PHILLIPS 66 PARTNERS LP Unless otherwise stated or the context otherwise indicates, all references to "Phillips 66 Partners ," "the Partnership," "us," "our," "we," or similar expressions refer toPhillips 66 Partners LP , including its consolidated subsidiaries. References toPhillips 66 may refer toPhillips 66 and/or its subsidiaries, depending on the context. References to our "General Partner" refer to Phillips 66Partners GP LLC , and references to "Phillips 66 PDI" refer toPhillips 66 Project Development Inc. , thePhillips 66 subsidiary that holds a limited partner interest in us and wholly owns ourGeneral Partner . Management's Discussion and Analysis is the Partnership's analysis of its financial performance, financial condition, and of significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the Partnership's plans, strategies, objectives, expectations and intentions. The words "anticipate," "estimate," "believe," "budget," "continue," "could," "intend," "may," "plan," "potential," "predict," "seek," "should," "will," "would," "expect," "objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target" and similar expressions normally identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The Partnership does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the Partnership's disclosures under the heading: "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS."
EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT
Partnership Overview 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, nine ofPhillips 66's owned or joint venture refineries.
We primarily generate revenue by providing fee-based transportation,
terminaling, processing, storage and fractionation services to
Our common units trade on the
Pending Merger withPhillips 66 OnOctober 26, 2021 , we entered into a definitive merger agreement withPhillips 66 and its wholly owned subsidiaries,Phillips 66 Company , Phillips 66 PDI, andPhoenix Sub LLC , and ourGeneral Partner pursuant to whichPhillips 66 would acquire all of the publicly held common units representing limited partner interests in the Partnership not already owned byPhillips 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 ofPhillips 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 forPhillips 66 common stock. The merger is expected to close in early 2022, subject to customary closing conditions. Upon closing, we will become an indirect wholly owned subsidiary ofPhillips 66 , and our common units will cease to be listed on the NYSE and will be subsequently deregistered under the Exchange Act. See Note 1-Description of the Business, in the Notes to Consolidated Financial Statements, for additional information regarding the merger agreement. 21
-------------------------------------------------------------------------------- Table of Contents How We Evaluate Our Operations Our management uses a variety of financial and operating metrics to analyze our performance, including: (1) volumes handled; (2) operating and maintenance expenses; (3) net income before net interest expense, income taxes, depreciation and amortization (EBITDA); (4) adjusted EBITDA; and (5) distributable cash flow. Volumes Handled The amount of revenue we generate primarily depends on the volumes of crude oil, refined petroleum products and NGL that we handle in our pipeline, terminal, rail rack, processing, storage and fractionator systems. In addition, our equity affiliates generate revenue from transporting and terminaling crude oil, refined petroleum products and NGL. These volumes are primarily affected by the supply of, and demand for, crude oil, refined petroleum products and NGL in the markets served directly or indirectly by our assets, as well as the operational status of the refineries served by our assets.Phillips 66 has committed to minimum throughput volumes under many of our commercial agreements. Operating and Maintenance Expenses Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses primarily consist of labor expenses (including contractor services), utility costs, and repair and maintenance expenses. Operating and maintenance expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities, particularly maintenance activities, performed during the period. Our processing assets are periodically subject to major maintenance, or turnaround activities, which can significantly increase operating and maintenance expenses in a given year. Although we seek to manage our maintenance expenditures on our facilities to avoid significant variability in our quarterly cash flows, we balance this approach with our high standards of safety and environmental stewardship, such that critical maintenance is regularly performed. Our operating and maintenance expenses are also affected by volumetric gains/losses resulting from variances in meter readings and other measurement methods, as well as volume fluctuations due to pressure and temperature changes. Under certain commercial agreements withPhillips 66 , the value of any crude oil, refined petroleum product and NGL volumetric gains and losses are determined by reference to the monthly average reference price for the applicable commodity. Any gains/losses under these provisions decrease or increase, respectively, our operating and maintenance expenses in the period in which they are realized. These contractual volumetric gain/loss provisions could increase variability in our operating and maintenance expenses.
EBITDA, Adjusted EBITDA and Distributable Cash Flow We define EBITDA as net income plus net interest expense, income taxes, depreciation and amortization.
