Note 1—Business and Basis of Presentation
Unless otherwise stated or the context otherwise indicates, all references to “Phillips 66 Partners,” “the Partnership,” “us,” “our,” “we,” or similar expressions refer to Phillips 66 Partners LP, including its consolidated subsidiaries. References to Phillips 66 may refer to Phillips 66 and/or its subsidiaries, depending on the context. References to our “General Partner” or “GP” refer to Phillips 66 Partners GP LLC, and references to “Phillips 66 PDI” refer to Phillips 66 Project Development Inc., the Phillips 66 subsidiary that holds a limited partner interest in us and wholly owns our General Partner.
Description of the Business
We are a Delaware limited partnership formed in 2013 by wholly owned subsidiaries of Phillips 66. We are a master limited partnership formed to own, operate, develop and acquire primarily fee-based midstream assets.
Our operations consist of crude oil, refined petroleum products and natural gas liquids (NGL) transportation, terminaling, processing and storage assets. We conduct our operations through both wholly owned and joint venture operations. The majority of our wholly owned assets are associated with, and are integral to the operation of, eight of Phillips 66’s owned or joint venture refineries. Our operations consist of one reportable segment.
We primarily generate revenue by providing fee-based transportation, terminaling, processing, storage and fractionation services to Phillips 66 and other customers. Our equity affiliates primarily generate revenue from transporting and terminaling crude oil, refined petroleum products and NGL. Since we do not own any of the crude oil, refined petroleum products and NGL we handle and do not engage in the trading of those commodities, we have limited direct exposure to risks associated with fluctuating commodity prices, although these risks indirectly influence our activities and results of operations over the long term.
Pending Merger with Phillips 66
On October 26, 2021, we entered into a definitive merger agreement with Phillips 66 and its wholly owned subsidiaries, Phillips 66 Company, Phillips 66 PDI, and Phoenix Sub LLC, and our General Partner pursuant to which Phillips 66 would acquire all of the publicly held common units representing limited partner interests in the Partnership not already owned by Phillips 66 and its subsidiaries on the closing date of the transaction. The agreement provides for an all-stock transaction in which each outstanding common unitholder would receive 0.50 shares of Phillips 66 common stock for each common unit. Pursuant to our partnership agreement, the Partnership’s perpetual convertible preferred units would be converted into common units at a premium to the original issuance price prior to exchange for Phillips 66 common stock. The merger is expected to close in March 2022, subject to customary closing conditions.
In connection with the merger transaction, our partnership agreement was amended, effective October 26, 2021, to provide for automatic conversion of the preferred units upon the acquisition by Phillips 66 of our common units at a conversion ratio determined by dividing (i) the product of the original issuance price multiplied by a premium of 147.5%, less distributions paid after June 30, 2021, and before the closing date of the transaction, by (ii) the closing unit price of the Partnership on the last trading day prior to completion of the merger.
Phillips 66 PDI, a wholly owned subsidiary of Phillips 66 that owns a majority of our common units, has delivered a written consent approving the transaction. This written consent constitutes the requisite vote of the holders of our common units to approve the transaction.
The terms of the transaction were unanimously approved by the Board of Directors of our General Partner based on the unanimous approval and recommendation of its conflicts committee, comprised entirely of independent directors.
Upon closing, we will become an indirect wholly owned subsidiary of Phillips 66, and our common units will cease to be listed on the NYSE and will be subsequently deregistered under the Exchange Act.
See Note 5—Net Income Per Limited Partner Unit, for additional information regarding the merger agreement.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP).
Note 2—Summary of Significant Accounting Policies
Consolidation Principles and Investments in Affiliates
Our consolidated financial statements include the accounts of majority-owned, controlled subsidiaries. The equity method is used to account for investments in affiliates in which we have the ability to exert significant influence over the affiliates’ operating and financial policies, including any variable interest entities of which we are not the primary beneficiary. Undivided interests in pipelines are consolidated on a proportionate basis.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Common Control Transactions
Businesses acquired from Phillips 66 and its subsidiaries are accounted for as common control transactions whereby the net assets acquired are combined with ours at their carrying value. Any difference between carrying value and recognized consideration is treated as a capital transaction. Cash consideration up to the carrying value of net assets acquired is presented as an investing activity in our consolidated statement of cash flows. Cash consideration in excess of the carrying value of net assets acquired is presented as a financing activity in our consolidated statement of cash flows.
Revenue Recognition
Revenues are primarily recognized for pipeline transportation, terminaling, storage, processing and fractionation services generated under long-term agreements. A significant portion of our revenues are derived from Phillips 66. The majority of these agreements with Phillips 66 are considered operating leases under GAAP.
We account for lease and service elements of contracts classified as leases on a combined basis under the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842),” except for leases of processing-type assets, which contain non-ratable fees related to turnaround activity. For these types of leases, we continued to separate the lease and service elements based on relative standalone prices and applied the new lease standard to the lease element and the revenue standard to the service element.
For new or modified leases, our determination of lease classification involves estimates, primarily related to the fair value of the leased asset based on comparable replacement cost and obsolescence estimates, and the allocation of contract consideration between the lease and non-lease components based on the relative stand-alone selling price.
Revenues from fixed minimum volume commitments are recognized over the performance obligation period for stand-ready service contracts. Revenues from the variable element of these stand-ready contracts and other contracts without fixed elements are recognized based on the actual volumes transported, stored, processed and fractionated at contractual rates because the actual volumes specifically relate to our efforts to transfer the distinct services. Generally, our services are billed and payments are received on a monthly basis.
Billings to Phillips 66 for shortfall volumes under its quarterly minimum volume commitments are recorded as “Deferred revenues” in our consolidated balance sheet, as Phillips 66 generally has the right to make up the shortfall volumes in the following four quarters. For the lease element of the contracts, the deferred revenue will be recognized at the earlier of when shortfall volumes are made up, when the make-up rights contractually expire or when we determine the system will not have the necessary capacity to enable a customer to make up the shortfall volumes. For the service element of the contracts, the deferred revenue will be recognized when the performance obligation is complete or it is probable that the shortfall volumes will not be made up.
Billings for tolling services relating to maintenance turnaround activities are billed in advance of such activities. These billings are initially recorded as “Deferred revenues” in our consolidated balance sheet and are recognized when the maintenance turnaround activity commences. Deferred revenue relating to maintenance turnaround operating expenses is recognized in the period the work is performed. Deferred revenue relating to capital projects performed concurrently with a maintenance turnaround is recognized ratably over the remaining tolling services agreement once the equipment is placed into service.
Cash Equivalents
Cash equivalents are highly liquid, short-term investments that are readily convertible to known amounts of cash and will mature within 90 days or less from the date of acquisition. We carry these at cost plus accrued interest, which approximates fair value.
Imbalances
We do not purchase or produce crude oil, refined petroleum or NGL product inventories. We experience imbalances as a result of variances in meter readings and in other measurement methods, and volume fluctuations within our crude oil, refined petroleum products and NGL systems due to pressure and temperature changes. Certain of our transportation contracts provide for the shipper to pay a contractual loss allowance, which is valued using quoted market prices of the applicable commodity being shipped. These contractual loss allowances, which are received from the shipper irrespective of, and independently calculated from, actual volumetric gains or losses, are recorded as revenue. Any actual volumetric gains or losses are valued using quoted market prices of the applicable commodities and are recorded as decreases or increases to operating and maintenance expenses, respectively.
Fair Value Measurements
We measure assets and liabilities requiring fair value presentation or disclosure using the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price), and disclose such amounts according to the quality of valuation inputs under the following hierarchy:
Level 1: Quoted prices in an active market for identical assets or liabilities.
Level 2: Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs.
Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities.
