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PSX > SEC Filings for PSX > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for PHILLIPS 66

Form 10-Q for PHILLIPS 66


31-Jul-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis is the company's analysis of its financial performance, financial condition, and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the company's plans, strategies, objectives, expectations and intentions that are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. 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 company 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 company's disclosures under the heading: "CAUTIONARY STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995," beginning on page 51.

The terms "earnings" and "loss" as used in Management's Discussion and Analysis refer to net income (loss) attributable to Phillips 66.

BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW

Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. At June 30, 2014, we had total assets of $51 billion. Our common stock trades on the New York Stock Exchange under the symbol "PSX."

Executive Overview
We reported earnings of $863 million in the second quarter of 2014, generated $830 million in cash from operating activities, and received $150 million from asset dispositions, primarily from return of investments in equity affiliates. We used available cash to fund capital expenditures and investments of $561 million, pay dividends of $281 million, and repurchase $616 million of our common stock. We ended the second quarter of 2014 with $5.0 billion of cash and cash equivalents and approximately $5.4 billion of total capacity available under our liquidity facilities.

Basis of Presentation
Effective January 1, 2014, we changed the organizational structure of the internal financial information reviewed by our chief executive officer, and determined this resulted in a change in the composition of our operating segments. The primary effects of this reporting reorganization were as follows:

We moved two of our equity investments, Excel Paralubes and Jupiter Sulphur, LLC, as well as the commission revenues related to needle and anode coke, polypropylene and solvents, from the Refining segment to the Marketing and Specialties (M&S) segment.

We moved several refining logistics projects from the Refining segment to the Midstream segment.

The new segment alignment is presented for the three- and six-month periods ended June 30, 2014, with the prior periods recast for comparability.


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Business Environment
The Midstream segment includes our 50 percent equity investment in DCP Midstream, LLC (DCP Midstream). Earnings of DCP Midstream are closely linked to natural gas liquids (NGL) prices, natural gas prices and crude oil prices. Industry NGL prices decreased in the second quarter of 2014, compared with the first quarter of 2014, but increased from the second quarter of 2013. High demand for propane in the first quarter of 2014 caused by severe winter temperatures, especially in the Midwest, drove prices up but this movement declined in the second quarter of 2014 as weather conditions improved. Additionally, the price increase in the second quarter of 2014, compared with the second quarter of 2013, was triggered by increased export capacity, which brought prices up with the addition of new outlets. Natural gas prices decreased in the second quarter of 2014, compared with the first quarter of 2014, but increased from the second quarter of 2013. The decline in natural gas prices in the second quarter of 2014 was a result of a seasonal temperature trend. The increase from the second quarter of 2013 was caused by increasing natural gas demand, largely resulting from higher natural gas utility usage by the refining and petrochemical industries.

The Chemicals segment consists of our 50 percent equity investment in Chevron Phillips Chemical Company LLC (CPChem). The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on market factors. The chemicals industry continues to experience higher ethylene margins in regions of the world where production is based upon NGL versus crude-derived feedstocks. In particular, companies with North American ethane-based crackers benefited from the lower-priced feedstocks and improved ethylene margins, as well as improved margins for polyethylene, an ethylene derivative.

Results for our Refining segment depend largely on refining margins, cost control, refinery throughput, and product yields. The crack spread is a measure of the difference between market prices for refined petroleum products and crude oil, and it is used within our industry as an indicator for refining margins. The U.S. 3:2:1 crack spread (three barrels of crude oil producing two barrels of gasoline and one barrel of diesel) increased in the second quarter of 2014, compared with the first quarter of 2014, but decreased compared with the second quarter of 2013. The second-quarter 2014 domestic industry crack spread increased compared with the first quarter of 2014, largely as the result of average market gasoline prices increasing more than the average market crude oil price due to seasonal demand and the transition to summer gasoline specifications. The decline in the second-quarter 2014 domestic industry crack spread compared with the second quarter of 2013 was due to domestic benchmark crude prices rising at a faster rate than gasoline and distillate prices. The Northwest Europe benchmark crack spread in the second quarter of 2014 increased compared with the first quarter of 2014 and fell compared with the second quarter of 2013. The increase from the first quarter of 2014 was a result of refinery run cuts and seasonal demand growth, while the decline compared to the second quarter of 2013 was largely caused by imported products and poor export demand.
Results for our M&S segment depend largely on marketing fuel margins, base oil margins, lubricant margins and other specialty product margins. These margins are primarily based on market factors, largely determined by the relationship between demand and supply. Marketing fuel margins are influenced by crude oil pricing trends, which drive spot prices for refined products. Generally, in a period of rising crude oil prices, refined product spot prices will increase at a faster pace than the corresponding wholesale "rack" price of products sold to retailers, thereby tightening marketing margins. In a period of falling crude oil prices, the inverse occurs, and marketing margins generally benefit.


