Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis is the company’s analysis of its financial performance and 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 Annual Report on Form 10-K.

The terms “earnings” and “loss” refer to net income (loss) attributable to Phillips 66. The terms “before-tax income” or “before-tax loss” refer to income (loss) before income taxes.

EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT

Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. At December 31, 2020, we had total assets of $54.7 billion.

Executive Overview

The COVID-19 pandemic continues to disrupt economic activities globally. Actions taken by governments to prevent the spread of the disease, including travel and business restrictions, have resulted in substantial decreases in the demand for many refined petroleum products, particularly gasoline and jet fuel. The lack of demand for petroleum products has resulted in low crude oil prices and refining margins. Accordingly, crude oil producers have shut in high cost production, and refiners have reduced crude oil processing rates.

During 2020, we took the following significant steps to enhance our liquidity in this challenged margin environment:

• Issued $3.75 billion of senior unsecured notes and borrowed a net $500 million under a term loan facility.

• Temporarily suspended our share repurchase program.

• Reduced consolidated capital spending in 2020 by more than $700 million compared with our original budget.

• Exceeded our $500 million cost reduction target in 2020.

In 2020, we reported a loss of $4.0 billion and generated $2.1 billion in cash from operating activities. We used available cash and the debt financing noted above to fund capital expenditures and investments of $2.9 billion, pay dividends of $1.6 billion, and repurchase $0.4 billion of our common stock. We ended 2020 with $2.5 billion of cash and cash equivalents and approximately $5.3 billion of total committed capacity available under our credit facilities.

Our results in 2020 reflect the adverse effects of the COVID-19 pandemic, including asset and investment impairments. These adverse effects may continue to be significant in the near term. The depth and duration of the economic consequences of the COVID-19 pandemic remain unknown. We continuously monitor our asset and investment portfolio for impairments, as well as optimization opportunities, in this challenging business environment. As such, additional impairments may be required in the future.

Index to Financial Statements

We continue to focus on the following strategic priorities:

• Operating Excellence. Our commitment to operating excellence guides everything we do. We are committed to protecting the health and safety of everyone who has a role in our operations and the communities in which we operate. Continuous improvement in safety, environmental stewardship, reliability and cost efficiency is a fundamental requirement for our company and employees. We employ rigorous training and audit programs to drive ongoing improvement in both personal and process safety as we strive for zero incidents. In 2020, we achieved a 0.11 total recordable incident rate—the lowest since our inception. Since we cannot control commodity prices, controlling operating expenses and overhead costs, within the context of our commitment to safety and environmental stewardship, is a high priority. Senior management actively monitors these costs. We are committed to protecting the environment and strive to reduce our environmental footprint throughout our operations. Optimizing utilization rates at our refineries through reliable and safe operations enables us to capture the value available in the market in terms of prices and margins. During 2020, our worldwide refining crude oil capacity utilization rate was 76%, mainly driven by the decrease in market demand for refined petroleum products due to negative impacts from the COVID-19 pandemic.

• Growth. A disciplined capital allocation process ensures we invest in projects that are expected to generate competitive returns. Our strategy primarily focuses on investing in growth opportunities in the Midstream and Chemicals segments. In response to the challenging market conditions caused by the COVID-19 pandemic, we reduced our 2021 capital budget to $1.7 billion. We are prioritizing sustaining capital spending and completion of in-progress growth projects, as well as advancing our investments in renewable fuels. In the third quarter of 2020, we announced Rodeo Renewed, a project to reconfigure our San Francisco Refinery in Rodeo, California, to produce renewable fuels. In 2021, we have budgeted $615 million for Midstream capital expenditures and investments, including $305 million for Phillips 66 Partners. Capital will be used to complete near-term committed and optimization projects and to maintain our integrated logistics infrastructure network. In Chemicals, our share of expected self-funded capital spending by CPChem is $410 million. CPChem plans to use its growth capital to fund expansion of its normal alpha olefins production, optimization and debottleneck opportunities in the olefins and polyolefins chains, as well as continuing development of petrochemical projects on the U.S. Gulf Coast and in Qatar. We recently formed an Emerging Energy organization. This group is charged with establishing a lower-carbon business platform that delivers attractive returns. It will focus on opportunities within our portfolio, such as Rodeo Renewed, as well as commercializing emerging energy technologies for a sustainable future.

• Returns. We plan to enhance Refining returns by increasing throughput of advantaged feedstocks, improving yields, portfolio optimization and an ongoing commitment to operating excellence. For 2021, capital in Refining will be directed toward high-return projects to enhance the yield of higher-value products and other high-return, quick-payout projects, as well as investments to competitively position the company for a lower-carbon future. M&S will continue to develop and enhance our retail network and brands in the United States and Europe.

• Distributions. We believe shareholder value is enhanced through, among other things, consistent growth of regular dividends, complemented by share repurchases. Regular dividends demonstrate the confidence our Board of Directors and management have in our capital structure and operations’ capability to generate free cash flow throughout the business cycle. In 2020, despite the challenging business environment, we maintained stable quarterly dividend distributions to shareholders and repurchased $443 million of common stock before suspending our share repurchase program in March 2020 to preserve liquidity.

• High-Performing Organization. We strive to attract, develop and retain individuals with the knowledge and skills to implement our business strategy and who support our values and culture. Throughout the company, we focus on getting results in the right way, embrace our values as a common bond, and believe success is both what we do and how we do it. We encourage collaboration throughout our company, while valuing differences, respecting diversity, and creating a great place to work. We foster an environment of learning and development through structured programs focused on enhancing functional and technical skills where employees are engaged in our business and committed to their own, as well as the company’s, success.

Index to Financial Statements

Business Environment

The Midstream segment includes our Transportation and NGL businesses. Our Transportation business contains fee-based operations that are not directly exposed to commodity price risk. Our NGL business contains both fee-based operations and operations that are directly impacted by NGL prices. The Midstream segment also includes our 50% equity investment in DCP Midstream. NGL prices were significantly lower in 2020, compared with 2019, due to negative economic impacts caused by the COVID-19 pandemic.

The Chemicals segment consists of our 50% equity investment in CPChem. The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on supply and demand, as well as cost factors. Compared with 2019, the benchmark high-density polyethylene chain margin was lower in the first three quarters of 2020, before rebounding strongly in the fourth quarter of 2020. The lower margin in the first three quarters of 2020 was mainly due to lower polyethylene sales prices. The significant margin increase in the fourth quarter of 2020 was primarily driven by tight supply caused by hurricane impacts in the Gulf Coast region and a strong global market demand.

Our Refining segment results are driven by several factors, including refining margins, refinery throughput, feedstock costs, product yields, turnaround activity, and other operating costs. The price of U.S. benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, decreased to an average of $39.31 per barrel during 2020, compared with an average of $57.02 per barrel in 2019, due to a significant decline in global demand driven by the adverse impacts of the COVID-19 pandemic. Market crack spreads are used as indicators of refining margins and measure the difference between market prices for refined petroleum products and crude oil. During 2020, the worldwide market crack spreads were significantly lower compared with 2019, mainly driven by a sharp decline in demand for refined petroleum products resulting from the COVID-19 global pandemic.

Results for our M&S segment depend largely on marketing fuel and lubricant margins, and sales volumes of our refined petroleum and other specialty products. While M&S margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are influenced by the trend in spot prices for refined petroleum products. Generally speaking, a downward trend of spot prices has a favorable impact on marketing fuel margins, while an upward trend of spot prices has an unfavorable impact on marketing fuel margins. The global disruption caused by the COVID-19 pandemic significantly reduced demand for our refined petroleum and specialty products in 2020 compared with 2019.

Index to Financial Statements

RESULTS OF OPERATIONS

Consolidated Results

A summary of income (loss) before income taxes by business segment with a reconciliation to net income (loss) attributable to Phillips 66 follows:

			Millions of Dollars
			Year Ended December 31
			2020						2019						2018
Midstream			$	(9)					684						1,181
Chemicals			635						879						1,025
Refining			(6,155)						1,986						4,535
Marketing and Specialties			1,446						1,433						1,557
Corporate and Other			(881)						(804)						(853)
Income (loss) before income taxes			(4,964)						4,178						7,445
Income tax expense (benefit)			(1,250)						801						1,572
Net income (loss)			(3,714)						3,377						5,873
Less: net income attributable to noncontrolling interests			261						301						278
Net income (loss) attributable to Phillips 66			$	(3,975)					3,076						5,595

2020 vs. 2019

Our results decreased $7,051 million in 2020, mainly reflecting:

• Lower realized refining margins and decreased refinery production.

• A goodwill impairment in our Refining segment.

• A long-lived asset impairment associated with our plan to reconfigure the San Francisco Refinery into a renewable fuels facility, which impacted our Refining and Midstream segments.

• Higher impairments of equity investments in our Midstream segment.

These decreases were partially offset by an income tax benefit recognized in 2020, compared with income tax expense recognized in 2019.

2019 vs. 2018

Our earnings decreased $2,519 million in 2019, mainly reflecting:

• Lower realized refining and marketing margins.

• Impairments associated with our equity investment in DCP Midstream.

• Decreased equity in earnings of affiliates in our Refining and Chemicals segments.

These decreases were partially offset by:

• Lower income tax expense.

• Improved results from our NGL and transportation businesses.

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

Index to Financial Statements

Statement of Operations Analysis

2020 vs. 2019

Sales and other operating revenues and purchased crude oil and products both decreased 40% in 2020. The decreases were mainly due to lower prices and volumes for refined petroleum products and crude oil, reflecting the impact of the COVID-19 pandemic.

Equity in earnings of affiliates decreased 44% in 2020. The decrease was primarily due to lower realized refining margins and decreased refinery production at WRB, and lower margins, partially offset by higher sales volumes, at CPChem. See Chemicals segment analysis in the “Segment Results” section for additional information on CPChem.

