Note 5—Sales and Other Operating Revenues
Disaggregated Revenues
The following tables present our disaggregated sales and other operating revenues:
| | | | | | | | | | | | |
| | Millions of Dollars |
| | Three Months Ended
March 31 | | |
| | 2023 | | | 2022 | | | | |
| Product Line and Services | | | | | | |
| Refined petroleum products | $ | 24,718 | | | 29,382 | | | | |
| Crude oil resales | 4,565 | | | 3,755 | | | | |
| Natural gas liquids (NGL) and natural gas | 4,421 | | | 3,230 | | | | |
Services and other* | 692 | | | (188) | | | | |
| Consolidated sales and other operating revenues | $ | 34,396 | | | 36,179 | | | | |
| | | | | | |
| Geographic Location** | | | | | | |
| United States | $ | 27,065 | | | 28,885 | | | | |
| United Kingdom | 3,930 | | | 3,640 | | | | |
| Germany | 1,306 | | | 1,382 | | | | |
| Other countries | 2,095 | | | 2,272 | | | | |
| Consolidated sales and other operating revenues | $ | 34,396 | | | 36,179 | | | | |
* Includes derivatives-related activities. See Note 14—Derivatives and Financial Instruments, for additional information. |
| ** Sales and other operating revenues are attributable to countries based on the location of the operations generating the revenues. |
Contract-Related Assets and Liabilities
At March 31, 2023, and December 31, 2022, receivables from contracts with customers were $7,317 million and $8,749 million, respectively. Significant noncustomer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.
Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At March 31, 2023, and December 31, 2022, our asset balances related to such payments were $509 million and $505 million, respectively.
Our contract liabilities represent advances from our customers prior to product or service delivery. At March 31, 2023, and December 31, 2022, contract liabilities were $203 million and $156 million, respectively.
Remaining Performance Obligations
Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We do not disclose remaining performance obligations for these contracts as the expected duration is one year or less or because the variable consideration has been allocated entirely to an unsatisfied performance obligation. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing. At March 31, 2023, the remaining performance obligations related to these minimum volume commitment contracts amounted to $446 million. This amount excludes variable consideration and estimates of variable rate escalation clauses in our contracts with customers, and is expected to be recognized through 2031 with a weighted average remaining life of three years as of March 31, 2023.
Note 6—Credit Losses
We are exposed to credit losses primarily through our sales of refined petroleum products, crude oil, NGL and natural gas. We assess each counterparty’s ability to pay for the products we sell by conducting a credit review. The credit review considers our expected billing exposure and timing for payment and the counterparty’s established credit rating or our assessment of the counterparty’s creditworthiness based on our analysis of their financial statements when a credit rating is not available. We also consider contract terms and conditions, country and political risk, and business strategy in our evaluation. A credit limit is established for each counterparty based on the outcome of this review. We may require collateralized asset support or a prepayment to mitigate credit risk.
We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliations, dispute resolution and payment confirmations. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables. In addition, when events and circumstances arise that may affect certain counterparties’ abilities to fulfill their obligations, we enhance our credit monitoring, and we may seek collateral to support some transactions or require prepayments from higher-risk counterparties.
At March 31, 2023, and December 31, 2022, we reported $9,326 million and $10,985 million of accounts and notes receivable, respectively, net of allowances of $67 million for both periods. Based on an aging analysis at March 31, 2023, more than 95% of our accounts receivable were outstanding less than 60 days.
We are also exposed to credit losses from off-balance sheet exposures, such as guarantees of joint venture debt and standby letters of credit. See Note 12—Guarantees, and Note 13—Contingencies and Commitments, for more information on these off-balance sheet exposures.
Note 7—Inventories
Inventories consisted of the following:
| | | | | | | | | | | |
| | Millions of Dollars |
| | March 31
2023 | | December 31
2022 |
| | | |
| Crude oil and petroleum products | $ | 5,046 | | | 2,914 | |
| Materials and supplies | 399 | | | 362 | |
| $ | 5,445 | | | 3,276 | |
Inventories valued on the last-in, first-out (LIFO) basis totaled $4,837 million and $2,635 million at March 31, 2023, and December 31, 2022, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $6 billion and $6.3 billion at March 31, 2023, and December 31, 2022, respectively.
Certain planned reductions in inventory that are not expected to be replaced by the end of the year cause liquidations of LIFO inventory values. LIFO inventory liquidations increased our net income by $4 million and $40 million in the three months ended March 31, 2023 and 2022, respectively.
Note 8—Investments, Loans and Long-Term Receivables
Equity Investments
Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In 2020, the trial court presiding over litigation brought by the Standing Rock Sioux Tribe (the Tribe) ordered the U.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) addressing an easement under Lake Oahe in North Dakota. The court later vacated the easement. Although the easement is vacated, the USACE has no plans to stop pipeline operations while it proceeds with the EIS, and the Tribe’s request for a shutdown was denied in May 2021. In June 2021, the trial court dismissed the litigation entirely. Once the EIS is completed, new litigation or challenges may be filed.
In February 2022, the U.S. Supreme Court (the Court) denied Dakota Access’ writ of certiorari requesting the Court to review the lower court’s decision to order the EIS and vacate the easement. Therefore, the requirement to prepare the EIS stands. Also in February 2022, the Tribe withdrew as a cooperating agency, causing the USACE to halt the EIS process while the USACE engaged with the Tribe on their reasons for withdrawing. The draft EIS process resumed in August 2022, and release is expected in the second quarter of 2023.
Dakota Access and ETCO have guaranteed repayment of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access in March 2019. On April 1, 2022, Dakota Access’ wholly owned subsidiary repaid $650 million aggregate principal amount of its outstanding senior notes upon maturity. We funded our 25% share, or $163 million, with a capital contribution of $89 million in March 2022 and $74 million of distributions we elected not to receive from Dakota Access in the first quarter of 2022. At March 31, 2023, the aggregate principal amount outstanding of Dakota Access’ senior unsecured notes was $1.85 billion.
In conjunction with the notes offering, Phillips 66 Partners LP (Phillips 66 Partners), now a wholly owned subsidiary of Phillips 66, and its co-venturers in Dakota Access also provided a Contingent Equity Contribution Undertaking (CECU). 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 above-mentioned ongoing litigation. At March 31, 2023, our 25% share of the maximum potential equity contributions under the CECU was approximately $467 million.
If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we could be required to support our 25% share of the ongoing expenses, including scheduled interest payments on the notes of approximately $20 million annually, in addition to the potential obligations under the CECU at March 31, 2023.
At March 31, 2023, the aggregate book value of our investments in Dakota Access and ETCO was $659 million.
