment’s “income 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 before income taxes, such as general and administrative expenses. It also includes our proportional share of our 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 before income taxes to realized refining margins:

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Millions of Dollars, Except as Indicated
Realized Refining Margins
Atlantic Basin/
Europe

Gulf
Coast

Central
Corridor

West
Coast

Worldwide

 
 
 
 
 
 
Three Months Ended September 30, 2019
 
 
 
 
 
Income (loss) before income taxes
$
296

184

408

(32
)
856

Plus:
 
 
 
 
 
Taxes other than income taxes
12

23

10

23

68

Depreciation and amortization
49

66

34

66

215

Selling, general and administrative expenses
10

7

6

8

31

Operating expenses
208

345

125

282

960

Equity in (earnings) losses of affiliates
3

(1
)
(69
)

(67
)
Other segment (income) expense, net
(24
)
1

(3
)
1

(25
)
Proportional share of refining gross margins contributed by equity affiliates
19


269


288

Realized refining margins
$
573

625

780

348

2,326

 
 
 
 
 
 
Total processed inputs (thousands of barrels)
49,895

74,936

26,740

34,498

186,069

Adjusted total processed inputs (thousands of barrels)*
49,895

74,936

48,853

34,498

208,182

 
 
 
 
 
 
Income (loss) before income taxes per barrel (dollars per barrel)**
$
5.93

2.46

15.26

(0.93
)
4.60

Realized refining margins (dollars per barrel)***
11.48

8.34

15.99

10.11

11.18

 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
 
 
 
Income (loss) before income taxes
$
209

210

839

(26
)
1,232

Plus:
 
 
 
 
 
Taxes other than income taxes
13

23

10

26

72

Depreciation and amortization
50

69

34

60

213

Selling, general and administrative expenses
16

13

7

11

47

Operating expenses
217

317

124

264

922

Equity in (earnings) losses of affiliates
2

1

(300
)

(297
)
Other segment (income) expense, net
(3
)
1

4


2

Proportional share of refining gross margins contributed by equity affiliates
16


472


488

Special items:
 
 
 
 
 
Certain tax impacts
(1
)



(1
)
Realized refining margins
$
519

634

1,190

335

2,678

 
 
 
 
 
 
Total processed inputs (thousands of barrels)
45,233

69,745

26,778

35,132

176,888

Adjusted total processed inputs (thousands of barrels)*
45,233

69,745

50,410

35,132

200,520

 
 
 
 
 
 
Income (loss) before income taxes per barrel (dollars per barrel)**
$
4.62

3.01

31.33

(0.74
)
6.96

Realized refining margins (dollars per barrel)***
11.48

9.09

23.61

9.53

13.36

    * 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 differ from the presented per barrel amounts due to rounding.

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Millions of Dollars, Except as Indicated
Realized Refining Margins
Atlantic Basin/
Europe

Gulf
Coast

Central
Corridor

West
Coast

Worldwide

 
 
 
 
 
 
Nine Months Ended September 30, 2019
 
 
 
 
 
Income (loss) before income taxes
$
547

288

1,005

(199
)
1,641

Plus:
 
 
 
 
 
Taxes other than income taxes
38

62

33

68

201

Depreciation and amortization
148

201

101

191

641

Selling, general and administrative expenses
27

13

14

21

75

Operating expenses
642

1,051

404

780

2,877

Equity in (earnings) losses of affiliates
9

1

(286
)

(276
)
Other segment (income) expense, net
(14
)
(3
)
(1
)
4

(14
)
Proportional share of refining gross margins contributed by equity affiliates
55


834


889

Special items:
 
 
 
 
 
Pending claims and settlements


(21
)

(21
)
Realized refining margins
$
1,452

1,613

2,083

865

6,013

 
 
 
 
 
 
Total processed inputs (thousands of barrels)
142,749

217,556

76,877

97,898

535,080

Adjusted total processed inputs (thousands of barrels)*
142,749

217,556

139,681

97,898

597,884

 
 
 
 
 
 
Income (loss) before income taxes per barrel (dollars per barrel)**
$
3.83

1.32

13.07

(2.03
)
3.07

Realized refining margins (dollars per barrel)***
10.17

7.42

14.91

8.84

10.06

    * 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 differ from the presented per barrel amounts due to rounding.

