SEC Company Response from Phillips 66 (PSX) — Oct 23, 2017
Phillips 66
Date: Oct. 23, 2017 · CIK: 0001534701 · Accession: 0001534701-17-000099
AI Filing Summary & Sentiment
File numbers found in text: 001-35349
Referenced dates: October 17, 2017, September 14, 2017
Letter
Via EDGAR Office of Natural Resources Division of Corporation Finance United States Securities and Exchange Commission Phillips 66 Form 10-K for Fiscal Year Ended December 31, 2016 Response Dated September 22, 2017 File No. 001-35349
Dear Mr. Skinner:
Set forth below is the response of Phillips 66 (“we,” “our” or the “Company”) to the comment received from the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated October 17, 2017, with respect to the Company’s Form 10-K for the fiscal year ended December 31, 2016, filed with the Commission on February 17, 2017, File No. 001-35349, and our response dated September 22, 2017, to your comment letter dated September 14, 2017.
For your convenience, our response is prefaced by the text of the Staff’s comment in bold/italicized text below.
U.S. Securities and Exchange Commission
October 23, 2017
Page 2
Form 10-K for Fiscal Year Ended December 31, 2016
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 30
Results of Operations, page 33
1.We have read your response to prior comment one in which you provide details of how marketing fuel margin, refining margin and realized refining margin are calculated on a per barrel basis. Further, we note on a prospective basis you intend to include a definition and calculation for each of these measures in your filings. Please include details of how the amounts used in the calculations are derived from your financial statements and related note disclosures. In addition, please indicate these margin measures are not comparable to GAAP gross margin or gross profit as you subtract some but not all of the expenses that comprise a complete cost of sales measure from revenue in your calculations.
Response:
We acknowledge the Staff’s comment and, in future filings, will reconcile our marketing and refining margins per barrel to the nearest GAAP measure – “net income attributable to Phillips 66 per barrel” for each respective measure. This reconciliation will be accompanied by the disclosures required by Item 10(e) of Regulation S-K.
Using 2016 as an example, we propose to include the following reconciliations and expanded disclosures in our upcoming Form 10-Q and Form 10-K filings in regards to our marketing and refining margins per barrel:
Realized Marketing Fuel Margins Per Barrel
The following table presents our realized marketing fuel margin per barrel. Realized marketing fuel margins measure the difference between a) sales and other operating revenues derived from the sale of fuels in our Marketing and Specialties segment and b) purchase costs of those fuels. These margins are converted to a per-barrel basis by dividing them by sales volumes measured on a barrel basis. Marketing fuel margin per barrel demonstrates the value uplift our marketing operations provide by optimizing the placement and ultimate sale of our refineries’ fuel production.
Within the Marketing and Specialties segment, the GAAP performance measure most directly comparable to marketing fuel margin per barrel is the marketing business’ “net income attributable to Phillips 66 per barrel.” Marketing fuel margin per barrel excludes items that are typically included in gross margin, such as depreciation and operating expenses, and other items used to determine net income, such as general and administrative expenses and income taxes. Because marketing fuel margin per barrel excludes these items, and because marketing fuel margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool.
U.S. Securities and Exchange Commission
October 23, 2017
Page 3
Dollars Per Barrel
Net Income Attributable to Phillips 66
U.S.
$
0.74
International
2.21
Realized Marketing Fuel Margins
U.S.
$
1.64
International
4.05
Non-GAAP Reconciliations
Millions of Dollars
Realized Marketing Fuel Margins
U.S.
International
Year Ended December 31, 2016
Net income attributable to Phillips 66
$
Plus (Minus):
Provision for income taxes
Taxes other than income taxes
5,187
8,132
Depreciation and amortization
Selling, general and administrative expenses
Equity in earnings of affiliates
(4
)
(75
)
Other operating revenues*
(5,558
)
(8,157
)
Other segment (income) expenses, net
—
Marketing margins
$
1,149
Less: Margin for non-fuel related sales
—
(45
)
Realized marketing fuel margins
$
1,149
Total fuel sales volumes (thousands of barrels)
699,111
106,574
Net income attributable to Phillips 66 per barrel (dollars per barrel)
$
0.74
2.21
Realized marketing fuel margins (dollars per barrel)
$
1.64
4.05
* Primarily excise taxes and other non-fuel revenues.