CF United LLC (CF United)
We own a 50% voting interest and a 47% economic interest in CF United, a retail marketing joint venture with operations primarily on the U.S. West Coast. CF United is considered a VIE because our co-venturer has an option to require us to purchase its interest based on a fixed multiple. The put option becomes effective July 1, 2023, and expires on March 31, 2024. The put option is viewed as a variable interest as the purchase price on the exercise date may not represent the then-current fair value of CF United. We have determined that we are not the primary beneficiary because we and our co-venturer jointly direct the activities of CF United that most significantly impact economic performance. At March 31, 2023, our maximum exposure to loss was comprised of our $292 million investment in CF United, and any potential future loss resulting from the put option should the purchase price based on a fixed multiple exceed the then-current fair value of CF United.
OnCue Holdings, LLC (OnCue)
We hold a 50% interest in OnCue, a joint venture that owns and operates retail convenience stores. We fully guaranteed various debt agreements of OnCue and our co-venturer did not participate in the guarantees. This entity is considered a VIE because our debt guarantees resulted in OnCue not being exposed to all potential losses. We have determined we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact economic performance. At March 31, 2023, our maximum exposure to loss was $213 million, which represented the book value of our investment in OnCue of $145 million and guaranteed debt obligations of $68 million.
DCP Midstream, DCP Sand Hills, DCP Southern Hills, and Gray Oak Pipeline—Prior to the merger of DCP Midstream and Gray Oak Holdings on August 17, 2022, we held:
•A 50% interest in DCP Midstream a joint venture that owns and operates NGL and gas pipelines, gas plants, gathering systems, storage facilities and fractionation plants, through its subsidiary DCP LP.
•A 33.33% direct ownership interest in DCP Sand Hills a joint venture that owns a NGL pipeline system that extends from the Permian Basin and Eagle Ford to facilities on the Texas Gulf Coast and to the Mont Belvieu, Texas, market hub.
•A 33.33% direct ownership interest in DCP Southern Hills a joint venture that owns a NGL pipeline system that extends from the Midcontinent region to the Mont Belvieu, Texas, market hub.
•A 65% interest in Gray Oak Pipeline, which was held through a consolidated holding company, Gray Oak Holdings. Our indirect interest in Gray Oak Pipeline was 42.25%, after considering a co-venturer’s 35% interest in Gray Oak Holdings. Gray Oak Pipeline is a crude oil pipeline that extends from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi, Texas, and the Sweeny area, including our Sweeny Refinery.
Other Investments
In September 2021, we acquired 78 million ordinary shares, representing a 16% ownership interest, in NOVONIX Limited (NOVONIX), which are traded on the Australian Securities Exchange. NOVONIX is a Brisbane, Australia-based company that develops technology and supplies materials for lithium-ion batteries. Since we do not have significant influence over the operating and financial policies of NOVONIX and the shares we own have a readily determinable fair value, our investment is recorded at fair value at the end of each reporting period. The fair value of our investment is recorded in the “Investments and long-term receivables” line item on our consolidated balance sheet. The change in the fair value of our investment due to fluctuations in NOVONIX’s stock price, or unrealized investment losses, is recorded in the “Other income (loss)” line item of our consolidated statement of income, while changes due to foreign currency fluctuations are recorded in the “Foreign currency transaction (gains) losses” line item on our consolidated statement of income. The fair value of our investment in NOVONIX was $66 million at March 31, 2023. The fair value of our investment in NOVONIX declined by $12 million during the three months ended March 31, 2023, reflecting an unrealized investment loss of $11 million and an unrealized foreign currency loss of $1 million. See Note 15—Fair Value Measurements, for additional information regarding the recurring fair value measurement of our investment in NOVONIX.
Note 9—Properties, Plants and Equipment
Our gross investment in PP&E and the associated accumulated depreciation and amortization (Accum. D&A) balances were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Millions of Dollars |
| | March 31, 2023 | | December 31, 2022 |
| | Gross
PP&E | | Accum.
D&A | | Net
PP&E | | Gross
PP&E | | Accum.
D&A | | Net
PP&E |
| | | | | | | | | | | |
| Midstream | $ | 25,549 | | | 3,743 | | | 21,806 | | | 25,422 | | | 3,524 | | | 21,898 | |
| Chemicals | — | | | — | | | — | | | — | | | — | | | — | |
| Refining | 24,236 | | | 12,500 | | | 11,736 | | | 24,200 | | | 12,523 | | | 11,677 | |
| Marketing and Specialties | 1,829 | | | 1,095 | | | 734 | | | 1,800 | | | 1,058 | | | 742 | |
| Corporate and Other | 1,580 | | | 745 | | | 835 | | | 1,568 | | | 722 | | | 846 | |
| $ | 53,194 | | | 18,083 | | | 35,111 | | | 52,990 | | | 17,827 | | | 35,163 | |
|
Note 10—Earnings Per Share
The numerator of basic earnings per share (EPS) is net income attributable to Phillips 66, adjusted for noncancelable dividends paid on unvested share-based employee awards during the vesting period (participating securities). The denominator of basic EPS is the sum of the daily weighted-average number of common shares outstanding during the periods presented and fully vested stock and unit awards that have not yet been issued as common stock. The numerator of diluted EPS is also based on net income attributable to Phillips 66, which is reduced by dividend equivalents paid on participating securities for which the dividends are more dilutive than the participation of the awards in the earnings of the periods presented. To the extent unvested stock, unit or option awards and vested unexercised stock options are dilutive, they are included with the weighted-average common shares outstanding in the denominator. Treasury stock is excluded from the denominator in both basic and diluted EPS.
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31 | | |
| | 2023 | | 2022 | | | |
| Basic | Diluted | | Basic | Diluted | | | | | |
Amounts Attributed to Phillips 66 Common Stockholders (millions): | | | | | | | | | | |
| Net Income Attributable to Phillips 66 | $ | 1,961 | | 1,961 | | | 582 | | 582 | | | | | | |
| Income allocated to participating securities | (3) | | (1) | | | (2) | | (2) | | | | | | |
| | | | | | | | | | |
| Net income available to common stockholders | $ | 1,958 | | 1,960 | | | 580 | | 580 | | | | | | |
| | | | | | | | | | |
Weighted-average common shares outstanding (thousands): | 462,870 | | 464,810 | | | 447,206 | | 449,298 | | | | | | |
| Effect of share-based compensation | 1,940 | | 2,224 | | | 2,092 | | 713 | | | | | | |
| Weighted-average common shares outstanding—EPS | 464,810 | | 467,034 | | | 449,298 | | 450,011 | | | | | | |
| | | | | | | | | | |
Earnings Per Share of Common Stock (dollars) | $ | 4.21 | | 4.20 | | | 1.29 | | 1.29 | | | | | | |
Note 11—Debt
Debt Issuances and Repayments
On March 29, 2023, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, issued $1.25 billion aggregate principal amount of senior unsecured notes consisting of:
•$750 million aggregate principal amount of 4.950% Senior Notes due December 2027 (2027 Notes).