Adjusted EBITDA is EBITDA attributable to the Partnership after deducting the adjusted EBITDA attributable to noncontrolling interest, further adjusted for:
•The proportional share of equity affiliates' net interest expense, income taxes, depreciation and amortization, and impairments.
•Transaction costs associated with acquisitions.
•Certain other noncash items, including gains and losses on asset sales and asset impairments.
Distributable cash flow is defined as adjusted EBITDA less (i) equity affiliate
distributions less than proportional adjusted EBITDA, (ii) maintenance capital
expenditures, (iii) net interest expense, (iv) income taxes paid and (v)
preferred unit distributions, plus adjustments for deferred revenue impacts.
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EBITDA, adjusted EBITDA, and distributable cash flow are not presentations made
in accordance with generally accepted accounting principles in the United States
(GAAP). EBITDA, adjusted EBITDA and distributable cash flow are non-GAAP
supplemental financial measures that management believes external users of our
consolidated financial statements, such as industry analysts, investors, lenders
and rating agencies, may find useful to assess:
•Our operating performance as compared to other publicly traded partnerships in
the midstream energy industry, without regard to historical cost basis or, in
the case of EBITDA and adjusted EBITDA, financing methods.
•The ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders.
•Our ability to incur and service debt and fund capital expenditures.
•The viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
The GAAP performance measure most directly comparable to EBITDA and adjusted EBITDA is net income. The GAAP liquidity measure most directly comparable to EBITDA and distributable cash flow is net cash provided by operating activities. These non-GAAP financial measures should not be considered alternatives to GAAP net income or net cash provided by operating activities. They have important limitations as analytical tools because they exclude some items that affect net income and net cash provided by operating activities. Additionally, because EBITDA, adjusted EBITDA, and distributable cash flow may be defined differently by other companies in our industry, our definition of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. Business Environment We do not own any of the crude oil, refined petroleum products and NGL we handle and do not engage in the trading of those commodities, and therefore have limited direct exposure to risks associated with fluctuating commodity prices, although these risks indirectly influence our activities and results of operations over the long term. Our throughput volumes primarily depend on the volume of crude oil processed and refined petroleum products produced atPhillips 66's owned or operated refineries with which our assets are integrated. These volumes are primarily dependent onPhillips 66's refining margins and maintenance schedules. Refining margins depend on the price of crude oil or other feedstocks and the price of refined petroleum products. These prices are affected by numerous factors beyond our orPhillips 66's control, including the domestic and global supply of and demand for crude oil and refined petroleum products. Throughput volumes of our equity affiliates primarily depend on upstream drilling activities, refinery performance and product supply and demand. The Coronavirus Disease 2019 (COVID-19) pandemic continues to impact global economic activity. Our results in the third quarter of 2021 reflect the gradual recovery of demand for refined petroleum products following the administration of COVID-19 vaccines and the easing of pandemic restrictions since the beginning of 2021. However, the adverse impacts of the COVID-19 pandemic may continue in the near term, and the depth and duration of the resulting economic consequences remain uncertain. While we believe we and the majority of our joint ventures have substantially mitigated our indirect exposure to commodity price fluctuations through the minimum volume commitments included in our commercial agreements, our ability to execute our strategy will depend, in part, on the availability of attractively priced crude oil in the areas served by our crude oil pipelines and rail racks, demand for refined petroleum products in the markets served by our refined petroleum product pipelines and terminals, and the general demand for midstream services, including NGL transportation and fractionation. 