We classify the fair value of an asset or liability based on the lowest level of input significant to its measurement. A fair value 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. Asset and liability fair values initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable.
The carrying amounts of our trade receivables and payables approximate fair value.
Nonrecurring Fair Value Measurements
We apply the fair value measurements criteria to determine the fair value of nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis, primarily asset retirement obligations and, when impaired, long-lived assets.
Properties, Plants and Equipment (PP&E)
PP&E is recorded at cost. Costs of maintenance and repairs, which are not significant improvements, are expensed when incurred. Depreciation of PP&E is determined by the individual-unit-straight-line method or the group-straight-line method (for those individual units that are highly integrated with other units).
Capitalized Interest
Interest from external borrowings is capitalized on major projects with an expected construction period of six months or longer. Capitalized interest is added to the cost of the underlying asset’s PP&E or the applicable equity investment and is amortized over the useful life of the asset.
Major Maintenance Activities
Costs for planned integrity management projects are expensed in the period incurred. These types of costs include inspection services, contractor repair services, materials and supplies, equipment rentals and labor costs.
Impairment of PP&E
PP&E used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in the future cash flows expected to be generated by an asset group. If, upon review, the sum of the undiscounted expected future pretax cash flows of an asset group is less than the carrying value of the asset group, including applicable liabilities, then the carrying value is written down to estimated fair value and the write down is reported as an impairment in the period in which the determination is made. Individual assets are grouped for impairment purposes at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets—generally at the pipeline system, terminal, or processing or fractionation system level. Since there usually is a lack of quoted market prices for our long-lived assets, the fair value of potentially impaired assets is typically determined based on the present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants, based on estimated replacement cost, or based on a multiple of operating cash flow validated with historical market transactions of similar assets where possible.
The expected future cash flows used for impairment reviews and related fair value calculations are based on estimated future throughputs, tariffs and fees, operating costs and capital project decisions, considering all available evidence at the date of review. See Note 7—Properties, Plants and Equipment, for additional information regarding the PP&E impairment we recorded in the third quarter of 2021.
Impairment of Investments in Nonconsolidated Entities
Investments in nonconsolidated entities are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred. When indicators exist, the fair value is estimated and compared to the investment carrying value. If any impairment is judgmentally determined to be other than temporary, the carrying value of the investment is written down to fair value. The fair value of the impaired investment is determined based on quoted market prices, if available, or upon the present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants and a market analysis of comparable assets, if appropriate. See Note 4—Equity Investments, for additional information on impairments recorded in 2021 and 2020.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized, but rather is assessed for impairment annually and when events or changes in circumstances indicate that the fair value of the reporting unit with goodwill has been reduced below carrying value. The majority of our goodwill is related to acquisitions from Phillips 66. In these common control transactions, the net assets acquired are recorded at Phillips 66’s historical carrying value, including any associated goodwill. We have one reporting unit for our goodwill impairment assessment.
Asset Retirement Obligations and Environmental Costs
Fair values of legal obligations to abandon or remove long-lived assets are recorded in the period in which the obligation arises. When the liability is initially recorded, we capitalize this cost by increasing the carrying amount of the related PP&E. Over time, the liability is increased for the change in its present value, and the capitalized cost in PP&E is depreciated over the useful life of the related asset. Our estimate may change after initial recognition of the obligation, in which case we record an adjustment to the liability and PP&E.
Environmental expenditures are expensed or capitalized, depending upon their future economic benefit. Expenditures relating to an existing condition caused by past operations, and those having no future economic benefit, are expensed. Liabilities for environmental expenditures are recorded on an undiscounted basis (unless acquired in a business combination) when environmental assessments or cleanups are probable and the costs can be reasonably estimated.
Income Taxes
We follow the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of our assets and liabilities. Our operations are treated as a partnership for federal and state income tax purposes, with each partner being separately taxed on its share of taxable income. Therefore, we have excluded income taxes from these consolidated financial statements, except for the income tax provision resulting from state laws that apply to entities organized as partnerships. Our tax provision is computed as if we were a stand-alone tax paying entity. Any interest and penalties related to income taxes would be reported in interest and debt expense and operating and maintenance expenses, respectively, in our consolidated statement of income.
Distributions from Equity Affiliates
Distributions received from our equity affiliates are classified on our consolidated statement of cash flows pursuant to the cumulative earnings approach. Under this approach, a distribution received from an equity affiliate is considered a return on investment and is classified as an operating cash inflow unless cumulative distributions received from the equity affiliate exceed cumulative equity in earnings. If cumulative distributions from an equity affiliate exceed cumulative equity in earnings, the excess is considered a return of investment and is classified as an investing cash inflow on our consolidated statement of cash flows.
Note 3—Operating Revenues
Operating revenues are primarily generated from long-term pipeline transportation, terminaling, storage, processing and fractionation lease and service agreements, mainly with Phillips 66. These agreements typically include escalation clauses to adjust transportation tariffs and terminaling and storage fees to reflect changes in price indices. In addition, most of these agreements contain renewal options, which typically require the mutual consent of both our customers and us.
Total operating revenues disaggregated by asset type were as follows:
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | | | 2019 | |
| | | | | |
Pipelines | $ | 490 | | 436 | | 473 |
Terminals | 175 | | 153 | | 167 |
Storage, processing and other revenues | 481 | | 449 | | 486 |
Total operating revenues | $ | 1,146 | | 1,038 | | 1,126 |
The majority of our agreements with Phillips 66 are considered operating leases under GAAP. The classification of a lease as either an operating or a financing lease requires judgment in assessing the contract’s lease and service components and in determining the asset’s fair value. We have elected to account for lease and service elements of contracts classified as leases on a combined basis under the provisions of ASU No. 2016-02, except for leases of processing-type assets, which contain non-ratable fees related to turnaround activity. For these types of leases, we continue to separate the lease and service elements based on relative standalone prices and apply the lease standard to the lease element and the revenue standard to the service element.
Total operating revenues disaggregated by lease and service revenues were as follows:
| | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | |
| | | |
| Lease revenues | $ | 944 | | | 875 | |
| Service revenues | 202 | | | 163 | |
| Total operating revenues | $ | 1,146 | | | 1,038 | |
Accounts Receivable
We bill our customers, mainly Phillips 66, under our lease and service contracts generally on a monthly basis.
Total accounts receivable by revenue type was as follows:
| | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | |
| | | |
| Lease receivables | $ | 98 | | | 87 | |
| Service receivables | 28 | | | 19 | |
| Total accounts receivable | $ | 126 | | | 106 | |
Deferred Revenues
Our deferred revenues represent payments received from our customers, mainly Phillips 66, in advance of the period in which lease and service contract performance obligations have been fulfilled. The majority of our deferred revenues relate to a tolling agreement and a storage agreement that are classified as leases. The remainder of our deferred revenues relate to lease and service agreements that contain minimum volume commitments with recovery provisions. Our deferred revenues are recorded in the “Deferred revenues” and “Other liabilities” line items on our consolidated balance sheet.
Total deferred revenues under our lease and service agreements were as follows:
| | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | |
| | | |
| Deferred lease revenues | $ | 31 | | | 45 | |
| Deferred service revenues | 9 | | | 4 | |
| Total deferred revenues | $ | 40 | | | 49 | |
Future Minimum Lease Payments from Customers
At December 31, 2021, future minimum payments to be received under our lease agreements with customers were estimated to be:
| | | | | |
| Millions
of Dollars |
| |
| 2022 | $ | 763 | |
| 2023 | 715 | |
| 2024 | 591 | |
| 2025 | 532 | |
| 2026 | 359 | |
| Remaining years | 923 | |
| Total future minimum lease payments from customers | $ | 3,883 | |
Remaining Performance Obligations
We typically have long-term service contracts with our customers, of which the original durations range from 5 to 15 years. The weighted-average remaining duration of these contracts is 14 years. These contracts include both fixed and variable transaction price components. At December 31, 2021, future service revenues expected to be recognized for the fixed component of the transaction price of our remaining performance obligations from service contracts with our customers that have an original expected duration of greater than one year were:
| | | | | |
| Millions
of Dollars |
| |
| 2022 | $ | 187 | |
| 2023 | 180 | |
| 2024 | 155 | |
| 2025 | 151 | |
| 2026 | 141 | |
| Remaining years | 971 | |
| Total future service revenues | $ | 1,785 | |
For the remaining service performance obligations, we applied the exemption for variable prices allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer distinct services as part of a performance obligation.