•$500 million aggregate principal amount of 5.300% Senior Notes due June 2033 (2033 Notes).
The 2027 Notes and 2033 Notes (collectively, the Notes) are fully and unconditionally guaranteed by Phillips 66. Interest on the 2027 Notes is payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2023. Interest on the 2033 Notes is payable semi-annually on June 30 and December 30 of each year, commencing on December 30, 2023.
The Notes are required to be redeemed at a price equal to 101% of the principal amount, plus accrued and unpaid interest, at the earliest occurrence of any of the following events: the DCP LP public common unit acquisition is not completed on or prior to December 31, 2023; the agreement to acquire the DCP LP public common units is terminated; or we notify the trustee of the notes in writing that the DCP LP public common unit acquisition will not be consummated on or prior to December 31, 2023. See Note 21—DCP Midstream Class A Segment, for additional information regarding the definitive agreement we executed on January 5, 2023, to acquire an incremental interest in DCP LP.
On March 15, 2023, DCP LP repaid its 3.875% senior unsecured notes due March 2023 with an aggregate principal amount of $500 million using borrowings under its revolving credit and accounts receivable securitization facilities.
On April 19, 2023, DCP LP announced its intent to redeem its 5.850% junior subordinated notes due May 2043 with an aggregate principal amount outstanding of $550 million on or about May 21, 2023. DCP LP expects to use borrowings under its revolving credit and accounts receivable securitization facilities.
Term Loan Agreement
On March 27, 2023 (the Closing Date), Phillips 66 Company, a wholly owned subsidiary of Phillips 66, entered into a $1.5 billion delayed draw term loan agreement guaranteed by Phillips 66 (the Term Loan Agreement). The Term Loan Agreement provides for a single borrowing (the date of such borrowing, the Funding Date) during a 90-day period commencing on the Closing Date, contingent upon us completing the DCP LP public common unit acquisition, and matures on the third anniversary of the Funding Date. The Term Loan Agreement contains customary covenants similar to those contained in our revolving credit agreement, including a maximum consolidated net debt-to-capitalization ratio of 65% as of the last day of each fiscal quarter. The Term Loan Agreement has customary events of default, such as nonpayment of principal when due; nonpayment of interest, fees or other amounts after grace periods; and violation of covenants. We may at any time prepay outstanding borrowings under the Term Loan Agreement, in whole or in part, without premium or penalty. Outstanding borrowings under the Term Loan Agreement will bear interest at either: (a) Adjusted Term SOFR in effect from time to time plus the applicable margin; or (b) the reference rate plus the applicable margin, as defined in the Term Loan Agreement. As of March 31, 2023, no borrowings are outstanding under the Term Loan Agreement.
See Note 21—DCP Midstream Class A Segment, for additional information regarding the definitive agreement we executed on January 5, 2023, to acquire an incremental interest in DCP LP.
Credit Facilities and Commercial Paper
Phillips 66 and Phillips 66 Company
On June 23, 2022, we entered into a $5 billion revolving credit facility with Phillips 66 Company as the borrower and Phillips 66 as the guarantor. At both March 31, 2023, and December 31, 2022, no amount had been drawn under the $5 billion revolving credit facility or $5 billion uncommitted commercial paper program.
DCP Midstream Class A Segment
At March 31, 2023, DCP LP had $225 million of borrowings outstanding under its $1.4 billion credit facility and $2 million of letters of credit had been issued that supported the credit facility. At December 31, 2022, DCP LP had no borrowings outstanding under its $1.4 billion credit facility, and $10 million in letters of credit had been issued that are supported by the credit facility.
As of March 31, 2023, and December 31, 2022, $350 million and $40 million of borrowings, respectively, were outstanding under DCP LP’s accounts receivable securitization facility, which are secured by its accounts receivable at DCP Receivables LLC.
Note 12—Guarantees
At March 31, 2023, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantees and expect future performance to be either immaterial or have only a remote chance of occurrence.
Lease Residual Value Guarantees
Under the operating lease agreement for our headquarters facility in Houston, Texas, we have the option, at the end of the lease term in September 2025, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at March 31, 2023. We also have residual value guarantees associated with railcar, airplane and truck leases with maximum potential future exposures totaling $164 million. These leases have remaining terms of five to ten years.
Guarantees of Joint Venture Obligations
In March 2019, Phillips 66 Partners and its co-venturers in Dakota Access provided a CECU in conjunction with a senior unsecured notes offering. See Note 8—Investments, Loans and Long-Term Receivables, for additional information on Dakota Access and the CECU.
At March 31, 2023, we also had other guarantees outstanding primarily for our portion of certain joint venture debt, which have remaining terms of up to three years. The maximum potential future exposures under these guarantees were approximately $83 million. Payment would be required if a joint venture defaults on its obligations.
Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnifications. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses, employee claims, and real estate tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. At March 31, 2023, and December 31, 2022, the carrying amount of recorded indemnifications was $134 million and $137 million, respectively.
We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information to support the reversal. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. At March 31, 2023, and December 31, 2022, environmental accruals for known contamination of $105 million and $108 million, respectively, were included in the carrying amount of the recorded indemnifications noted above. These environmental accruals were primarily included in the “Asset retirement obligations and accrued environmental costs” line item on our consolidated balance sheet. For additional information about environmental liabilities, see Note 13—Contingencies and Commitments.
Indemnification and Release Agreement
In 2012, in connection with our separation from ConocoPhillips, we entered into an Indemnification and Release Agreement. This agreement governs the treatment between ConocoPhillips and us of matters relating to indemnification, insurance, litigation responsibility and management, and litigation document sharing and cooperation arising in connection with the separation. Generally, the agreement provides for cross indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of ConocoPhillips’ business with ConocoPhillips. The agreement also establishes procedures for handling claims subject to indemnification and related matters.
Note 13—Contingencies and Commitments
A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by 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 active and inactive sites. We regularly assess the need for financial 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 uncertain.
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 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.
Environmental
We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using information available at the time. We measure estimates and base contingent liabilities on currently available facts, existing technology and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring contingent environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the EPA or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.
Although liability for environmental remediation costs is generally joint and several for federal sites and frequently so for state sites, we are usually only one of many companies alleged to have liability at a particular site. Due to such joint and several liabilities, we could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites for which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit, although some of the indemnifications are subject to dollar and time limits.