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Millions of Dollars, Except as Indicated
Realized Refining Margins
Atlantic Basin/
Europe

Gulf
Coast

Central Corridor

West
Coast

Worldwide

 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
Income before income taxes
$
265

576

1,632

61

2,534

Plus:
 
 
 
 
 
Taxes other than income taxes
43

71

31

76

221

Depreciation, amortization and impairments
152

199

101

178

630

Selling, general and administrative expenses
44

36

21

34

135

Operating expenses
727

975

356

722

2,780

Equity in (earnings) losses of affiliates
7

5

(459
)

(447
)
Other segment (income) expense, net
(10
)
3

(8
)
(11
)
(26
)
Proportional share of refining gross margins contributed by equity affiliates
73


1,051


1,124

Special items:
 
 
 
 
 
Certain tax impacts
(1
)



(1
)
Realized refining margins
$
1,300

1,865

2,725

1,060

6,950

 
 
 
 
 
 
Total processed inputs (thousands of barrels)
132,429

215,827

79,223

103,378

530,857

Adjusted total processed inputs (thousands of barrels)*
132,429

215,827

141,522

103,378

593,156

 
 
 
 
 
 
Income before income taxes per barrel (dollars per barrel)**
$
2.00

2.67

20.60

0.59

4.77

Realized refining margins (dollars per barrel)***
9.82

8.64

19.26

10.25

11.72

    * 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 differ from the presented per barrel amounts due to rounding.

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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
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
 
U.S.

International

 
U.S.

International

Realized Marketing Fuel Margins
 
 
 
 
 
Income before income taxes
$
312

139

 
256

122

Plus:
 
 
 
 
 
Taxes other than income taxes
3

2

 
3

1

Depreciation and amortization
2

16

 
3

17

Selling, general and administrative expenses
184

61

 
201

66

Equity in earnings of affiliates
(3
)
(27
)
 
(3
)
(22
)
Other operating revenues*
(101
)
(10
)
 
(104
)
(7
)
Other segment expense, net

1

 


Special items:
 
 
 
 
 
Certain tax impacts


 
(44
)

Marketing margins
397

182

 
312

177

Less: margin for non-fuel related sales

11

 

10

Realized marketing fuel margins**
$
397

171

 
312

167

 
 
 
 
 
 
Total fuel sales volumes (thousands of barrels)
188,172

26,796

 
173,072

25,441

 
 
 
 
 
 
Income before income taxes per barrel (dollars per barrel)
$
1.66

5.19

 
1.48

4.80

Realized marketing fuel margins (dollars per barrel)***
2.11

6.37

 
1.80

6.58

* Includes other non-fuel revenues.
** Prior period U.S. realized marketing fuel margins have been revised to exclude the effects of special items on fuel margins.
*** 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 differ from the presented per barrel amounts due to rounding.

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Millions of Dollars, Except as Indicated
 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
 
U.S.

International

 
U.S.