U.S. Securities and Exchange Commission
October 23, 2017
Page 4
Refining Margins Per Barrel
The following table presents our realized refining margin per barrel. Realized refining margins measure the difference between a) sales and other operating revenues derived from the sale of petroleum products manufactured at our refineries and b) purchase costs of feedstocks, primarily crude oil, used to produce the petroleum products. The margins are adjusted to include our proportional share of our joint venture refineries’ realized margins, as calculated above, as well as to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized refining margins are converted to a per-barrel basis by dividing them by total refinery processed inputs (primarily crude oil) measured on a barrel basis, including our share of inputs processed by our joint venture refineries. Our realized refining margin per barrel is intended to be comparable with industry refining margins, which are known as “crack spreads.” As discussed in “Business Environment,” industry crack spreads measure the difference between market prices for refined petroleum products and crude oil. Realized refining margin per barrel calculated on a similar basis as industry crack spreads provides a useful measure of how well we performed relative to benchmark industry margins.
The GAAP performance measure most directly comparable to refining margin per barrel is the Refining segment’s “net income attributable to Phillips 66 per barrel.” Refining margin per barrel excludes items that are typically included in a manufacturer’s gross margin, such as depreciation and operating expenses, and other items used to determine net income, such as general and administrative expenses and income taxes. It also includes our proportional share of joint venture refineries’ realized margins and excludes special items. Because refining margin per barrel is calculated in this manner, and because refining margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool.
Dollars Per Barrel
Net Income Attributable to Phillips 66
Atlantic Basin/Europe
$
0.93
Gulf Coast
0.18
Central Corridor
2.38
West Coast
(0.92
)
Worldwide
0.51
Realized Refining Margins
Atlantic Basin/Europe
$
6.26
Gulf Coast
5.49
Central Corridor
8.70
West Coast
9.15
Worldwide
6.99
U.S. Securities and Exchange Commission
October 23, 2017
Page 5
Non-GAAP Reconciliations
Millions of Dollars
Realized Refining Margins
Atlantic Basin/Europe
Gulf Coast
Central Corridor
West Coast
Worldwide
Year Ended December 31, 2016
Net income (loss) attributable to Phillips 66
$
(116
)
Plus (Minus):
Provision (benefit) for income taxes
(17
)
(72
)
Taxes other than income taxes
Depreciation, amortization and impairments
Selling, general and administrative expenses
Operating expenses
1,234
3,495
Equity in earnings of affiliates
(50
)
(122
)
—
(164
)
Other segment (income) expenses, net
(11
)
(6
)
(2
)
(16
)
Proportional share of refining gross margins contributed by equity affiliates
(4
)
—
Special items:
Pending claims and settlements
—
(70
)
—
—
(70
)
Certain tax impacts
(32
)
—
—
—
(32
)
Recognition of deferred logistics commitments
—
—
—
Railcar lease residual value deficiencies and related costs
Realized refining margins
$
1,381
1,556
1,599
1,156
5,692
Total processed inputs (thousands of barrels)
220,519
283,574
98,217
126,329
728,639
Adjusted total processed inputs (thousands of barrels)*
220,519
283,574
183,691
126,329
814,113
Net income (loss) attributable to Phillips 66 per barrel (dollars per barrel)**
$
0.93
0.18
2.38
(0.92
)
0.51
Realized refining margins (dollars per barrel)***
$
6.26
5.49
8.70
9.15
6.99
* Adjusted total processed inputs include our proportional share of processed inputs of equity affiliates.
** Net income (loss) attributable to Phillips 66 divided by total processed inputs.
*** Realized refining margin divided by adjusted total processed inputs.
U.S. Securities and Exchange Commission
October 23, 2017
Page 6
We appreciate this opportunity to work with the Staff to improve our margin-per-barrel disclosures, and trust the above reconciliations and expanded disclosures appropriately address the Staff’s comment.
If you have any additional questions or comments, please contact the undersigned.
