PHILLIPS 66 PARTNERS LP Unless otherwise stated or the context otherwise indicates, all references to "Phillips 66 Partners ," "the Partnership," "us," "our," "we," or similar expressions refer toPhillips 66 Partners LP , including its consolidated subsidiaries. References toPhillips 66 may refer toPhillips 66 and/or its subsidiaries, depending on the context. References to our "General Partner" refer to Phillips 66Partners GP LLC , and references to "Phillips 66 PDI" refer toPhillips 66 Project Development Inc. , thePhillips 66 subsidiary that holds a limited partner interest in us and wholly owns ourGeneral Partner . 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 normally identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. 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 ofPhillips 66's owned or joint venture refineries.
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.Phillips 66 has committed to minimum throughput volumes under many of our commercial agreements. 21 -------------------------------------------------------------------------------- Table of Contents 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, 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 withPhillips 66 , the value of any crude oil, refined petroleum product and NGL volumetric gains and losses are determined by reference to the monthly average reference price for the applicable commodity. Any gains/losses under these provisions decrease or increase, respectively, our operating and maintenance expenses in the period in which they are realized. These contractual volumetric gain/loss provisions could increase variability in our operating and maintenance expenses.
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 attributable to the Partnership after deducting the adjusted EBITDA attributable to noncontrolling interest, 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 inthe United States (GAAP). EBITDA, adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management believes external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may find useful to assess: •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.
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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.
Business Environment
We do not own any of the crude oil, refined petroleum products and NGL we handle
and do not engage in the trading of those commodities, and therefore 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 Phillips 66's owned or operated
refineries with which our assets are integrated. These volumes are primarily
dependent on Phillips 66's refining margins and maintenance schedules. Refining
margins depend on the price of crude oil or other feedstocks and the price of
refined petroleum products. These prices are affected by numerous factors beyond
our or Phillips 66's control, including the domestic and global supply of and
demand for crude oil and refined petroleum products. Throughput volumes of our
equity affiliates primarily depend on upstream drilling activities, refinery
performance and product supply and demand.
The Coronavirus Disease 2019 (COVID-19) pandemic continues to result in economic
disruption globally. Actions taken by governments to prevent the spread of the
disease have included travel and business restrictions, which have resulted in
substantial decreases in the demand for crude oil and many refined petroleum
products, particularly gasoline and jet fuel. The lack of demand for petroleum
products has resulted in low crude oil prices and refining margins. As a result,
crude oil producers have shut in high cost production and refiners have reduced
crude oil processing rates. These actions have reduced throughput volumes on
both our and our joint ventures' assets.
The near-term outlook for petroleum product demand remains highly uncertain, and
margins and volumes remain challenged. Our customers, including Phillips 66 , may
continue to experience adverse economic effects in the near term as the depth
and duration of the economic consequences of the COVID-19 pandemic remain
unknown. We continue to assess our long-lived assets and equity investments for
impairment in this challenging business environment. Impairments may be required
in the future if there is a further deterioration in our projected cash flows.
While we believe we and the majority of our joint ventures have substantially
mitigated our indirect exposure to commodity price fluctuations through the
minimum volume commitments in commercial agreements during the respective terms
of those agreements, our ability to execute our growth strategy will depend, in
part, on the availability of attractively priced crude oil in the areas served
by our crude oil pipelines and rail racks, demand for refined petroleum products
in the markets served by our refined petroleum product pipelines and terminals,
and the general demand for midstream services, including NGL transportation and
fractionation.