Note 4—Equity Investments
The following table summarizes the carrying value of our equity investments:
| | | | | | | | | | | | | | | | | |
| | | Millions of Dollars |
| | | |
| Percentage Ownership | | 2021 | | | 2020 | |
| | | | | |
| Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (Bakken Pipeline) | 25.00 | % | | $ | 574 | | | 577 | |
| Bayou Bridge Pipeline, LLC (Bayou Bridge) | 40.00 | | | 277 | | | 288 | |
| DCP Sand Hills Pipeline, LLC (Sand Hills) | 33.34 | | | 577 | | | 582 | |
| DCP Southern Hills Pipeline, LLC (Southern Hills) | 33.34 | | | 217 | | | 217 | |
| Explorer Pipeline Company (Explorer) | 21.94 | | | 83 | | | 92 | |
| Gray Oak Pipeline, LLC | 65.00 | | | 812 | | | 860 | |
| Liberty Pipeline LLC (Liberty)* | — | | | — | | | 241 | |
| Paradigm Pipeline LLC (Paradigm) | 50.00 | | | 137 | | | 141 | |
| Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal) | 70.00 | | | 15 | | | 15 | |
| South Texas Gateway Terminal LLC (South Texas Gateway Terminal) | 25.00 | | | 175 | | | 167 | |
| STACK Pipeline LLC (STACK) | 50.00 | | | 62 | | | 64 | |
| Total equity investments | | | $ | 2,929 | | | 3,244 | |
*In April 2021, we transferred our 50% ownership interest in Liberty to our co-venturer.
Earnings (losses) from our equity investments were as follows:
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | | | 2019 | |
| | | | | |
| Bakken Pipeline | $ | 194 | | | 173 | | | 226 | |
| Bayou Bridge | 38 | | | 31 | | | 31 | |
| Sand Hills | 120 | | | 138 | | | 150 | |
| Southern Hills | 49 | | | 42 | | | 43 | |
| Explorer | 30 | | | 20 | | | 33 | |
| Gray Oak Pipeline, LLC | 117 | | | 68 | | | 3 | |
| | | | | |
| Paradigm | 23 | | | 15 | | | 14 | |
| Phillips 66 Partners Terminal | 1 | | | (2) | | | 25 | |
| South Texas Gateway Terminal | 20 | | | 5 | | | — | |
| STACK | 3 | | | 3 | | | 10 | |
| Total equity in earnings of affiliates | $ | 595 | | | 493 | | | 535 | |
Distributions received from our equity affiliates were $728 million, $677 million, and $599 million in 2021, 2020 and 2019, respectively.
Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
Dakota Access owns a pipeline system that transports crude oil from the Bakken/Three Forks production area in North Dakota to Patoka, Illinois, and ETCO owns a connecting crude oil pipeline system from Patoka to Nederland, Texas. These two pipeline systems collectively form the Bakken Pipeline system, which is operated by a co-venturer. The Bakken Pipeline system went into service in June 2017. We have a positive basis difference of $46 million for this investment, which represents capitalized interest incurred during construction of the pipeline and a capital contribution disbursed to the co-venturer. The positive basis difference is being amortized over periods between 16 and 41 years.
In 2020, the trial court presiding over litigation regarding the Dakota Access Pipeline ordered the U.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) relating to an easement under Lake Oahe in North Dakota and later vacated the easement. Although the easement has been vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS, which is expected to be completed in the second half of 2022. In May 2021, the court denied a request for an injunction to shut down the pipeline while the EIS is being prepared and in June 2021, dismissed the litigation. It is possible that the litigation could be reopened or new litigation challenging the EIS, once completed, could be filed. In September 2021, Dakota Access filed a writ of certiorari, requesting the U.S. Supreme Court to review the lower court’s judgment that ordered the EIS and vacated the easement.
In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of $2.5 billion aggregate principal amount of senior unsecured notes consisting of:
•$650 million aggregate principal amount of 3.625% Senior Notes due 2022.
•$1.0 billion aggregate principal amount of 3.900% Senior Notes due 2024.
•$850 million aggregate principal amount of 4.625% Senior Notes due 2029.
Dakota Access and ETCO have guaranteed repayment of the notes. In addition, we and our co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the above mentioned ongoing litigation. Contributions may be required if Dakota Access determines that the issues included in any such final judgment cannot be remediated and Dakota Access has or is projected to have insufficient funds to satisfy repayment of the notes. If Dakota Access undertakes remediation to cure issues raised in a final judgment, contributions may be required if any series of the notes become due, whether by acceleration or at maturity, during such time, to the extent Dakota Access has or is projected to have insufficient funds to pay such amounts. At December 31, 2021, our share of the maximum potential equity contributions under the CECU was approximately $631 million.
If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we also could be required to support our share of the ongoing expenses, including scheduled interest payments on the notes of approximately $25 million annually, in addition to the potential obligations under the CECU.
Gray Oak Pipeline, LLC
Gray Oak Pipeline, LLC was formed to develop and construct the Gray Oak Pipeline, which transports crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi, Texas, and the Sweeny area, including the Phillips 66 Sweeny Refinery. We have a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC.
In April 2018, we entered into a Purchase and Sale Agreement with Phillips 66 PDI to acquire its 100% interest in Gray Oak Holdings LLC (Holdings LLC), a limited liability company that, at that time, owned a 100% interest in Gray Oak Pipeline, LLC. We accounted for the acquisition of Holdings LLC as an acquisition of assets under common control. Also in April 2018, a co-venturer acquired a 25% interest in Gray Oak Pipeline, LLC, along with sufficient voting rights over key governance provisions such that we no longer could assert control over Gray Oak Pipeline, LLC. As a result, we (through our consolidated subsidiary Holdings LLC) began using the equity method of accounting for our investment in Gray Oak Pipeline, LLC at that time.
In December 2018, a third party exercised its option to acquire a 35% interest in Holdings LLC. Because Holdings LLC’s sole asset was its 75% ownership interest in Gray Oak Pipeline, LLC, which was considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in Holdings LLC during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP.
Rather, the third party’s subsequent cash contributions to Holdings LLC to fund its share of previously incurred and future construction costs plus a premium to us were reflected as a long-term obligation in the “Obligation from equity interest transfer” line item on our consolidated balance sheet and as financing cash inflows in the “Proceeds from equity interest transfer” line item on our consolidated statement of cash flows. The Gray Oak Pipeline commenced full operations in the second quarter of 2020 and the restrictions placed on the co-venturer were lifted on June 30, 2020, resulting in the recognition of the sale under GAAP. Accordingly, at June 30, 2020, the co-venturer’s 35% interest in the holding company was recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet, and the premium of $84 million previously paid by the co-venturer in 2019 was recharacterized from a long-term obligation to a gain in our consolidated statement of income. During 2020 and 2019, the co-venturer contributed an aggregate of $61 million and $342 million, respectively, into Holdings LLC, and Holdings LLC used these contributions to fund its portion of Gray Oak Pipeline, LLC’s cash calls. We have an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC, after considering our co-venturer’s 35% interest in the consolidated holding company.
