Phillips 66 — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; it also reports unaudited fourth-quarter results. Phillips 66 operates across Midstream, Chemicals, Refining, and Marketing and Specialties (M&S), with significant equity-method joint ventures.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Sales and operating revenue | $98.975 billion | $161.212 billion |
| Income from continuing operations attributable to Phillips 66 | $4.227 billion | $4.056 billion |
| Net income attributable to Phillips 66 | $4.227 billion | $4.762 billion |
| Diluted EPS | $7.73 | $8.33 |
| Cash from operating activities | $5.713 billion | $3.529 billion |
| Capital expenditures and investments | $5.764 billion | $3.773 billion |
| Cash and cash equivalents at year-end | $3.074 billion | $5.207 billion |
| Total debt | $8.887 billion | $8.635 billion |
| Total equity | $23.938 billion | $22.037 billion |
Revenue fell 39%, primarily reflecting lower average prices for crude oil, petroleum products, and NGL. Continuing-operations earnings rose 4%; reported net income declined because 2014 included a $706 million contribution from discontinued operations, including the PSPI transaction gain. Operating cash flow less capital expenditures and investments was approximately negative $51 million in 2015. Debt-to-capital was 27%; excluding Phillips 66 Partners’ debt and noncontrolling interest, adjusted debt-to-capital was 25%, within the company’s 20%–30% target range. Phillips 66 reported approximately $4.9 billion of available capacity under its $5 billion revolving facility and no commercial paper borrowings.
Dividends declared were $2.18 per share for 2015, up from $1.89 in 2014; cash dividends paid were $1.172 billion. The company repurchased $1.512 billion of stock. Cash fell by $2.133 billion during the year.
Fourth-quarter results
Unaudited Q4 2015 revenue was $21.893 billion, income before tax was $832 million, net income was $666 million, and net income attributable to Phillips 66 was $650 million ($1.20 diluted EPS). Q4 2014 attributable net income was $1.147 billion ($2.05 diluted EPS), on revenue of $34.963 billion.
Segment results and changes
| Segment earnings attributable to Phillips 66 | 2015 | 2014 | Change |
|---|---|---|---|
| Midstream | $13 million | $507 million | Down $494 million |
| Chemicals | $962 million | $1.137 billion | Down $175 million |
| Refining | $2.555 billion | $1.771 billion | Up $784 million |
| Marketing and Specialties | $1.187 billion | $1.034 billion | Up $153 million |
- Refining: Worldwide refining margin increased to $11.84 per barrel from $9.93. Higher gasoline crack spreads, stronger secondary-product margins, and lower utility costs lifted earnings; lower feedstock advantage, weaker distillate spreads, and more downtime and turnarounds were offsets. Crude utilization declined to 91% from 94%.
- Midstream: Transportation earnings improved, but weak commodity prices and impairment charges drove DCP Midstream’s contribution sharply lower. Phillips 66 recorded a $324 million loss from its DCP investment versus $135 million of earnings in 2014. DCP recognized $460 million of goodwill impairment and $342 million of other asset impairments; these reduced Phillips 66 equity earnings by $232 million after tax.
- Chemicals: Earnings fell 15%, mainly from lower sales prices and margins, weaker equity-affiliate earnings, and greater turnaround and maintenance activity. Higher volumes and lower feedstock and utility costs partly offset the decline.
- M&S: Earnings rose 15%, helped by domestic marketing activity and volumes, biodiesel tax credits, and recognition of $242 million after tax of deferred gain from the 2013 sale of the Immingham power plant. Lower international marketing and lubricant margins were offsets.
Outlook, material items, and risks
- Management budgeted $3.9 billion of 2016 company capital expenditures and investments, including $0.3 billion for Phillips 66 Partners. Including expected spending by DCP Midstream, CPChem, and WRB, the total 2016 capital program was projected at $5.3 billion. Major spending priorities include Midstream growth, reliability, safety, environmental compliance, and refinery yield improvements.
- Management expected 2016 refinery utilization in the mid-90% range and forecast a double-digit percentage increase in the quarterly dividend rate during 2016. The board declared a $0.56-per-share quarterly dividend in February 2016.
- In October 2015, Phillips 66 contributed $1.5 billion to DCP Midstream; both owners agreed to forgo DCP cash distributions amid weak commodity prices. Phillips 66’s year-end carrying value in DCP was approximately $2.3 billion, and management said it would monitor for further effects.
- Management expected a roughly $590 million tax refund to benefit operating cash flow in Q1 2016, following a refund claim filed after late-2015 tax legislation.
- Environmental compliance costs remain material: expenses were $581 million in 2015 and were expected to be about $655 million annually in 2016 and 2017; capitalized environmental costs were $330 million in 2015 and expected to be about $235 million annually in 2016 and 2017. Accrued environmental costs were $485 million at year-end.
- The company identified possible exposure of approximately $150 million before tax if previously purchased Renewable Identification Numbers are found invalid; replacement costs recorded through year-end were not material, and the ultimate exposure was not estimable.
- Key risks include volatile crude, NGL, natural gas, refined-product and chemical prices and margins; environmental and renewable-fuel regulation; project execution and returns; refinery, pipeline, and other operating interruptions; reliance on joint ventures and third-party transport; and climate, political, cybersecurity, and financing risks.
- Reportable legal matters include environmental and permitting allegations at several facilities. The company stated it did not expect the pending proceedings described to materially affect consolidated financial position. It reported $485 million of accrued environmental costs and various guarantees and indemnities; future payments on some indemnities cannot be reasonably estimated.
Investor verification priorities
- Reconcile the strong reported continuing earnings with cash generation, capital spending, dividends, and buybacks; review working-capital effects and the expected tax refund.
- Assess DCP Midstream’s commodity sensitivity, impairment assumptions, distribution outlook, and the implications of Phillips 66’s $1.5 billion contribution.
- Test whether refining margins, utilization, and the 2016 capital program support management’s return and dividend expectations.
- Review the $150 million potential RIN replacement exposure, environmental obligations, and material guarantees or indemnities.
- Confirm the distinction between 2014 continuing earnings and total net income, which included discontinued-operation gains. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective at year-end.