Net gain on dispositions increased $88 million in 2020. The increase was mainly due to a gain of $84 million associated with a co-venturer’s prior-year acquisition of a 35% interest in Phillips 66 Partners’ consolidated holding company that owns an interest in Gray Oak Pipeline, LLC. See Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information.

Operating expenses decreased 10% in 2020, primarily driven by our company-wide cost reduction initiatives in response to the COVID-19 pandemic, lower utility costs, and decreased refinery turnaround activities.

Impairments increased $3,391 million in 2020. See Note 9—Impairments, and Note 16—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information associated with impairments.

We had an income tax benefit of $1,250 million in 2020, compared with income tax expense of $801 million in 2019, primarily due to a net loss in 2020 versus net income in 2019. See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes.

2019 vs. 2018

Sales and other operating revenues and purchased crude oil and products decreased 4% and 2%, respectively, in 2019. The decreases were mainly driven by lower prices for refined petroleum products, crude oil and NGL.

Equity in earnings of affiliates decreased 21% in 2019. The decrease was mainly due to lower margins at WRB and CPChem, partially offset by improved results from our Transportation and NGL joint venture assets. Lower equity earnings in 2019 also reflected higher goodwill and other asset impairments at DCP Midstream. See the “Segment Results” section for additional information.

Other income increased $58 million in 2019. The increase was mainly driven by trading activities not directly related to our physical business. See Note 15—Derivatives and Financial Instruments, in the Notes to Consolidated Financial Statements, for additional information associated with our commodity derivatives.

Impairments increased $853 million in 2019. The increase was driven by an $853 million before-tax impairment associated with our investment in DCP Midstream recognized in the third quarter of 2019. See Note 9—Impairments, and Note 16—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information associated with this impairment.

Income tax expense (benefit) decreased 49% in 2019. The decrease in income tax expense was primarily attributable to lower income before income taxes. See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes.

Index to Financial Statements

Segment Results

Midstream

			Year Ended December 31
			2020						2019						2018
			Millions of Dollars
Income (Loss) Before Income Taxes
Transportation			$	508					946						770
NGL and Other			441						522						305
DCP Midstream			(958)						(784)						106
Total Midstream			$	(9)					684						1,181

			Thousands of Barrels Daily
Transportation Volumes
Pipelines*			3,005						3,396						3,441
Terminals			2,971						3,315						3,153
Operating Statistics
NGL fractionated**			249						224						216
NGL extracted***			399						417						413

** Pipelines represent the sum of volumes transported through each separately tariffed consolidated pipeline segment.*

*** Excludes DCP Midstream.*

**** Includes 100% of DCP Midstream’s volumes.*

			Dollars Per Gallon
Weighted-Average NGL Price*
DCP Midstream			$	0.41					0.51						0.75

** Based on index prices from the Mont Belvieu market hub, which are weighted by NGL component mix.*

The Midstream segment provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, fractionation, processing and marketing services, mainly in the United States. This segment includes our MLP, Phillips 66 Partners, as well as our 50% equity investment in DCP Midstream, which includes the operations of its MLP, DCP Partners.

2020 vs. 2019

Midstream’s results decreased $693 million in 2020, compared with 2019.

Results from our Transportation business decreased $438 million in 2020, compared with 2019. The decrease was primarily attributable to before-tax impairments of $300 million, decreased equity earnings, lower pipeline and terminal throughput volumes, and higher operating costs, partially offset by an $84 million before-tax gain recognized in the second quarter of 2020 associated with the Gray Oak Pipeline joint venture.

The $300 million before-tax impairments consisted of a $120 million impairment of the pipeline and terminal assets associated with the planned reconfiguration of our San Francisco Refinery into a renewable fuels facility, a $96 million impairment of Phillips 66 Partners’ equity investments in two crude oil logistics joint ventures, and an $84 million impairment of our equity investment in the canceled Red Oak Pipeline project.

See Note 9—Impairments, and Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information regarding the impairments and the $84 million before-tax gain, respectively.

Index to Financial Statements

Results from our NGL and Other business decreased $81 million in 2020, compared with 2019. The decrease was mainly due to lower results from our trading activities and decreased margins, partially offset by higher export cargos and increased fractionation volumes from the startup of Frac 2 and Frac 3 in late 2020, as well as the startup of a new isomerization unit at our Lake Charles Refinery in the second half of 2019.

Results from our investment in DCP Midstream decreased $174 million in 2020, compared with 2019. The decrease was primarily due to higher impairment charges, partially offset by the recognition of a larger benefit to our equity earnings from the amortization of the basis difference associated with the impairments and DCP Midstream’s cost reduction initiatives in response to the challenging business environment. See Note 6—Investments, Loans and Long-Term Receivables, and Note 9—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding the impairments and the associated basis difference amortization related to our investment in DCP Midstream.

See the “Executive Overview and Business Environment” section for information on market factors impacting 2020 results.

2019 vs. 2018

Before-tax income from the Midstream segment decreased $497 million in 2019, compared with 2018, mainly driven by an $853 million before-tax impairment associated with our investment in DCP Midstream and lower equity earnings from DCP Midstream, partially offset by improved results from our Transportation and NGL and Other businesses.

Before-tax income from our Transportation business increased $176 million in 2019, compared with 2018. The increase was mainly driven by higher volumes and pipeline tariffs from our portfolio of consolidated and joint venture assets.

Before-tax income from our NGL and Other business increased $217 million in 2019, compared with 2018. The increase was mainly due to improved margins and volumes, primarily at the Sweeny Hub, and higher equity earnings from certain pipeline affiliates driven by higher volumes.

Before-tax income from our investment in DCP Midstream decreased $890 million in 2019, compared with 2018. The decrease was primarily due to an $853 million before-tax impairment associated with our investment in DCP Midstream and lower equity earnings driven by higher goodwill and other asset impairments at DCP Partners in 2019. See Note 6—Investments, Loans and Long-Term Receivables, Note 9—Impairments, and Note 16—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information regarding our investment in DCP Midstream.

Index to Financial Statements

Chemicals

			Year Ended December 31
			2020						2019						2018
			Millions of Dollars
Income Before Income Taxes			$	635					879						1,025
			Millions of Pounds
CPChem Externally Marketed Sales Volumes*
Olefins and Polyolefins			20,993						20,237						18,977
Specialties, Aromatics and Styrenics			4,367						4,281						4,931
			25,360						24,518						23,908
** Represents 100% of CPChem’s outside sales of produced petrochemical products, as well as commission sales from equity affiliates.*
Olefins and Polyolefins Capacity Utilization (percent)			99		%				97						94

The Chemicals segment consists of our 50% interest in CPChem, which we account for under the equity method. CPChem uses NGL and other feedstocks to produce petrochemicals. These products are then marketed and sold or used as feedstocks to produce plastics and other chemicals. We structure our reporting of CPChem’s operations around two primary business lines: Olefins and Polyolefins (O&P) and Specialties, Aromatics and Styrenics (SA&S). The O&P business line produces and markets ethylene and other olefin products. Ethylene produced is primarily consumed within CPChem for the production of polyethylene, normal alpha olefins and polyethylene pipe. The SA&S business line manufactures and markets aromatics and styrenics products, such as benzene, cyclohexane, styrene and polystyrene. SA&S also manufactures and/or markets a variety of specialty chemical products. Unless otherwise noted, amounts referenced below reflect our net 50% interest in CPChem.

2020 vs. 2019

Before-tax income from the Chemicals segment decreased $244 million in 2020, compared with 2019. The decrease was mainly due to lower margins and decreased earnings from CPChem’s equity affiliates, partially offset by higher sales volumes and a favorable impact from lower-of-cost-or-market adjustments of inventories valued on the last-in-first-out (LIFO) basis attributable to petrochemical product price recovery in 2020.

See the “Executive Overview and Business Environment” section for information on market factors impacting CPChem’s 2020 results.

2019 vs. 2018

Before-tax income from the Chemicals segment decreased $146 million in 2019, compared with 2018. The decrease was mainly due to lower polyethylene margins attributable to additional industry capacity and slower demand growth in Asia. In addition, CPChem recorded lower-of-cost-or-market write-downs of LIFO-valued inventories during 2019, and our portion of the write-downs reduced our equity earnings from CPChem by $65 million, before-tax. The decreases were partially offset by higher polyethylene sales volumes and lower turnaround and maintenance activity during 2019.

Index to Financial Statements

Refining

			Year Ended December 31
			2020						2019						2018
			Millions of Dollars
Income (Loss) Before Income Taxes
Atlantic Basin/Europe			$	(1,224)					608						567
Gulf Coast			(2,077)						364						1,040
Central Corridor			(641)						1,338						2,817
West Coast			(2,213)						(324)						111
Worldwide			$	(6,155)					1,986						4,535
			Dollars Per Barrel
Income (Loss) Before Income Taxes
Atlantic Basin/Europe			$	(7.18)					3.11						3.05
Gulf Coast			(9.71)						1.24						3.55
Central Corridor			(6.96)						12.95						26.50
West Coast			(20.01)						(2.49)						0.81
Worldwide			(10.48)						2.75						6.29
Realized Refining Margins*
Atlantic Basin/Europe			$	2.17					9.33						10.32
Gulf Coast			1.85						7.42						9.48
Central Corridor			7.17						14.91						22.22
West Coast			3.43						9.18						11.20
Worldwide			3.51						9.91						12.99

** See the “Non-GAAP Reconciliations” section for a reconciliation of this non-GAAP measure to the most directly comparable measure under generally accepted accounting principles in the United States (GAAP), income (loss) before income taxes per barrel.*

Index to Financial Statements

			Thousands of Barrels Daily
			Year Ended December 31
			2020						2019						2018
Operating Statistics
Refining operations*
Atlantic Basin/Europe
Crude oil capacity			537						537						537
Crude oil processed			434						497						477
Capacity utilization (percent)			81		%				92						89
Refinery production			470						541						514
Gulf Coast
Crude oil capacity			769						764						752
Crude oil processed			533						725						717
Capacity utilization (percent)			69		%				95						95
Refinery production			586						804						808
Central Corridor
Crude oil capacity			530						515						493
Crude oil processed			431						498						507
Capacity utilization (percent)			81		%				97						103
Refinery production			446						518						530
West Coast
Crude oil capacity			364						364						364
Crude oil processed			279						323						343
Capacity utilization (percent)			77		%				89						94
Refinery production			301						354						373
Worldwide
Crude oil capacity			2,200						2,180						2,146
Crude oil processed			1,677						2,043						2,044
Capacity utilization (percent)			76		%				94						95
Refinery production			1,803						2,217						2,225
** Includes our share of equity affiliates.*

The Refining segment refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates and aviation fuels, at 13 refineries in the United States and Europe.