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RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three- and six-month periods ended June 30, 2014, is based on a comparison with the corresponding periods of 2013.

Consolidated Results
A summary of net income (loss) attributable to Phillips 66 by business segment
follows:

                                                    Millions of Dollars
                                         Three Months Ended        Six Months Ended
                                               June 30                 June 30
                                            2014        2013        2014       2013

Midstream                              $     108          90         296        201
Chemicals                                    324         181         640        463
Refining                                     390         455         696      1,359
Marketing and Specialties                    162         344         299        534
Corporate and Other                         (121 )      (126 )      (202 )     (221 )
Discontinued Operations                        -          14         706         29
Net income attributable to Phillips 66 $     863         958       2,435      2,365

Earnings for Phillips 66 decreased $95 million, or 10 percent, in the second quarter of 2014. The decrease was due to lower realized refining margins resulting from decreased market crack spreads partially offset by impacts related to widening crude differentials. In addition, lower M&S margins contributed to lower earnings, resulting from rising gasoline prices. These decreases were partially offset by improved realized margins in our Chemicals segment.

Earnings for the six months ended June 30, 2014, increased $70 million, or 3 percent, largely due to the recognition of a noncash $696 million gain related to the Phillips Specialty Products Inc. (PSPI) share exchange, as well as improved realized margins in our Chemicals segment. These increases were mostly offset by lower realized refining margins resulting from decreased market crack spreads, as well as lower M&S margins resulting from rising gasoline prices.

See the "Segment Results" section for additional information on our segment results.

Statement of Income Analysis

Sales and other operating revenues for the second quarter and six-month period of 2014 increased 5 percent and 2 percent, respectively, and purchased crude oil and products increased 6 percent and 2 percent, respectively. The increases for the second quarter of 2014 were primarily due to higher prices for petroleum products, crude oil and NGL. In addition, both comparative periods were positively impacted by higher volumes due to reduced unplanned downtime.

Equity in earnings of affiliates increased 24 percent in the second quarter of 2014, primarily resulting from increased earnings from CPChem, as well as from DCP Midstream. These increases were partially offset by decreased earnings from WRB Refining LP (WRB). Equity in earnings for the six-month period of 2014 decreased 7 percent, primarily due to decreased earnings from WRB partially offset by increased earnings from CPChem and DCP Midstream. Equity in earnings of WRB decreased 47 percent and 62 percent in the second quarter and six-month period of 2014, respectively, mainly due to lower refining margins. See the "Segment Results" section for additional information on CPChem and DCP Midstream earnings.

Operating expenses for the second quarter and six-month period of 2014 increased $45 million, or 4 percent, and $157 million, or 8 percent, respectively, primarily related to higher utility costs largely due to increased natural gas prices, as well as turnarounds at our refineries.


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Selling, general and administrative expenses increased $44 million, or 12 percent, and $119 million, or 17 percent, in the second quarter and six-month period of 2014, respectively. These increases were primarily due to additional fees under marketing consignment fuels agreements. In addition, the six-month period of 2014 was impacted by the costs associated with the acquisition of an additional interest in an entity that operates a power and steam generation plant.

Foreign currency transaction (gains) losses for the second quarter of 2014 were a $29 million loss, compared with a gain of $18 million for the second quarter of 2013. During the six-month period of 2014, there was a $10 million foreign currency transaction loss, compared with a gain of $16 million for the six-month period of 2013. The unfavorable change noted was primarily due to the U.S. dollar weakening against the Canadian dollar during both periods of 2014, compared with the U.S. dollar strengthening against the Canadian dollar during both periods of 2013.

See Note 21-Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our provision for income taxes and effective tax rates.

Income from discontinued operations increased $677 million in the six-month period of 2014, due to the completion of the PSPI share exchange on February 25, 2014. See Note 5-Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements, for additional information on this transaction.