23 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Unless otherwise indicated, discussion of results for the three and nine months endedSeptember 30, 2021 , is based on a comparison with the corresponding period of 2020. Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Revenues and Other Income Operating revenues-related parties$ 275 256 794 750 Operating revenues-third parties 8 9 21 23 Equity in earnings of affiliates 163 129 429 369 Gain from equity interest transfer - - - 84 Other income 6 - 7 2 Total revenues and other income 452 394 1,251 1,228 Costs and Expenses Operating and maintenance expenses 89 85 277 257 Depreciation 38 35 106 96 Impairments 10 - 208 - General and administrative expenses 17 16 52 50 Taxes other than income taxes 10 9 31 30 Interest and debt expense 32 32 97 89 Other expenses 1 - 1 7 Total costs and expenses 197 177 772 529 Income before income taxes 255 217 479 699 Income tax expense - 1 1 2 Net Income 255 216 478 697 Less: Net income attributable to noncontrolling interest 13 10 29 10 Net Income Attributable to the Partnership 242 206 449 687
Less: Preferred unitholders' interest in net income attributable to the Partnership
12 10 36 29
Limited Partners' Interest in Net Income
Attributable to the Partnership $ 230 196 413 658
Net Cash Provided by Operating Activities $ 338 296 851 785
Adjusted EBITDA $ 367 313 993 903
Distributable Cash Flow $ 268 243 768 730
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Three Months
Ended Nine Months Ended
September 30 September 30
2021 2020 2021 2020
Wholly Owned Operating Data
Pipelines
Pipeline revenues (millions of dollars) $ 121 117 346 325
Pipeline volumes(1) (thousands of barrels
daily)
Crude oil 954 867 903 871
Refined petroleum products and NGL 994 907 945 866
Total 1,948 1,774 1,848 1,737
Average pipeline revenue per barrel (dollars) $ 0.67 0.71 0.68 0.68
Terminals
Terminal revenues (millions of dollars)$ 40 36 122 112 Terminal throughput (thousands of barrels daily) Crude oil(2) 446 296 406 378 Refined petroleum products 780 700 756 713 Total 1,226 996 1,162 1,091 Average terminaling revenue per barrel (dollars)$ 0.36 0.39 0.38 0.37 Storage, processing and other revenues (millions of dollars)$ 122 112 347 336 Total Operating Revenues (millions of dollars)$ 283 265 815 773 Joint Venture Operating Data(3) Crude oil, refined petroleum products and NGL (thousands of barrels daily) 1,294 1,142 1,225 975 (1) Represents the sum of volumes transported through each separately tariffed pipeline segment. (2) Bayway and Ferndale rail rack volumes included in crude oil terminals. (3) Proportional share of total pipeline and terminal volumes of joint ventures consistent with recognized equity in earnings of affiliates. 25 -------------------------------------------------------------------------------- Table of Contents The following tables present reconciliations of EBITDA and adjusted EBITDA to net income, and EBITDA and distributable cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.
Millions of Dollars
Three Months
Ended Nine Months Ended
September 30 September 30
2021 2020 2021 2020Reconciliation to Net Income Attributable to the
Partnership
Net Income Attributable to the Partnership$ 242 206 449 687
Plus:
Net income attributable to noncontrolling interest 13 10 29 10 Net Income 255 216 478 697 Plus: Depreciation 38 35 106 96 Net interest expense 31 31 96 88 Income tax expense - 1 1 2 EBITDA 324 283 681 883 Plus: Proportional share of equity affiliates' net interest, taxes, depreciation and amortization, and impairments 51 45 151 118 Expenses indemnified or prefunded by Phillips 66 - 1 1 1 Transaction costs associated with acquisitions - - - 1 Impairments 10 - 208 -
Less:
Gain from equity interest transfer - - - 84 Adjusted EBITDA attributable to noncontrolling interest 18 16 48 16 Adjusted EBITDA 367 313 993 903 Plus: Deferred revenue impacts*† 2 (3) 7 4
Less:
Equity affiliate distributions less than (more than) proportional adjusted EBITDA 14 4 31 (5) Maintenance capital expenditures† 44 21 67 64 Net interest expense 31 31 96 88 Preferred unit distributions 12 10 36 29 Income taxes paid - 1 2 1 Distributable Cash Flow$ 268 243 768 730
*Difference between cash receipts and revenue recognition. †Excludes Merey Sweeny capital reimbursements and turnaround impacts.