In February 2019, Holdings LLC transferred a 10% interest in Gray Oak Pipeline, LLC, to a third party that exercised a purchase option, for proceeds of $81 million. The proceeds received from this sale are reflected as an investing cash inflow in the “Proceeds from sale of equity interest” line item on our consolidated statement of cash flows.
In June 2019, Gray Oak Pipeline, LLC entered into a third-party term loan facility. We and our co-venturers provided a guarantee through an equity contribution agreement requiring proportionate equity contributions to Gray Oak Pipeline, LLC up to the total outstanding loan amount. The net proceeds from the term loan were used by Gray Oak Pipeline, LLC for construction of the Gray Oak Pipeline and repayment of amounts borrowed under a related party loan agreement that we and our co-venturers executed in March 2019 and terminated upon the repayment by Gray Oak Pipeline, LLC in June 2019. Our total related party loan to and repayment received from Gray Oak Pipeline, LLC was $95 million.
In September 2020, Gray Oak Pipeline, LLC closed its offering of $1.4 billion aggregate principal amount of senior unsecured notes with maturities ranging from 2023 to 2027. These senior notes are not guaranteed by the Partnership or any of its co-venturers. Net proceeds from the offering were used to repay the $1,379 million outstanding under the third-party term loan facility described above, and for general company purposes. Concurrent with the full repayment of the third-party term loan facility, the associated guarantee we issued through an equity contribution agreement was terminated.
During its development phase, Gray Oak Pipeline, LLC was considered a variable interest entity (VIE) because it did not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We determined we were not the primary beneficiary because we and our co-venturers jointly directed the activities of Gray Oak Pipeline, LLC that most significantly impact economic performance. The Gray Oak Pipeline commenced full operations in the second quarter of 2020 and ceased being a VIE.
Liberty
In February 2020, we entered into a Purchase and Sale Agreement with Phillips 66 PDI to acquire its 50% interest in the Liberty Pipeline joint venture for $75 million. The purchase price reflected the reimbursement of project costs incurred by Phillips 66 prior to the effective date of the transaction. The transaction was funded through a combination of cash on hand and our revolving credit facility, and closed on March 2, 2020. Liberty was a joint venture formed to develop and construct the Liberty Pipeline system. In the first quarter of 2021, we decided to exit the Liberty Pipeline project, which had previously been deferred due to the challenging business environment created by the Coronavirus Disease 2019 pandemic. As a result, we recorded a $198 million impairment to reduce the book value of our investment in Liberty at March 31, 2021, to our share of the estimated fair value of the joint venture’s pipeline assets and net working capital. The impairment is included in the “Impairments” line item on our consolidated statement of income. This valuation resulted in a Level 3 nonrecurring fair value measurement.
In April 2021, we transferred our 50% ownership interest in Liberty to our co-venturer for cash and certain pipeline assets with a value that approximated our book value of $46 million at March 31, 2021.
Bayou Bridge
Bayou Bridge is a joint venture that owns a pipeline that transports crude oil from Nederland, Texas, to St. James, Louisiana. The Bayou Bridge Pipeline is operated by our co-venturer.
Sand Hills
Sand Hills is a joint venture with DCP Partners that owns an NGL pipeline system that extends from the Permian Basin and Eagle Ford to facilities along the Texas Gulf Coast and the Mont Belvieu, Texas market hub. The Sand Hills Pipeline system is operated by DCP Partners.
Southern Hills
Southern Hills is a joint venture with DCP Partners that owns an NGL pipeline system that extends from the Midcontinent region to the Mont Belvieu market hub. The Southern Hills Pipeline system is operated by DCP Partners. We have a negative basis difference of $86 million for this investment, which originated when the pipeline, formerly known as Seaway Products, was sold by Phillips 66 to a related party. The negative basis difference represents a deferred gain and is being amortized over 40 years.
Explorer
Explorer owns and operates a pipeline system that extends from the Texas Gulf Coast to Indiana. The Explorer Pipeline system transports refined petroleum products to more than 70 major cities in 16 U.S. states. We have a positive basis difference of $65 million for this investment, which represents fair value adjustments attributable to ownership increases in the pipeline. The positive basis difference is being amortized over periods between 6 and 14 years.
Paradigm
Paradigm is a joint venture that owns the Sacagawea pipelines and Keene Terminal in North Dakota. We account for the joint venture under the equity method of accounting due to governance provisions that require supermajority or unanimous voting on all decisions that significantly impact the governance, management and economic performance of the joint venture.
Phillips 66 Partners Terminal
Phillips 66 Partners Terminal is a joint venture that owns the Palermo Terminal in North Dakota. We account for the joint venture under the equity method of accounting due to governance provisions that require supermajority or unanimous voting on all decisions that significantly impact the governance, management and economic performance of the joint venture.
At December 31, 2020, we estimated the fair value of our investment in Phillips 66 Partners Terminal was below our book value, and we concluded the decline in fair value was not temporary, based upon our projections of future crude oil production in the joint venture’s area of operation. As a result, we recorded a $50 million impairment in the fourth quarter of 2020. The impairment is included in the “Impairments” line item on our consolidated statement of income. The fair value of this equity method investment was calculated by weighting the results of different economic scenarios using the income approach. The income approach uses a discounted cash flow model that requires various observable and unobservable inputs, including volumes, rates, expenses and discount rates. This valuation resulted in a Level 3 nonrecurring fair value measurement.
South Texas Gateway Terminal
In April 2018, we acquired a 25% interest in the South Texas Gateway Terminal under construction by a co-venturer, which connects to the Gray Oak Pipeline in Corpus Christi. The first dock of the marine export terminal began crude oil export operations in July 2020. The second dock commenced crude oil export operations in the fourth quarter of 2020. In the first quarter of 2021, the South Texas Gateway terminal commissioned additional storage capacity, bringing the total capacity to 8.6 million barrels and marking the completion of the final construction phase. The marine export terminal has two deepwater docks with up to 800,000 BPD of export capacity.
During its development phase, South Texas Gateway Terminal was considered a VIE because it did not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We determined we were not the primary beneficiary because we and our co-venturers jointly directed the activities of the terminal that most significantly impact economic performance. South Texas Gateway Terminal commenced primary operations in the fourth quarter of 2020 and ceased being a VIE.
STACK
STACK is a joint venture that owns and operates a crude storage terminal and a common carrier pipeline that transports crude oil from the Sooner Trend, Anadarko Basin, Canadian and Kingfisher Counties play in northwestern Oklahoma to Cushing, Oklahoma.
At December 31, 2020, we estimated the fair value of our investment in STACK was below our book value, and we concluded the decline in fair value was not temporary, based upon our projections of future crude oil production in the joint venture’s area of operation. As a result, we recorded a $46 million impairment in the fourth quarter of 2020. The impairment is included in the “Impairments” line item on our consolidated statement of income. The fair value of this equity method investment was calculated by weighting the results of different economic scenarios using the income approach. The income approach uses a discounted cash flow model that requires various observable and unobservable inputs, including volumes, tariffs, expenses and discount rates. This valuation resulted in a Level 3 nonrecurring fair value measurement.
Summarized 100% financial information for all equity investments is presented on a combined basis below:
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | | | 2019 | |
| | | | | |
| Revenues | $ | 3,034 | | | 2,670 | | | 2,753 | |
| Income before income taxes | 1,963 | | | 1,583 | | | 1,894 | |
| Net income | 1,904 | | | 1,545 | | | 1,832 | |
| Current assets | 716 | | | 671 | | | 642 | |
| Noncurrent assets | 12,812 | | | 12,884 | | | 12,072 | |
| Current liabilities | 1,144 | | | 381 | | | 662 | |
| Noncurrent liabilities | 4,001 | | | 4,673 | | | 4,322 | |
From acquisition date forward.