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Segment Results

Midstream

                                              Three Months Ended         Six Months Ended
                                                   June 30                    June 30
                                                  2014       2013          2014       2013
                                                          Millions of Dollars
Net Income Attributable to Phillips 66
Transportation                             $        60         50           122         95
DCP Midstream                                       33         30           116         86
NGL                                                 15         10            58         20
Total Midstream                            $       108         90           296        201



                                                            Dollars Per Unit
Weighted Average NGL Price*
DCP Midstream (per barrel)                 $       39.06      34.58         41.81      36.02
DCP Midstream (per gallon)                          0.93       0.82          1.00       0.86


* Based on index prices from the Mont Belvieu and Conway market hubs that are weighted by NGL component and location mix. 2013 weighted average NGL prices have been recast to reflect the impact of ethane rejection.

                            Thousands of Barrels Daily
Transportation Volumes
Pipelines*               3,243       3,170    3,172  3,101
Terminals                1,609       1,194    1,543  1,117

Operating Statistics
NGL extracted**            226         206      224    202
NGL fractionated***        117         113      114    115

* Pipelines represent the sum of volumes transported through each separately tariffed pipeline segment, including our share of equity volumes from Yellowstone Pipe Line Company and Lake Charles Pipe Line Company. ** Includes our share of equity affiliates. *** Excludes DCP Midstream.

The Midstream segment purchases raw natural gas from producers and gathers natural gas through an extensive network of pipeline gathering systems. The natural gas is then processed to extract NGL from the raw gas stream. The remaining "residue" gas is marketed to electric utilities, industrial users and gas marketing companies. Most of the NGLs are fractionated-separated into individual components such as ethane, propane and butane-and marketed as chemical feedstock, fuel or blendstock. In addition, the Midstream segment includes U.S. transportation and terminaling services associated with the movement of crude oil, refined and specialty products, natural gas and NGL, as well as NGL fractionation, trading and marketing businesses in the United States. The Midstream segment includes our 50 percent equity investment in DCP Midstream and the consolidated results of Phillips 66 Partners LP.

Earnings from the Midstream segment increased $18 million, or 20 percent, in the second quarter of 2014 and $95 million, or 47 percent, in the six-month period of 2014. The improvements were driven by higher earnings from each of our business lines.

Transportation earnings increased $10 million in the second quarter of 2014 and $27 million in the six-month period of 2014. This increase primarily resulted from increased throughput fees, as well as higher earnings associated with railcar


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activity. These increases were partially offset by higher earnings attributable to noncontrolling interests, reflecting the contribution of previously wholly owned assets to Phillips 66 Partners.

DCP Midstream earnings increased $3 million in the second quarter of 2014. The $30 million increase in earnings of DCP Midstream in the six-month period of 2014 primarily resulted from higher commodity prices, as well as increased gathering and processing earnings due to asset growth. These increases were partially offset by higher operating costs related to asset growth and increased spending on preventative maintenance. See the "Business Environment and Executive Overview" section for information on market factors impacting this quarter's results.

DCP Midstream Partners, LP (DCP Partners) is a publicly-traded master limited partnership and a subsidiary of DCP Midstream. DCP Partners issues, from time to time, limited partner units to the public. These issuances benefited our equity in earnings from DCP Midstream, on an after-tax basis, by approximately $35 million in the six months ended June 30, 2014, compared with approximately $32 million in the corresponding period of 2013.

Earnings of our NGL business increased $5 million in the second quarter of 2014 and $38 million for the six-month period of 2014. The increase for the six-month period of 2014 was primarily due to improved margins driven by strong propane prices, positive asset performance and inventory impacts. In addition to margins, NGL results also benefited from equity earnings from the DCP Sand Hills and DCP Southern Hills pipeline entities.


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Chemicals

                                              Three Months Ended         Six Months Ended
                                                   June 30                    June 30
                                                  2014       2013          2014       2013

                                                          Millions of Dollars

Net Income Attributable to Phillips 66     $       324        181           640        463



                                                          Millions of Pounds
CPChem Externally Marketed Sales Volumes*
Olefins and Polyolefins                          4,395      3,862         8,697      7,898
Specialties, Aromatics and Styrenics             1,530      1,485         3,099      2,981
                                                 5,925      5,347        11,796     10,879


* Includes 100 percent of CPChem's outside sales of produced petrochemical products, as well as commission sales from equity affiliates.

Olefins and Polyolefins Capacity Utilization (percent) 95 % 78 % 94 % 84 %

The Chemicals segment consists of our 50 percent interest in CPChem, which we account for under the equity method. CPChem uses NGL and other feedstocks to produce petrochemicals. These products are then marketed and sold or used as feedstocks to produce plastics and other chemicals.