2020 vs. 2019

Results from the Refining segment decreased $8,141 million in 2020, compared with 2019. The decreased results in 2020 were due to:

• Lower realized refining margins and decreased refinery production. A sharp decline in demand for refined petroleum products resulting from global economic disruption caused by the COVID-19 pandemic led to lower market crack spreads and reduced refinery production in 2020. In addition, hurricane impacts contributed to the lower refinery production in the Gulf Coast region in 2020.

• A before-tax long-lived asset impairment of $910 million in the third quarter of 2020 associated with our plan to reconfigure the San Francisco Refinery into a renewable fuels facility.

• A before-tax goodwill impairment of $1,845 million in the first quarter of 2020.

Index to Financial Statements

Our worldwide refining crude oil capacity utilization rate was 76% and 94% in 2020 and 2019, respectively. The lower utilization rate in 2020 was primarily due to reduced refining runs driven by lower demand for refined petroleum products as a result of the COVID-19 pandemic, as well as hurricane impacts in the Gulf Coast region.

See the “Executive Overview and Business Environment” section for information on industry crack spreads and other market factors impacting this year’s results.

2019 vs. 2018

Before-tax income for the Refining segment decreased $2,549 million in 2019, compared with 2018. The decrease was primarily driven by lower realized refining margins and lower refinery production at certain refineries due to turnaround activities and unplanned downtime. In 2019, the decrease in realized refining margins was primarily due to lower feedstock advantage driven by narrowing heavy crude differentials.

Our worldwide refining crude oil capacity utilization rate was 94% and 95% in 2019 and 2018, respectively.

Index to Financial Statements

Marketing and Specialties

			Year Ended December 31
			2020						2019						2018
			Millions of Dollars
Income Before Income Taxes
Marketing and Other			$	1,271					1,199						1,306
Specialties			175						234						251
Total Marketing and Specialties			$	1,446					1,433						1,557
			Dollars Per Barrel
Income Before Income Taxes
U.S.			$	1.42					1.22						1.21
International			4.84						3.58						5.00
Realized Marketing Fuel Margins*
U.S.			$	1.87					1.57						1.62
International			6.34						4.90						6.87
***** See the “Non-GAAP Reconciliations” section for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure, income before income taxes per barrel.
			Dollars Per Gallon
U.S. Average Wholesale Prices*
Gasoline			$	1.56					2.12						2.20
Distillates			1.47						2.12						2.29
***** On third-party branded refined petroleum product sales, excluding excise taxes.
			Thousands of Barrels Daily
Marketing Refined Petroleum Product Sales
Gasoline			1,021						1,230						1,195
Distillates			895						1,104						975
Other			17						18						18
			1,933						2,352						2,188

The M&S segment purchases for resale and markets refined petroleum products, such as gasoline, distillates and aviation fuels, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products, such as base oils and lubricants.

2020 vs. 2019

Before-tax income from the M&S segment increased $13 million in 2020, compared with 2019. The increase was primarily attributable to higher realized marketing fuel margins, partially offset by lower sales volumes for refined petroleum and specialty products driven by decreased demand.

See the “Executive Overview and Business Environment” section for information on marketing fuel margins and other market factors impacting 2020 results.

2019 vs. 2018

Before-tax income from the M&S segment decreased $124 million in 2019, compared with 2018. The decrease was primarily due to lower realized marketing fuel margins, mainly driven by international marketing, partially offset by higher sales volumes.

Index to Financial Statements

Corporate and Other

			Millions of Dollars
			Year Ended December 31
			2020						2019						2018
Loss Before Income Taxes
Net interest expense			$	(485)					(415)						(459)
Corporate overhead and other			(396)						(389)						(394)
Total Corporate and Other			$	(881)					(804)						(853)

Net interest expense consists of interest and financing expense, net of interest income and capitalized interest. Corporate overhead and other includes general and administrative expenses, technology costs, environmental costs associated with sites no longer in operation, foreign currency transaction gains and losses, and other costs not directly associated with an operating segment.

2020 vs. 2019

Net interest expense increased $70 million in 2020, compared with 2019, primarily due to higher average debt principal balances, reflecting new debt issuances during 2020, along with decreased interest income driven by lower interest rates in 2020. See Note 12—Debt, in the Notes to Consolidated Financial Statements, for additional information on the debt issuances in 2020.

2019 vs. 2018

Net interest expense decreased $44 million in 2019, compared with 2018, mainly due to higher capitalized interest related to capital projects under development in our Midstream segment, partially offset by higher debt balances in 2019.

Index to Financial Statements

CAPITAL RESOURCES AND LIQUIDITY

Financial Indicators

			Millions of Dollars, Except as Indicated
			2020						2019						2018
Cash and cash equivalents			$	2,514					1,614						3,019
Net cash provided by operating activities			2,111						4,808						7,573
Short-term debt			987						547						67
Total debt			15,893						11,763						11,160
Total equity			21,523						27,169						27,153
Percent of total debt to capital*			42		%				30						29
Percent of floating-rate debt to total debt			12		%				9						11
** Capital includes total debt and total equity.*

To meet our short- and long-term liquidity requirements, we use a variety of funding sources but rely primarily on cash generated from operating activities and debt financing. During 2020, we generated $2.1 billion in cash from operations and had net borrowings of $4.1 billion. We used available cash primarily for capital expenditures and investments of $2.9 billion and dividend payments on our common stock of $1.6 billion. During the first quarter of 2020, we repurchased $443 million of common stock before suspending our share repurchase program in March 2020. During 2020, cash and cash equivalents increased $900 million to $2.5 billion.

Significant Sources of Capital

Operating Activities

During 2020, cash generated by operating activities was $2,111 million, a 56% decrease compared with 2019. The decrease was primarily due to lower realized refining margins, driven by the global economic disruption caused by the COVID-19 pandemic, partially offset by lower cash income taxes paid.

During 2019, cash generated by operating activities was $4,808 million, a 37% decrease compared with 2018. The decrease was mainly driven by lower realized refining margins and decreased distributions from our equity affiliates, along with unfavorable working capital impacts, partially offset by improved results from our Transportation and NGL and Other businesses.

Our short- and long-term operating cash flows are highly dependent upon refining and marketing margins, NGL prices and chemicals margins. Prices and margins in our industry are typically volatile, and are driven by market conditions over which we have little or no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows. The recent decline in demand for refined petroleum products has led to a decrease in refining margins. If the global economic disruption associated with the COVID-19 pandemic sustains, we expect refining margins to remain challenged in the near term, all of which could have an unfavorable impact on our future operating cash flows.

The level and quality of output from our refineries also impacts our cash flows. Factors such as operating efficiency, maintenance turnarounds, market conditions, feedstock availability and weather conditions can affect output. We actively manage the operations of our refineries, and any variability in their operations typically has not been as significant to cash flows as that caused by margins and prices. However, the recent decline in demand for refined petroleum products has led to a reduction of our refinery production. If the global economic disruption associated with the COVID-19 pandemic sustains, we expect refinery production, along with marketing, transportation and terminaling volumes, to remain challenged in the near term, which could have an unfavorable impact on our future operating cash flows. Our worldwide refining crude oil capacity utilization was 76%, 94% and 95% in 2020, 2019 and 2018, respectively.

Index to Financial Statements

Equity Affiliate Operating Distributions

Our operating cash flows are also impacted by distribution decisions made by our equity affiliates, including CPChem, DCP Midstream and WRB. Over the three years ended December 31, 2020, our operating cash flows included aggregate distributions from our equity affiliates of $6,406 million, including $290 million from DCP Midstream, $2,490 million from CPChem and $1,230 million from WRB. We cannot control the amount or timing of future distributions from equity affiliates; therefore, future distributions are not assured.

Tax Refunds

An income tax receivable of $1.5 billion is included in the “Accounts and notes receivable” line item on our consolidated balance sheet as of December 31, 2020, which reflects tax refunds we expect to receive within the next 12 months.

Phillips 66 Partners

In 2013, we formed Phillips 66 Partners, a publicly traded MLP, to own, operate, develop and acquire primarily fee-based midstream assets.

Ownership and Restructuring Transaction

On August 1, 2019, Phillips 66 Partners completed a restructuring transaction to eliminate the incentive distribution rights (IDRs) held by us and to convert our 2% economic general partner interest into a noneconomic general partner interest in exchange for 101 million Phillips 66 Partners common units. No distributions were made for the general partner interest after August 1, 2019. At December 31, 2020, we owned 170 million Phillips 66 Partners common units, representing 74% of Phillips 66 Partners’ limited partner units.

We consolidate Phillips 66 Partners as a variable interest entity for financial reporting purposes. See Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on why we consolidate the partnership. As a result of this consolidation, the public common and preferred unitholders’ interests in Phillips 66 Partners are reflected as noncontrolling interests of $2,219 million in our consolidated balance sheet at December 31, 2020.