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Millions of Dollars
Three Months
Ended Nine Months Ended
September 30 September 30
2021 2020 2021 2020Reconciliation to Net Cash Provided by Operating
Activities
Net Cash Provided by Operating Activities$ 338 296 851 785 Plus: Net interest expense 31 31 96 88 Income tax expense - 1 1 2 Changes in working capital (36) (45) (58) (60) Undistributed equity earnings 2 - - (9) Impairments (10) - (208) - Gain from equity interest transfer - - - 84 Deferred revenues and other liabilities - 1 2 3 Other (1) (1) (3) (10) EBITDA 324 283 681 883 Plus: Proportional share of equity affiliates' net interest, taxes, depreciation and amortization, and impairments 51 45 151 118 Expenses indemnified or prefunded by Phillips 66 - 1 1 1 Transaction costs associated with acquisitions - - - 1 Impairments 10 - 208 -
Less:
Gain from equity interest transfer - - - 84 Adjusted EBITDA attributable to noncontrolling interest 18 16 48 16 Adjusted EBITDA 367 313 993 903 Plus: Deferred revenue impacts*† 2 (3) 7 4
Less:
Equity affiliate distributions less than (more than) proportional adjusted EBITDA 14 4 31 (5) Maintenance capital expenditures† 44 21 67 64 Net interest expense 31 31 96 88 Preferred unit distributions 12 10 36 29 Income taxes paid - 1 2 1 Distributable Cash Flow$ 268 243 768 730
*Difference between cash receipts and revenue recognition. †Excludes Merey Sweeny capital reimbursements and turnaround impacts.
Statement of Income Analysis
Operating revenues increased$18 million , or 7%, and increased$42 million , or 5%, in the third quarter and nine-month period of 2021, respectively. The increases in both periods were primarily attributable to higher volumes resulting from improved market demand. Additionally, the increase in the nine-month period was partially offset by the effects of winter storms impacting the Central andGulf Coast regions in the first quarter of 2021. 27 -------------------------------------------------------------------------------- Table of Contents Equity in earnings of affiliates increased$34 million , or 26%, and increased$60 million , or 16%, in the third quarter and nine-month period of 2021, respectively. The increases in both periods were primarily due to higher volumes, including volumes fromGray Oak Pipeline, LLC , which commenced full operations during the second quarter of 2020, andSouth Texas Gateway Terminal LLC (South Texas Gateway), which commenced full operations in the first quarter of 2021. The increases in both periods were partially offset by a decrease in earnings fromDCP Sand Hills Pipeline, LLC . See Note 4-Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.
Gain on equity interest transfer reflects the second-quarter 2020 gain
recognition related to a co-venturer's acquisition of a 35% interest in the
consolidated holding company that owns an interest in
Operating and maintenance expenses increased$4 million , or 5%, and increased$20 million , or 8%, in the third quarter and nine-month period of 2021, respectively. The increases in both periods were primarily due to higher utility costs. Depreciation increased$3 million , or 9%, and increased$10 million , or 10%, in the third quarter and nine-month period of 2021, respectively. The increases in both periods were primarily attributable to additional assets placed in operation, including additional storage capacity at the Clemens Caverns in mid-2020 and theSweeny to Pasadena Pipeline expansion project in the third quarter of 2020. Impairments reflects the impairment resulting from the cancellation of theACE Pipeline Project in the third quarter and nine-month period of 2021. See Note 6-Properties, Plants and Equipment, in the Notes to Consolidated Financial Statements, for additional information. Additionally, the nine-month period reflects the first-quarter 2021 impairment of our investment inLiberty Pipeline LLC (Liberty). See Note 4-Equity Investments, in the Notes to Consolidated Financial Statements, for additional information. CAPITAL RESOURCES AND LIQUIDITY Significant Sources of Capital Our sources of liquidity include cash generated from operations, distributions from our equity affiliates, borrowings from related parties and under our revolving credit facility, issuances of additional debt and equity securities, and funding from joint venture partners. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements, long-term capital expenditure requirements and our quarterly cash distributions. Operating Activities We generated$851 million in cash from operations during the first nine months of 2021, an increase of$66 million compared with the corresponding period of 2020. The increase was primarily driven by higher operating distributions from equity affiliates and higher operating revenues. Equity Affiliate Distributions Our operating and investing cash flows are impacted by distribution decisions made by our equity affiliates. During the first nine months of 2021, we received aggregate distributions from our equity affiliates of$544 million , compared with$502 million during the same period of 2020. We cannot control the amount or timing of future distributions from equity affiliates; therefore, future distributions are not assured. Revolving Credit Facility AtSeptember 30, 2021 , no borrowings were outstanding and$1 million in letters of credit had been drawn under our$750 million revolving credit facility, compared with outstanding borrowings of$415 million and$1 million in letters of credit drawn under the facility atDecember 31, 2020 . Term Loan Agreement OnApril 6, 2021 , we entered into a$450 million term loan agreement and borrowed the full amount. The term loan agreement has a maturity date ofApril 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. 28 -------------------------------------------------------------------------------- Table of Contents Transfer of Equity Interest InApril 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 atMarch 31, 2021 . See Note 4-Equity Investments, in the Notes to Consolidated Financial Statements, for additional information. ATM Program AtSeptember 30, 2021 , we have$248 million of available capacity under our$250 million continuous offering of common units, or at-the-market (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 three and nine months endedSeptember 30, 2021 . OnOctober 26, 2021 , we entered into a definitive merger agreement withPhillips 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-Description of the Business, for additional information regarding the merger agreement.
