Phillips 66 2013 Form 10-K Summary
Business context and reporting period
Phillips 66 is an energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties businesses. This filing covers the fiscal year ended December 31, 2013; the fourth-quarter figures below are unaudited. The company reports a 50% equity interest in both DCP Midstream and Chevron Phillips Chemical Company (CPChem), alongside its refining and marketing operations.
Comparability note: Phillips 66 separated from ConocoPhillips in May 2012, so 2012 results combine eight months of Phillips 66 with four months of predecessor-business results. Effective January 2013, segments were reorganized and prior periods recast; PSPI was also recast as discontinued operations.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Sales and other operating revenues | $171.6 billion | $179.3 billion |
| Net income attributable to Phillips 66 | $3.726 billion | $4.124 billion |
| Income from continuing operations | $3.682 billion | $4.083 billion |
| Diluted EPS | $6.02 | $6.48 |
| Net cash provided by operating activities | $6.027 billion | $4.296 billion |
| Capital expenditures and investments | $1.779 billion | $1.701 billion |
| Cash and cash equivalents at year-end | $5.400 billion | $3.474 billion |
| Total debt | $6.155 billion | $6.974 billion |
| Debt to capital | 22% | 25% |
Operating cash flow rose 40%, principally reflecting positive working-capital movements and increased CPChem distributions, partly offset by weaker refining margins. The company reported approximately $5.4 billion of capacity under available liquidity facilities. Current assets were $19.237 billion and current liabilities were $12.931 billion at year-end.
Segment net income attributable to Phillips 66 was: Refining $1.851 billion (down 42%); Chemicals $986 million (up 20%); Marketing and Specialties $790 million (up 89%); and Midstream $469 million, compared with $53 million in 2012. Refining margins fell to $10.10 per barrel from $13.59; worldwide refinery utilization remained 93%. The Refining decline reflected a 16% reduction in market cracks and lower feedstock advantage. Chemicals benefited from improved polyethylene margins and lower debt costs; Marketing and Specialties benefited from higher marketing margins, including RIN-related benefits.
Fourth-quarter 2013 sales were $43.049 billion and net income attributable to Phillips 66 was $826 million, or $1.38 per basic share and $1.37 diluted. Fourth-quarter 2012 sales were $43.933 billion and net income was $708 million, or $1.12 basic and $1.11 diluted.
Material changes, outlook, risks and unusual items
- 2013 earnings fell 10% year over year, mainly because of lower realized refining margins. Impairment expense declined substantially, to $29 million from $1.158 billion in 2012.
- Cash uses included $1.8 billion of capital spending and investments, $2.2 billion of share repurchases, $1.0 billion of debt repayment, and $0.8 billion of dividends. The company repurchased approximately 44.1 million shares for $2.6 billion through year-end and increased its dividend rate during 2013.
- Management budgeted $2.7 billion of 2014 company capital spending; including expected spending by DCP Midstream, CPChem and WRB, the stated total capital program was $4.6 billion. Management forecast 2014 refinery utilization in the low-90% range. Planned growth includes an NGL fractionator and LPG export terminal, subject to project execution and market conditions.
- After year-end, the company agreed to exchange PSPI for its own shares; PSPI was expected to have about $450 million of cash at closing. Management anticipated an approximately $710 million gain, subject to adjustments, and expected the transaction to close in first-quarter 2014. The filing estimated approximately 18 million shares would have been exchanged using the February 14, 2014 share price.
- In February 2014, Phillips 66 agreed to contribute assets to Phillips 66 Partners for $700 million, with consideration including cash, partnership units and a note payable to a Phillips 66 subsidiary.
- Environmental exposure includes $492 million of accrued environmental costs. The company identified possible pre-tax exposure of approximately $150 million if previously purchased RINs are later found invalid; the amount and timing are not reasonably estimable. Environmental regulation, including renewable-fuel requirements and greenhouse-gas rules, may increase costs.
- Other matters to monitor include the PDVSA arbitration over the MSLP ownership call right, several environmental and regulatory proceedings, and indemnification and tax-sharing obligations related to the ConocoPhillips separation. Management stated known contingency costs were not expected to materially exceed recorded accruals, while acknowledging estimation uncertainty.
- Key business risks include volatile crude, NGL and natural-gas prices and refining and chemicals margins; dependence on joint-venture distributions; project cost, schedule and returns; operational, weather, cybersecurity and transportation disruptions; and potential effects of regulation or credit deterioration. A downgrade below investment grade under specified conditions could also give Chevron a purchase right over Phillips 66’s CPChem interest.
Investor verification priorities
- Confirm the 2012 comparison is adjusted for the separation and 2013 segment realignment before interpreting year-over-year trends.
- Assess whether the cash-flow increase is sustainable: the filing attributes much of it to working capital, while refining margins weakened.
- Verify the assumptions behind the $4.6 billion 2014 capital program, project approvals, schedules and expected returns.
- Track the PSPI share exchange, expected gain and cash delivered at closing, and the Phillips 66 Partners asset contribution and financing.
- Review the potential RIN replacement exposure, environmental accruals and spending, and the status and possible financial effects of legal, arbitration and separation-related contingencies.
- Reconcile capital returns and leverage: share repurchases, dividends, debt repayment, available liquidity and the company’s stated 20%–30% debt-to-capital target range.