Debt and Equity Financings

During the three years ended December 31, 2020, Phillips 66 Partners raised net proceeds of approximately $1 billion from the following third-party debt and equity offerings:

• In September 2019, Phillips 66 Partners received net proceeds of $892 million from the issuance of $300 million of 2.450% Senior Notes due December 2024 and $600 million of 3.150% Senior Notes due December 2029.

• In March 2019, Phillips 66 Partners entered into a senior unsecured term loan facility with a borrowing capacity of $400 million due March 20, 2020. Phillips 66 Partners borrowed an aggregate amount of $400 million under the facility during the first half of 2019, which was repaid in full in September 2019.

• Phillips 66 Partners has authorized an aggregate of $750 million under three $250 million continuous offerings of common units, or at-the-market (ATM) programs. Phillips 66 Partners completed the first two programs in June 2018 and December 2019, respectively. For the three years ended December 31, 2020, net proceeds of $303 million have been received under these programs.

Phillips 66 Partners primarily used these net proceeds to fund the cash portion of acquisitions of assets from Phillips 66 and for capital spending and investments. See Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information regarding Phillips 66 Partners.

Index to Financial Statements

Transfers of Equity Interests

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 our Sweeny Refinery. Phillips 66 Partners has a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. In December 2018, a third party acquired a 35% interest in the holding company. Because the holding company’s sole asset was its 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 the holding company during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP at that time. 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 operations. For the year ended December 31, 2020, the co-venturer contributed an aggregate of $61 million to the holding company to fund its portion of Gray Oak Pipeline, LLC’s cash calls. Phillips 66 Partners’ effective ownership interest in Gray Oak Pipeline, LLC is 42.25% , after considering the co-venturer’s 35% interest in the consolidated holding company. See Note 6—Investments, Loans and Long-Term Receivables, for further discussion regarding Phillips 66 Partners’ investment in Gray Oak Pipeline, LLC.

Revolving Credit Facilities and Commercial Paper

Phillips 66 has a $5 billion revolving credit facility which may be used for direct bank borrowings, as support for issuances of letters of credit, and as support for our commercial paper program. We have an option to increase the overall capacity to $6 billion, subject to certain conditions. We also have the option to extend the scheduled maturity of the facility for up to 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 a maximum consolidated net debt-to-capitalization ratio of 65% as of the last day of each fiscal quarter. 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 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 the ratings in effect for Phillips 66’s senior unsecured long-term debt from time to time. Phillips 66 may at any time prepay outstanding borrowings under the facility, in whole or in part, without premium or penalty. At December 31, 2020 and 2019, no amount had been drawn under the facility.

Phillips 66 also has a $5 billion uncommitted commercial paper program for short-term working capital needs that is supported by our revolving credit facility. Commercial paper maturities are contractually limited to 365 days. At December 31, 2020 and 2019, no borrowings were outstanding under the program.

Index to Financial Statements

Phillips 66 Partners has a $750 million revolving credit facility which may be used for direct bank borrowings and as support for issuances of letters of credit. Phillips 66 Partners has an option to increase the overall capacity to $1 billion, subject to certain conditions. Phillips 66 Partners also has 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. 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 Phillips 66 Partners’ 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 Phillips 66 Partners’ credit ratings in effect from time to time. Borrowings under this facility may be short-term or long-term in duration, and Phillips 66 Partners may at any time prepay outstanding borrowings under the facility, in whole or in part, without premium or penalty. At December 31, 2020, borrowings of $415 million were outstanding under this facility, compared with no borrowings outstanding at December 31, 2019. At both December 31, 2020 and 2019, $1 million in letters of credit had been issued that were supported by this facility.

We had approximately $5.3 billion and $5.7 billion of total committed capacity available under our revolving credit facilities at December 31, 2020 and 2019, respectively.

Other Debt Issuances and Financings

Senior Unsecured Notes

On November 18, 2020, Phillips 66 closed its public offering of $1.75 billion aggregate principal amount of senior unsecured notes consisting of:

• $450 million aggregate principal amount of Floating Rate Senior Notes due 2024 (the Floating Rate Notes).

• $800 million aggregate principal amount of 0.900% Senior Notes due 2024.

• $500 million aggregate principal amount of 1.300% Senior Notes due 2026.

The Floating Rate Notes will bear interest at a floating rate, reset quarterly, equal to the three-month London Interbank Offered Rate (LIBOR) plus 0.62% per year, subject to adjustment. Interest on the Senior Notes due 2024 and 2026 is payable semiannually on February 15 and August 15 of each year, commencing on February 15, 2021.

Proceeds received from the public offering of senior unsecured notes on November 18, 2020, were $1.74 billion, net of underwriters’ discounts and commissions, as well as debt issuance costs. On November 19, 2020, a portion of these proceeds were used to repay $500 million of outstanding borrowings under the term loan facility that Phillips 66 entered into in March 2020 (see the “Term Loan Facility” section below for a full description of the term loan facility). In addition, a portion of the proceeds will be used to repay the $500 million aggregate principal amount of our outstanding Floating Rate Senior Notes due February 2021. The remainder of the proceeds are being used for general corporate purposes.

Index to Financial Statements

On June 10, 2020, Phillips 66 closed its public offering of $1 billion aggregate principal amount of senior unsecured notes consisting of:

• $150 million aggregate principal amount of 3.850% Senior Notes due 2025.

• $850 million aggregate principal amount of 2.150% Senior Notes due 2030.

On April 9, 2020, Phillips 66 closed its public offering of $1 billion aggregate principal amount of senior unsecured notes consisting of:

• $500 million aggregate principal amount of 3.700% Senior Notes due 2023.

• $500 million aggregate principal amount of 3.850% Senior Notes due 2025.

Interest on the Senior Notes due 2023 is payable semiannually on April 6 and October 6 of each year, commencing on October 6, 2020. The Senior Notes due 2025 issued on June 10, 2020, constitute a further issuance of the Senior Notes due 2025 originally issued on April 9, 2020. The $650 million in aggregate principal amount of Senior Notes due 2025 is treated as a single class of debt securities. Interest on the Senior Notes due 2025 is payable semiannually on April 9 and October 9 of each year, commencing on October 9, 2020. Interest on the Senior Notes due 2030 is payable semiannually on June 15 and December 15 of each year, commencing on December 15, 2020.

Proceeds received from the public offerings of senior unsecured notes on June 10, 2020, and April 9, 2020, were $1,008 million and $993 million, respectively, net of underwriters’ discounts or premiums and commissions, as well as debt issuance costs. These proceeds are being used for general corporate purposes.

Term Loan Facility

On March 19, 2020, Phillips 66 entered into a $1 billion 364-day delayed draw term loan agreement (the Facility) and borrowed $1 billion under the Facility shortly thereafter. On April 6, 2020, Phillips 66 increased the size of the Facility to $2 billion, and in June 2020, the Facility was amended to extend the commitment period to September 19, 2020. We did not draw additional amounts under the Facility before the end of the commitment period or further extend the commitment period. In November 2020, we repaid $500 million of borrowings outstanding under the Facility, and the Facility was amended to extend the maturity date of the remaining $500 million outstanding borrowings from March 18, 2021, to November 20, 2023. Borrowings under the Facility bear interest at a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by the credit rating of Phillips 66’s senior unsecured long-term debt. Phillips 66 is using the proceeds for general corporate purposes.

Availability of Debt Financing

We have a BBB+ credit rating, with a negative outlook, from Standard & Poor’s and an A3 credit rating, with a negative outlook, from Moody’s Investors Service. These investment grade ratings have served to lower our borrowing costs and facilitate access to a variety of lenders. We do not have any ratings triggers on any of our corporate debt that would cause an automatic default, and thereby impact our access to liquidity, in the event of a rating downgrade. Failure to maintain strong investment grade ratings could prohibit us from accessing the commercial paper market, although we would expect to be able to access funds under our liquidity facilities mentioned above.

Index to Financial Statements

Off-Balance Sheet Arrangements

Lease Residual Value Guarantees

In September 2020, we amended the operating lease agreement for our headquarters facility in Houston, Texas, and extended the lease term from June 2021 to September 2025. Under this agreement, we have the option, at the end of the lease term, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at December 31, 2020. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future payments totaling $381 million. These operating leases have remaining terms of up to nine years.

Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)

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, Phillips 66 Partners and its coventurers 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 ongoing litigation related to an easement granted by the U.S. Army Corps of Engineers (USACE) to allow the pipeline to be constructed under Lake Oahe in North Dakota. 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, 2020, Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU was approximately $631 million and the aggregate book value of Phillips 66 Partners’ investments in Dakota Access and ETCO was $577 million.

In March 2020, the trial court presiding over this litigation ordered the USACE to prepare an Environmental Impact Statement (EIS) and requested additional information to enable a decision on whether the Dakota Access Pipeline should be shut down while the EIS is being prepared. In July 2020, the trial court ordered the Dakota Access Pipeline to be shut down and emptied of crude oil within 30 days and that the pipeline should remain shut down pending the preparation of the EIS by the USACE, which the USACE has indicated is expected to take approximately 13 months. Dakota Access filed an appeal and a request for a stay of the order, which was granted. In January 2021, the appellate court affirmed the trial court’s order that: (1) vacated Dakota Access’s easement under Lake Oahe, and (2) directed the USACE to prepare an EIS. The appellate court did not affirm the trial court’s order that the Dakota Access Pipeline be shut down and emptied of crude oil. However, the appellate court acknowledged the precise consequences of the vacated easement remain uncertain. Since the pipeline is now an encroachment, the USACE could seek a shutdown of the pipeline during the preparation of the EIS. Alternatively, the trial court could again issue an injunction that the pipeline be shut down, assuming it makes all findings necessary for injunctive relief. A status hearing is scheduled for April 9, 2021, at which time the parties will discuss the appellate court’s decision and how the USACE plans to proceed given the vacating of the easement.