Off-Balance Sheet Arrangements
Dakota Access, LLC (Dakota Access) andEnergy Transfer Crude Oil Company, LLC (ETCO) In 2020, the trial court presiding over litigation regarding the Dakota Access Pipeline ordered theU.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) relating to an easement underLake Oahe inNorth 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. InMay 2021 , the court denied a request for an injunction to shut down the pipeline while the EIS is being prepared and inJune 2021 , dismissed the litigation. It is possible that the litigation could be reopened or new litigation challenging the EIS, once completed, could be filed. InSeptember 2021 , Dakota Access filed a writ of certiorari, requesting theU.S. Supreme Court to review the lower court's judgment that ordered the EIS and vacated the easement. Dakota Access and ETCO have guaranteed repayment of$2.5 billion aggregate principal amount of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access. 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 in certain circumstances relating to the litigation described above. AtSeptember 30, 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
Capital Requirements
Capital Expenditures and Investments
Our operations are capital intensive and require investments to expand, upgrade,
maintain or enhance existing operations and to meet environmental and
operational requirements of our wholly owned and joint venture entities. Our
capital requirements consist of maintenance and expansion capital expenditures,
as well as contributions to our joint ventures. Maintenance capital expenditures
are those made to replace partially or fully depreciated assets, to maintain the
existing operating capacity of our assets and to extend their useful lives, or
to maintain existing system volumes and related cash flows. In contrast,
expansion capital expenditures are those made to expand and upgrade our systems
and facilities and to construct or acquire new systems or facilities to grow our
business, including contributions to joint ventures that are using the
contributed funds for such purposes.
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Our capital expenditures and investments represent the total spending for our
capital requirements. Our adjusted capital spending is a non-GAAP financial
measure that demonstrates our net share of capital spending, and reflects an
adjustment for the portion of consolidated capital spending funded by certain
joint venture partners. Additionally, the disaggregation of adjusted capital
spending between expansion and maintenance is not a distinction recognized under
GAAP. We disaggregate adjusted capital spending because our partnership
agreement requires that we treat expansion and maintenance capital differently
for operating and capital surplus determinations. Further, we generally fund
expansion capital spending with both operating and financing cash flows and fund
maintenance capital spending with operating cash flows.
Our capital expenditures and investments were:
Millions of Dollars
Nine Months Ended
September 30
2021 2020
Capital Expenditures and Investments
Capital expenditures and investments $ 222 795
Capital expenditures and investments funded by certain joint
venture partners - (64)
Adjusted Capital Spending $ 222 731
Expansion $ 155 667
Maintenance 67 64
Our capital expenditures and investments for the first nine months of 2021 were primarily associated with the following activities:
•Construction activities related to the C2G Pipeline, a new 16-inch ethane pipeline that connects our Clemens Caverns storage facility to petrochemical facilities inGregory, Texas , nearCorpus Christi, Texas .
•Contributions to Dakota Access for a pipeline optimization project.
•Contributions to complete the South Texas Gateway Terminal development activities.
•Spending associated with other return, reliability and maintenance projects.
