PHILLIPS 66 PARTNERS LP Unless otherwise stated or the context otherwise indicates, all references to
"
Management's Discussion and Analysis is the Partnership's analysis of its financial performance, financial condition, and of significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the Partnership's plans, strategies, objectives, expectations and intentions. The words "anticipate," "estimate," "believe," "budget," "continue," "could," "intend," "may," "plan," "potential," "predict," "seek," "should," "will," "would," "expect," "objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target" and similar expressions identify forward-looking statements. The Partnership does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the Partnership's disclosures under the heading: "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS."
BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW
Partnership Overview
We are a growth-oriented master limited partnership formed to own, operate,
develop and acquire primarily fee-based midstream assets. Our operations consist
of crude oil, refined petroleum products and natural gas liquids (NGL)
transportation, terminaling, processing and storage assets. We conduct our
operations through both wholly owned and joint venture operations. The majority
of our wholly owned assets are associated with, and are integral to the
operation of, nine of
We primarily generate revenue by providing fee-based transportation,
terminaling, processing, storage and fractionation services to
Our common units trade on the
How We Evaluate Our Operations Our management uses a variety of financial and operating metrics to analyze our performance, including: (1) volumes handled; (2) operating and maintenance expenses; (3) net income (loss) before net interest expense, income taxes, depreciation and amortization (EBITDA); (4) adjusted EBITDA; and (5) distributable cash flow.
Volumes Handled
The amount of revenue we generate primarily depends on the volumes of crude oil,
refined petroleum products and NGL that we handle in our pipeline, terminal,
rail rack, processing, storage and fractionator systems. In addition, our equity
affiliates generate revenue from transporting and terminaling crude oil, refined
petroleum products and NGL. These volumes are primarily affected by the supply
of, and demand for, crude oil, refined petroleum products and NGL in the markets
served directly or indirectly by our assets, as well as the operational status
of the refineries served by our assets.
Operating and Maintenance Expenses Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses primarily consist of labor expenses (including contractor services), utility costs, and repair and maintenance expenses. Operating and maintenance expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities,
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particularly maintenance activities, performed during the period. Although we seek to manage our maintenance expenditures on our facilities to avoid significant variability in our quarterly cash flows, we balance this approach with our high standards of safety and environmental stewardship, such that critical maintenance is regularly performed.
Our operating and maintenance expenses are also affected by volumetric
gains/losses resulting from variances in meter readings and other measurement
methods, as well as volume fluctuations due to pressure and temperature changes.
Under certain commercial agreements with
EBITDA, Adjusted EBITDA and Distributable Cash Flow We define EBITDA as net income (loss) plus net interest expense, income taxes, depreciation and amortization.
Adjusted EBITDA is EBITDA, further adjusted for:
• The proportional share of equity affiliates' net interest expense, income
taxes and depreciation and amortization.
• Transaction costs associated with acquisitions.
• Certain other noncash items, including expenses indemnified by
Distributable cash flow is defined as adjusted EBITDA less (i) equity affiliate distributions less than proportional EBITDA, (ii) maintenance capital expenditures, (iii) net interest expense, (iv) income taxes paid and (v) preferred unit distributions, plus adjustments for deferred revenue impacts.
EBITDA, adjusted EBITDA, and distributable cash flow are not presentations made
in accordance with generally accepted accounting principles in
• Our operating performance as compared to other publicly traded
partnerships in the midstream energy industry, without regard to
historical cost basis or, in the case of EBITDA and adjusted EBITDA,
financing methods.
• The ability of our business to generate sufficient cash to support our
decision to make distributions to our unitholders.
• Our ability to incur and service debt and fund capital expenditures.
• The viability of acquisitions and other capital expenditure projects and
the returns on investment of various investment opportunities.
The GAAP performance measure most directly comparable to EBITDA and adjusted EBITDA is net income. The GAAP liquidity measure most directly comparable to EBITDA and distributable cash flow is net cash provided by operating activities. These non-GAAP financial measures should not be considered alternatives to GAAP net income or net cash provided by operating activities. They have important limitations as analytical tools because they exclude some items that affect net income and net cash provided by operating activities. Additionally, because EBITDA, adjusted EBITDA, and distributable cash flow may be defined differently by other companies in our industry, our definition of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
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Business Environment Since we do not own any of the crude oil, refined petroleum products and NGL we handle and do not engage in the trading of crude oil, refined petroleum products and NGL, we have limited direct exposure to risks associated with fluctuating commodity prices, although these risks indirectly influence our activities and results of operations over the long term.