23-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Unless otherwise indicated, discussion of results for the three and nine months endedSeptember 30, 2020 , is based on a comparison with the corresponding periods of 2019. Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2020 2019 2020 2019 Revenues and Other Income Operating revenues-related parties$ 256 262 750 814 Operating revenues-third parties 9 8 23 21 Equity in earnings of affiliates 129 139 369 395 Gain from equity interest transfer - - 84 - Other income - 2 2 5 Total revenues and other income 394 411 1,228 1,235 Costs and Expenses Operating and maintenance expenses 85 91 257 315 Depreciation 35 30 96 88 General and administrative expenses 16 16 50 51 Taxes other than income taxes 9 10 30 30 Interest and debt expense 32 26 89 80 Other expenses - - 7 - Total costs and expenses 177 173 529 564 Income before income taxes 217 238 699 671 Income tax expense 1 1 2 3 Net Income 216 237 697 668 Less: Net income attributable to noncontrolling interest 10 - 10 - Net Income Attributable to the Partnership 206 237 687 668
Less: Preferred unitholders' interest in net income attributable to the Partnership
10 9 29 28
Less: General partner's interest in net income
attributable to the Partnership - - - 140
Limited Partners' Interest in Net Income
Attributable to the Partnership $ 196 228 658 500
Net Cash Provided by Operating Activities $ 296 276 785 757
Adjusted EBITDA $ 313 323 903 923
Distributable Cash Flow $ 243 255 730 735
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Three Months
Ended Nine Months Ended
September 30 September 30
2020 2019 2020 2019
Wholly Owned Operating Data
Pipelines
Pipeline revenues (millions of dollars) $ 117 121 325 347
Pipeline volumes(1) (thousands of barrels daily)
Crude oil 867 998 871 986
Refined petroleum products and NGL 907 990 866 918
Total 1,774 1,988 1,737 1,904
Average pipeline revenue per barrel (dollars) $ 0.71 0.66 0.68 0.67
Terminals
Terminal revenues (millions of dollars)$ 36 41 112 120 Terminal throughput (thousands of barrels daily) Crude oil(2) 296 493 378 473 Refined petroleum products 700 819 713 788 Total 996 1,312 1,091 1,261 Average terminaling revenue per barrel (dollars)$ 0.39 0.33 0.37 0.34 Storage, processing and other revenues (millions of dollars)$ 112 108 336 368 Total Operating Revenues (millions of dollars)$ 265 270 773 835 Joint Venture Operating Data(3) Crude oil, refined petroleum products and NGL (thousands of barrels daily) 1,142 786 975 749 (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. 25 -------------------------------------------------------------------------------- Table of Contents 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 Nine Months Ended
September 30 September 30
2020 2019 2020 2019
Reconciliation to Net Income Attributable to the
Partnership
Net Income Attributable to the Partnership $ 206 237 687 668
Plus:
Net income attributable to noncontrolling interest 10 - 10 - Net Income 216 237 697 668 Plus: Depreciation 35 30 96 88 Net interest expense 31 25 88 78 Income tax expense 1 1 2 3 EBITDA 283 293 883 837 Plus: Proportional share of equity affiliates' net interest, taxes and depreciation and amortization 45 30 118 85 Expenses indemnified or prefunded by Phillips 66 1 - 1 1 Transaction costs associated with acquisitions - - 1 -
Less:
Gain from equity interest transfer - - 84 - Adjusted EBITDA attributable to noncontrolling interest 16 - 16 - Adjusted EBITDA 313 323 903 923 Plus: Deferred revenue impacts*† (3) - 4 (4)
Less:
Equity affiliate distributions less than (more than) proportional EBITDA 4 9 (5) 31 Maintenance capital expenditures† 21 25 64 46 Net interest expense 31 25 88 78 Preferred unit distributions 10 9 29 28 Income taxes paid 1 - 1 1 Distributable Cash Flow$ 243 255 730 735
*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 Nine Months Ended
September 30 September 30
2020 2019 2020 2019
Reconciliation to Net Cash Provided by Operating
Activities
Net Cash Provided by Operating Activities $ 296 276 785 757
Plus:
Net interest expense 31 25 88 78
Income tax expense 1 1 2 3
Changes in working capital (45) (9) (60) 14
Undistributed equity earnings - (4) (9) (7)
Gain from equity interest transfer - - 84 -
Deferred revenues and other liabilities 1 2 3 (6)
Other (1) 2 (10) (2)
EBITDA 283 293 883 837
Plus:
Proportional share of equity affiliates' net
interest, taxes and depreciation and amortization 45 30 118 85
Expenses indemnified or prefunded by Phillips 66 1 - 1 1
Transaction costs associated with acquisitions - - 1 -
Less:
Gain from equity interest transfer - - 84 - Adjusted EBITDA attributable to noncontrolling interest 16 - 16 - Adjusted EBITDA 313 323 903 923 Plus: Deferred revenue impacts*† (3) - 4 (4)
Less:
Equity affiliate distributions less than (more than) proportional EBITDA 4 9 (5) 31 Maintenance capital expenditures† 21 25 64 46 Net interest expense 31 25 88 78 Preferred unit distributions 10 9 29 28 Income taxes paid 1 - 1 1 Distributable Cash Flow$ 243 255 730 735
*Difference between cash receipts and revenue recognition. †Excludes Merey Sweeny capital reimbursements and turnaround impacts.
Statement of Income Analysis
Operating revenues decreased$62 million , or 7%, in the nine-month period of 2020. The decrease was primarily attributable to the recognition of deferred revenues related to turnaround activity atMerey Sweeny LLC (Merey Sweeny) in the first quarter of 2019, as well as lower volumes, partially offset by increased rates.