Note 5—Net Income Per Limited Partner Unit
We calculate net income attributable to the Partnership per limited partner unit by dividing the limited partners’ interest in net income by the weighted-average number of common units outstanding for the period. After considering the period’s cash distributions declared, the remaining undistributed earnings or excess distributions declared over earnings, if any, are allocated to participating securities in accordance with the contractual terms of our partnership agreement and as prescribed under the two-class method for those periods in which we have participating securities. Our preferred units became participating securities effective October 1, 2020. The earnings amount allocated to the limited partner common unitholders is adjusted for any premiums paid to repurchase preferred units. Participating securities included general partner units and associated incentive distribution rights (IDRs) prior to the restructuring transaction effective August 1, 2019. See Note 13—Equity for information on the restructuring transaction and our preferred units.
For the diluted net income per limited partner unit calculation, the preferred units are assumed to be converted at the beginning of the period into limited partner common units on a one-for-one basis, and the distribution formula for available cash in our partnership agreement is recalculated, using the original available cash amount increased only for the preferred distributions declared which would not have been paid after conversion. Any potentially dilutive securities are excluded from the diluted earnings per unit computation if the effect of including such securities would be anti-dilutive.
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | | | 2019 | |
| | | | | |
| Net income attributable to the Partnership | $ | 735 | | | 791 | | | 923 | |
Less: | | | | | |
General partner’s distributions declared (including IDRs)* | — | | | — | | | 139 | |
| Limited partners’ distributions declared on preferred units* | 48 | | | 41 | | | 37 | |
| Limited partners’ distributions declared on common units* | 799 | | | 799 | | | 609 | |
| Distributions less than (more than) net income attributable to the Partnership | $ | (112) | | | (49) | | | 138 | |
*Distributions declared are attributable to the indicated periods.
| | | | | | | | | | | |
| 2021 |
| Limited Partners’ Common Units | Limited Partners’ Preferred Units | Total |
Net income attributable to the Partnership (millions): | | | |
| Distributions declared | $ | 799 | | 48 | | 847 | |
| Distributions more than net income attributable to the Partnership | (112) | | — | | (112) | |
| Net income attributable to the Partnership | 687 | | 48 | | 735 | |
| Premium paid for the repurchase of preferred units | (4) | | | |
| Net income attributable to the Partnership—basic | 683 | | | |
| Dilutive effect of preferred units | — | | | |
| Net income attributable to the Partnership—diluted | $ | 683 | | | |
| | | |
| Weighted-average units outstanding—basic | 228,340,146 | | | |
| Dilutive effect of preferred units | — | | | |
| Weighted-average units outstanding—diluted | 228,340,146 | | | |
| | | |
Net income attributable to the Partnership per limited partner unit—basic (dollars) | $ | 3.00 | | | |
Net income attributable to the Partnership per limited partner unit—diluted (dollars) | 3.00 | | | |
| | | | | | | | | | | |
| 2020 |
| Limited Partners’ Common Units | Limited Partners’ Preferred Units | Total |
Net income attributable to the Partnership (millions): | | | |
| Distributions declared | $ | 799 | | 41 | | 840 | |
Distributions less than net income attributable to the Partnership | (49) | | — | | (49) | |
| Net income attributable to the Partnership—basic | 750 | | 41 | | 791 | |
| Dilutive effect of preferred units | 41 | | | |
| Net income attributable to the Partnership—diluted | $ | 791 | | | |
| | | |
Weighted-average units outstanding—basic | 228,333,213 | | | |
| Dilutive effect of preferred units | 13,819,791 | | | |
| Weighted-average units outstanding—diluted | 242,153,004 | | | |
| | | |
Net income attributable to the Partnership per limited partner unit—basic (dollars) | $ | 3.29 | | | |
Net income attributable to the Partnership per limited partner unit—diluted (dollars) | 3.27 | | | |
| | | | | | | | | | | | | | |
| 2019 |
| Limited Partners’ Common Units | General Partner (including IDRs) | Limited Partners’ Preferred Units | Total |
Net income attributable to the Partnership (millions): | | | | |
| Distributions declared | $ | 609 | | 139 | | 37 | | 785 | |
Distributions less than net income attributable to the Partnership | 137 | | 1 | | — | | 138 | |
| Net income attributable to the Partnership—basic | 746 | | 140 | | 37 | | 923 | |
Dilutive effect of preferred units(1) | 32 | | | | |
| Net income attributable to the Partnership—diluted | $ | 778 | | | | |
| | | | |
Weighted-average units outstanding—basic | 167,655,306 | | | | |
Dilutive effect of preferred units(1) | 13,819,791 | | | | |
| Weighted-average units outstanding—diluted | 181,475,097 | | | | |
| | | | |
Net income attributable to the Partnership per limited partner unit—basic (dollars) | $ | 4.45 | | | | |
Net income attributable to the Partnership per limited partner unit—diluted (dollars) | 4.29 | | | | |
(1) The dilutive effect of the preferred units assumes the reallocation of net income attributable to the Partnership to the limited and general partners, including a reallocation associated with IDRs, pursuant to the available cash formula in the partnership agreement.
On January 18, 2022, the Board of Directors of our General Partner declared a quarterly cash distribution of $0.875 per common unit, which resulted in a total distribution to common unitholders of $200 million attributable to the fourth quarter of 2021. This distribution was paid February 14, 2022, to common unitholders of record as of January 31, 2022.
Beginning with the distribution to preferred unitholders attributable to the fourth quarter of 2020, the preferred unitholders are entitled to receive cumulative quarterly distributions equal to the greater of $0.678375 per unit, or the per-unit distribution amount paid to the common unitholders. Preferred unitholders received $12 million of distributions attributable to the fourth quarter of 2021. This distribution was paid February 14, 2022, to preferred unitholders of record as of January 31, 2022.
On October 26, 2021, we entered into a definitive merger agreement with Phillips 66. This agreement provides that, unless prohibited by the partnership agreement or applicable law, our General Partner shall cause the Partnership to declare, authorize and pay regular quarterly cash distributions on our common units in an amount not less than $0.875 per unit for the quarterly period ending December 31, 2021, and for each full quarterly period thereafter, unless the merger closes prior to the applicable record date. See Note 1—Business and Basis of Presentation, for additional information regarding the merger agreement.
Note 6—Major Customer and Concentration of Credit Risk
Phillips 66 accounted for 97%, 98% and 97% of our total operating revenues for the years ended December 31, 2021, 2020 and 2019, respectively. Through our wholly owned and joint venture operations, we provide crude oil, refined petroleum products and NGL pipeline transportation, terminaling and storage, and crude oil gathering, NGL fractionation, crude oil processing, and rail-unloading services to Phillips 66 and other related parties.
We are potentially exposed to concentration of credit risk primarily through our accounts receivable from Phillips 66. These receivables have payment terms of 30 days or less and are settled against any existing payables we may have to Phillips 66 through Phillips 66’s interaffiliate settlement process. We monitor the creditworthiness of Phillips 66, which has an investment grade credit rating.