Our throughput volumes primarily depend on the volume of crude oil processed and
refined petroleum products produced at
The global markets for crude oil and petroleum products were materially disrupted during the first quarter of 2020 by two significant events:
• The outbreak of the Coronavirus Disease 2019 (COVID-19) and its
development into a pandemic resulted in significant economic disruption
globally. Actions taken by governments to prevent the spread of the
disease included severe travel and business restrictions, which resulted
in substantial decreases in the demand for many refined petroleum
products, particularly gasoline and jet fuel. This drop in demand led
refiners to reduce crude oil processing rates and eventually to lower
crude oil demand and prices.
• The dispute over production levels between Russia and the members of the
Organization of Petroleum Exporting Countries (OPEC), including Saudi
Arabia , resulted in an oversupply of crude oil, which exacerbated the
decline in crude oil prices and eventually led to lower petroleum product
prices as well.
We expect these events may result in reduced transportation and terminaling
volumes in the near term. In
While we believe we have substantially mitigated our indirect exposure to
commodity price fluctuations through the minimum volume commitments in our
commercial agreements with
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RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three months ended
Millions of Dollars
Three Months Ended
March 31
2020 2019
Revenues and Other Income
Operating revenues-related parties $ 258 296
Operating revenues-third parties 9 6
Equity in earnings of affiliates 136 119
Other income 1 2
Total revenues and other income 404 423
Costs and Expenses
Operating and maintenance expenses 88 139
Depreciation 30 29
General and administrative expenses 17 18
Taxes other than income taxes 11 11
Interest and debt expense 29 27
Other expenses 2 -
Total costs and expenses 177 224
Income before income taxes 227 199
Income tax expense 1 1
Net income 226 198
Less: Preferred unitholders' interest in net income 10 10
Less: General partner's interest in net income - 69
Limited partners' interest in net income $ 216 119
Net cash provided by operating activities $ 274 205
Adjusted EBITDA $ 321 281
Distributable cash flow $ 269 226
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Three Months Ended
March 31
2020 2019
Wholly Owned Operating Data
Pipelines
Pipeline revenues (millions of dollars) $ 111 109
Pipeline volumes(1) (thousands of barrels daily)
Crude oil 941 959
Refined petroleum products and NGL 866 768
Total 1,807 1,727
Average pipeline revenue per barrel (dollars) $ 0.67 0.70
Terminals
Terminal revenues (millions of dollars) $ 43 40 Terminal throughput (thousands of barrels daily) Crude oil(2) 460 471 Refined petroleum products 748 736 Total 1,208 1,207 Average terminaling revenue per barrel (dollars)$ 0.39 0.36
Storage, processing and other revenues (millions of dollars)
$ 113 153 Total operating revenues (millions of dollars)$ 267 302
Joint Venture Operating Data(3) Crude oil, refined petroleum products and NGL (thousands of barrels daily)
838 687
(1) Represents the sum of volumes transported through each separately tariffed pipeline segment. (2) Bayway and Ferndale rail rack volumes included in crude oil terminals. (3) Proportional share of total pipeline and terminal volumes of joint ventures consistent with recognized equity in earnings of affiliates.
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The following tables present reconciliations of EBITDA and adjusted EBITDA to net income, and EBITDA and distributable cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.
Millions of Dollars
Three Months Ended
March 31
2020 2019
Reconciliation to Net Income
Net income $ 226 198
Plus:
Depreciation 30 29
Net interest expense 28 27
Income tax expense 1 1
EBITDA 285 255
Plus:Proportional share of equity affiliates' net interest, taxes and depreciation and amortization
35 26
Expenses indemnified or prefunded by Phillips 66 - -
Transaction costs associated with acquisitions 1 -
Adjusted EBITDA 321 281
Plus:
Deferred revenue impacts*† 2 -
Less:
Equity affiliate distributions less than proportional EBITDA
1 9
Maintenance capital expenditures† 15 9
Net interest expense 28 27
Preferred unit distributions 10 10
Distributable cash flow $ 269 226
*Difference between cash receipts and revenue recognition. †Excludes Merey Sweeny capital reimbursements and turnaround impacts.
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Millions of Dollars
Three Months Ended
March 31
2020 2019
Reconciliation to Net Cash Provided by Operating
Activities
Net cash provided by operating activities $ 274 205
Plus:
Net interest expense 28 27 Income tax expense 1 1 Changes in working capital (12 ) 34 Undistributed equity earnings (4 ) (2 ) Deferred revenues and other liabilities - (9 ) Other (2 ) (1 ) EBITDA 285 255
Plus:
Proportional share of equity affiliates' net interest, taxes and depreciation and amortization
35 26
Expenses indemnified or prefunded by Phillips 66 - -
Transaction costs associated with acquisitions 1 -
Adjusted EBITDA 321 281
Plus:
Deferred revenue impacts*† 2 -
Less:
Equity affiliate distributions less than proportional EBITDA
1 9
Maintenance capital expenditures† 15 9
Net interest expense 28 27
Preferred unit distributions 10 10
Distributable cash flow $ 269 226
*Difference between cash receipts and revenue recognition. †Excludes Merey Sweeny capital reimbursements and turnaround impacts.