Equity in earnings of affiliates decreased
27
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Gain on equity interest transfer reflects the second-quarter 2020 gain
recognition related to a co-venturer's prior-year acquisition of a 35% interest
in the consolidated holding company that owns an interest in Gray Oak Pipeline,
LLC . See Note 4-Equity Investments, in the Notes to Consolidated Financial
Statements, for additional information.
Operating and maintenance expenses decreased
Depreciation increased$5 million , or 17%, and increased$8 million , or 9%, in the third quarter and nine-month period of 2020, respectively. The increases in both periods were attributable to additional assets placed in operation, including the isomerization unit at the Phillips 66Lake Charles Refinery and additional storage capacity at Clemens Caverns.
Interest and debt expense increased
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$785 million in cash from operations during the first nine months of 2020, an improvement of$28 million compared with the corresponding period of 2019. The improvement was primarily driven by lower operating and maintenance expenses, partly offset by lower operating distributions from equity affiliates. Equity Affiliate Operating Distributions Our operating cash flows are also impacted by distribution decisions made by our equity affiliates. During the first nine months of 2020, cash from operations included distributions of$378 million from our equity affiliates, compared with$402 million during the same period of 2019. We cannot control the amount or timing of future distributions from equity affiliates; therefore, future distributions are not assured. ATM Programs We have authorized an aggregate of$750 million under three$250 million continuous offerings of common units, or at-the-market (ATM) programs. The first two programs concluded inJune 2018 andDecember 2019 , respectively. We did not issue any common units under the current ATM program during the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2020 , on a settlement date basis, we issued an aggregate of 40,570 common units, generating net proceeds of$2 million . For the three and nine months endedSeptember 30, 2019 , we issued an aggregate of 1,635,669 and 2,470,037 common units, respectively, generating net proceeds of$91 million and$133 million , respectively. Since inception inJune 2016 throughSeptember 30, 2020 , we issued an aggregate of 9,487,055 common units under our ATM programs, and generated net proceeds of$494 million , after broker commissions of$5 million and other costs of$3 million . The net proceeds from sales under the ATM programs are used for general partnership purposes, which may include debt repayment, acquisitions, capital expenditures and additions to working capital. Revolving Credit Facility AtSeptember 30, 2020 , borrowings of$290 million were outstanding and$3 million in letters of credit had been drawn under our$750 million revolving credit facility. 28
-------------------------------------------------------------------------------- Table of Contents Transfer of Equity InterestGray Oak Pipeline, LLC was formed to develop and construct the Gray Oak Pipeline, which transports crude oil from the Permian andEagle Ford toTexas Gulf Coast destinations that includeCorpus Christi and the Sweeny area, including the Phillips 66Sweeny Refinery , as well as access to theHouston market. We have a consolidated holding company that owns 65% ofGray Oak Pipeline, LLC . InDecember 2018 , a third party exercised its option to acquire a 35% interest in the holding company. Because the holding company's sole asset was its ownership interest inGray Oak Pipeline, LLC , which was considered a financial asset, and because certain restrictions were placed on the third party's ability to transfer or sell its interest in the holding company during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP at that time. The Gray Oak Pipeline commenced full operations in the second quarter of 2020 and the restrictions placed on the co-venturer were lifted onJune 30, 2020 , resulting in the recognition of the sale under GAAP. Accordingly, atJune 30, 2020 , the co-venturer's 35% interest in the holding company was recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet, and the premium of$84 million previously paid by the co-venturer in 2019 was recharacterized from a long-term obligation to a gain in our consolidated statement of income. For the nine months endedSeptember 30, 2020 , the co-venturer contributed an aggregate of$64 million to the holding company to fund its portion ofGray Oak Pipeline, LLC's cash calls. We have an effective ownership interest of 42.25% inGray Oak Pipeline, LLC , after considering our co-venturer's 35% interest in the consolidated holding company.
Off-Balance Sheet Arrangements
Dakota Access, LLC (Dakota Access) andEnergy Transfer Crude Oil Company, LLC (ETCO) InMarch 2019 , a wholly owned subsidiary of Dakota Access closed an offering of$2.5 billion aggregate principal amount of senior unsecured notes, consisting of:
•$650 million aggregate principal amount of 3.625% Senior Notes due 2022. •$1.0 billion aggregate principal amount of 3.900% Senior Notes due 2024. •$850 million aggregate principal amount of 4.625% Senior Notes due 2029.
