Phillips 66 — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Phillips 66 is an integrated energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties (M&S) segments.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Sales and other operating revenues | $111.5 billion | $102.4 billion |
| Income before income taxes | $7.445 billion | $3.555 billion |
| Net income attributable to Phillips 66 | $5.595 billion | $5.106 billion |
| Diluted EPS | $11.80 | $9.85 |
| Cash from operating activities | $7.573 billion | $3.648 billion |
| Capital expenditures and investments | $2.639 billion | $1.832 billion |
| Cash and cash equivalents at year-end | $3.019 billion | $3.119 billion |
| Total debt | $11.160 billion | $10.110 billion |
| Total debt to capital | 29% | 27% |
| Cash dividends declared per share | $3.10 | $2.73 |
Fourth-quarter 2018 revenue was $29.098 billion, income before taxes $2.918 billion, net income $2.316 billion, net income attributable to Phillips 66 $2.240 billion, and diluted EPS $4.82. Revenue comparisons require care: beginning in 2018, excise taxes on refined-product sales were presented net rather than gross, so reported revenue is not directly comparable with prior years.
At year-end, total assets were $54.302 billion and total equity $27.153 billion. Management reported approximately $5.6 billion of committed capacity available under credit facilities. Phillips 66’s $5 billion revolver and commercial paper program were undrawn; Phillips 66 Partners had $125 million outstanding under its $750 million revolver.
Segments and changes versus 2017
| Segment | 2018 income before income taxes | Change and principal drivers |
|---|---|---|
| Midstream | $1.181 billion | Up $543 million; higher transportation volumes, tariffs and storage rates, improved NGL and other results, and stronger DCP Midstream affiliate earnings. |
| Chemicals | $1.025 billion | Up $309 million; new U.S. Gulf Coast petrochemical assets reached full operations, with lower hurricane costs and impairments also contributing. |
| Refining | $4.535 billion | Up $2.459 billion; higher realized margins, feedstock advantage and optimization benefits outweighed lower market crack spreads. Worldwide refinery utilization was 95%, unchanged. |
| Marketing and Specialties | $1.557 billion | Up $537 million; higher marketing fuel margins, especially internationally, a biodiesel tax incentive, and improved specialty margins. |
| Corporate and Other | $(853) million | Loss narrowed by $42 million; net interest expense increased by $51 million. |
Consolidated attributable earnings increased $489 million, or 10%, to $5.595 billion. Improvements in operating and affiliate results were partly offset by the absence of the $2.735 billion provisional Tax Act benefit recorded in 2017, the absence of a 2017 Merey Sweeny consolidation gain, higher noncontrolling interests and higher interest expense. The Tax Act reduced the U.S. federal corporate tax rate to 21% starting in 2018.
Cash, capital allocation and outlook
- Operating cash flow rose 108% to $7.573 billion, reflecting stronger realized refining and marketing margins, higher affiliate distributions and lower benefit-plan contributions; working-capital movements partly offset the increase.
- 2018 uses included $4.645 billion of common-stock repurchases, $2.639 billion of capital expenditures and investments, $1.436 billion of common dividends, and $550 million of early debt repayment. The company also issued $1.5 billion of senior notes.
- Management budgeted $3.2 billion of 2019 company capital expenditures and investments, including $0.9 billion for Phillips 66 Partners. Its expected share of self-funded spending by DCP Midstream, CPChem and WRB was an additional $1.2 billion.
- Planned investment emphasizes Midstream pipelines, storage and fractionation; Refining reliability, safety, environmental compliance and higher-value yields; and European retail sites. Major developments include Gray Oak, the Sweeny Hub expansion and the South Texas Gateway Terminal, with timing and returns subject to execution and market conditions.
- The board declared a $0.80 quarterly dividend in February 2019; management forecast a double-digit percentage increase in the quarterly dividend rate during 2019. Repurchases remain discretionary and depend on market conditions and other factors.
Risks, contingencies and notable items
- Results and cash generation are exposed to volatile crude, natural gas and NGL prices; refining, marketing and petrochemical margins; feedstock differentials; and working-capital swings. Management noted that the WTI-Brent differential widened, while U.S. gasoline crack spreads declined in 2018.
- Key risks include environmental and climate regulation, renewable-fuel obligations and RIN costs, severe weather and operational interruptions, cybersecurity, project delays or cost overruns, dependence on third-party transportation and joint-venture distributions, and changing access to financing.
- Accrued asset-retirement and environmental costs totaled $708 million at year-end. Environmental costs expensed were $690 million in 2018; management estimated approximately $740 million in 2019 and $700 million in 2020. The company reported 27 unresolved sites with potential CERCLA or comparable state-law liability.
- Reported legal matters included a $150,000 CARB settlement and an EPA proposal involving $150,000 in penalties plus approximately $220,000 for environmental projects at the Billings refinery. A Wood River groundwater and hazardous-waste complaint remained unresolved; management stated that pending reportable proceedings were not expected to materially affect consolidated financial position.
- Other exposures include guarantees of up to $304 million for certain joint-venture obligations, residual-value guarantees of $554 million on the Houston headquarters lease and $300 million on railcar and aircraft leases, and indemnification obligations associated with the ConocoPhillips separation.
- Adoption of revenue standard Topic 606 changed excise-tax presentation and produced a $49 million cumulative increase to opening equity. Adoption of the lease standard in 2019 was expected to add approximately $1.4 billion of right-of-use assets and operating lease liabilities, without a material income-statement or cash-flow impact.
Important facts for investors to verify
- Review the full audited statements and notes for cash-flow quality, working-capital effects, debt maturities and affiliate distributions; reported 2018 results rely meaningfully on equity-method earnings and distributions.
- Assess the sustainability of Refining’s unusually strong 2018 results and the extent to which feedstock advantages, margins and crude differentials persist.
- Check progress, ownership economics, costs and start-up schedules for Gray Oak and other major Midstream projects, as well as CPChem’s future growth spending.
- Reconcile year-over-year revenue using the excise-tax presentation change, and separate recurring operating performance from the 2017 Tax Act benefit and Merey Sweeny gain.
- Monitor environmental and regulatory obligations, RIN exposure, joint-venture and separation-related indemnities, and the discretionary nature of future buybacks and dividends.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2018; management also concluded disclosure controls were effective.