Statement of Income Analysis
Operating revenues decreased
Equity in earnings of affiliates increased
Operating and maintenance expenses decreased by
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CAPITAL RESOURCES AND LIQUIDITY Significant Sources of Capital Our sources of liquidity include cash generated from operations, distributions from our equity affiliates, borrowings from related parties and under our revolving credit facility, issuances of additional debt and equity securities, and funding from joint venture partners. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements, long-term capital expenditure requirements and our quarterly cash distributions.
Operating Activities
We generated
Equity Affiliate Operating Distributions
Our operating cash flows are also impacted by distribution decisions made by our
equity affiliates. During the first three months of 2020, cash from operations
included distributions of
ATM Programs
We have authorized an aggregate of
Revolving Credit Facility
At
Transfer of Equity Interests
We have a consolidated holding company that owns 65% of
See Note 4-Equity Investments and Loans, in the Notes to Consolidated Financial Statements, for additional information regarding these transactions.
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Shelf Registration
We have a universal shelf registration statement on file with the
Off-Balance Sheet Arrangements
In
Capital Requirements
Liberty Acquisition
In
Capital Expenditures and Investments Our operations are capital intensive and require investments to expand, upgrade, maintain or enhance existing operations and to meet environmental and operational requirements of our wholly owned and joint venture entities. Our capital requirements consist of maintenance and expansion capital expenditures, as well as contributions to our joint ventures. Maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or to maintain existing system volumes and related cash flows. In contrast, expansion capital expenditures are those made to expand and upgrade our systems and facilities and to construct or acquire new systems or facilities to grow our business, including contributions to joint ventures that are using the contributed funds for such purposes.
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Our capital expenditures and investments represent the total spending for our capital requirements. Our adjusted capital spending is a non-GAAP financial measure that demonstrates our net share of capital spending, and reflects an adjustment for the portion of consolidated capital spending funded by certain joint venture partners. Additionally, the disaggregation of adjusted capital spending between expansion and maintenance is not a distinction recognized under GAAP. We disaggregate adjusted capital spending because our partnership agreement requires that we treat expansion and maintenance capital differently for certain surplus determinations. Further, we generally fund expansion capital spending with both operating and financing cash flows and fund maintenance capital spending with operating cash flows.
Our capital expenditures and investments were:
Millions of Dollars
Three Months Ended
March 31
2020 2019
Capital expenditures and investments
Capital expenditures and investments $ 234 632
Capital expenditures and investments funded by certain
joint venture partners* (23 ) (422 )
Adjusted capital spending $ 211 210
Expansion $ 196 195
Maintenance 15 15
*See Note 4-Equity Investments and Loans, in the Notes to Consolidated Financial Statements, for additional information.
Our capital expenditures and investments for the first three months of 2020 were primarily associated with the following activities:
• Contributions toGray Oak Pipeline, LLC to progress construction of the pipeline system. • Contributions toLiberty Pipeline LLC to progress construction of the Liberty Pipeline, which will transport crude oil from the Rockies and Bakken production areas toCushing, Oklahoma . As discussed below, this project has been deferred. • Contributions toSouth Texas Gateway Terminal for construction activities related to the marine export terminal that will connect to the Gray Oak Pipeline inCorpus Christi, Texas . • Construction activities related to increasing capacity on the Sweeny toPasadena refined petroleum products pipeline. • Construction activities related to a new ethane pipeline from the Clemens Caverns to petrochemical facilities inGregory, Texas , nearCorpus Christi . • Construction activities related to increasing storage capacity at Clemens Caverns.
• Spending associated with other return, reliability and maintenance projects.
2020 Budget Update
In late
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Cash Distributions
On
The holders of our preferred units are entitled to receive cumulative quarterly
distributions equal to
Debt Repayment
On
Contingencies
From time to time, lawsuits involving a variety of claims that arise in the ordinary course of business are filed against us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various sites. We regularly assess the need for accounting recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.
Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include any contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.