Dakota Access and ETCO have guaranteed repayment of the notes. In addition, we and our co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the ongoing litigation related to an easement granted by theU.S. Army Corps of Engineers (USACE) to allow the pipeline to be constructed underLake Oahe inNorth Dakota . Contributions may be required if Dakota Access determines that the issues included in any such final judgment cannot be remediated and Dakota Access has or is projected to have insufficient funds to satisfy repayment of the notes. If Dakota Access undertakes remediation to cure issues raised in a final judgment, contributions may be required if any series of the notes become due, whether by acceleration or at maturity, during such time, to the extent Dakota Access has or is projected to have insufficient funds to pay such amounts. AtSeptember 30, 2020 , our share of the maximum potential equity contributions under the CECU was approximately$631 million . InMarch 2020 , the trial court presiding over this litigation ordered the USACE to prepare an Environmental Impact Statement (EIS), and requested additional information to enable a decision on whether the Dakota Access Pipeline should be shut down while the EIS is being prepared. OnJuly 6, 2020 , the trial court ordered the Dakota Access Pipeline to be shut down and emptied of crude oil within 30 days, and that the pipeline should remain shut down pending the preparation of the EIS by the USACE, which the USACE has indicated is expected to take approximately 13 months. Dakota Access filed an appeal and a request for a stay of the order, which was granted. The case is now on an expedited appellate track and oral arguments regarding whether the pipeline easement is valid and whether the USACE must prepare an EIS are set for earlyNovember 2020 , with a decision expected in late 2020 or early 2021. In addition to the proceedings in the appellate court, the trial court has been asked to issue an injunction to shut down the pipeline until the USACE completes the EIS, which could be ruled on as early as lateDecember 2020 . If the pipeline is required to cease operations pending the preparation of the EIS, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we also could be asked to support our share of the ongoing expenses, including scheduled interest payments on the notes of approximately$25 million annually, in addition to the potential obligations under the CECU. 29 -------------------------------------------------------------------------------- Table of ContentsGray Oak Pipeline, LLC Gray Oak Pipeline, LLC had a third-party term loan facility with a borrowing capacity of$1,379 million , inclusive of accrued interest. Borrowings under the facility were due onJune 3, 2022 . We and our co-venturers provided a guarantee through an equity contribution agreement requiring proportionate equity contributions toGray Oak Pipeline, LLC up to the total outstanding loan amount, plus any additional accrued interest and associated fees, ifGray Oak Pipeline, LLC defaults on certain of its obligations thereunder. InSeptember 2020 ,Gray Oak Pipeline, LLC fully repaid the outstanding balance of the term loan facility and the associated guarantee we issued through an equity contribution agreement was terminated. Capital Requirements Liberty Acquisition InFebruary 2020 , we entered into a Purchase and Sale Agreement withPhillips 66 PDI to acquire its 50% interest in the Liberty Pipeline joint venture for$75 million . The purchase price reflected the reimbursement of project costs incurred byPhillips 66 prior to the effective date of the transaction. The transaction was funded through a combination of cash on hand and our revolving credit facility, and closed onMarch 2, 2020 .Liberty Pipeline LLC was formed to develop and construct the Liberty Pipeline system which, upon completion, will transport crude oil from the Rockies and Bakken production areas toCushing, Oklahoma . OnMarch 24, 2020 , we and our co-venturer announced we are deferring the development and construction of the Liberty Pipeline system as a result of the current challenging business environment. 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. 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 operating and capital 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
Nine Months Ended
September 30
2020 2019
Capital Expenditures and Investments
Capital expenditures and investments $ 795 907
Capital expenditures and investments funded by certain joint
venture partners* (64) (422)
Adjusted Capital Spending $ 731 485
Expansion $ 667 433
Maintenance 64 52
*See Note 4-Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.
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Our capital expenditures and investments for the first nine months of 2020 were
primarily associated with the following activities:
•Contributions to
•Contributions to
•Construction activities related to a new ethane pipeline from the Clemens
Caverns to petrochemical facilities in
•Contributions toSouth Texas Gateway Terminal for construction activities related to the marine export terminal that connects to the Gray Oak Pipeline inCorpus Christi, Texas .
•Completion of construction activities related to increasing capacity on the
Sweeny to
•Completion of construction activities related to increasing storage capacity at Clemens Caverns.
•Spending associated with other return, reliability and maintenance projects.