We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At March 31, 2023, our total environmental accruals were $439 million, compared with $434 million at December 31, 2022. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.
Legal Proceedings
Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the 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, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required.
Other Contingencies
We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized.
At March 31, 2023, we had performance obligations secured by letters of credit and bank guarantees of $749 million related to various purchase and other commitments incident to the ordinary conduct of business.
Note 14—Derivatives and Financial Instruments
Derivative Instruments
We use financial and commodity-based derivative contracts to manage exposures to fluctuations in commodity prices, interest rates and foreign currency exchange rates, or to capture market opportunities. Because we do not apply hedge accounting for commodity derivative contracts, all realized and unrealized gains and losses from commodity derivative contracts are recognized in our consolidated statement of income. Gains and losses from derivative contracts held for trading not directly related to our physical business are reported net in the “Other income (loss)” line item on our consolidated statement of income. Cash flows from all our derivative activity for the periods presented appear in the operating section on our consolidated statement of cash flows.
Purchase and sales contracts with firm minimum notional volumes for commodities that are readily convertible to cash are recorded on our consolidated balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception, whereby the contracts are recorded on an accrual basis. We generally apply the normal purchases and normal sales exception to eligible crude oil, refined petroleum product, NGL, natural gas, renewable feedstock, and power commodity contracts to purchase or sell quantities we expect to use or sell in the normal course of business. All other derivative instruments are recorded at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 15—Fair Value Measurements.
Commodity Derivative Contracts—We sell into or receive supply from the worldwide crude oil, refined petroleum product, NGL, natural gas, renewable feedstock, and electric power markets, exposing our revenues, purchases, cost of operating activities and cash flows to fluctuations in the prices for these commodities. Generally, our policy is to remain exposed to the market prices of commodities; however, we use futures, forwards, swaps and options in various markets to balance physical systems, meet customer needs, manage price exposures on specific transactions, and do a limited amount of trading not directly related to our physical business, all of which may reduce our exposure to fluctuations in market prices. We also use the market knowledge gained from these activities to capture market opportunities such as moving physical commodities to more profitable locations, storing commodities to capture seasonal or time premiums, and blending commodities to capture quality upgrades.
DCP Midstream Class A Segment
Through DCP LP’s operations, DCP Midstream Class A Segment is exposed to a variety of risks including but not limited to changes in the prices of commodities that DCP LP buys or sells. Effective from the date of the merger, we include DCP LP’s financial instruments in our financial statements. See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger, for additional information regarding the merger and the associated accounting treatment.
The following table indicates the consolidated balance sheet line items that include the fair values of commodity derivative assets and liabilities. The balances in the following table are presented on a gross basis, before the effects of counterparty and collateral netting. However, we have elected to present our commodity derivative assets and liabilities with the same counterparty on a net basis on our consolidated balance sheet when the legal right of offset exists.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Millions of Dollars |
| | March 31, 2023 | | December 31, 2022 |
| Commodity Derivatives | Effect of Collateral Netting | Net Carrying Value Presented on the Balance Sheet | | | Commodity Derivatives | Effect of Collateral Netting | Net Carrying Value Presented on the Balance Sheet |
| | Assets | Liabilities | | Assets | Liabilities |
| | | | | | | | | | |
| Assets | | | | | | | | | | |
| Prepaid expenses and other current assets | $ | 3,008 | | (2,834) | | (1) | | 173 | | | | 1,331 | | (1,110) | | — | | 221 | |
| Other assets | 29 | | (4) | | — | | 25 | | | | 46 | | (1) | | — | | 45 | |
| Liabilities | | | | | | | | | | |
| Other accruals | 27 | | (144) | | 15 | | (102) | | | | 471 | | (750) | | 90 | | (189) | |
| Other liabilities and deferred credits | 24 | | (23) | | — | | 1 | | | | 12 | | (35) | | — | | (23) | |
| Total | $ | 3,088 | | (3,005) | | 14 | | 97 | | | | 1,860 | | (1,896) | | 90 | | 54 | |
At March 31, 2023, there was $32 million of collateral paid that was not offset on our consolidated balance sheet. At December 31, 2022, there was $93 million of cash collateral paid that was not offset on our consolidated balance sheet.
The realized and unrealized gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of income, were:
| | | | | | | | | | | | | | |
| | Millions of Dollars |
| | Three Months Ended
March 31 | | |
| | 2023 | | | 2022 | | | | |
| | | | | | |
| Sales and other operating revenues | $ | 50 | | | (420) | | | | |
| Other income (loss) | (14) | | | 25 | | | | |
| Purchased crude oil and products | 137 | | | (228) | | | | |
| Net gain (loss) from commodity derivative activity | $ | 173 | | | (623) | | | | |
The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from nonderivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward purchase and sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was more than 90% at March 31, 2023, and December 31, 2022.
| | | | | | | | | | | |
| | Open Position
Long / (Short) |
| | March 31
2023 | | December 31
2022 |
| Commodity | | | |
Crude oil, refined petroleum products, NGL and renewable feedstocks (millions of barrels) | (37) | | | (25) | |
Natural gas (billions of cubic feet) | (37) | | | (77) | |
Credit Risk from Derivative and Financial Instruments
Financial instruments potentially exposed to concentrations of credit risk consist primarily of trade receivables and derivative contracts.
Our trade receivables result primarily from the sale of products from, or related to, our refinery operations and reflect a broad national and international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of 30 days or less. We continually monitor this exposure and the creditworthiness of the counterparties and recognize bad debt expense based on a probability assessment of credit loss. Generally, we do not require collateral to limit the exposure to loss; however, we will sometimes use letters of credit, prepayments or master netting arrangements to mitigate credit risk with counterparties that both buy from and sell to us, as these agreements permit the amounts owed by us to others to be offset against amounts owed to us.
The credit risk from our derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements, typically on a daily basis, until settled.
Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit ratings. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if our credit ratings fall below investment grade. Cash is the primary collateral in all contracts; however, many contracts also permit us to post letters of credit as collateral.
The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were immaterial at March 31, 2023, and December 31, 2022.
Note 15—Fair Value Measurements
Recurring Fair Value Measurements
We carry certain assets and liabilities at fair value, which we measure at the reporting date using the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price), and disclose the quality of these fair values based on the valuation inputs used in these measurements under the following hierarchy:
•Level 1: Fair value measured with unadjusted quoted prices from an active market for identical assets or liabilities.
•Level 2: Fair value measured either with: (1) adjusted quoted prices from an active market for similar assets or liabilities; or (2) other valuation inputs that are directly or indirectly observable.