Earnings from the Chemicals segment increased $143 million, or 79 percent, in the second quarter of 2014 and $177 million, or 38 percent, in the six-month period of 2014. The increase in the second quarter of 2014 was primarily driven by improved ethylene and polyethylene realized margins, higher ethylene and polyethylene volumes, lower turnaround activity costs, and unplanned power outages in the second quarter of 2013. The increase in earnings in the six-month period of 2014 was primarily due to improved ethylene and polyethylene realized margins, higher earnings from CPChem's equity affiliates, higher ethylene volumes and lower turnaround activity costs. The increases for the three- and six-month periods of 2014 were partially offset by an increase in utility costs due to higher natural gas prices. See the "Business Environment and Executive Overview" section for information on market factors impacting this quarter's results.

CPChem's Port Arthur facility experienced a localized fire in a portion of its ethylene unit in early July 2014. An evaluation is underway to determine how long it will take to return the facility to full operation, with preliminary indications from this evaluation of a possible restart during the fourth quarter of 2014. We expect CPChem's results in the third and fourth quarters of 2014 to be negatively impacted by this shutdown.


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Refining

                                                    Three Months Ended                     Six Months Ended
                                                          June 30                              June 30
                                                      2014               2013                2014           2013

                                                                     Millions of Dollars
Net Income (Loss) Attributable to Phillips
66
Atlantic Basin/Europe                      $           (10 )               24                   6            119
Gulf Coast                                             118                (82 )               195            (47 )
Central Corridor                                       229                395                 451            983
Western/Pacific                                         65                 33                  18             96
Other Refining                                         (12 )               85                  26            208
Worldwide                                  $           390                455                 696          1,359

                                                                     Dollars Per Barrel
Refining Margins*
Atlantic Basin/Europe                      $          6.06               6.83                6.74           7.73
Gulf Coast                                            8.12               3.89                8.37           5.82
Central Corridor                                     14.91              19.45               15.06          23.29
Western/Pacific                                      10.53               8.80                8.83           9.21
Worldwide                                             9.66               9.70                9.77          11.68


* Based on total processed inputs and includes proportional share of refining margins contributed by certain equity affiliates.

                                                                 Thousands of Barrels Daily
Operating Statistics
Refining operations*
Atlantic Basin/Europe
Crude oil capacity                                     588                588                 588            588
Crude oil processed                                    562                555                 556            563
Capacity utilization (percent)                          96 %               94                  95             96
Refinery production                                    615                598                 602            608
Gulf Coast
Crude oil capacity                                     733                733                 733            733
Crude oil processed                                    673                664                 643            625
Capacity utilization (percent)                          92 %               91                  88             85
Refinery production                                    783                748                 750            698
Central Corridor
Crude oil capacity                                     485                475                 485            475
Crude oil processed                                    493                474                 480            465
Capacity utilization (percent)                         102 %              100                  99             98
Refinery production                                    513                488                 498            481
Western/Pacific
Crude oil capacity                                     440                440                 440            440
Crude oil processed                                    424                417                 410            409
Capacity utilization (percent)                          96 %               95                  93             93
Refinery production                                    454                452                 441            448
Worldwide
Crude oil capacity                                   2,246              2,236               2,246          2,236
Crude oil processed                                  2,152              2,110               2,089          2,062
Capacity utilization (percent)                          96 %               94                  93             92
Refinery production                                  2,365              2,286               2,291          2,235


* Includes our share of equity affiliates.


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The Refining segment buys, sells and refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 15 refineries, mainly in the United States, Europe and Asia.

Earnings for the Refining segment decreased $65 million, or 14 percent, in the second quarter of 2014. The decrease was primarily due to lower realized refining margins resulting from decreased market crack spreads partially offset by impacts related to widening crude differentials and increased volumes.

Earnings for the six-month period of 2014 decreased $663 million, or 49 percent. The decrease was primarily due to lower realized refining margins resulting from decreased market crack spreads, as well as higher utility costs due to increased natural gas prices. These decreases during the six-month period of 2014 were partially offset by increased volumes. See the "Business Environment and Executive Overview" section for information on industry crack spreads and other market factors impacting this quarter's results.

Our worldwide refining crude oil capacity utilization rate was 96 percent in the second quarter of 2014, compared with 94 percent in the second quarter of 2013. The current year increase was primarily due to lower unplanned downtime, partially offset by turnaround activity.

Marketing and Specialties

                                              Three Months Ended         Six Months Ended
                                                   June 30                    June 30
                                                  2014       2013          2014       2013

                                                          Millions of Dollars
Net Income Attributable to Phillips 66
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