2021 Capital Budget
We currently expect our 2021 capital budget to be approximately
Cash Distributions OnOctober 20, 2020 , the Board of Directors of ourGeneral Partner declared a quarterly cash distribution of$0.875 per common unit, which will result in a total distribution of$200 million attributable to the third quarter of 2020. This distribution is payable onNovember 13, 2020 , to common unitholders of record as ofOctober 30, 2020 . The holders of our preferred units are entitled to receive cumulative quarterly distributions equal to$0.678375 per preferred unit. Preferred unitholders will receive$10 million of distributions attributable to the third quarter of 2020. This distribution is payable onNovember 13, 2020 , to preferred unitholders of record as ofOctober 30, 2020 .
Beginning with the distribution to preferred unitholders attributable to the
fourth quarter of 2020, the preferred unitholders are entitled to receive a
quarterly distribution equal to the greater of
Debt Repayment OnApril 1, 2020 , we repaid the$25 million tranche of tax-exempt bonds dueApril 2020 . The two remaining tranches, totaling$50 million , mature inApril 2021 .
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.
31-------------------------------------------------------------------------------- Table of Contents 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 theFederal Energy Regulatory Commission under the Interstate Commerce Act and Energy Policy Act of 1992, and certain of our pipeline systems providing intrastate service are subject to rate regulation by applicable state authorities under their respective laws and regulations. Our pipeline, rail rack and terminal operations are also subject to safety regulations adopted by theDepartment of Transportation , as well as to state regulations. Legal and Tax Matters Under our amended omnibus agreement,Phillips 66 provides certain services for our benefit, including legal and tax support services, and we pay an operational and administrative support fee for these services.Phillips 66's legal and tax organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions.Phillips 66's legal organization employs a litigation management process to manage and monitor the legal proceedings against us. The process facilitates the early evaluation and quantification of potential exposures in individual cases and enables tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases,Phillips 66's legal organization regularly assesses the adequacy of current accruals and recommends if adjustment of existing accruals, or establishment of new accruals, is required. As ofSeptember 30, 2020 , andDecember 31, 2019 , we did not have any material accrued contingent liabilities associated with litigation matters.
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.
32-------------------------------------------------------------------------------- Table of Contents 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 fromPhillips 66 ,Phillips 66 will indemnify us, or assume responsibility, for certain environmental liabilities, tax liabilities, litigation and any other liabilities attributable to the ownership or operation of the assets contributed to us and that arose prior to the effective date of each acquisition. These indemnifications and exclusions from liability have, in some cases, time limits and deductibles. WhenPhillips 66 performs under any of these indemnifications or exclusions from liability, we recognize non-cash expenses and associated non-cash capital contributions from ourGeneral Partner , as these are considered liabilities paid for by a principal unitholder. 33
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. You can normally 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, although the absence of these words does not mean that a statement
is not forward-looking.
We based the forward-looking statements on our current expectations, estimates
and projections about us, our operations, the operations of our joint ventures
and the entities in which we own equity interests, as well as the industries in
which we and they 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 of Phillips 66 to satisfy its obligations under our
commercial and other agreements.
•Reductions in the volume of crude oil, refined petroleum products and NGL we or
our equity affiliates transport, fractionate, process, terminal and store.
•Changes to the tariff rates with respect to volumes transported through
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 of Phillips 66 and the business of its suppliers,
customers, business partners and credit lenders.
•The continuing effects of the COVID-19 pandemic and its negative impact on the
demand for crude oil and refined petroleum products, as well as the extent and
duration of recovery of economies and the demand for crude oil and refined
petroleum products after the pandemic subsides.
•Actions taken by OPEC and other countries impacting supply and demand and,
correspondingly, commodity prices.
•Changes in governmental policies relating to crude oil, refined petroleum
products or NGL pricing, regulation, taxation, or exports.
•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 (including as a result of
climate change) disruption or natural disasters; riots, strikes, lockouts or
other industrial disturbances.
•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
equity affiliates, suppliers or customers.
•Our, and our equity affiliates', inability to obtain or maintain permits, in a
timely manner or at all, and the possibility of the revocation or modification
of such permits.
•The 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, cost overruns associated with such projects, and the ability
to obtain or maintain permits necessary for such projects.
•Our ability to successfully execute our growth strategies, whether through
organic growth or acquisitions.
•The operation, financing and distribution decisions of our joint ventures,
which we may not control.
•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.
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•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, and other political,
economic or diplomatic developments, including those caused by public health
issues and outbreaks of diseases and pandemics.
•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.
•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 and in Item 1A.- Risk Factors of Part II in this Quarterly
Report on Form 10-Q.
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