Regulatory Matters
Our interstate common carrier crude oil and refined petroleum products pipeline
operations are subject to rate regulation by the
Legal and Tax Matters
Under our amended omnibus agreement,
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Environmental
We are subject to extensive federal, state and local environmental laws and regulations. These requirements, which frequently change, regulate the discharge of materials into the environment or otherwise relate to protection of the environment. Compliance with these laws and regulations may require us to remediate environmental damage from any discharge of petroleum or chemical substances from our facilities or require us to install additional pollution control equipment at or on our facilities. Our failure to comply with these or any other environmental or safety-related regulations could result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of governmental orders that may subject us to additional operational constraints. Future expenditures may be required to comply with the Federal Clean Air Act and other federal, state and local requirements in respect of our various sites, including our pipelines and storage assets. The impact of legislative and regulatory developments, if enacted or adopted, could result in increased compliance costs and additional operating restrictions on our business, each of which could have an adverse impact on our financial position, results of operations and liquidity.
As with all costs, if these expenditures are not ultimately recovered in the tariffs and other fees we receive for our services, our operating results will be adversely affected. We believe that substantially all similarly situated parties and holders of comparable assets must comply with similar environmental laws and regulations. However, the specific impact on each may vary depending on a number of factors, including, but not limited to, the age and location of its operating facilities.
We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. New or expanded environmental requirements, which could increase our environmental costs, may arise in the future. We believe we are in substantial compliance with all legal obligations regarding the environment and have established the environmental accruals that are currently required; however, it is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed, because not all of the costs are fixed or presently determinable (even under existing legislation) and the costs may be affected by future legislation or regulations.
Indemnification and Excluded Liabilities
Under our amended omnibus agreement and pursuant to the terms of various
agreements under which we acquired assets from
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. You can identify our forward-looking statements by the words "anticipate," "estimate," "believe," "budget," "continue," "could," "intend," "may," "plan," "potential," "predict," "seek," "should," "will," "would," "expect," "objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target" and similar expressions.
We based the forward-looking statements on our current expectations, estimates and projections about us and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:
• The continued ability ofPhillips 66 to satisfy its obligations under our commercial and other agreements. • Reductions in the volume of crude oil, refined petroleum products and NGL we transport, fractionate, process, terminal and store. • Changes to the tariff rates with respect to volumes that we transport through our regulated assets, which rates are subject to review and possible adjustment by federal and state regulators. • Changes in revenue we realize under the loss allowance provisions of our regulated tariffs resulting from changes in underlying commodity prices. • Fluctuations in the prices and demand for crude oil, refined petroleum products and NGL. • Changes in global economic conditions and the effects of a global economic downturn on the business ofPhillips 66 and the business of its suppliers, customers, business partners and credit lenders. • Potential liabilities associated with the risks and operational hazards inherent in transporting, fractionating, processing, terminaling and storing crude oil, refined petroleum products and NGL. • Curtailment of operations due to severe weather disruption or natural disasters; riots, strikes, lockouts or other industrial disturbances; or failure of information technology systems due to various causes, including unauthorized access or attack. • Accidents or other unscheduled shutdowns affecting our pipelines, processing, fractionating, terminaling, and storage facilities or equipment, or those of our suppliers or customers. • Our inability to obtain or maintain permits in a timely manner, if at all, including those necessary for capital projects, or the revocation or modification of existing permits. • Our inability to comply with government regulations or make capital expenditures required to maintain compliance. • The failure to complete construction of announced and future capital projects in a timely manner and any cost overruns associated with such projects. • Our ability to successfully execute growth strategies, whether through organic growth or acquisitions.
• The operation, financing and distribution decisions of our joint ventures.
• Costs or liabilities associated with federal, state, and local laws and
regulations relating to environmental protection and safety, including
spills, releases and pipeline integrity.
• Costs associated with compliance with evolving environmental laws and
regulations on climate change.
• Costs associated with compliance with safety regulations, including
pipeline integrity management program testing and related repairs.
• Changes in the cost or availability of third-party vessels, pipelines,
railcars and other means of delivering and transporting crude oil, refined
petroleum products and NGL.
• General domestic and international economic and political developments
including: armed hostilities; expropriation of assets; changes in
governmental policies relating to crude oil, refined petroleum products or
NGL pricing, regulation or taxation; actions taken by the members of OPEC
affecting the production and pricing of crude oil; and other political,
economic or diplomatic developments, including those caused by public
health issues and outbreaks of diseases.
• Direct or indirect effects on our business resulting from actual or
threatened terrorist incidents or acts of war.
• Our ability to comply with the terms of our credit facility, indebtedness
and other financing arrangements, which, if accelerated, we may not be
able to repay.
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• Our ability to incur additional indebtedness or our ability to obtain
financing on terms that we deem acceptable, including the refinancing of
our current obligations; higher interest rates and costs of financing
would increase our expenses.
• Changes in tax, environmental and other laws and regulations.
• The factors generally described in "Item 1A. Risk Factors" in our 2019
Annual Report on Form 10-K filed with the SEC on February 21, 2020 and in
Item 1A. of Part II of this Quarterly Report on Form 10-Q.
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