Phillips 66 — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The requested 2012 Q4 figures are included below. Phillips 66 separated from ConocoPhillips on April 30, 2012. Accordingly, 2012 results combine the downstream businesses through April with Phillips 66’s standalone results thereafter; 2011 and 2010 are combined predecessor results, so comparisons are not fully like-for-like.
Business context and financial performance
Phillips 66 operates Refining and Marketing (R&M), Midstream, and Chemicals. Midstream includes a 50% interest in DCP Midstream; Chemicals consists of a 50% interest in Chevron Phillips Chemical Company (CPChem).
| Metric | 2012 | 2011 |
|---|---|---|
| Sales and other operating revenues | $179.460 billion | $196.088 billion |
| Net income attributable to Phillips 66 | $4.124 billion | $4.775 billion |
| Diluted EPS | $6.48 | $7.52 |
| Cash provided by operating activities | $4.296 billion | $5.006 billion |
| Capital expenditures and investments | $1.721 billion | $1.022 billion |
| Cash and cash equivalents at year-end | $3.474 billion | — |
| Total debt at year-end | $6.974 billion | $391 million |
2012 consolidated income before tax was $6.631 billion; income-tax provision was $2.500 billion, implying a 37.7% effective tax rate. Net income was $4.131 billion, including $7 million attributable to noncontrolling interests. A consolidated operating margin is not presented as a key measure in the filing.
For Q4 2012, revenue was $43.985 billion, income before tax $1.219 billion, net income $710 million, and net income attributable to Phillips 66 $708 million ($1.12 basic and $1.11 diluted EPS). Q4 2011 attributable net income was $2.011 billion ($3.20 basic EPS).
Segments, cash flow, debt and liquidity
- R&M: 2012 earnings were $3.729 billion versus $3.848 billion. Worldwide refining margin averaged $13.42 per barrel, up from $9.70; Central Corridor margin was $25.06 per barrel. Refining capacity utilization was 93%, compared with 92% in 2011.
- Midstream: Earnings fell to $6 million from $403 million, principally reflecting $480 million of pretax REX impairment charges and lower DCP Midstream earnings amid weaker NGL prices. NGL extracted, including equity affiliates, rose to 201,000 barrels per day from 192,000.
- Chemicals: Earnings increased to $823 million from $716 million, supported by improved ethylene and polyethylene margins and lower utility costs. Results included Phillips 66’s share of CPChem’s debt-extinguishment loss and asset impairments.
- Operating cash flow declined 14%, with working capital a significant factor, including a $985 million cash reduction from accounts payable activity. The company used cash for $1.721 billion of capital spending and investments, $282 million of dividends, $356 million of share repurchases, and debt repayment, and ended the year with $3.474 billion of cash.
- Debt-to-capital was 25%, within management’s 20%–30% target range. Phillips 66 issued $7.8 billion of debt in connection with the separation and prepaid $1.0 billion of its term loan in December. It reported approximately $5.0 billion of available liquidity capacity; its $4.0 billion revolving facility was undrawn, apart from letters of credit.
Material changes, outlook and risks
- Attributable earnings declined 14% year over year. Lower asset-disposition gains (2011 included significant pipeline-sale gains), increased impairments, higher interest expense from separation-related borrowing, and weaker Midstream results offset stronger refining and Chemicals performance.
- Total 2012 impairments were $1.158 billion pretax, including the $564 million MRC investment impairment and $480 million REX impairment. Phillips 66 also sold the Trainer refinery and associated assets and the Riverhead terminal.
- Management forecast 2013 worldwide refining utilization in the low-90% range. The 2013 capital program was $3.7 billion in total: $1.9 billion of consolidated spending and $1.8 billion representing planned spending by equity affiliates, which was not expected to require cash outlays by Phillips 66. The consolidated budget was 11% above 2012.
- Management prioritized safe, reliable operations, increasing use of advantaged crude, cost control through its “Optimize 66” program, and growth in Midstream and Chemicals. It planned to file an MLP IPO registration statement in Q2 2013 and anticipated a possible minority-interest IPO in the second half, subject to market conditions and Board approval.
- Shareholder returns increased: the quarterly dividend was raised to $0.25 in Q4 2012; the Board declared $0.3125 per share for March 2013. The share-repurchase authorization was expanded to $2 billion; $356 million had been repurchased by year-end.
- Principal business risks include volatile crude, refined-product, NGL and chemical margins; environmental regulation and remediation; operational incidents, weather and transport disruptions; joint-venture performance; and access to capital. The filing identifies possible additional costs of approximately $150 million before tax if previously purchased fraudulent RINs are found invalid.
- Environmental remediation accruals were $530 million at year-end. The company also guaranteed $233 million of MSLP debt. PDVSA’s arbitration contesting Phillips 66’s exercise of a call right over MSLP was awaiting a final ruling, then expected in Q4 2013. The filing describes separation-related tax and indemnification exposures, including potentially uncapped obligations; litigation outcomes were uncertain, though management did not expect known proceedings to materially affect consolidated financial position.
Important facts for investors to verify
- Compare 2012 results with prior years in light of the separation, predecessor-company presentation, and one-time gains and impairments.
- Review the assumptions behind the MRC and REX impairment valuations and whether subsequent operating or market developments support them.
- Track cash conversion and working-capital movements, debt repayment, and funding for the 2013 capital plan and shareholder returns.
- Monitor Midstream exposure to NGL prices and volumes, and the start-up, utilization and economics of the Sand Hills and Southern Hills pipelines.
- Assess progress and costs associated with the proposed MLP, CPChem growth projects, environmental obligations, RIN exposure, and separation-related tax and indemnity matters.