Repurchase of Preferred Units OnJune 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. Debt Repayment OnApril 1, 2021 , we repaid the two remaining$25 million tranches of tax-exempt bonds dueApril 2021 , totaling$50 million . 30 -------------------------------------------------------------------------------- Table of Contents Cash Distributions OnOctober 19, 2021 , the Board of Directors of ourGeneral Partner declared a quarterly cash distribution of$0.875 per common unit, which will result in a total distribution of$200 million attributable to the third quarter of 2021. This distribution is payable onNovember 12, 2021 , to common unitholders of record as ofOctober 29, 2021 . Beginning with the distribution to preferred unitholders attributable to the fourth quarter of 2020, the preferred unitholders at the record date 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 will receive$12 million of distributions attributable to the third quarter of 2021. This distribution is payableNovember 12, 2021 , to preferred unitholders of record as ofOctober 29, 2021 . OnOctober 26, 2021 , we entered into a definitive merger agreement withPhillips 66 . This agreement provides that, unless prohibited by the partnership agreement or applicable law, ourGeneral 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 endingDecember 31, 2021 , and for each full quarterly period thereafter, unless the merger closes prior to the applicable record date. See Note 1-Description of the Business, in the Notes to Consolidated Financial Statements, for additional information regarding the merger agreement.
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. Regulatory Matters Our interstate common carrier crude oil and refined petroleum products pipeline operations are subject to rate regulation by theFederal Energy Regulatory Commission under the Interstate Commerce Act and Energy Policy Act of 1992, and certain of our pipeline systems providing intrastate service are subject to rate regulation by applicable state authorities under their respective laws and regulations. Our pipeline, rail rack and terminal operations are also subject to safety regulations adopted by theDepartment of Transportation , as well as to state regulations. 31 -------------------------------------------------------------------------------- Table of Contents Legal and Tax Matters Under our amended omnibus agreement,Phillips 66 provides certain services for our benefit, including legal and tax support services, and we pay an operational and administrative support fee for these services.Phillips 66's legal and tax organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions.Phillips 66's legal organization employs a litigation management process to manage and monitor the legal proceedings against us. The process facilitates the early evaluation and quantification of potential exposures in individual cases and enables tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases,Phillips 66's legal organization regularly assesses the adequacy of current accruals and recommends if adjustment of existing accruals, or establishment of new accruals, is required. As ofSeptember 30, 2021 , andDecember 31, 2020 , we did not have any material accrued contingent liabilities associated with litigation matters.
Environmental
We are subject to extensive federal, state and local environmental laws and regulations. These requirements, which frequently change, regulate the discharge of materials into the environment or otherwise relate to protection of the environment. Compliance with these laws and regulations may require us to remediate environmental damage from any discharge of petroleum or chemical substances from our facilities or require us to install additional pollution control equipment at or on our facilities. Our failure to comply with these or any other environmental or safety-related regulations could result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of governmental orders that may subject us to additional operational constraints. Future expenditures may be required to comply with the Federal Clean Air Act and other federal, state and local requirements in respect of our various sites, including our pipelines and storage assets. The impact of legislative and regulatory developments, if enacted or adopted, could result in increased compliance costs and additional operating restrictions on our business, each of which could have an adverse impact on our financial position, results of operations and liquidity. As with all costs, if these expenditures are not ultimately recovered in the tariffs and other fees we receive for our services, our operating results will be adversely affected. We believe that substantially all similarly situated parties and holders of comparable assets must comply with similar environmental laws and regulations. However, the specific impact on each may vary depending on a number of factors, including, but not limited to, the age and location of its operating facilities. We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. New or expanded environmental requirements, which could increase our environmental costs, may arise in the future. We believe we are in substantial compliance with all legal obligations regarding the environment and have established the environmental accruals that are currently required; however, it is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed, because not all of the costs are fixed or presently determinable (even under existing legislation) and the costs may be affected by future legislation or regulations. Indemnification and Excluded Liabilities Under our amended omnibus agreement and pursuant to the terms of various agreements under which we acquired assets fromPhillips 66 ,Phillips 66 will indemnify us, or assume responsibility, for certain environmental liabilities, tax liabilities, litigation and any other liabilities attributable to the ownership or operation of the assets contributed to us and that arose prior to the effective date of each acquisition. These indemnifications and exclusions from liability have, in some cases, time limits and deductibles. WhenPhillips 66 performs under any of these indemnifications or exclusions from liability, we recognize non-cash expenses and associated non-cash capital contributions from ourGeneral Partner , as these are considered liabilities paid for by a principal unitholder. 32
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. You can normally identify our
forward-looking statements by the words "anticipate," "estimate," "believe,"
"budget," "continue," "could," "intend," "may," "plan," "potential," "predict,"
"seek," "should," "will," "would," "expect," "objective," "projection,"
"forecast," "goal," "guidance," "outlook," "effort," "target" and similar
expressions, although the absence of these words does not mean that statement is
not forward-looking.
