Phillips 66 — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Phillips 66 is an energy manufacturing and logistics company operating in Midstream, Chemicals, Refining, and Marketing and Specialties. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales and operating revenues | $23,595 | $22,894 |
| Net income | $585 | $563 |
| Net income attributable to Phillips 66 | $524 | $535 |
| Diluted EPS | $1.07 | $1.02 |
| Cash from operating activities | $488 | $(549) |
| Capital expenditures and investments | $328 | $470 |
| Dividends paid on common stock | $327 | $326 |
Revenue increased 3%, but comparisons are affected by the January 2018 change to net presentation of petroleum excise taxes; reported revenue and taxes are therefore not directly comparable. Net income attributable to Phillips 66 fell $11 million (2%). The effective tax rate declined to 18% from 29%, primarily due to the U.S. Tax Cuts and Jobs Act.
Cash from operations improved from an outflow to an inflow, reflecting working-capital changes, especially receivables collections, and higher distributions from equity affiliates ($543 million versus $153 million). Cash flow remained sensitive to working capital and affiliate distributions.
Segments and operating indicators
- Midstream: Net income rose to $233 million from $112 million, led by improved transportation and NGL results, including asset contributions to Phillips 66 Partners and stronger affiliate earnings.
- Chemicals: Net income increased to $232 million from $181 million, mainly on higher olefins and polyolefins volumes and margins. CPChem olefins/polyolefins utilization was 96%, versus 89%.
- Refining: Net income declined to $91 million from $259 million. Worldwide realized refining margin improved to $9.29 per barrel from $8.55, and crude throughput rose to 1.913 million barrels per day from 1.783 million. Prior-year earnings included a substantial one-time gain (see below).
- Marketing and Specialties: Net income increased to $184 million from $141 million, aided by specialty margins, asset disposition gains, tax effects and a biodiesel tax incentive; lower marketing margins partially offset these items.
- Corporate and Other: Loss widened to $155 million from $130 million, principally reflecting higher net interest expense.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $842 million at March 31, 2018, down from $3.119 billion at year-end 2017. Total assets were $52.132 billion.
- Total debt increased to $11.621 billion from $10.110 billion; debt-to-capital rose to 32% from 27%. Long-term debt was $11.579 billion and short-term debt $42 million.
- Phillips 66 issued $1.5 billion of senior notes in March: $500 million floating-rate notes due 2021, $800 million 3.900% notes due 2028, and $200 million additional 4.875% notes due 2044. Proceeds and cash were used to repay commercial paper and for general corporate purposes.
- Approximately $5.8 billion of committed credit capacity was available; no direct borrowings were outstanding under the parent revolving credit facility or its supported commercial paper program at quarter-end.
- The company repurchased $3.513 billion of shares during the quarter, including a separately authorized $3.280 billion purchase of 35 million shares from Berkshire Hathaway and National Indemnity. The quarterly common dividend was $0.70 per share, up from $0.63 a year earlier.
Material changes, outlook and risks
- The prior-year quarter included a $423 million pretax ($261 million after-tax) noncash gain from consolidating Merey Sweeny, L.P. Its absence, lower WRB equity earnings due to turnarounds, increased noncontrolling interests and higher interest expense weighed on year-over-year attributable earnings. Higher refining margins, stronger Midstream and Chemicals affiliate earnings, and lower taxes partly offset these effects.
- Management gave no specific consolidated earnings or financial guidance in the supplied filing text. It said current cash, operating cash generation and access to external funding should be sufficient for expected capital spending, dividends, benefit contributions, debt repayments and share repurchases. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- Management highlighted volatile crude, product, NGL, natural gas, refining, marketing and petrochemical prices and margins; refinery turnarounds, output and feedstock availability; affiliate distribution decisions; project execution and permitting; and weather, operational and transportation disruptions as factors affecting results and cash flows.
- Environmental accruals were $456 million at quarter-end. Phillips 66 reported 30 unresolved U.S. sites with potential liability under CERCLA or comparable laws. Management stated it did not expect known contingency costs to exceed accruals by an amount that would materially harm consolidated financial statements, while noting estimates may change.
- Guarantees included up to $277 million for certain joint-venture debt and maximum residual-value exposures of $554 million for the Houston headquarters lease and $298 million for railcar and airplane leases. The filing also describes legal, environmental and climate-regulation risks; no material changes to previously reported risk factors were noted.
- Adoption of revenue-recognition guidance changed excise-tax presentation and produced a $35 million retained-earnings adjustment, net of tax, plus $13 million to noncontrolling interests. The company expected the upcoming lease standard to materially increase reported assets and liabilities, while not materially affecting income or cash flow.
Important facts for investors to verify
- Reconcile revenue and tax-line comparisons for the new net excise-tax presentation.
- Assess the sustainability of operating cash flow, including working-capital swings and the timing and amount of affiliate distributions.
- Separate recurring operating performance from the prior-year MSLP gain and current-quarter disposition, tax-incentive and tax-reform effects.
- Review the effect of the large share repurchase and increased debt on leverage, liquidity and future interest expense.
- Monitor refining and chemicals margins, refinery utilization and turnaround activity, and execution and funding of announced Midstream projects.
- Track environmental accrual adequacy, lease-guarantee exposure, legal matters and the evolving costs of environmental and climate-related regulation.