Phillips 66 — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing; quarterly data are included. Phillips 66 operates in Midstream, Chemicals, Refining, and Marketing and Specialties (M&S), with substantial joint-venture exposure.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Sales and other operating revenues | $102.354 billion | $84.279 billion |
| Net income attributable to Phillips 66 | $5.106 billion | $1.555 billion |
| Diluted earnings per share | $9.85 | $2.92 |
| Cash from operating activities | $3.648 billion | $2.963 billion |
| Capital expenditures and investments | $1.832 billion | $2.844 billion |
| Cash and cash equivalents at year-end | $3.119 billion | $2.711 billion |
| Total debt | $10.110 billion | $10.138 billion |
| Total debt to capital | 27% | 30% |
| Cash dividends declared per share | $2.73 | $2.45 |
2017 income included a provisional $2.735 billion income-tax benefit from the Tax Cuts and Jobs Act. The reported effective tax rate was a benefit of 47.6%; the filing expects the new law to lower tax rates in 2018 and later years, but the tax accounting was provisional. Revenue growth largely reflected higher commodity prices; sales include petroleum excise taxes.
Year-end current assets were $14.390 billion and current liabilities $10.107 billion. The company reported approximately $5.8 billion of committed capacity available under its and Phillips 66 Partners’ credit facilities. Its $5.0 billion revolving credit facility and commercial-paper program were undrawn at year-end; Phillips 66 Partners’ $750 million revolver was also undrawn.
Segment performance and changes
- Midstream: Net income increased to $464 million from $280 million, supported by improved DCP Midstream results, higher affiliate earnings, and the Bakken Pipeline entering service. Transportation volumes and terminal activity also increased.
- Chemicals: Net income declined to $525 million from $583 million. Hurricane Harvey disruption, lower volumes and margins weighed on results; impairment charges were $127 million at CPChem, versus $177 million in 2016. The two polyethylene units started up in September; the ethane cracker reached mechanical completion in December.
- Refining: Net income rose to $1.404 billion from $374 million. Worldwide realized refining margin increased to $9.13 per barrel from $6.99, while crude utilization was 95%, compared with 96%. Higher crack spreads were partly offset by lower feedstock advantage, turnaround costs and unplanned downtime.
- M&S: Net income decreased to $686 million from $891 million, mainly due to lower realized marketing margins and the absence of 2016 biofuel tax credits and a favorable tax adjustment.
- Corporate and Other: Reported income was $2.169 billion, versus a $484 million loss, primarily because it included the Tax Act benefit. Excluding that unusual tax item, consolidated earnings were supported by stronger refining margins and a $261 million after-tax MSLP consolidation gain, but faced higher interest expense and Hurricane-related costs.
Cash flow, capital allocation and outlook
Operating cash flow increased 23% year over year, primarily on higher refining results and affiliate distributions; working-capital changes partly offset the improvement. Phillips 66 spent $1.832 billion on capital and investments, repurchased $1.590 billion of its shares, and paid $1.395 billion in common dividends. Management reported approximately 18.7 million shares repurchased during 2017 and an 11% increase in the quarterly dividend rate during the year.
Management budgeted $2.3 billion of 2018 capital expenditures and investments, including $0.6 billion for Phillips 66 Partners, and expected its share of DCP Midstream, CPChem and WRB capital spending to total $0.9 billion. Priorities include integrated Midstream growth, reliability and high-return refinery projects, and European retail-site growth. The filing does not provide a specific earnings or revenue forecast.
After year-end, Phillips 66 repurchased 35 million shares from Berkshire Hathaway and National Indemnity for approximately $3.3 billion; the transaction closed February 14, 2018, funded with about $1.9 billion cash and $1.4 billion commercial paper borrowing.
Risks, contingencies and unusual items
- Earnings and cash flows are exposed to volatile crude, natural gas and NGL prices, refining and petrochemical margins, feedstock availability, and marketing fuel margins. Phillips 66 does not produce the crude oil it processes.
- Hurricane Harvey disrupted Gulf Coast operations, including flooding and shutdowns at CPChem’s Cedar Bayou facility, and caused costs and downtime.
- Environmental, renewable-fuel and climate regulation may raise compliance costs or affect demand. The company reported $458 million of accrued environmental costs and estimated environmental expenses of about $670 million for 2018; it stated that known contingencies were not expected to materially affect consolidated financial statements.
- Operational hazards, severe weather, transportation interruptions, cyber incidents, joint-venture performance and large-project execution are material business risks. The company also disclosed guarantees, including up to $554 million related to its headquarters lease and $305 million related to railcar and airplane leases.
- Reported legal proceedings included unresolved environmental and Clean Air Act matters. Management expected no material consolidated financial-position effect from the proceedings described; certain matters remained under review or challenge.
- Other notable items include the $423 million pre-tax gain from consolidating MSLP, railcar lease residual-value costs, and the provisional Tax Act accounting. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of 2017’s $5.106 billion attributable net income and $9.85 diluted EPS reflects the one-time Tax Act benefit, and how the provisional tax estimates are finalized.
- Whether refining margins and utilization, CPChem operations following Harvey, and DCP Midstream results sustain or improve in subsequent periods.
- Progress, costs and expected returns for the 2018 capital program and major projects, including Beaumont expansion and the Gulf Coast petrochemicals project start-up.
- Cash flow conversion, affiliate distributions, debt and liquidity after the February 2018 $3.3 billion share repurchase, and the effect of ongoing dividends and repurchases on financial flexibility.
- Developments in environmental obligations, RIN compliance, pending legal proceedings, and lease or joint-venture guarantees.