International

Realized Marketing Fuel Margins
 
 
 
 
 
Income before income taxes
$
613

326

 
575

241

Plus:
 
 
 
 
 
Taxes other than income taxes
8

5

 
(4
)
1

Depreciation and amortization
7

48

 
10

53

Selling, general and administrative expenses
522

184

 
570

207

Equity in earnings of affiliates
(7
)
(74
)
 
(7
)
(65
)
Other operating revenues*
(286
)
(25
)
 
(286
)
(20
)
Other segment income, net


 

(3
)
Special items:
 
 
 
 
 
Certain tax impacts


 
(100
)

Marketing margins
857

464

 
758

414

Less: margin for non-fuel related sales

33

 

36

Realized marketing fuel margins**
$
857

431


758

378

 
 
 
 
 
 
Total fuel sales volumes (thousands of barrels)
538,718

79,429

 
506,577

74,692

 
 
 
 
 
 
Income before income taxes per barrel (dollars per barrel)
$
1.14

4.10

 
1.14

3.23

Realized marketing fuel margins (dollars per barrel)***
1.59

5.42

 
1.50

5.07

* Includes other non-fuel revenues.
** Prior period U.S. realized marketing fuel margins have been revised to exclude the effects of special items on fuel margins.
*** 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 differ from the presented per barrel amounts due to rounding.


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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.

We based the forward-looking statements on our current expectations, estimates and projections about us and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:

Fluctuations in NGL, crude oil, refined petroleum product and natural gas prices and refining, marketing and petrochemical margins.
Failure of new products and services to achieve market acceptance.
Unexpected changes in costs or technical requirements for constructing, modifying or operating our facilities or transporting our products.
Unexpected technological or commercial difficulties in manufacturing, refining or transporting our products, including chemical products.
Lack of, or disruptions in, adequate and reliable transportation for our NGL, crude oil, natural gas and refined petroleum products.
The level and success of drilling and quality of production volumes around our Midstream assets.
Our inability to timely obtain or maintain permits, including those necessary for capital projects.
Our inability to comply with government regulations or make capital expenditures required to maintain compliance.
Failure to complete definitive agreements and feasibility studies for, and to complete construction of, announced and future capital projects on time and within budget.
Potential disruption or interruption of our operations due to accidents, weather events, civil unrest, political events, terrorism or cyber attacks.
International monetary conditions and exchange controls.
Substantial investment or reduced demand for products as a result of existing or future environmental rules and regulations.
Liability resulting from litigation or for remedial actions, including removal and reclamation obligations under environmental regulations.
General domestic and international economic and political developments including: armed hostilities; expropriation of assets; changes in governmental policies relating to NGL, crude oil, natural gas or refined petroleum products pricing, regulation or taxation; and other political, economic or diplomatic developments.
Changes in tax, environmental and other laws and regulations (including alternative energy mandates) applicable to our business.
Limited access to capital or significantly higher cost of capital related to changes to our credit profile or illiquidity or uncertainty in the domestic or international financial markets.
The operation, financing and distribution decisions of our joint ventures.
Domestic and foreign supplies of crude oil and other feedstocks.
Domestic and foreign supplies of petrochemicals and refined petroleum products, such as gasoline, diesel, aviation fuel and home heating oil.
Governmental policies relating to exports of crude oil and natural gas.
Overcapacity or undercapacity in the midstream, chemicals and refining industries.
Fluctuations in consumer demand for refined petroleum products.
The factors generally described in Item 1A.—Risk Factors in our 2018 Annual Report on Form 10-K.

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Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our commodity price risk and interest rate risk at September 30, 2019, did not differ materially from the risks disclosed under Item 7A of our 2018 Annual Report on Form 10-K.


Item 4.   CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2019, with the participation of management, our Chairman and Chief Executive Officer and our Executive Vice President, Finance and Chief Financial Officer carried out an evaluation, pursuant to Rule 13a-15(b) of the Act, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our Chairman and Chief Executive Officer and our Executive Vice President, Finance and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of September 30, 2019.