•Level 3: Fair value measured with unobservable inputs that are significant to the measurement.
We classify the fair value of an asset or liability based on the significance of its observable or unobservable inputs to the measurement. However, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable.
We used the following methods and assumptions to estimate the fair value of financial instruments:
•Cash and cash equivalents—The carrying amount reported on our consolidated balance sheet approximates fair value.
•Accounts and notes receivable—The carrying amount reported on our consolidated balance sheet approximates fair value.
•Derivative instruments—The fair value of our exchange-traded contracts is based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange or other exchanges, and is reported as Level 1 in the fair value hierarchy. When exchange-cleared contracts lack sufficient liquidity, or are valued using either adjusted exchange-provided prices or nonexchange quotes, we classify those contracts as Level 2 or Level 3 based on the degree to which inputs are observable.
Physical commodity forward purchase and sales contracts and over-the-counter (OTC) financial swaps are generally valued using forward quotes provided by brokers and price index developers, such as Platts and Oil Price Information Service. We corroborate these quotes with market data and classify the resulting fair values as Level 2. When forward market prices are not available, we estimate fair value using the forward price of a similar commodity, adjusted for the difference in quality or location. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, physical commodity purchase and sales contracts and OTC swaps are valued using internally developed methodologies that consider historical relationships among various commodities that result in management’s best estimate of fair value. We classify these contracts as Level 3. Physical and OTC commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines whether the options are classified as Level 2 or 3. We use a midmarket pricing convention (the midpoint between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
We determine the fair value of interest rate swaps based on observable market valuations for interest rate swaps that have notional amounts, terms and pay and reset frequencies similar to ours.
•Rabbi trust assets—These deferred compensation investments are measured at fair value using unadjusted quoted prices available from national securities exchanges and are therefore categorized as Level 1 in the fair value hierarchy.
•Investment in NOVONIX—Our investment in NOVONIX is measured at fair value using unadjusted quoted prices available from the Australian Securities Exchange and is therefore categorized as Level 1 in the fair value hierarchy.
•Other investments—Includes other marketable securities with observable market prices.
•Debt—The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated primarily based on observable market prices.
The following tables display the fair value hierarchy for our financial assets and liabilities either accounted for or disclosed at fair value on a recurring basis. These values are determined by treating each contract as the fundamental unit of account; therefore, derivative assets and liabilities with the same counterparty are shown on a gross basis in the hierarchy sections of these tables, before the effects of counterparty and collateral netting. The following tables also reflect the effect of netting derivative assets and liabilities with the same counterparty for which we have the legal right of offset and collateral netting.
The carrying values and fair values by hierarchy of our financial assets and liabilities, either carried or disclosed at fair value, including any effects of counterparty and collateral netting, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Millions of Dollars |
| | March 31, 2023 |
| Fair Value Hierarchy | | Total Fair Value of Gross Assets & Liabilities | Effect of Counterparty Netting | Effect of Collateral Netting | Difference in Carrying Value and Fair Value | Net Carrying Value Presented on the Balance Sheet | |
| | Level 1 | | Level 2 | | Level 3 |
| Commodity Derivative Assets | | | | | | | | | | | | |
| Exchange-cleared instruments | $ | 2,914 | | | 76 | | | 2 | | | 2,992 | | (2,867) | | (1) | | — | | 124 | | |
| OTC instruments | — | | | 13 | | | 13 | | | 26 | | — | | — | | — | | 26 | | |
| Physical forward contracts | — | | | 68 | | | 2 | | | 70 | | (22) | | — | | — | | 48 | | |
| | | | | | | | | | | | |
| Rabbi trust assets | 179 | | | — | | | — | | | 179 | | N/A | N/A | — | | 179 | | |
| Investment in NOVONIX | 66 | | | — | | | — | | | 66 | | N/A | N/A | — | | 66 | | |
| | | | | | | | | | | | |
| $ | 3,159 | | | 157 | | | 17 | | | 3,333 | | (2,889) | | (1) | | — | | 443 | | |
| | | | | | | | | | | | |
| Commodity Derivative Liabilities | | | | | | | | | | | | |
| Exchange-cleared instruments | $ | 2,883 | | | 82 | | | 2 | | | 2,967 | | (2,867) | | (15) | | — | | 85 | | |
| OTC instruments | — | | | 4 | | | — | | | 4 | | — | | — | | — | | 4 | | |
| Physical forward contracts | — | | | 34 | | | — | | | 34 | | (22) | | — | | — | | 12 | | |
| | | | | | | | | | | | |
| Floating-rate debt | — | | | 600 | | | — | | | 600 | | N/A | N/A | — | | 600 | | |
| Fixed-rate debt, excluding finance leases and software obligations | — | | | 16,919 | | | — | | | 16,919 | | N/A | N/A | 696 | | 17,615 | | |
| $ | 2,883 | | | 17,639 | | | 2 | | | 20,524 | | (2,889) | | (15) | | 696 | | 18,316 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Millions of Dollars |
| | December 31, 2022 |
| Fair Value Hierarchy | | Total Fair Value of Gross Assets & Liabilities | Effect of Counterparty Netting | Effect of Collateral Netting | Difference in Carrying Value and Fair Value | Net Carrying Value Presented on the Balance Sheet | |
| | Level 1 | | Level 2 | | Level 3 | |
| Commodity Derivative Assets | | | | | | | | | | | | |
| Exchange-cleared instruments | $ | 1,615 | | | 130 | | | 3 | | | 1,748 | | (1,582) | | — | | — | | 166 | | |
| OTC instruments | — | | | 7 | | | 16 | | | 23 | | — | | — | | — | | 23 | | |
| Physical forward contracts | — | | | 86 | | | 3 | | | 89 | | (12) | | — | | — | | 77 | | |
| | | | | | | | | | | | |
| Rabbi trust assets | 126 | | | — | | | — | | | 126 | | N/A | N/A | — | | 126 | | |
| Investment in NOVONIX | 78 | | | — | | | — | | | 78 | | N/A | N/A | — | | 78 | | |
| Other investments | 42 | | | 1 | | | — | | | 43 | | N/A | N/A | — | | 43 | | |
| $ | 1,861 | | | 224 | | | 22 | | | 2,107 | | (1,594) | | — | | — | | 513 | | |
| | | | | | | | | | | | |
| Commodity Derivative Liabilities | | | | | | | | | | | | |
| Exchange-cleared instruments | $ | 1,676 | | | 164 | | | 5 | | | 1,845 | | (1,582) | | (90) | | — | | 173 | | |
| OTC instruments | — | | | 9 | | | — | | | 9 | | — | | — | | — | | 9 | | |
| Physical forward contracts | — | | | 42 | | | — | | | 42 | | (12) | | — | | — | | 30 | | |
| | | | | | | | | | | | |
| Floating-rate debt | — | | | 65 | | | — | | | 65 | | N/A | N/A | — | | 65 | | |
| Fixed-rate debt, excluding finance leases and software obligations | — | | | 15,871 | | | — | | | 15,871 | | N/A | N/A | 977 | | 16,848 | | |
| $ | 1,676 | | | 16,151 | | | 5 | | | 17,832 | | (1,594) | | (90) | | 977 | | 17,125 | | |
The rabbi trust assets and investment in NOVONIX are recorded in the “Investments and long-term receivables” line item, and floating-rate and fixed-rate debt are recorded in the “Short-term debt” and “Long-term debt” line items on our consolidated balance sheet. See Note 14—Derivatives and Financial Instruments, for information regarding where the assets and liabilities related to our commodity derivatives are recorded on our consolidated balance sheet.