We based the forward-looking statements on our current expectations, estimates
and projections about us, our operations, the operations of our joint ventures
and the entities in which we own equity interests, as well as the industries in
which we and they operate in general. We caution you these statements are not
guarantees of future performance as they involve assumptions that, while made in
good faith, may prove to be incorrect, and involve risks and uncertainties we
cannot predict. In addition, we based many of these forward-looking statements
on assumptions about future events that may prove to be inaccurate. Accordingly,
our actual outcomes and results may differ materially from what we have
expressed or forecast in the forward-looking statements. Any differences could
result from a variety of factors, including the following:
•The timing and completion of the pending merger with Phillips 66 .
•The continuing effects of the COVID-19 pandemic and its negative impact on the
demand for crude oil and refined petroleum products, as well as the extent and
duration of recovery of economies and the demand for crude oil and refined
petroleum products after the pandemic subsides.
•Reductions in the volume of crude oil, refined petroleum products and NGL we or
our equity affiliates transport, fractionate, process, terminal and store.
•The continued ability of Phillips 66 to satisfy its obligations under our
commercial and other agreements.
•Fluctuations in the prices and demand for crude oil, refined petroleum products
and NGL, including as a result of actions taken by OPEC and other countries
impacting supply and demand and, correspondingly, commodity prices.
•Changes in governmental policies relating to crude oil, refined petroleum
products or NGL pricing, regulation, taxation, or exports.
•Potential liabilities associated with the risks and operational hazards
inherent in transporting, fractionating, processing, terminaling and storing
crude oil, refined petroleum products and NGL.
•Curtailment of operations due to severe weather (including as a result of
climate change) disruption or natural disasters; riots, strikes, lockouts or
other industrial disturbances.
•Accidents or other unscheduled shutdowns affecting our pipelines, processing,
fractionating, terminaling, and storage facilities or equipment, or those of our
equity affiliates, suppliers or customers.
•Our, and our equity affiliates', inability to obtain or maintain permits, in a
timely manner, or at all, and the possibility of the revocation or modification
of such permits.
•The operation, financing and distribution decisions of our joint ventures,
which we may not control.
•The inability to comply with government regulations or make capital
expenditures required to maintain compliance.
•The failure to complete construction of announced and future capital projects
in a timely manner, cost overruns associated with such projects, and the ability
to obtain or maintain permits necessary for such projects.
•Costs or liabilities associated with federal, state, and local laws and
regulations relating to environmental protection and safety, including spills,
releases and pipeline integrity.
•Failure of information technology systems due to various causes, including
unauthorized access or attack.
•Changes to the tariff rates with respect to volumes transported through
regulated assets, which rates are subject to review and possible adjustment by
federal and state regulators.
•Changes in revenues we realize under the loss allowance provisions of our
regulated tariffs resulting from changes in underlying commodity prices.
•Costs associated with compliance with evolving environmental laws and
regulations on climate change.
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•Costs associated with compliance with safety regulations, including pipeline
integrity management program testing and related repairs.
•Changes in the cost or availability of third-party vessels, pipelines, railcars
and other means of delivering and transporting crude oil, refined petroleum
products and NGL.
•General domestic and international economic and political developments
including armed hostilities, expropriation of assets, social unrest,
insurrections, and other political, economic or diplomatic developments,
including those caused by public health issues and outbreaks of diseases and
pandemics.
•Direct or indirect effects on our business resulting from actual or threatened
terrorist incidents or acts of war.
•Our ability to comply with the terms of our credit facility, indebtedness and
other financing arrangements, which, if accelerated, we may not be able to
repay.
•Our ability to incur additional indebtedness or our ability to obtain financing
on terms that we deem acceptable, including the refinancing of our current
obligations; higher interest rates and costs of financing would increase our
expenses.
•Changes in tax, environmental and other laws and regulations.
•The factors generally described in Item 1A. Risk Factors in our 2020 Annual
Report on Form 10-K.
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