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the quarterly period ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS

Item 103 of U.S. Securities and Exchange Commission (SEC) Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings, or such proceedings are known to be contemplated, unless we reasonably believe that the matter will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than $100,000. There were no such new matters that arose during the third quarter of 2019. In addition, there were no material developments that occurred with respect to matters previously reported in our 2018 Annual Report on Form 10-K for the quarterly period ended December 31, 2018, or for any matter reported in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019, or June 30, 2019. We do not currently believe that the eventual outcome of any matters previously reported, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our U.S. refineries are implementing two separate consent decrees, regarding alleged violations of the Federal Clean Air Act, with the U.S. Environmental Protection Agency (EPA), five states and one local air pollution agency. Some of the requirements and limitations contained in the decrees provide for stipulated penalties for violations. Stipulated penalties under the decrees are not automatic, but must be requested by one of the agency signatories. As part of periodic reports under the decrees or other reports required by permits or regulations, we occasionally report matters that could be subject to a request for stipulated penalties. If a specific request for stipulated penalties meeting the SEC reporting threshold described above is made pursuant to these decrees based on a given reported exceedance, we will separately report that matter and the amount of the proposed penalty.


Item 1A.   RISK FACTORS

There were no material changes from the risk factors disclosed in Item 1A of our 2018 Annual Report on Form 10-K.



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Item 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities

 
 
 
 
 
 
Millions of Dollars

Period
Total Number of Shares Purchased*
 
Average Price Paid per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs**
 
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under the
Plans or Programs

July 1-31, 2019
1,207,472
 
$
98.74

1,207,472
 
$
689

August 1-31, 2019
1,804,388
 
98.45

1,804,388
 
511

September 1-30, 2019
1,394,841
 
101.82

1,394,841
 
369

Total
4,406,701
 
$
99.59

4,406,701
 

  * Includes repurchase of shares of common stock from company employees in connection with the company’s broad-based employee incentive plans, when applicable.
** As of September 30, 2019, our Board of Directors has authorized repurchases totaling up to $12 billion of our outstanding common stock since the inception of our share repurchase program in July 2012. The authorizations do not have expiration dates. 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 share repurchases are expected to be funded primarily through available cash. The shares under these authorizations will be repurchased from time to time in the open market at the company’s discretion, subject to market conditions and other factors, and in accordance with applicable regulatory requirements. We are not obligated to acquire any particular amount of common stock and may commence, suspend or discontinue purchases at any time or from time to time without prior notice. Shares of stock repurchased are held as treasury shares.


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Table of Contents

Item 6. EXHIBITS
 
 
 
 
Incorporate by Reference
Exhibit
Number
 
Exhibit Description
Form
Exhibit Number
Filing Date
SEC File No.
 
 
 
 
 
 
 
 
 
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the company has not filed with this Quarterly Report on Form 10-Q certain instruments defining the rights of holders of long-term debt of the company and its subsidiaries because the total amount of securities authorized thereunder does not exceed 10% of the total assets of the company and its subsidiaries on a consolidated basis. The company agrees to furnish a copy of such agreements to the Commission upon request.
 
 
 
 
 
 
 
 
 
 
 
 
8-K
10.1
7/26/2019
001-35349
 
 
 
 
 
 
 
 
8-K
10.1
8/1/2019
001-35349
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS*
 
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
 
 
 
 
 
 
 
 
101.SCH*
 
Inline XBRL Schema Document.
 
 
 
 
 
 
 
 
 
 
 
101.CAL*
 
Inline XBRL Calculation Linkbase Document.
 
 
 
 
 
 
 
 
 
 
 
101.LAB*
 
Inline XBRL Labels Linkbase Document.
 
 
 
 
 
 
 
 
 
 
 
101.PRE*
 
Inline XBRL Presentation Linkbase Document.
 
 
 
 
 
 
 
 
 
 
 
101.DEF*
 
Inline XBRL Definition Linkbase Document.
 
 
 
 
 
 
 
 
 
 
 
104*
 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
 
 
 
 
* Filed herewith.
 
 
 
 
   

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
PHILLIPS 66
 
 
 
 
 
/s/ Chukwuemeka A. Oyolu
 
 
Chukwuemeka A. Oyolu
Vice President and Controller
(Chief Accounting and Duly Authorized Officer)

Date: October 25, 2019

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