Phillips 66 2014 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; the fourth-quarter figures below are unaudited. Phillips 66 operates Midstream, Chemicals, Refining, and Marketing and Specialties businesses, with significant activities conducted through equity-method joint ventures. Prior-year segment results were recast to reflect a January 2014 reporting realignment.
Key financial metrics
| Metric | 2014 | 2013 | Change or context |
|---|---|---|---|
| Sales and other operating revenues | $161.2 billion | $171.6 billion | Down 6%, primarily reflecting lower average crude oil and petroleum product prices. |
| Net income attributable to Phillips 66 | $4.762 billion | $3.726 billion | Up 28%; includes discontinued operations and significant gains. |
| Continuing-operations income attributable to Phillips 66 | $4.056 billion | $3.665 billion | Up 11%. |
| Diluted EPS | $8.33 | $6.02 | Continuing-operations diluted EPS was $7.10 versus $5.92. |
| Operating cash flow | $3.529 billion | $6.027 billion | Down $2.498 billion; working capital was a $1.020 billion use of cash in 2014. |
| Capital expenditures and investments | $3.773 billion | $1.779 billion | Higher spending, particularly in Midstream. |
| Cash and cash equivalents | $5.207 billion | $5.400 billion | Year-end balance; approximately $4.9 billion remained available under the company revolving facility. |
| Total debt / debt-to-capital | $8.684 billion / 28% | $6.155 billion / 22% | Debt-to-capital remained within the company’s stated 20%–30% target range. |
| Dividends paid per share | $1.8900 | $1.3275 | Dividend rate increased 28% during 2014. |
Fourth-quarter 2014 sales were $34.963 billion and net income attributable to Phillips 66 was $1.147 billion, or $2.07 basic and $2.05 diluted per share. Fourth-quarter 2013 amounts were $43.049 billion, $826 million, and $1.38 basic and $1.37 diluted per share, respectively.
Segment earnings attributable to Phillips 66
- Midstream: $507 million, up from $469 million; higher Transportation and NGL earnings partly offset lower DCP Midstream earnings.
- Chemicals: $1.137 billion, up 15%; improved ethylene and polyethylene margins supported results.
- Refining: $1.771 billion, up 1%; reported results included the MRC disposition gain, partly offset by weaker gasoline and distillate margins and the Whitegate impairment.
- Marketing and Specialties: $1.034 billion, up 16%; lower fuel prices supported marketing margins.
Worldwide refining margin was $9.93 per barrel versus $9.90 in 2013; utilization improved to 94% from 93%. Central Corridor margin declined to $15.26 per barrel from $18.62.
Material changes and unusual items
- Reported earnings rose by $1.036 billion year over year, but included a $696 million pre-tax noncash gain on the PSPI share exchange, a $369 million after-tax gain and related tax adjustment associated with the MRC sale, and $126 million after-tax recognition of a previously deferred ICHP sale gain. PSPI contributed $706 million of discontinued-operations income.
- These benefits were offset in part by a $131 million after-tax Whitegate Refinery impairment, lower realized gasoline and distillate margins, and reduced DCP Midstream equity earnings amid falling NGL and crude prices.
- Operating cash flow fell despite higher reported net income, reflecting working-capital movements and the unusually high prior-year working-capital contribution. A $760 million WRB special distribution was included in operating cash flow; another $472 million was classified as investing proceeds.
- Phillips 66 issued $2.5 billion of long-term notes in November 2014 and repurchased $2.3 billion of common stock. It ended the year with $8.684 billion of total debt.
Outlook, commentary, and risks
- Management budgeted $4.6 billion of 2015 company capital spending and investments; including expected spending by DCP Midstream, CPChem, and WRB, the program was approximately $6.7 billion. Management said budgets would be reviewed as market conditions evolve.
- Management forecast 2015 refinery utilization in the low-90% range and forecast double-digit annual dividend-rate increases in 2015 and 2016. It also expected the remaining $243 million deferred ICHP gain to be recognized in the first half of 2015, absent indemnity claims.
- Major growth projects include the 100,000-barrel-per-day Sweeny Fractionator One, expected to start in the second half of 2015, and the Freeport LPG export terminal, expected to start in the second half of 2016. The company delayed investment decisions on a second phase of Texas Midstream projects amid challenging market conditions.
- Key risks include volatile crude, natural gas and NGL prices and refining/chemical margins; environmental and renewable-fuel requirements, including potential invalid RIN replacement costs estimated at up to approximately $150 million before tax; operational outages, severe weather and cybersecurity disruptions; joint-venture distribution dependence; and legal, environmental, tax, and post-Separation indemnity exposures.
- Environmental remediation accruals were $496 million at year-end. The company reported 34 unresolved sites with potential CERCLA or comparable state-law liability and stated it did not expect known contingencies to exceed accruals by a material amount based on information then available.
Most important facts for investors to verify
- How much of the 2014 earnings increase is recurring, given the PSPI, MRC, and ICHP gains and the Whitegate impairment.
- Whether operating cash flow recovers from the working-capital outflow and supports capital spending, dividends, and repurchases without continued debt growth.
- How lower commodity prices and changing crack spreads affect DCP Midstream, refining margins, and marketing profitability, and whether joint ventures sustain distributions.
- Progress, cost, timing, and expected returns for the 2015–2016 growth projects, alongside environmental, RIN, legal, and indemnification exposures.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.