Very Truly Yours,
PHILLIPS 66
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Phillips 66
2331 CityWest Blvd.
Houston, Texas 77042
October 23, 2017
Via EDGAR
Brad Skinner
Senior Assistant Chief Accountant
Office of Natural Resources
Division of Corporation Finance
United States Securities and Exchange Commission
100 F Street, N.E., Mail Stop 4628
Washington, D.C. 20549-4628
Re:
Phillips 66
Form 10-K for Fiscal Year Ended December 31, 2016
Response Dated September 22, 2017
File No. 001-35349
Dear Mr. Skinner:
Set forth below is the response of Phillips 66 (“we,” “our” or the “Company”) to the comment received from the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated October 17, 2017, with respect to the Company’s Form 10-K for the fiscal year ended December 31, 2016, filed with the Commission on February 17, 2017, File No. 001-35349, and our response dated September 22, 2017, to your comment letter dated September 14, 2017.
For your convenience, our response is prefaced by the text of the Staff’s comment in bold/italicized text below.
U.S. Securities and Exchange Commission
October 23, 2017
Page 2
Form 10-K for Fiscal Year Ended December 31, 2016
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 30
Results of Operations, page 33
1.We have read your response to prior comment one in which you provide details of how marketing fuel margin, refining margin and realized refining margin are calculated on a per barrel basis. Further, we note on a prospective basis you intend to include a definition and calculation for each of these measures in your filings. Please include details of how the amounts used in the calculations are derived from your financial statements and related note disclosures. In addition, please indicate these margin measures are not comparable to GAAP gross margin or gross profit as you subtract some but not all of the expenses that comprise a complete cost of sales measure from revenue in your calculations.
Response:
We acknowledge the Staff’s comment and, in future filings, will reconcile our marketing and refining margins per barrel to the nearest GAAP measure – “net income attributable to Phillips 66 per barrel” for each respective measure. This reconciliation will be accompanied by the disclosures required by Item 10(e) of Regulation S-K.
Using 2016 as an example, we propose to include the following reconciliations and expanded disclosures in our upcoming Form 10-Q and Form 10-K filings in regards to our marketing and refining margins per barrel:
Realized Marketing Fuel Margins Per Barrel
The following table presents our realized marketing fuel margin per barrel. Realized marketing fuel margins measure the difference between a) sales and other operating revenues derived from the sale of fuels in our Marketing and Specialties segment and b) purchase costs of those fuels. These margins are converted to a per-barrel basis by dividing them by sales volumes measured on a barrel basis. Marketing fuel margin per barrel demonstrates the value uplift our marketing operations provide by optimizing the placement and ultimate sale of our refineries’ fuel production.
Within the Marketing and Specialties segment, the GAAP performance measure most directly comparable to marketing fuel margin per barrel is the marketing business’ “net income attributable to Phillips 66 per barrel.” Marketing fuel margin per barrel excludes items that are typically included in gross margin, such as depreciation and operating expenses, and other items used to determine net income, such as general and administrative expenses and income taxes. Because marketing fuel margin per barrel excludes these items, and because marketing fuel margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool.
U.S. Securities and Exchange Commission
October 23, 2017
Page 3
Dollars Per Barrel
2016
Net Income Attributable to Phillips 66
U.S.
$
0.74
International
2.21
Realized Marketing Fuel Margins
U.S.
$
1.64
International
4.05
Non-GAAP Reconciliations
Millions of Dollars
Realized Marketing Fuel Margins
U.S.
International
Year Ended December 31, 2016
Net income attributable to Phillips 66
$
519
235
Plus (Minus):
Provision for income taxes
285
17
Taxes other than income taxes
5,187
8,132
Depreciation and amortization
12
63
Selling, general and administrative expenses
708
259
Equity in earnings of affiliates
(4
)
(75
)
Other operating revenues*
(5,558
)
(8,157
)
Other segment (income) expenses, net
—
3
Marketing margins
$
1,149
477
Less: Margin for non-fuel related sales
—
(45
)
Realized marketing fuel margins
$
1,149
432
Total fuel sales volumes (thousands of barrels)
699,111
106,574
Net income attributable to Phillips 66 per barrel (dollars per barrel)
$
0.74
2.21
Realized marketing fuel margins (dollars per barrel)
$
1.64
4.05
* Primarily excise taxes and other non-fuel revenues.