If the pipeline is required to cease operations pending the preparation of the EIS, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, Phillips 66 Partners also could be required to support its 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.

Index to Financial Statements

Gray Oak Pipeline, LLC

Gray Oak Pipeline, LLC had a third-party term loan facility with a borrowing capacity of $1,379 million, inclusive of accrued interest. Phillips 66 Partners and its 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, plus any additional accrued interest and associated fees, if Gray Oak Pipeline, LLC defaulted on certain of its obligations thereunder. In September 2020, Gray Oak Pipeline, LLC fully repaid the outstanding balance of the term loan facility, and the associated equity contribution agreement was terminated.

See Note 13—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.

Index to Financial Statements

Capital Requirements

Capital Expenditures and Investments

For information about our capital expenditures and investments, see the “Capital Spending” section below.

Debt Financing

Our debt balance at December 31, 2020, was $15.9 billion and our total debt-to-capital ratio was 42%.

See Note 12—Debt, in the Notes to Consolidated Financial Statements, for our annual debt maturities over the next five years and more information on debt repayments.

Debt Incurred During 2020

As noted in “Significant Sources of Capital,” Phillips 66 received approximately $4.7 billion in proceeds from debt issuances during 2020, while repaying approximately $1.0 billion of debt. Phillips 66 Partners had net borrowings of $415 million under its revolving credit facility during 2020. The net increase in debt of $4.1 billion reflects our response to the COVID-19 pandemic’s negative impacts on our operating cash flows. As economic conditions improve and our operating cash flows return to more typical levels, we will continue to prioritize funding sustaining capital expenditures and the company’s dividend. After these cash flow needs, we expect to prioritize repayment of debt, with an objective of maintaining our investment grade credit ratings and reducing our debt to pre-pandemic levels. We intentionally structured the maturities and call options of our debt issued in 2020 to facilitate these objectives. Additionally, restarting our share repurchase program remains a priority once operating cash flows exceed amounts needed to fulfill the other priorities stated above and assuming our shares are trading below intrinsic value.

Joint Venture Loans

During 2020, we and our co-venturer provided member loans to WRB. At December 31, 2020, our share of the loan balance was $277 million. The need for additional loans to WRB in 2021, as well as WRB’s repayment schedule, will depend on market conditions.

Dividends

On February 10, 2021, our Board of Directors declared a quarterly cash dividend of $0.90 per common share, payable March 1, 2021, to holders of record at the close of business on February 22, 2021. We expect that our Board of Directors will continue to declare quarterly dividends in 2021.

Share Repurchases

Since July 2012, our Board of Directors has authorized an aggregate of $15 billion of repurchases of our outstanding common stock. The authorizations do not have expiration dates. The share repurchases are expected to be funded primarily through available cash. We are not obligated to repurchase any shares of common stock pursuant to these authorizations and may commence, suspend or terminate repurchases at any time. Since the inception of our share repurchase program in 2012, we have repurchased 159 million shares at an aggregate cost of $12.5 billion. Shares of stock repurchased are held as treasury shares. We suspended share repurchases in mid-March 2020 to preserve liquidity in response to the global economic disruption caused by the COVID-19 pandemic.

Index to Financial Statements

Contractual Obligations

The following table summarizes our aggregate contractual fixed and variable obligations as of December 31, 2020:

			Millions of Dollars
			Payments Due by Period
			Total						Up to 1 Year						Years 2-3						Years 4-5						After 5 Years
Debt obligations (a)			$	15,716					965						3,000						2,700						9,051
Finance lease obligations			264						16						30						32						186
Software obligations			19						6						10						3						—
Total debt			15,999						987						3,040						2,735						9,237
Interest on debt			7,434						568						998						866						5,002
Operating lease obligations			1,372						406						455						240						271
Purchase obligations (b)			76,887						28,946						9,742						8,099						30,100
Other long-term liabilities (c)
Asset retirement obligations			309						9						40						29						231
Accrued environmental costs			427						70						131						65						161
Repatriation income tax liability (d)			88						9						27						52						—
Total			$	102,516					30,995						14,433						12,086						45,002

(a)For additional information, see Note 12—Debt, in the Notes to Consolidated Financial Statements.

(b)Represents any agreement to purchase goods or services that is enforceable, legally binding and specifies all significant terms. We expect these purchase obligations will be fulfilled with operating cash flows in the applicable maturity period. The majority of the purchase obligations are market-based contracts, including exchanges and futures, for the purchase of products such as crude oil and raw NGL. The products are used to supply our refineries and fractionators and optimize our supply chain. Product purchase commitments with third parties totaled $29,551 million. Related party purchase commitments totaled $31,729 million and included purchases from CPChem, DCP Midstream and other equity affiliates.

Purchase obligations of $4,027 million are related to agreements to access and utilize the capacity of third-party equipment and facilities, including pipelines and product terminals, to transport, process, treat, and store products. The remainder is primarily our net share of purchase commitments for materials and services for jointly owned facilities where we are the operator.

(c)Excludes pensions and unrecognized income tax benefits. From 2021 through 2025, we expect to contribute an average of $125 million per year to our qualified and nonqualified pension and other postretirement benefit plans in the United States and an average of $30 million per year to our non-U.S. plans. The U.S. five-year average consists of approximately $40 million for 2021 and $145 million per year for the remaining four years. Our minimum funding in 2021 is expected to be $40 million in the United States and $30 million outside the United States.

This amount also excludes unrecognized tax benefits of $56 million because the ultimate disposition and timing of any tax payments to be made with regard to such amounts are not reasonably estimable or the amounts relate to potential refunds. This amount also excludes interest of $5 million. Although unrecognized tax benefits are not a contractual obligation, they represent potential demands on our liquidity.

(d)We elected to pay the one-time deemed repatriation income tax on foreign-sourced earnings, recognized as a result of the Tax Act enacted in December 2017, in installments over eight years beginning in 2018. The amount represents the remaining income tax liability.

Index to Financial Statements

Capital Spending

Our capital expenditures and investments represent consolidated capital spending. 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 our consolidated capital spending funded by certain joint venture partners.

			Millions of Dollars
			2021 Budget						2020						2019						2018
Capital Expenditures and Investments
Midstream			$	615					1,747						2,292						1,548
Chemicals			—						—						—						—
Refining			776						816						1,001						826
Marketing and Specialties			116						173						374						125
Corporate and Other			166						184						206						140
Total Capital Expenditures and Investments			1,673						2,920						3,873						2,639
Less: capital spending funded by certain joint venture partners*			5						61						423						—
Adjusted Capital Spending			$	1,668					2,859						3,450						2,639
Selected Equity Affiliates**
DCP Midstream			$	55					119						472						484
CPChem			410						284						382						339
WRB			242						175						175						156
			$	707					578						1,029						979

** Included in the Midstream segment.*

*** Our share of joint venture’s capital spending.*

Midstream

Capital spending in our Midstream segment during the three-year period ended December 31, 2020, included:

• Continued development of additional Gulf Coast fractionation capacity. During 2020, Phillips 66 commenced operations of two new NGL fractionators (Frac 2 and Frac 3) at the Sweeny Hub in Texas.

• Contributions by Phillips 66 Partners to fund the Gray Oak Pipeline project and South Texas Gateway Terminal development activities.

• Construction activities on Phillips 66 Partners’ C2G Pipeline that will connect its Clemens Caverns storage facility to petrochemical facilities in Gregory, Texas.

• Contributions to joint ventures to develop and construct crude oil pipeline systems, including the Liberty Pipeline system.

• Construction activities to increase storage and export capacity at our Beaumont Terminal.

• Construction of Phillips 66 Partners’ Sweeny to Pasadena refined petroleum product pipeline.

• Construction of Phillips 66 Partners’ new isomerization unit at the Lake Charles Refinery.

• Contributions to Bayou Bridge Pipeline, LLC, a Phillips 66 Partners’ 40 percent-owned joint venture, for the construction of a pipeline from Nederland, Texas, to Lake Charles, Louisiana, and a pipeline segment from Lake Charles to St. James, Louisiana.

• Spending associated with other return, reliability and maintenance projects in our Transportation and NGL businesses.

Index to Financial Statements

In March 2020, the development and construction of our Red Oak Pipeline system and Sweeny Frac 4, as well as Phillips 66 Partners’ Liberty Pipeline system projects, were deferred as a result of the challenging business environment. In the third quarter of 2020, the Red Oak Pipeline project was canceled. We plan to resume construction of Sweeny Frac 4 in the second half of 2021.

During the three-year period ended December 31, 2020, DCP Midstream’s self-funded capital expenditures and investments were $2.1 billion on a 100% basis. Capital spending during this period was primarily for expansion projects and maintenance capital expenditures for existing assets. Expansion projects included construction of the Latham II offload facilities, the Cheyenne Connector, and the Mewbourn 3 and O’Connor 2 plants, as well as investments in the Sand Hills, Southern Hills and Gulf Coast Express pipeline joint ventures.

Chemicals

During the three-year period ended December 31, 2020, CPChem had a self-funded capital program that totaled $2.0 billion on a 100% basis. The capital spending was primarily for the development of U.S. Gulf Coast petrochemical projects, debottlenecking projects on existing assets, and the development of a petrochemicals complex in Qatar.

Refining

Capital spending for the Refining segment during the three-year period ended December 31, 2020, was $2.6 billion, primarily for refinery upgrade projects to enhance the yield of high-value products, renewable diesel projects, improvements to the operating integrity of key processing units, and safety-related projects.

Key projects completed during the three-year period included:

• Installation of facilities to improve clean product yield at the Bayway and Lake Charles refineries, as well as the jointly owned Borger and Wood River refineries.

• Installation of facilities to improve product value at the Bayway and Sweeny refineries.

• Installation of facilities to improve processing of advantaged crude at the Lake Charles refinery.

• Installation of facilities to comply with the EPA Tier 3 gasoline regulations at the Bayway and Ferndale refineries.