Nonrecurring Fair Value Measurements
DCP Midstream and Gray Oak Holdings Merger
On August 17, 2022, we and Enbridge agreed to merge DCP Midstream and Gray Oak Holdings with DCP Midstream as the surviving entity. As a result, we began consolidating the financial results of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills, and accordingly, accounted for the business combination using the acquisition method of accounting, which requires DCP Midstream Class A Segment’s, DCP Sand Hills’ and DCP Southern Hills’, assets and liabilities to be recorded at fair value as of the acquisition date on our consolidated balance sheet. See Note 4—Business Combinations, for additional information on the merger transaction.
Equity Investments
The preliminary fair value of the investments we acquired that are accounted for under the equity method was $2,215 million. The preliminary fair value of these assets was determined using the income approach. The income approach used discounted cash flow models that require various observable and non-observable inputs, such as margins, tariffs and rates, utilization, volumes, product costs, operating expenses, capital expenditures, terminal-year values and risk-adjusted discount rates. These valuations resulted in Level 3 nonrecurring fair value measurements.
PP&E
The preliminary fair value of PP&E was $12,850 million. The preliminary fair value of these assets was determined primarily using the cost approach. The cost approach used assumptions for the current replacement costs of similar plant and equipment assets adjusted for estimated physical deterioration, functional obsolescence and economic obsolescence. The estimated fair value of properties was determined using a sales comparison approach. These valuations resulted in Level 3 nonrecurring fair value measurements.
Debt
The preliminary fair value of DCP LP’s senior and junior subordinated notes was measured using a market approach, based on the average of quotes for the acquired debt from major financial institutions. These valuations resulted in Level 2 nonrecurring fair value measurements.
Noncontrolling Interests
As a result of our consolidation of the DCP Midstream Class A Segment, the noncontrolling interests held in the DCP Midstream Class A Segment were recorded at their estimated fair values on the merger date. These noncontrolling interests primarily include Enbridge’s indirect economic interest in DCP LP, the public holders of DCP LP’s common units and the holders of DCP LP’s preferred units. The fair value of the noncontrolling interests in DCP LP’s common units was based on their unit market price as of the date of the merger, August 17, 2022. The fair value of the noncontrolling interests in DCP LP’s publicly traded preferred units was based on their respective market price as of the date of the merger, August 17, 2022. These valuations resulted in Level 1 nonrecurring fair value measurements. The preliminary fair value of the noncontrolling interests in DCP LP’s other preferred units was based on an income approach that used projected distributions that were discounted using an average implied yield of DCP LP’s publicly traded preferred units and expected redemption dates. This valuation resulted in a Level 2 nonrecurring fair value measurement.
Note 16—Pension and Postretirement Plans
The components of net periodic benefit cost for the three months ended March 31, 2023 and 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Millions of Dollars |
| | Pension Benefits | | Other Benefits |
| | 2023 | | 2022 | | 2023 | | | 2022 | |
| U.S. | | Int’l. | | U.S. | | Int’l. | | | | |
| Components of Net Periodic Benefit Cost | | | | | | | | | | | |
| Three Months Ended March 31 | | | | | | | | | | | |
| Service cost | $ | 27 | | | 3 | | | 35 | | | 8 | | | 1 | | | 1 | |
| Interest cost | 29 | | | 8 | | | 21 | | | 6 | | | 2 | | | 1 | |
| Expected return on plan assets | (31) | | | (10) | | | (39) | | | (16) | | | — | | | — | |
| | | | | | | | | | | |
| Amortization of net actuarial loss (gain) | 3 | | | (1) | | | 6 | | | 3 | | | (2) | | | (1) | |
| Settlements | 10 | | | — | | | 1 | | | — | | | — | | | — | |
| Net periodic benefit cost* | $ | 38 | | | — | | | 24 | | | 1 | | | 1 | | | 1 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
* Included in the “Operating expenses” and “Selling, general and administrative expenses” line items on our consolidated statement of income. |
During the three months ended March 31, 2023, we contributed $29 million to our U.S. pension and other postretirement benefit plans and $5 million to our international pension plans. We currently expect to make additional contributions of approximately $40 million to our U.S. pension and other postretirement benefit plans and approximately $15 million to our international pension plans during the remainder of 2023.