Note 7—Properties, Plants and Equipment
Our investment in PP&E, with the associated accumulated depreciation, at December 31 was:
| | | | | | | | | | | | | | | | | |
| Estimated Useful Lives | | Millions of Dollars |
| | 2021 | | 2020 | |
| | | | | |
Land | | | $ | 19 | | | 19 | |
Buildings and improvements | 3 to 30 years | | 118 | | | 115 | |
Pipelines and related assets* | 10 to 45 years | | 1,986 | | | 1,518 | |
Terminals and related assets* | 25 to 45 years | | 853 | | | 847 | |
Rail racks and related assets* | 33 years | | 137 | | | 137 | |
Processing and related assets* | 25 years | | 1,064 | | | 1,063 | |
Caverns and related assets* | 25 to 45 years | | 733 | | | 732 | |
Construction-in-progress | | | 137 | | | 394 | |
Gross PP&E | | | 5,047 | | | 4,825 | |
Accumulated depreciation | | | (1,320) | | | (1,186) | |
Net PP&E | | | $ | 3,727 | | | 3,639 | |
*Assets for which we are the lessor.
In the third quarter of 2021, we decided not to pursue the ACE Pipeline project. Accordingly, we wrote-off the capitalized costs associated with this project of $10 million. This charge is included in the “Impairments” line item on our consolidated statement of income.
Note 8—Goodwill
The carrying amount of goodwill was as follows:
| | | | | | | | | | | |
| | Millions of Dollars |
| | 2021 | | | 2020 | |
| | | |
| Beginning balance January 1 | $ | 185 | | | 185 | |
Activity during the year | — | | | — | |
| Ending balance December 31 | $ | 185 | | | 185 | |
Note 9—Lease Assets and Liabilities
We have agreements with Phillips 66 to lease land underlying or associated with certain of our assets. These agreements are classified as operating leases. Due to the economic infeasibility of canceling these leases, we consider them non-cancellable. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices. Our lease agreements do not impose any significant restrictions on distribution payments, asset dispositions or borrowing ability.
Effective with our implementation of ASU No. 2016-02, we elected to discount lease obligations using our incremental borrowing rate. For all leases, we elected the practical expedient not to separate service and lease costs. Our right-of way agreements in effect prior to January 1, 2019, were not accounted for as leases as they were not initially determined to be leases at their commencement dates. However, modifications to these agreements or new agreements will be assessed and accounted for accordingly under ASU No. 2016-02. For short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that is reasonably certain to be exercised, we elected to not recognize the ROU asset and corresponding lease liability on our consolidated balance sheet.
Operating lease ROU assets are recorded in the “Other assets” line item and lease liabilities are recorded in the “Other current liabilities” and “Other liabilities” line items on our consolidated balance sheet. During the years ended December 31, 2021 and 2020, the total operating lease ROU asset was $43 million and $44 million, respectively.
Future minimum lease payments and recorded short- and long-term lease liabilities at December 31, 2021, for operating leases were:
| | | | | |
| Millions
of Dollars |
| |
| 2022 | $ | 3 | |
| 2023 | 3 | |
| 2024 | 3 | |
| 2025 | 3 | |
| 2026 | 3 | |
| Remaining years | 84 | |
| Future minimum lease payments | 99 | |
| Amount representing interest or discounts | (56) | |
| Total lease liabilities | 43 | |
| Short-term lease liabilities | (1) | |
| Long-term lease liabilities | $ | 42 | |
Operating lease costs and operating cash outflows for the year ended December 31, 2021 and 2020, were not material.
The weighted-average remaining lease term for our operating leases as of December 31, 2021 and 2020, was 33 and 34 years, respectively. The weighted-average discount rate for our operating leases as of December 31, 2021 and 2020, was 5.9%.
Note 10—Debt
Debt at December 31 was:
| | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | |
| | | |
| | | |
2.450% Senior Notes due December 2024 | $ | 300 | | | 300 | |
3.605% Senior Notes due February 2025 | 500 | | | 500 | |
3.550% Senior Notes due October 2026 | 500 | | | 500 | |
3.750% Senior Notes due March 2028 | 500 | | | 500 | |
3.150% Senior Notes due December 2029 | 600 | | | 600 | |
4.680% Senior Notes due February 2045 | 450 | | | 450 | |
4.900% Senior Notes due October 2046 | 625 | | | 625 | |
Floating Rate Term Loan due April 2022 at rate of 0.978% at year-end 2021 | 450 | | | — | |
Tax-exempt bonds due April 2021 at weighted-average rate of 0.360% at year-end 2020 | — | | | 50 | |
Revolving credit facility borrowings due January 2021 at weighted-average rate of 1.397% at year-end 2020 | — | | | 415 | |
| Debt at face value | 3,925 | | | 3,940 | |
Net unamortized discounts and debt issuance costs | (28) | | | (31) | |
| Total debt | 3,897 | | | 3,909 | |
| Short-term debt | (450) | | | (465) | |
| Long-term debt | $ | 3,447 | | | 3,444 | |
The fair value of our fixed-rate and floating-rate debt is estimated based on observable market prices and is classified as Level 2 of the fair value hierarchy. The fair value of our fixed-rate debt amounted to $3,810 million and $3,752 million at December 31, 2021 and 2020, respectively. The fair value of our floating-rate debt approximated carrying value of $450 million and $465 million at December 31, 2021 and 2020, respectively.
Maturities of borrowings outstanding at December 31, 2021, inclusive of net unamortized discounts and debt issuance costs, for the five-year period ending 2026 were $450 million in 2022, $298 million in 2024, $499 million in 2025 and $498 million in 2026.
During the year ended December 31, 2021, our debt at face value decreased $15 million due to:
.
•Payments of $415 million under the revolving credit facility.
•Repayments of $50 million of tax-exempt bonds.
•Issuance of $450 million under term loan due April 2022.
Revolving Credit Facility
Our $750 million revolving credit facility may be used for direct bank borrowings and as support for issuances of letters of credit. We have an option to increase the overall capacity to $1 billion, subject to certain conditions. We also have the option to extend the facility for two additional one-year terms after its July 30, 2024, maturity date, subject to, among other things, the consent of the lenders holding the majority of the commitments and of each lender extending its commitment.
The facility is with a broad syndicate of financial institutions and contains covenants that are usual and customary for an agreement of this type, including that, as of the last day of each fiscal quarter, the ratio of total debt to EBITDA for the prior four fiscal quarters must be no greater than 5.0:1.0 (and 5.5:1.0 during the period following certain specified acquisitions). The facility has customary events of default, such as nonpayment of principal when due; nonpayment of interest, fees or other amounts; and violation of covenants.
Outstanding revolving borrowings under the facility bear interest, at our option, at either: (a) the Eurodollar rate in effect from time to time plus the applicable margin; or (b) the reference rate (as described in the facility) plus the applicable margin. The facility also provides for customary fees, including commitment fees. The pricing levels for the commitment fees and interest-rate margins are determined based on our credit ratings in effect from time to time. Borrowings under the facility may be short-term or long-term in duration, and we may at any time prepay outstanding borrowings under the facility, in whole or in part, without premium or penalty. At December 31, 2021, no borrowings were outstanding under this facility, compared with $415 million borrowings outstanding under this facility at December 31, 2020. At both December 31, 2021 and 2020, $1 million in letters of credit had been issued that were supported by this facility.
Term Loan Agreement
On April 6, 2021, we entered into a $450 million term loan agreement and borrowed the full amount. The term loan agreement has a maturity date of April 5, 2022, and the outstanding borrowings can be repaid at any time and from time to time, in whole or in part, without premium or penalty. Borrowings bear interest at a floating rate based on either a Eurodollar rate or a reference rate, plus a margin of 0.875%. Proceeds were primarily used to repay amounts borrowed under our $750 million revolving credit facility.
Tax-Exempt Bonds
In 2017, we assumed four $25 million tranches of tax-exempt bonds issued by the Brazos River Harbor Navigation District. We repaid one tranche in 2018 and another tranche in April 2020. The two remaining tranches, totaling $50 million, were repaid in April 2021.
The tranches accrued interest monthly based on a daily rate derived by the remarketing agent for the bonds. The interest rates are designed to represent the lowest rate acceptable by the tax-exempt, variable-rate bond market and approximate the tax-exempt bonds trading at par.
