Phillips 66 — Q1 2012 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2012. Phillips 66 became an independent, publicly traded company in connection with ConocoPhillips’ separation, completed April 30, 2012; its stock began regular-way trading May 1. Accordingly, Q1 results are combined historical financial statements of ConocoPhillips’ downstream businesses, not results for a standalone Phillips 66 throughout the quarter. They include allocated parent-company costs and may not reflect the costs or results that would have applied as a standalone business.
The business comprises refining and marketing (R&M), Midstream (principally a 50% interest in DCP Midstream), Chemicals (a 50% interest in CPChem), and corporate activities.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 or prior date |
|---|---|---|
| Sales and other operating revenues | $45.783 billion | $44.779 billion |
| Income before income taxes | $1.069 billion | $1.095 billion |
| Net income attributable to Phillips 66 | $636 million | $676 million |
| Net cash used in operating activities | $361 million | $1.500 billion |
| Capital expenditures and investments | $218 million | $165 million |
| Total assets | $52.998 billion | $43.211 billion at Dec. 31, 2011 |
| Short- and long-term debt on balance sheet | $6.178 billion | $391 million at Dec. 31, 2011 |
- Revenue increased about 2%, while attributable net income declined about 6%. The effective tax rate rose to 40% from 38%.
- Operating cash use improved year over year, primarily because the inventory build was smaller. Working capital remained a significant cash-flow factor: inventories rose to $5.040 billion from $3.466 billion at year-end.
- Cash and cash equivalents were nil at March 31. Restricted cash was $6.050 billion, primarily note proceeds held in escrow and unavailable for general use at that date. The escrow funds were released at separation.
- In March, the company issued $5.8 billion of senior notes with maturities from 2015 to 2042 and stated coupons of 1.950% to 5.875%. The balance sheet reports $207 million of short-term and $5.971 billion of long-term debt; a separate debt disclosure reports $6.165 billion carrying amount, excluding capital leases.
- A $4.0 billion five-year revolving facility was available after separation conditions were met; it was undrawn. A $1.2 billion receivables securitization facility was arranged in April and also undrawn. Management considered liquidity adequate for anticipated needs.
Segments and changes versus prior year
- R&M: Earnings fell to $400 million from $488 million. U.S. earnings were $407 million versus $423 million; international operations recorded a $7 million loss versus $65 million earnings. A $42 million pretax impairment, higher operating expenses, weaker international refining margins and taxes on certain foreign dividends weighed on results. U.S. refining margin was $10.89 per barrel versus $10.05; international margin was $7.29 versus $8.28.
- Midstream: Earnings increased to $89 million from $61 million, mainly on higher gathering and processing volumes and improved marketing, partly offset by lower NGL prices.
- Chemicals: Earnings increased to $217 million from $185 million, mainly on improved olefins and polyolefins margins and lower utility costs. CPChem’s planned early retirement of fixed-rate bonds was expected to reduce Phillips 66’s equity earnings after tax by about $80 million over the remainder of 2012.
- Worldwide refinery capacity utilization was 91%, versus 89%; crude processed was 2.027 million barrels per day, versus 2.145 million. Capacity declined following changes in the asset base.
Outlook, transactions, risks and unusual items
- Following separation, Phillips 66 paid ConocoPhillips a $5.95 billion special cash distribution on April 30, subject to working-capital true-up. The company also retired about $185 million of existing debt and financed a $2.0 billion three-year amortizing term loan in April.
- Management expected to begin paying a quarterly dividend of $0.20 per share in Q3 2012. Declarations and amounts remain subject to board discretion and other factors.
- An agreement was signed in late April to sell the Trainer refinery and associated assets for approximately $180 million, subject to working-capital adjustments and regulatory approvals; closing was expected in Q2. At March 31, the assets had a net carrying value of $15 million.
- The carrying value of the 25% investment in Rockies Express Pipeline was approximately $780 million. A possible sale by another investor could provide an indication of fair value; Phillips 66 said it would assess whether any indicated impairment was other than temporary.
- Environmental accruals were $540 million at March 31, compared with $542 million at year-end; the company expected substantial expenditures over the next 30 years. Management said known contingencies were not expected to exceed accruals by an amount that would materially adversely affect the combined financial statements, but estimates remain sensitive to future developments.
- At March 31, guarantees included up to $49 million for certain joint-venture debt and $188 million for other arrangements. Separation-related guarantees added in April included up to $251 million for MSLP notes and an estimated $116 million relating to Excel Paralubes notes. Recorded indemnification liabilities were $272 million; maximum future payments for certain indefinite-term indemnities could not be reasonably estimated.
- PDVSA is challenging Phillips 66’s acquisition of its interest in MSLP through arbitration; hearings were scheduled for December 2012. The filing also identifies commodity-price and refining-margin volatility, environmental and climate regulation, operating disruptions, litigation, and joint-venture decisions among key risks.
- Management stated that no material changes had occurred to the previously disclosed risk factors and that disclosure controls were effective as of March 31. The filing gives no formal earnings or operating guidance beyond the items noted above.
Important facts for investors to verify
- Standalone cash, debt, liquidity and financing costs after the separation and the $5.95 billion distribution; distinguish unrestricted funds from the $6.050 billion restricted balance at quarter-end.
- Actual post-spin corporate costs and cash flows compared with the allocated historical amounts in these combined statements.
- Completion and proceeds from the Trainer asset sale, related approvals, and working-capital adjustments.
- Any impairment assessment or charge for the Rockies Express investment, and the outcome of the MSLP arbitration.
- The timing and actual impact of CPChem’s bond retirement, the anticipated Q3 dividend, and environmental, legal and guarantee exposures.