Note 17—Accumulated Other Comprehensive Loss
Changes in the balances of each component of accumulated other comprehensive loss were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Millions of Dollars |
| | Defined Benefit Plans | | Foreign Currency Translation | | Hedging | | Accumulated Other Comprehensive Loss |
| | | | | | | |
| December 31, 2022 | $ | (122) | | | (336) | | | (2) | | | (460) | |
| Other comprehensive income before reclassifications | 2 | | | 77 | | | — | | | 79 | |
Amounts reclassified from accumulated other
comprehensive loss | | | | | | | |
| Defined benefit plans* | | | | | | | |
| Amortization of net actuarial loss and settlements | 8 | | | — | | | — | | | 8 | |
| Foreign currency translation | — | | | — | | | — | | | — | |
| Hedging | — | | | — | | | — | | | — | |
| Net current period other comprehensive income | 10 | | | 77 | | | — | | | 87 | |
| March 31, 2023 | $ | (112) | | | (259) | | | (2) | | | (373) | |
| | | | | | | |
| December 31, 2021 | $ | (398) | | | (45) | | | (2) | | | (445) | |
| Other comprehensive income (loss) before reclassifications | 4 | | | (82) | | | — | | | (78) | |
Amounts reclassified from accumulated other comprehensive loss | | | | | | | |
| Defined benefit plans* | | | | | | | |
| Amortization of net actuarial loss, prior service credit and settlements | 9 | | | — | | | — | | | 9 | |
| Foreign currency translation | — | | | — | | | — | | | — | |
| Hedging | — | | | — | | | — | | | — | |
| Net current period other comprehensive income (loss) | 13 | | | (82) | | | — | | | (69) | |
| | | | | | | |
| March 31, 2022 | $ | (385) | | | (127) | | | (2) | | | (514) | |
* Included in the computation of net periodic benefit cost. See Note 16—Pension and Postretirement Plans, for additional information. |
Note 18—Related Party Transactions
Significant transactions with related parties were:
| | | | | | | | | | | | | | |
| | Millions of Dollars |
| | Three Months Ended
March 31 | | |
| | 2023 | | | 2022 | | | | |
| | | | | | |
| Operating revenues and other income (a)(d) | $ | 1,304 | | | 1,340 | | | | |
| Purchases (b)(d) | 3,699 | | | 4,681 | | | | |
| Operating expenses and selling, general and administrative expenses (c) | 72 | | | 70 | | | | |
| | | | | | |
(a)We sold NGL, other petrochemical feedstocks and solvents to Chevron Phillips Chemical Company LLC (CPChem), NGL and certain feedstocks to DCP Midstream, gas oil and hydrogen feedstocks to Excel Paralubes LLC (Excel Paralubes), and refined petroleum products to several of our equity affiliates in the Marketing and Specialties (M&S) segment, including OnCue and CF United. We also sold certain feedstocks and intermediate products to WRB Refining LP (WRB) and acted as an agent for WRB in supplying crude oil and other feedstocks for a fee. In addition, we charged several of our equity affiliates, including CPChem, for the use of common facilities, such as steam generators, waste and water treaters and warehouse facilities.
(b)We purchased crude oil, refined petroleum products, NGL and solvents from WRB. We also purchased natural gas and NGL from DCP Midstream and CPChem, as well as other feedstocks from various equity affiliates, for use in our refinery and fractionation processes. In addition, we purchased base oils and fuel products from Excel Paralubes for use in our specialty and refining businesses. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline equity affiliates for transporting crude oil, refined petroleum products and NGL.
(c)We paid consignment fees to CF United, and utility and processing fees to various equity affiliates.
(d)As a result of the DCP Midstream and Gray Oak Holdings merger, we began consolidating DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills. As a result, transactions with these parties after August 17, 2022, are not presented in the table above.
Note 19—Segment Disclosures and Related Information
Effective October 1, 2022, we changed the organizational structure of the internal financial information reviewed by our President and Chief Executive Officer, and determined this resulted in a change in the composition of our operating segments. As part of the realignment, we moved the results and net assets of our Merey Sweeny vacuum distillation and delayed coker units at our Sweeny Refinery and the isomerization unit at our Lake Charles Refinery from our Midstream segment to our Refining segment. Additionally, commissions charged to the Refining segment by the M&S segment related to sales of specialty products were eliminated and the costs of the sales organization were reclassified from the M&S segment to the Refining segment. The segment realignment is presented for the three months ended March 31, 2023, with prior periods recast for comparability.
Our operating segments are:
1)Midstream—Provides natural gas and NGL transportation, storage, fractionation, gathering, processing and marketing services, as well as crude oil and refined petroleum product transportation, terminaling and processing services, mainly in the United States. As a result of the merger on August 17, 2022, we began consolidating DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills. On March 9, 2022, we also completed the merger between us and Phillips 66 Partners. See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger and Note 22—Phillips 66 Partners LP, for additional information on these transactions. This segment also includes our 16% investment in NOVONIX.
2)Chemicals—Consists of our 50% equity investment in CPChem, which manufactures and markets petrochemicals and plastics on a worldwide basis.
3)Refining—Refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates and aviation fuels, as well as renewable fuels, at 12 refineries in the United States and Europe.
4)Marketing and Specialties—Purchases for resale and markets refined petroleum products and renewable fuels, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of base oils and lubricants.
Corporate and Other includes general corporate overhead, interest expense, our investment in research of new technologies and various other corporate activities. Corporate assets include all cash, cash equivalents and income tax-related assets. Corporate and Other also includes restructuring costs related to our business transformation. See Note 23—Restructuring for additional information regarding restructuring costs.
Intersegment sales are at prices that we believe approximate market.
Analysis of Results by Operating Segment
| | | | | | | | | | | | | | | |
| | Millions of Dollars |
| | Three Months Ended
March 31 | | |
| | 2023 | | | 2022 | | | | | |
Sales and Other Operating Revenues* | | | | | | | |
| Midstream | | | | | | | |
| Total sales | $ | 5,292 | | | 4,022 | | | | | |
| Intersegment eliminations | (695) | | | (826) | | | | | |
| Total Midstream | 4,597 | | | 3,196 | | | | | |
| Chemicals | — | | | — | | | | | |
| Refining | | | | | | | |
| Total sales | 22,341 | | | 24,141 | | | | | |
| Intersegment eliminations | (14,095) | | | (15,576) | | | | | |
| Total Refining | 8,246 | | | 8,565 | | | | | |
| Marketing and Specialties | | | | | | | |
| Total sales | 22,399 | | | 25,211 | | | | | |
| Intersegment eliminations | (855) | | | (798) | | | | | |
| Total Marketing and Specialties | 21,544 | | | 24,413 | | | | | |
| Corporate and Other | 9 | | | 5 | | | | | |
| Consolidated sales and other operating revenues | $ | 34,396 | | | 36,179 | | | | | |
* See Note 5—Sales and Other Operating Revenues, for further details on our disaggregated sales and other operating revenues. |
| | | | | | | |
| | | | | | | |
| Income (Loss) Before Income Taxes | | | | | | | |
| Midstream | $ | 702 | | | 212 | | | | | |
| Chemicals | 198 | | | 396 | | | | | |
| Refining | 1,608 | | | 173 | | | | | |
| Marketing and Specialties | 426 | | | 296 | | | | | |
| Corporate and Other | (283) | | | (249) | | | | | |
| Consolidated income before income taxes | $ | 2,651 | | | 828 | | | | | |
| | | | | | | | | | | |
| | Millions of Dollars |
| | March 31
2023 | | December 31
2022 |
| Total Assets | | | |
| Midstream | $ | 29,358 | | | 30,273 | |
| Chemicals | 6,981 | | | 6,785 | |
| Refining | 22,750 | | | 21,581 | |
| Marketing and Specialties | 9,443 | | | 9,939 | |
| Corporate and Other | 8,730 | | | 7,864 | |
| Consolidated total assets | $ | 77,262 | | | 76,442 | |
Note 20—Income Taxes
Our effective income tax rate for the three months ended March 31, 2023, was 22%, compared with 21% for the corresponding period of 2022. The increase in our effective tax rate for the three months ended March 31, 2023, was primarily attributable to non-taxable foreign earnings of our chemical joint venture and an increase in foreign tax rate.