U.S. Securities and Exchange Commission
October 23, 2017
Page 4
Refining Margins Per Barrel
The following table presents our realized refining margin per barrel. Realized refining margins measure the difference between a) sales and other operating revenues derived from the sale of petroleum products manufactured at our refineries and b) purchase costs of feedstocks, primarily crude oil, used to produce the petroleum products. The margins are adjusted to include our proportional share of our joint venture refineries’ realized margins, as calculated above, as well as to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized refining margins are converted to a per-barrel basis by dividing them by total refinery processed inputs (primarily crude oil) measured on a barrel basis, including our share of inputs processed by our joint venture refineries. Our realized refining margin per barrel is intended to be comparable with industry refining margins, which are known as “crack spreads.” As discussed in “Business Environment,” industry crack spreads measure the difference between market prices for refined petroleum products and crude oil. Realized refining margin per barrel calculated on a similar basis as industry crack spreads provides a useful measure of how well we performed relative to benchmark industry margins.
The GAAP performance measure most directly comparable to refining margin per barrel is the Refining segment’s “net income attributable to Phillips 66 per barrel.” Refining margin per barrel excludes items that are typically included in a manufacturer’s gross margin, such as depreciation and operating expenses, and other items used to determine net income, such as general and administrative expenses and income taxes. It also includes our proportional share of joint venture refineries’ realized margins and excludes special items. Because refining margin per barrel is calculated in this manner, and because refining margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool.
Dollars Per Barrel
2016
Net Income Attributable to Phillips 66
Atlantic Basin/Europe
$
0.93
Gulf Coast
0.18
Central Corridor
2.38
West Coast
(0.92
)
Worldwide
0.51
Realized Refining Margins
Atlantic Basin/Europe
$
6.26
Gulf Coast
5.49
Central Corridor
8.70
West Coast
9.15
Worldwide
6.99
U.S. Securities and Exchange Commission
October 23, 2017
Page 5
Non-GAAP Reconciliations
Millions of Dollars
Realized Refining Margins
Atlantic Basin/Europe
Gulf Coast
Central Corridor
West Coast
Worldwide
Year Ended December 31, 2016
Net income (loss) attributable to Phillips 66
$
204
52
234
(116
)
374
Plus (Minus):
Provision (benefit) for income taxes
(17
)
17
133
(72
)
61
Taxes other than income taxes
58
73
42
80
253
Depreciation, amortization and impairments
200
234
106
230
770
Selling, general and administrative expenses
64
51
31
49
195
Operating expenses
817
1,234
465
979
3,495
Equity in earnings of affiliates
8
(50
)
(122
)
—
(164
)
Other segment (income) expenses, net
(11
)
3
(6
)
(2
)
(16
)
Proportional share of refining gross margins contributed by equity affiliates
55
(4
)
705
—
756
Special items:
Pending claims and settlements
—
(70
)
—
—
(70
)
Certain tax impacts
(32
)
—
—
—
(32
)
Recognition of deferred logistics commitments
30
—
—
—
30
Railcar lease residual value deficiencies and related costs
5
16
11
8
40
Realized refining margins
$
1,381
1,556
1,599
1,156
5,692
Total processed inputs (thousands of barrels)
220,519
283,574
98,217
126,329
728,639
Adjusted total processed inputs (thousands of barrels)*
220,519
283,574
183,691
126,329
814,113
Net income (loss) attributable to Phillips 66 per barrel (dollars per barrel)**
$
0.93
0.18
2.38
(0.92
)
0.51
Realized refining margins (dollars per barrel)***
$
6.26
5.49
8.70
9.15
6.99
* Adjusted total processed inputs include our proportional share of processed inputs of equity affiliates.
** Net income (loss) attributable to Phillips 66 divided by total processed inputs.
*** Realized refining margin divided by adjusted total processed inputs.
U.S. Securities and Exchange Commission
October 23, 2017
Page 6
We appreciate this opportunity to work with the Staff to improve our margin-per-barrel disclosures, and trust the above reconciliations and expanded disclosures appropriately address the Staff’s comment.
If you have any additional questions or comments, please contact the undersigned.
Very Truly Yours,
PHILLIPS 66
By:
/s/ Chukwuemeka A. Oyolu
Chukwuemeka A. Oyolu
Vice President and Controller
Cc:
Jenifer Gallagher, Securities and Exchange Commission
Scott Miracle, Ernst & Young, LLP