Marketing and Specialties

Capital spending for the M&S segment during the three-year period ended December 31, 2020, was primarily for an investment in a U.S. West Coast retail marketing joint venture, and the acquisition, development and enhancement of retail sites in Europe.

Corporate and Other

Capital spending for Corporate and Other during the three-year period ended December 31, 2020, was primarily for information technology and facilities.

Index to Financial Statements

2021 Budget

Our 2021 capital budget is $1.7 billion, including $305 million of Phillips 66 Partners’ planned capital spending. Our projected $1.7 billion capital budget excludes our portion of planned capital spending by our major joint ventures DCP Midstream, CPChem and WRB totaling $707 million. Phillips 66 Partners’ planned capital spending of $305 million includes $5 million of capital expected to be funded by a joint venture partner.

The Midstream capital budget is $615 million, of which $5 million is expected to be funded by a joint venture partner. The Midstream growth capital budget is directed toward completing near-term committed and optimization projects, including the construction of Sweeny Frac 4 and the completion of the C2G Pipeline. Sustaining capital will be used to enhance asset integrity and reliability. Refining’s capital budget of $776 million includes $521 million of sustaining capital for reliability, safety and environmental projects. The Refining budget includes $255 million for high-return, quick-payout projects to enhance margins by improving clean product yields and reducing feedstock costs, as well as investments to competitively position the company for a lower carbon future. The Refining budget also includes pre-construction engineering and design costs related to the company’s plans to reconfigure the San Francisco Refinery in Rodeo, California, to produce renewable fuels. The M&S capital budget of $116 million primarily reflects the development and improvement of our international retail sites. The Corporate and Other capital budget of $166 million will primarily fund digital transformation projects, including a new enterprise resource planning system.

Index to Financial Statements

Contingencies

A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

Legal and Tax Matters

Our legal and tax matters are handled by our legal and tax organizations. These organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions. We employ a litigation management process to manage and monitor the legal proceedings. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required. In the case of income tax-related contingencies, we monitor tax legislation and court decisions, the status of tax audits and the statute of limitations within which a taxing authority can assert a liability. See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information about income tax-related contingencies.

Environmental

We are subject to international, federal, state and local environmental laws and regulations. Among the most significant of these international and federal environmental laws and regulations are the:

• U.S. Federal Clean Air Act, which governs air emissions.

• U.S. Federal Clean Water Act, which governs discharges into water bodies.

• European Union Regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), which governs production, marketing and use of chemicals.

• U.S. Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which imposes liability on generators, transporters and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur.

• U.S. Federal Resource Conservation and Recovery Act (RCRA), which governs the treatment, storage and disposal of solid waste.

• U.S. Federal Emergency Planning and Community Right-to-Know Act (EPCRA), which requires facilities to report toxic chemical inventories to local emergency planning committees and response departments.

Index to Financial Statements

• U.S. Federal Oil Pollution Act of 1990 (OPA90), under which owners and operators of onshore facilities and pipelines as well as owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States.

• European Union Trading Directive resulting in the European Union Emissions Trading Scheme (EU ETS), which uses a market-based mechanism to incentivize the reduction of greenhouse gas (GHG) emissions, as well as the United Kingdom Emissions Trading Scheme (UK ETS), which will replace the EU ETS in the United Kingdom beginning April 30, 2021.

These laws and their implementing regulations set limits on emissions and, in the case of discharges to water, establish water quality limits. They also, in most cases, require permits in association with new or modified operations. These permits can require an applicant to collect substantial information in connection with the application process, which can be expensive and time consuming. In addition, there can be delays associated with notice and comment periods and the agency’s processing of the application. Many of the delays associated with the permitting process are beyond the control of the applicant.

Other foreign countries and many states where we operate also have, or are developing, similar environmental laws and regulations governing these same types of activities. While similar, in some cases these regulations may impose additional, or more stringent, requirements that can add to the cost and difficulty of developing infrastructure and marketing and transporting products across state and international borders. For example, in California the South Coast Air Quality Management District (SCAQMD) approved amendments to the Regional Clean Air Incentives Market (RECLAIM) that became effective in 2016, which require a phased reduction of nitrogen oxide emissions through 2022, affecting refineries in the Los Angeles metropolitan area. In 2017, SCAQMD required additional nitrogen dioxide emissions reductions through 2025 and is now promulgating new regulations to replace the RECLAIM program with a traditional command and control regulatory regime.

The ultimate financial impact arising from environmental laws and regulations is neither clearly known nor easily determinable as new standards, such as air emission standards, water quality standards and stricter fuel regulations, continue to evolve. However, environmental laws and regulations, including those that may arise to address concerns about global climate change, are expected to continue to have an increasing impact on our operations in the United States and in other countries in which we operate. Notable areas of potential impacts include air emissions compliance and remediation obligations in the United States.

An example of this in the fuels area is the Energy Independence and Security Act of 2007 (EISA). It requires fuel producers and importers to provide additional renewable fuels for transportation motor fuels and stipulates a mix of various types. RINs form the mechanism used by the EPA to record compliance with the Renewable Fuel Standard. If an obligated party has more RINs than it needs to meet its obligation, it may sell or trade the extra RINs, or instead choose to “bank” them for use the following year. We have met the stringent requirements to date while establishing implementation, operating and capital strategies, along with advanced technology development, to address projected future requirements. It is uncertain how various future requirements contained in EISA, and the regulations promulgated thereunder, may be implemented and what their full impact may be on our operations. For the 2020 compliance year, the EPA set volumes of advanced and total renewable fuels required to be blended into transportation fuels at higher levels than in previous years; it is uncertain if these increased obligations will be achievable by fuel producers and shippers without drawing on the RIN bank. Additionally, we may experience a decrease in demand for refined petroleum products due to the regulatory program as currently promulgated. This program continues to be the subject of possible Congressional review and re-promulgation in revised form, and the EPA’s regulations pertaining to the 2019 and 2020 compliance years are subject to legal challenge, further creating uncertainty regarding renewable fuel volume requirements and obligations. Uncertainty also exists surrounding compliance year 2021, as the EPA has not yet promulgated standards for that compliance year, although we expect the EPA to follow its past practice of using its authority to reduce the statutorily required volumes under EISA of advanced and total renewable fuels required to be blended into transportation fuels. Compliance with the regulation has been further complicated as the market for RINs has been the subject of fraudulent third-party activity, and it is possible that some RINs that we have purchased may be determined to be invalid. Should that occur, we could incur costs to replace those fraudulent RINs. Although the cost for replacing any fraudulently marketed RINs is not reasonably estimable at this time, we would not expect such costs to have a material impact on our results of operations or financial condition.

Index to Financial Statements

We also are subject to certain laws and regulations relating to environmental remediation obligations associated with current and past operations. Such laws and regulations include CERCLA and RCRA and their state equivalents. Remediation obligations include cleanup responsibility arising from petroleum releases from underground storage tanks located at numerous previously and currently owned and/or operated petroleum-marketing outlets throughout the United States. Federal and state laws require contamination caused by such underground storage tank releases be assessed and remediated to meet applicable standards. In addition to other cleanup standards, many states have adopted cleanup criteria for methyl tertiary-butyl ether (MTBE) for both soil and groundwater.

At RCRA-permitted facilities, we are required to assess environmental conditions. If conditions warrant, we may be required to remediate contamination caused by prior operations. In contrast to CERCLA, which is often referred to as “Superfund,” the cost of corrective action activities under RCRA corrective action programs typically is borne solely by us. We anticipate increased expenditures for RCRA remediation activities may be required, but such annual expenditures for the near term are not expected to vary significantly from the range of such expenditures we have experienced over the past few years. Longer-term expenditures are subject to considerable uncertainty and may fluctuate significantly.

We occasionally receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging that we are a potentially responsible party under CERCLA or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. As of December 31, 2019, we reported that we had been notified of potential liability under CERCLA and comparable state laws at 27 sites within the United States. During 2020, we were notified of one previously resolved site that was returned to active status and three sites that were deemed resolved and closed, leaving 25 unresolved sites with potential liability at December 31, 2020.

For the majority of Superfund sites, our potential liability will be less than the total site remediation costs because the percentage of waste attributable to us, versus that attributable to all other potentially responsible parties, is relatively low. Although liability of those potentially responsible is generally joint and several for federal sites and frequently so for state sites, other potentially responsible parties at sites where we are a party typically have had the financial strength to meet their obligations, and where they have not, or where potentially responsible parties could not be located, our share of liability has not increased materially. Many of the sites for which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or attain a settlement of liability. Actual cleanup costs generally occur after the parties obtain the EPA or equivalent state agency approval of a remediation plan. There are relatively few sites where we are a major participant, and given the timing and amounts of anticipated expenditures, neither the cost of remediation at those sites nor such costs at all CERCLA sites, in the aggregate, is expected to have a material adverse effect on our competitive or financial condition.

Expensed environmental costs were $610 million in 2020 and are expected to be approximately $720 million per year in 2021 and 2022. Capitalized environmental costs were $131 million in 2020 and are expected to be approximately $105 million and $140 million, in 2021 and 2022, respectively. These amounts do not include capital expenditures made for other purposes that have an indirect benefit on environmental compliance.

Accrued liabilities for remediation activities are not reduced for potential recoveries from insurers or other third parties and are not discounted (except those assumed in a business combination, which we record on a discounted basis).

Many of these liabilities result from CERCLA, RCRA and similar state laws that require us to undertake certain investigative and remedial activities at sites where we conduct, or once conducted, operations or at sites where our generated waste was disposed. We also have accrued for a number of sites we identified that may require environmental remediation, but which are not currently the subject of CERCLA, RCRA or state enforcement activities. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the future, we may incur significant costs under both CERCLA and RCRA. Remediation activities vary substantially in duration and cost from site to site, depending on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, and the presence or absence of potentially liable third parties. Therefore, it is difficult to develop reasonable estimates of future site remediation costs.