2019 Senior Notes
On September 6, 2019, we closed on a public offering of $900 million aggregate principal amount of unsecured notes consisting of:
•$300 million aggregate principal amount of 2.450% Senior Notes due December 15, 2024.
•$600 million aggregate principal amount of 3.150% Senior Notes due December 15, 2029.
Interest on each series of senior notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2020. Total proceeds received from the offering were $892 million, net of underwriting discounts and commissions. Net proceeds from the Senior Notes offering were used for general partnership purposes, including debt repayments. On September 13, 2019, we used a portion of the proceeds to repay the $400 million outstanding principal balance of the senior unsecured term loan facility that was drawn during the first half of 2019. On October 15, 2019, we used a portion of the proceeds to repay the aggregate $300 million outstanding principal balance of our 2.646% Senior Notes due February 2020.
Note 11—Contingencies
From time to time, lawsuits involving a variety of claims that arise in the ordinary course of business are filed against us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various sites. We regularly assess the need for accounting recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable.
If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is 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 any contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.
Environmental
We are subject to federal, state and local environmental laws and regulations. We record accruals for contingent environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency 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. At December 31, 2021, and 2020, our total environmental accruals were not material.
In the future, we may be involved in additional environmental assessments, cleanups and proceedings.
Legal Proceedings
Under our amended omnibus agreement, Phillips 66 provides certain services for our benefit, including legal support services, and we pay an operational and administrative support fee for these services. Phillips 66’s 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. The process facilitates the early evaluation and quantification of potential exposures in individual cases and enables tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, Phillips 66’s legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required. At December 31, 2021 and 2020, we did not have any material accrued contingent liabilities associated with litigation matters.
Indemnification and Excluded Liabilities
Under our amended omnibus agreement and pursuant to the terms of various agreements under which we acquired assets from Phillips 66, Phillips 66 will indemnify us, or assume responsibility, for certain environmental liabilities, tax liabilities, litigation and any other liabilities attributable to the ownership or operation of the assets contributed to us and that arose prior to the effective date of each acquisition. These indemnifications and exclusions from liability have, in some cases, time limits and deductibles. When Phillips 66 performs under any of these indemnifications or exclusions from liability, we recognize noncash expenses and associated noncash capital contributions from our General Partner, as these are considered liabilities paid for by a principal unitholder.
Note 12—Asset Retirement Obligations and Accrued Environmental Costs
Asset retirement obligations and accrued environmental costs at December 31 were:
| | | | | | | | | | | |
| | Millions of Dollars |
| | 2021 | | | 2020 | |
| | | |
| Asset retirement obligations | $ | 11 | | | 11 | |
| Accrued environmental costs | 1 | | | 2 | |
| Total asset retirement obligations and accrued environmental costs | 12 | | | 13 | |
Asset retirement obligations and accrued environmental costs due within one year | — | | | (1) | |
| Long-term asset retirement obligations and accrued environmental costs | $ | 12 | | | 12 | |
Asset Retirement Obligations
We have asset retirement obligations we are required to perform under law or contract once an asset is permanently taken out of service. These obligations primarily relate to the abandonment or removal of certain pipelines. Most of these obligations are not expected to be paid until many years in the future.
During 2021 and 2020, our asset retirement obligations changed as follows:
| | | | | | | | | | | |
| | Millions of Dollars |
| | 2021 | | | 2020 | |
| | | |
| Balance at January 1 | $ | 11 | | | 11 | |
| Accretion of discount | — | | | 1 | |
| | | |
| Changes in estimates of existing obligations | — | | | (1) | |
| Balance at December 31 | $ | 11 | | | 11 | |
Note 13—Equity
ATM Programs
We have authorized an aggregate of $750 million under three $250 million continuous offerings of common units, or at-the-market (ATM) programs. The first two programs concluded in June 2018 and December 2019, respectively. At December 31, 2021, we have $248 million of available capacity under our $250 million ATM program. We suspended issuances under the ATM program in the first quarter of 2020 due to low common unit prices. We did not issue any common units under the ATM program during the twelve months ended December 31, 2021. During the year ended December 31, 2020, on a settlement-date basis, we issued an aggregate of 40,570 common units, generating net proceeds of $2 million. Since inception in June 2016 through December 31, 2021, we issued an aggregate of 9,487,055 common units under our ATM programs, and generated net proceeds of $494 million, after broker commissions of $5 million and other costs of $3 million. The net proceeds from sales under the ATM programs are used for general partnership purposes, which may include debt repayment, acquisitions, capital expenditures and additions to working capital.
On October 26, 2021, we entered into a definitive merger agreement with Phillips 66. If this merger is consummated, our common units will no longer be publicly traded and, as a result, we would not expect any issuances of common units under our ATM program before or after the closing date of this transaction. See Note 1—Business and Basis of Presentation, for additional information regarding the merger agreement.
Preferred Units
On June 29, 2021, we repurchased 368,528 of the outstanding Series A Perpetual Convertible Preferred Units with an aggregate carrying value of $20 million for $24 million in cash, or $65.124 per unit. Upon the repurchase, these preferred units were canceled and are no longer outstanding.
On October 26, 2021, we entered into a definitive merger agreement with Phillips 66. See Note 1—Description of the Business, and Note 5—Net Income Per Limited Partner Unit, for additional information regarding the merger agreement.
The preferred units rank senior to all common units with respect to distributions and rights upon liquidation. The holders of the preferred units were entitled to receive cumulative quarterly distributions equal to $0.678375 per unit, beginning for the quarter ended December 31, 2017, with a prorated amount from the date of issuance. Beginning with the distribution to preferred unitholders attributable to the fourth quarter of 2020, the preferred unitholders are entitled to receive cumulative quarterly distributions equal to the greater of $0.678375 per unit, or the per-unit distribution amount paid to the common unitholders as if such preferred units had converted into common units immediately prior to the record date.
The holders of the preferred units may convert their preferred units into common units, on a one-for-one basis, at any time after the second anniversary of the issuance date, in full or in part, subject to minimum conversion amounts and conditions. After the third anniversary of the issuance date, we may convert the preferred units into common units at any time, in whole or in part, subject to certain minimum conversion amounts and conditions, if the arithmetic average of the volume-weighted trading price of our common units is greater than $73.2645 per unit for the 20 day trading period immediately preceding the conversion notice date and the average trading volume of the common units is at least 100,000 for the preceding 20 trading days. The conversion rate for the preferred units shall be the quotient of (a) the sum of (i) $54.27, plus (ii) any unpaid cash distributions on the applicable preferred unit, divided by (b) $54.27. The holders of the preferred units are entitled to vote on an as-converted basis with the common unitholders and have certain other class voting rights with respect to any amendment to our partnership agreement that would adversely affect any rights, preferences or privileges of the preferred units. In addition, upon certain events involving a change in control, the holders of preferred units may elect, among other potential elections, to convert their preferred units to common units at the then change of control conversion rate.
Restructuring Transaction
On August 1, 2019, we closed on the transactions contemplated by the Partnership Interests Restructuring Agreement, dated July 24, 2019, entered into with our General Partner. Pursuant to this agreement, all of the outstanding IDRs held by our General Partner were eliminated and its approximately 2% general partner interest in us was converted into a non-economic general partner interest; both in exchange for an aggregate of 101 million common units issued to Phillips 66 PDI. Because these transactions were between entities under common control, the common units issued to Phillips 66 PDI were not assigned any value; rather, our General Partner’s negative equity balance of $1.4 billion at August 1, 2019, was transferred to Phillips 66’s limited partner equity account.