The effective tax rate for the three months ended March 31, 2023, varied from the U.S. federal statutory income tax rate primarily due to state income taxes, partially offset by the impact of foreign operations and noncontrolling interest.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (IRA) that includes, among other provisions, changes to the U.S. corporate income tax system, including 15% minimum tax based on adjusted financial statement income as defined in the IRA, which was effective after December 31, 2022. We do not anticipate owing 2023 corporate alternative minimum tax as the regular U.S. tax liability is forecasted to exceed the corporate alternative minimum tax.
Note 21—DCP Midstream Class A Segment
DCP Midstream Class A Segment is a VIE and we are the primary beneficiary. DCP Midstream Class A Segment is comprised of the businesses, activities, assets and liabilities of DCP LP and its subsidiaries and its general partner entities. Refer to Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger and Note 4—Business Combinations, for more details on the DCP Midstream and Gray Oak Holdings merger transaction and related accounting.
DCP LP, headquartered in Denver, Colorado, is a publicly traded master limited partnership whose operations currently include producing and fractionating NGL, gathering, compressing, treating and processing natural gas; recovering condensate; and transporting, trading, marketing and storing natural gas and NGL.
As a result of our consolidation of DCP Midstream Class A Segment, the public common and preferred unitholders’ ownership interests and Enbridge’s indirect economic interest in DCP LP are reflected as noncontrolling interests in our consolidated financial statements. At March 31, 2023, we held a 43.3% indirect economic interest in DCP LP.
The most significant assets of DCP Midstream Class A Segment that are available to settle only its obligations, along with its most significant liabilities for which its creditors do not have recourse to Phillips 66’s general credit, were:
| | | | | | | | | | | |
| Millions of Dollars |
| March 31
2023 | | December 31
2022 |
| Accounts receivable, trade* | $ | 713 | | | 988 | |
| Net properties, plants and equipment | 9,280 | | | 9,297 | |
| Investments in unconsolidated affiliates** | 2,182 | | | 2,161 | |
| Accounts payable | 755 | | | 1,239 | |
| Short-term debt | 4 | | | 504 | |
| Long-term debt | 4,808 | | | 4,248 | |
* Included in the “Accounts and notes receivable” line item on the Phillips 66 consolidated balance sheet.
** Included in the “Investments and long-term receivables” line item on the Phillips 66 consolidated balance sheet.
Preferred Units
DCP LP’s preferred units rank senior to its common units with respect to distribution rights and rights upon liquidations. Holders of DCP LP’s preferred units have no voting rights except for certain limited protective voting rights. Distributions on the preferred units are payable out of DCP LP’s available cash, are accretive and are cumulative from the date of original issuance of the preferred units.
Distributions on the Series B preferred units are payable quarterly in arrears in March, June, September and December of each year. Distributions on the Series C preferred units are payable quarterly in arrears in January, April, July and October of each year. During the three months ended March 31, 2023, DCP LP made cash distributions of $3 million to Series B preferred unitholders and $2 million to Series C preferred unitholders.
As of March 31, 2023, DCP LP had 6,450,000 Series B preferred units outstanding with an aggregate liquidation preference of approximately $161 million, and 4,400,000 Series C preferred units outstanding with an aggregate liquidation preference of $110 million. The Series B and C preferred units are publicly traded on the New York Stock Exchange.
Common Units
As of March 31, 2023, DCP LP had approximately 209 million of common units outstanding, of which approximately 91 million were publicly held. In addition, Enbridge holds a 23.36% economic interest in the approximately 118 million common units held by DCP Midstream Class A Segment. During the three months ended March 31, 2023, DCP LP made cash distributions of $51 million to common unit holders other than Phillips 66.
DCP LP Public Common Unit Acquisition
On January 5, 2023, we entered into a definitive agreement with DCP LP, its subsidiaries and its general partner entities, pursuant to which one of our wholly owned subsidiaries will merge with and into DCP LP, with DCP LP surviving as a Delaware limited partnership. Under the terms of the agreement, at the effective time of the merger, each publicly held common unit representing a limited partner interest in DCP LP (other than the common units owned by DCP Midstream and DCP Midstream GP, LP) issued and outstanding as of immediately prior to the effective time will be converted into the right to receive $41.75 per common unit in cash, without interest. The merger will increase our economic interest in DCP LP from 43.3% to 86.8%. The transaction is expected to close in the second quarter of 2023, subject to customary closing conditions.
If the merger is successfully completed, we will pay approximately $3.8 billion in cash consideration, which we expect to fund through a combination of cash generated from operating activities, proceeds from the offering of the Notes and borrowings under the Term Loan Agreement. See Note 11—Debt, for additional information.
The transaction was unanimously approved by the board of the general partner of DCP LP, based on the unanimous approval and recommendation of its special committee comprised entirely of independent directors after evaluation of the transaction by the special committee in consultation with independent financial and legal advisors. Concurrently with the execution of the agreement, affiliates of Phillips 66, which together own greater than a majority of the outstanding DCP LP common units, delivered their consent to approve the transaction. As a result, DCP LP has not solicited and is not soliciting approval of the transaction by any other holders of DCP LP common units.
Note 22—Phillips 66 Partners LP
On March 9, 2022, we completed a merger between us and Phillips 66 Partners. The merger resulted in the acquisition of all limited partnership interests in Phillips 66 Partners not already owned by us in exchange for 41.8 million shares of Phillips 66 common stock issued from treasury stock. Phillips 66 Partners common unitholders received 0.50 shares of Phillips 66 common stock for each outstanding Phillips 66 Partners common unit. Phillips 66 Partners’ perpetual convertible preferred units were converted into common units at a premium to the original issuance price prior to being exchanged for Phillips 66 common stock. The merger was accounted for as an equity transaction. Upon closing, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66 and its common units are no longer publicly traded.
Note 23—Restructuring
In April 2022, we announced that we are progressing a multi-year business transformation focused on enterprise-wide opportunities to improve our cost structure. For the three months ended March 31, 2023, we recorded restructuring costs totaling $35 million, primarily related to consulting fees. These costs are primarily recorded in the “Selling, general and administrative expenses” line item on our consolidated statement of income and are reported in our Corporate segment.
In addition, in the first quarter of 2023, we recorded restructuring costs of $12 million associated with the integration of DCP Midstream Class A Segment primarily related to severance. These costs are primarily recorded in the “Selling, general and administrative expenses” line item on our consolidated statement of income and are reported in our Midstream segment.