Index to Financial Statements

Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in certain of our operations and products, and there can be no assurance that those costs and liabilities will not be material. However, we currently do not expect any material adverse effect on our results of operations or financial position as a result of compliance with current environmental laws and regulations.

Climate Change

There has been a broad range of proposed or promulgated state, national and international laws focusing on GHG emissions reduction, including various regulations proposed or issued by the EPA. These proposed or promulgated laws apply or could apply in states and/or countries where we have interests or may have interests in the future. Laws regulating GHG emissions continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws potentially could have a material impact on our results of operations and financial condition as a result of increasing costs of compliance, lengthening project implementation and agency reviews, or reducing demand for certain hydrocarbon products. Examples of legislation or precursors for possible regulation that do or could affect our operations include:

• EU ETS, which is part of the European Union’s policy to combat climate change and is a key tool for reducing industrial GHG emissions. EU ETS impacts factories, power stations and other installations across all EU member states. As a result of the United Kingdom’s exit from the European Union (BREXIT), those types of entities in the United Kingdom will be subject to the UK ETS, rather than the EU ETS, beginning April 30, 2021.

• California’s Senate Bill No. 32, which requires reduction of California's GHG emissions to 40% below the 1990 emission level by 2030, and Assembly Bill 398, which extends the California GHG emission cap and trade program through 2030. Other GHG emissions programs in the western U.S. states have been enacted or are under consideration or development, including amendments to California's Low Carbon Fuel Standard, Oregon's Low Carbon Fuel Standard, and Washington's carbon reduction programs.

• The U.S. Supreme Court decision in Massachusetts v. EPA, 549 U.S. 497, 127 S. Ct. 1438 (2007), confirming that the EPA has the authority to regulate carbon dioxide as an “air pollutant” under the Federal Clean Air Act.

• The EPA’s announcement on March 29, 2010 (published as “Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs,” 75 Fed. Reg. 17004 (April 2, 2010)), and the EPA’s and U.S. Department of Transportation’s joint promulgation of a Final Rule on April 1, 2010, that triggers regulation of GHGs under the Clean Air Act. These collectively may lead to more climate-based claims for damages, and may result in longer agency review time for development projects to determine the extent of potential climate change.

• The EPA's 2015 Final Rule regulating GHG emissions from existing fossil fuel-fired electrical generating units under the Federal Clean Air Act, commonly referred to as the Clean Power Plan. The EPA commenced rulemaking in 2017 to rescind the Clean Power Plan and, in August 2018, the EPA proposed the Affordable Clean Energy (ACE) rule as its replacement. On January 19, 2021, the U.S. Court of Appeals for the District of Columbia invalidated the ACE rule and remanded the matter to the EPA, essentially restarting this rulemaking process.

• Carbon taxes in certain jurisdictions.

• GHG emission cap and trade programs in certain jurisdictions.

In the EU, the first phase of the EU ETS completed at the end of 2007. Phase II was undertaken from 2008 through 2012, and Phase III ran from 2013 through to 2020. Phase IV runs from January 1, 2021 through 2030 and sectors covered under the ETS must reduce their GHG emissions by 43% compared to 2005 levels. From April 30, 2021, the United Kingdom will no longer be part of the EU ETS and has launched the UK ETS. Phillips 66 has assets that are subject to the EU ETS and assets that will be subject to the UK ETS.

Index to Financial Statements

From November 30 to December 12, 2015, more than 190 countries, including the United States, participated in the United Nations Climate Change Conference in Paris, France. The conference culminated in what is known as the “Paris Agreement,” which, upon certain conditions being met, entered into force on November 4, 2016. The Paris Agreement establishes a commitment by signatory parties to pursue domestic GHG emission reductions. In 2017, President Trump announced his intention to withdraw the United States from the Paris Agreement and that withdrawal became effective on November 4, 2020. On January 20, 2021, President Biden signed the “Acceptance on Behalf of the United States of America,” which allows the United States to rejoin the Paris Agreement. The United States officially rejoined the Paris Agreement in February 2021, which could lead to additional GHG emission reduction requirements for sources in the United States.

In the United States, some additional form of regulation is likely to be forthcoming in the future at the state or federal levels with respect to GHG emissions. Such regulation could take any of several forms that may result in additional financial burden in the form of taxes, the restriction of output, investments of capital to maintain compliance with laws and regulations, or required acquisition or trading of emission allowances.

Compliance with changes in laws and regulations that create a GHG emission trading program, GHG reduction requirements or carbon taxes could significantly increase our costs, reduce demand for fossil energy derived products, impact the cost and availability of capital and increase our exposure to litigation. Such laws and regulations could also increase demand for less carbon intensive energy sources.

An example of one such program is California’s cap and trade program, which was promulgated pursuant to the State’s Global Warming Solutions Act. The program had been limited to certain stationary sources, which include our refineries in California, but beginning in January 2015 was expanded to include emissions from transportation fuels distributed in California. Inclusion of transportation fuels in California’s cap and trade program as currently promulgated has increased our cap and trade program compliance costs. The ultimate impact on our financial performance, either positive or negative, from this and similar programs, will depend on a number of factors, including, but not limited to:

• Whether and to what extent legislation or regulation is enacted.

• The nature of the legislation or regulation, such as a cap and trade system or a tax on emissions.

• The GHG reductions required.

• The price and availability of offsets.

• The demand for, and amount and allocation of allowances.

• Technological and scientific developments leading to new products or services.

• Any potential significant physical effects of climate change, such as increased severe weather events, changes in sea levels and changes in temperature.

• Whether, and the extent to which, increased compliance costs are ultimately reflected in the prices of our products and services.

We consider and take into account anticipated future GHG emissions in designing and developing major facilities and projects, and implement energy efficiency initiatives to reduce GHG emissions. Data on our GHG emissions, legal requirements regulating such emissions, and the possible physical effects of climate change on our coastal assets are incorporated into our planning, investment, and risk management decision-making. We are working to continuously improve operational and energy efficiency through resource and energy conservation throughout our operations.

Index to Financial Statements

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to select appropriate accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. See Note 1—Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, for descriptions of our major accounting policies. Some of these accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts would have been reported under different conditions, or if different assumptions had been used. The following discussion of critical accounting estimates, along with the discussion of contingencies in this report, address all important accounting areas where the nature of accounting estimates or assumptions could be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change.

Impairment of Long-Lived Assets and Equity Method Investments

Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in future expected cash flows. If the sum of the undiscounted expected future before-tax cash flows of an asset group is less than the carrying value, including applicable liabilities, the carrying value is written down to estimated fair value. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined using one or more of the following methods: 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; a market multiple for similar assets; historical market transactions including similar assets, adjusted using principal market participant assumptions when necessary; or replacement cost adjusted for physical deterioration and economic obsolescence. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments, including future volumes, commodity prices, operating costs, margins, discount rates and capital project decisions, considering all available information at the date of review.

Investments in nonconsolidated entities accounted for under the equity method are assessed for impairment when there are indicators of a loss in value, such as a lack of sustained earnings capacity or a current fair value less than the investment’s carrying amount. When it is determined that an indicated impairment is other than temporary, a charge is recognized for the difference between the investment’s carrying value and its estimated fair value. When determining whether a decline in value is other than temporary, management considers factors such as the duration and extent of the decline, the investee’s financial condition and near-term prospects, and our ability and intention to retain our investment for a period that allows for recovery. When quoted market prices are not available, the fair value is usually 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 and observed market earnings multiples of comparable companies, if appropriate. Different assumptions could affect the timing and the amount of an impairment of an investment in any period.

See Note 9—Impairments, in the Notes to Consolidated Financial Statements, for information about significant impairments recorded in 2020 and 2019.

Asset Retirement Obligations

Under various contracts, permits and regulations, we have legal obligations to remove tangible equipment and restore the land at the end of operations at certain operational sites. Our largest asset removal obligations involve asbestos abatement at refineries. Estimating the timing and cost of future asset removals is difficult. Most of these removal obligations are many years, or decades, in the future, and the contracts and regulations often have vague descriptions of what removal practices and criteria must be met when the removal event actually occurs. Asset removal technologies and costs, regulatory and other compliance considerations, expenditure timing, and other inputs into valuation of the obligation, including discount and inflation rates, are also subject to change.

Index to Financial Statements

Environmental Costs

In addition to asset retirement obligations discussed above, we have certain obligations to complete environmental-related projects. These projects are primarily related to cleanup at domestic refineries, underground storage sites and nonoperated sites. Future environmental remediation costs are difficult to estimate because they are subject to change due to such factors as the uncertain magnitude of cleanup costs, timing and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties.

Intangible Assets and Goodwill

At December 31, 2020, we had $725 million of intangible assets that we have determined to have indefinite useful lives, and therefore do not amortize. The judgmental determination that an intangible asset has an indefinite useful life is continuously evaluated. If, due to changes in facts and circumstances, management determines these intangible assets have finite useful lives, amortization will commence at that time on a prospective basis. As long as these intangible assets are determined to have indefinite lives, they will be subject to at least annual impairment tests that require management’s judgment of their estimated fair value.

At December 31, 2020, we had $1.4 billion of goodwill recorded in conjunction with past business combinations. Goodwill is not amortized. Instead, goodwill is subject to at least annual tests for impairment at a reporting unit level. A reporting unit is an operating segment or a component that is one level below an operating segment, and it is determined primarily based on the manner in which the business is managed.

We perform our annual goodwill impairment test using a qualitative assessment and a quantitative assessment, if one is deemed necessary. As part of our qualitative assessment, we evaluate relevant events and circumstances that could affect the fair value of our reporting units, including macroeconomic conditions, overall industry and market considerations and regulatory changes, as well as company-specific market metrics, performance and events. The evaluation of company-specific events and circumstances includes evaluating changes in our stock price and cost of capital, actual and forecasted financial performance, as well as the effect of significant asset dispositions. If our qualitative assessment indicates it is likely the fair value of a reporting unit has declined below its carrying value (including goodwill), a quantitative assessment is performed.