Note 14—Related Party Transactions
Commercial Agreements
We have entered into long-term, fee-based commercial agreements with Phillips 66 to provide transportation, terminaling, storage, stevedoring, fractionation, processing, and rail terminal services. Under these agreements, Phillips 66 commits to provide us with minimum transportation, throughput or storage volumes, or minimum monthly service fees. If Phillips 66 does not meet its minimum volume commitments under an agreement, Phillips 66 pays us a deficiency payment based on the calculation described in the agreement.
Amended and Restated Operational Services Agreement
Under our amended and restated operational services agreement, we reimburse Phillips 66 for certain operational services provided in support of our pipelines, terminaling, processing, and storage facilities. These services include routine and emergency maintenance and repair services, routine operational activities, routine administrative services, construction and related services and such other services as we and Phillips 66 may mutually agree upon from time to time.
Amended Omnibus Agreement
The amended omnibus agreement addresses our payment of an operating and administrative support fee and our obligation to reimburse Phillips 66 for all other direct or allocated costs and expenses incurred by Phillips 66 in providing general and administrative services. Additionally, the omnibus agreement addresses Phillips 66’s indemnification to us and our indemnification to Phillips 66 for certain environmental and other liabilities. Further, it addresses the granting of a license from Phillips 66 to us with respect to the use of certain Phillips 66 trademarks.
The operational and administrative support fee is for the provision of certain services, including: logistical services; asset oversight, such as operational management and supervision; corporate engineering services, including asset integrity and regulatory services; business development services; executive services; financial and administrative services (including treasury and accounting); information technology; legal services; corporate health, safety and environmental services; facility services; human resources services; procurement services; investor relations; tax matters; and public company reporting services. We pay Phillips 66 an operational and administrative support fee under the terms of our amended omnibus agreement in the amount of $8 million per month.
We also reimburse Phillips 66 for all other direct or allocated costs incurred on behalf of us, pursuant to the terms of our amended omnibus agreement. The classification of these charges between operating and maintenance expenses and general and administrative expenses is based on the functional nature of the services performed for our operations. Under our amended and restated operational services agreement, we reimburse Phillips 66 for the provision of certain operational services in support of our operating assets. Additionally, we pay Phillips 66 for insurance services provided to us, and recoveries under these policies are recorded as an offset to our expenses. Operating and maintenance expenses also include volumetric gains and losses associated with volumes transported by Phillips 66.
Tax Sharing Agreement
Under our tax sharing agreement, we reimburse Phillips 66 for our share of state and local income and other taxes incurred by Phillips 66 due to our results of operations being included in a combined or consolidated tax return filed by Phillips 66. Any reimbursement is limited to the tax that we (and our subsidiaries) would have paid had we not been included in a combined group with Phillips 66. Phillips 66 may use its tax attributes to cause its combined or consolidated group to owe no tax; however, we would nevertheless reimburse Phillips 66 for the tax we would have owed, even though Phillips 66 had no cash expense for that period.
Related Party Transactions
Significant related party transactions included in our costs and expenses were:
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | | | 2019 | |
| | | | | |
| Operating and maintenance expenses | $ | 212 | | | 184 | | | 258 | |
| General and administrative expenses | 61 | | | 62 | | | 65 | |
| | | | | |
| | | | | |
Other related party balances were included in the following line items on our consolidated balance sheet, all of which were related to commercial agreements with Phillips 66:
| | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | |
| | | |
| Prepaid expenses and other current assets | $ | 4 | | | 7 | |
| Other assets | 46 | | | 47 | |
| Deferred revenues | 21 | | | 27 | |
| Other current liabilities | 1 | | | 1 | |
| Other liabilities | 60 | | | 64 | |
Equity Affiliate Arrangements
In March 2019, we and our co-venturers in Dakota Access provided a CECU in conjunction with a senior unsecured notes offering. See Note 4—Equity Investments, for additional information.
Note 15—Employee Benefit Plans
Pension and Retirement Savings Plans
Neither we nor our subsidiaries have any employees. Our General Partner has the sole responsibility for providing the employees and other personnel necessary to conduct our operations. All of the employees that conduct our wholly owned businesses are employed by Phillips 66. Those employees participate in benefit plans sponsored by Phillips 66. Most employees of Phillips 66 who provide direct support to our operations do so under the provisions of the amended and restated operational services agreement, which fees include a burden for benefit costs.
Note 16—Unit-Based Compensation
In 2013, the Board of Directors of our General Partner adopted the Phillips 66 Partners LP 2013 Incentive Compensation Plan (the ICP). Awards under the ICP are available for officers, directors and employees of our General Partner or its affiliates, and any consultants or other individuals who perform services for the Partnership. The ICP allows for the grant of unit awards, restricted units, phantom units, unit options, unit appreciation rights, distribution equivalent rights, profits interest units and other unit-based awards. The ICP limits the number of common units that may be delivered pursuant to awards to 2,500,000, subject to proportionate adjustment in the event of unit splits and similar events.
From the closing of our initial public offering through December 31, 2021, we have only issued phantom units under the ICP and have only made issuances to non-employee directors. A phantom unit entitles the recipient to receive cash equal to the fair market value of a common unit on the date the phantom unit is settled after the vesting period (settlement date), and to also receive a distribution equivalent each quarter between the grant date and the settlement date in an amount equal to any cash distributions paid on a common unit during that time. During the year ended December 31, 2021, we granted a total of 13,848 phantom units to non-employee directors of the Partnership. For the years ended December 31, 2020 and 2019, we granted a total of 6,092 and 4,950 phantom units, respectively. On the grant date, phantom units awarded to non-employee directors become non-forfeitable; therefore, we immediately recognize expense equal to the grant-date fair value of the award. Phantom units awarded under the ICP do not have voting rights.
Note 17—Income Taxes
We are not a taxable entity for U.S. federal income tax purposes or for the majority of states that impose an income tax. Taxes on our net income are borne generally by our limited partners through the allocation of taxable income. Our income tax provision results from state laws that apply to entities organized as partnerships. For us, this is primarily the state of Texas.
At December 31, 2021 and 2020, we had a net deferred tax liability of $14 million and $10 million, respectively. The net deferred tax liability was primarily associated with PP&E and equity investments.
Our effective tax rate was less than 1% for the years ended December 31, 2021, 2020 and 2019.
At December 31, 2021 and 2020, we had no liability recorded for uncertain tax positions. We also did not have any interest or penalties related to income taxes for the years ended December 31, 2021, 2020 and 2019. Texas tax returns for the years 2014 and forward are subject to examination.
Note 18—Cash Flow Information
Capital Expenditures and Investments
Our capital expenditures and investments consisted of:
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | | | 2019 | |
| | | | | |
| Cash capital expenditures and investments | $ | 311 | | | 910 | | | 1,095 | |
| Change in capital expenditure accruals | (15) | | | 5 | | | (13) | |
| Total capital expenditures and investments | $ | 296 | | | 915 | | | 1,082 | |
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | | | 2019 | |
| Cash Payments | | | | | |
| Interest and debt expense | $ | 125 | | | 124 | | | 100 | |
Note 19—Other Financial Information
| | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| 2021 | | | 2020 | | | 2019 | |
| Interest and Debt Expense | | | | | |
| Incurred | | | | | |
| Debt | $ | 139 | | | 138 | | | 133 | |
| Other | 4 | | | 4 | | | 3 | |
| 143 | | | 142 | | | 136 | |
| Capitalized | (15) | | | (21) | | | (28) | |
| Expensed | $ | 128 | | | 121 | | | 108 | |
| | | | | |
| Other Income | | | | | |
| Interest income | $ | — | | | 1 | | | 3 | |
| Other | 13 | | | 2 | | | 3 | |
| Total other income | $ | 13 | | | 3 | | | 6 | |