When a quantitative assessment is performed, management applies judgment in determining the estimated fair values of the reporting units because quoted market prices for our reporting units are not available. Management uses available information to make this fair value determination, including estimated future cash flows, cost of capital, observed market earnings multiples of comparable companies, our common stock price and associated total company market capitalization.

See Note 9—Impairments, and Note 16—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information regarding the goodwill impairment we recorded in the first quarter of 2020.

We completed our annual qualitative assessment of goodwill as of October 1, 2020, and concluded that the fair values of our reporting units exceeded their respective carrying values (including goodwill). A decline in the estimated fair value of one or more of our reporting units in the future could result in an impairment. As such, we continue to monitor for indicators of impairment until our next annual impairment assessment is performed.

Index to Financial Statements

Tax Assets and Liabilities

Our operations are subject to various taxes, including federal, state and foreign income taxes, property taxes, and transactional taxes such as excise, sales and use, value-added and payroll taxes. We record tax liabilities based on our assessment of existing tax laws and regulations. The recording of tax liabilities requires significant judgment and estimates. We recognize the financial statement effects of an income tax position when it is more likely than not that the position will be sustained upon examination by a taxing authority. A contingent liability related to a transactional tax claim is recorded if the loss is both probable and reasonably estimable. Actual incurred tax liabilities can vary from our estimates for a variety of reasons, including different interpretations of tax laws and regulations and different assessments of the amount of tax due.

In determining our income tax expense (benefit), we assess the likelihood our deferred tax assets will be recovered through future taxable income. Valuation allowances reduce deferred tax assets to an amount that will, more likely than not, be realized. Judgment is required in estimating the amount of valuation allowance, if any, that should be recorded against our deferred tax assets. Based on our historical taxable income, our expectations for the future, and available tax-planning strategies, we expect our net deferred tax assets will more likely than not be realized as offsets to reversing deferred tax liabilities and as reductions to future taxable income. If our actual results of operations differ from such estimates or our estimates of future taxable income change, the valuation allowance may need to be revised.

New tax laws and regulations, as well as changes to existing tax laws and regulations, are continuously being proposed or promulgated. The implementation of future legislative and regulatory tax initiatives could result in increased income tax liabilities that cannot be predicted at this time.

Projected Benefit Obligations

Calculation of the projected benefit obligations for our defined benefit pension and postretirement plans impacts the obligations on the balance sheet and the amount of benefit expense in the statement of operations. The actuarial calculation of projected benefit obligations and company contribution requirements involves judgment about uncertain future events, including estimated retirement dates, salary levels at retirement, mortality rates, lump-sum election rates, rates of return on plan assets, future interest rates, future health care cost-trend rates, and rates of utilization of health care services by retirees. We engage outside actuarial firms to assist in the calculation of these projected benefit obligations and company contribution requirements due to the specialized nature of these calculations. As financial accounting rules and the pension plan funding regulations promulgated by governmental agencies have different objectives and requirements, the actuarial methods and assumptions for the two purposes differ in certain important respects. Ultimately, we will be required to fund all promised benefits under pension and postretirement benefit plans not funded by plan assets or investment returns, but the judgmental assumptions used in the actuarial calculations significantly affect periodic financial statements and funding patterns over time. Benefit expense is particularly sensitive to the discount rate and return on plan assets assumptions. A one percentage-point decrease in the discount rate assumption used for the plan obligation would increase annual benefit expense by an estimated $70 million, while a one percentage-point decrease in the return on plan assets assumption would increase annual benefit expense by an estimated $40 million. In determining the discount rate, we use yields on high-quality fixed income investments with payments matched to the estimated distributions of benefits from our plans.

The expected weighted-average long-term rate of return for worldwide pension plan assets was approximately 6% for both 2020 and 2019, while the actual weighted-average rate of return was 12% in 2020 and 18% in 2019. For the past ten years, our actual weighted-average rate of return for worldwide pension plan assets was 9%.

Index to Financial Statements

GUARANTOR FINANCIAL INFORMATION

At December 31, 2020, Phillips 66 had $11 billion of senior unsecured notes outstanding guaranteed by Phillips 66 Company, a direct, wholly owned operating subsidiary of Phillips 66. Phillips 66 conducts substantially all of its operations through subsidiaries, including Phillips 66 Company, and those subsidiaries generate substantially all of its operating income and cash flow. The guarantees are (1) unsecured obligations of Phillips 66 Company, (2) rank equally with all of Phillips 66 Company’s other unsecured and unsubordinated indebtedness, and (3) are full and unconditional.

Summarized financial information of Phillips 66 and Phillips 66 Company (the Obligor Group) is presented on a combined basis. Intercompany transactions among the members of the Obligor Group have been eliminated. The financial information of non-guarantor subsidiaries has been excluded from the summarized financial information. Significant intercompany transactions and receivable/payable balances between the Obligor Group and non-guarantor subsidiaries are presented separately in the summarized financial information.

The summarized results of operations for the year ended December 31, 2020, and the summarized financial position at December 31, 2020, for the Obligor Group on a combined basis were:

Summarized Combined Statement of Operations			Millions of Dollars
Sales and other operating revenues			$	47,950
Revenues and other income—non-guarantor subsidiaries			3,211
Purchased crude oil and products—third parties			32,187
Purchased crude oil and products—related parties			6,433
Purchased crude oil and products—non-guarantor subsidiaries			8,690
Impairments			2,777
Loss before income taxes			(5,111)
Net loss			(3,882)

Summarized Combined Balance Sheet			Millions of Dollars
Accounts and notes receivable—third parties			$	4,060
Accounts and notes receivable—related parties			804
Due from non-guarantor subsidiaries, current			288
Total current assets			8,965
Investments and long-term receivables			9,229
Net properties, plants and equipment			12,815
Goodwill			1,047
Due from non-guarantor subsidiaries, noncurrent			6,173
Other assets associated with non-guarantor subsidiaries			2,870
Total noncurrent assets			34,034
Total assets			42,999
Due to non-guarantor subsidiaries, current			$	2,203
Total current liabilities			7,938
Long-term debt			11,330
Due to non-guarantor subsidiaries, noncurrent			9,316
Total noncurrent liabilities			26,044
Total liabilities			33,982
Total equity			9,017
Total liabilities and equity			42,999

Index to Financial Statements

NON-GAAP RECONCILIATIONS

Refining

Our 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) costs of feedstocks, primarily crude oil, used to produce the petroleum products. The realized refining margins are adjusted to include our proportional share of our joint venture refineries’ realized margins, 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. We believe 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 refining margins.

The GAAP performance measure most directly comparable to realized refining margin per barrel is the Refining segment’s “income (loss) before income taxes per barrel.” Realized 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 income (loss) before income taxes, such as general and administrative expenses. It also includes our proportional share of joint venture refineries’ realized refining margins and excludes special items. Because realized refining margin per barrel is calculated in this manner, and because realized refining margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. Following are reconciliations of income (loss) before income taxes to realized refining margins:

Index to Financial Statements

			Millions of Dollars, Except as Indicated
Realized Refining Margins			Atlantic Basin/Europe			Gulf Coast			Central Corridor			West Coast			Worldwide
Year Ended December 31, 2020
Loss before income taxes			$	(1,224)		(2,077)			(641)			(2,213)			(6,155)
Plus:
Taxes other than income taxes			61			107			51			89			308
Depreciation, amortization and impairments			643			968			571			1,460			3,642
Selling, general and administrative expenses			44			39			28			38			149
Operating expenses			774			1,354			498			1,000			3,626
Equity in losses of affiliates			10			3			363			—			376
Other segment (income) expense, net			1			1			(2)			5			5
Proportional share of refining gross margins contributed by equity affiliates			67			—			298			—			365
Special items:
Certain tax impacts			(6)			—			—			—			(6)
Realized refining margins			$	370		395			1,166			379			2,310
Total processed inputs (thousands of barrels)			170,536			213,871			92,050			110,602			587,059
Adjusted total processed inputs (thousands of barrels)*			170,536			213,871			162,693			110,602			657,702
Loss before income taxes per barrel (dollars per barrel)**			$	(7.18)		(9.71)			(6.96)			(20.01)			(10.48)
Realized refining margins (dollars per barrel)***			2.17			1.85			7.17			3.43			3.51
Year Ended December 31, 2019
Income (loss) before income taxes			$	608		364			1,338			(324)			1,986
Plus:
Taxes other than income taxes			52			73			40			85			250
Depreciation, amortization and impairments			198			271			135			253			857
Selling, general and administrative expenses			39			23			22			31			115
Operating expenses			863			1,449			550			1,143			4,005
Equity in (earnings) losses of affiliates			11			2			(331)			—			(318)
Other segment (income) expense, net			(16)			(3)			—			5			(14)
Proportional share of refining gross margins contributed by equity affiliates			69			—			1,073			—			1,142
Special items:
Pending claims and settlements			—			—			(21)			—			(21)
Realized refining margins			$	1,824		2,179			2,806			1,193			8,002
Total processed inputs (thousands of barrels)			195,506			293,666			103,294			130,014			722,480
Adjusted total processed inputs (thousands of barrels)*			195,506			293,666			188,045			130,014			807,231
Income (loss) before income taxes per barrel (dollars per barrel)**			$	3.11		1.24			12.95			(2.49)			2.75
Realized refining margins (dollars per barrel)***			9.33			7.42			14.91			9.18			9.91
** Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate.*
*** Income (loss) before income taxes divided by total processed inputs.*
**** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts.*

Index to Financial Statements

			Millions of Dollars, Except as Indicated
Realized Refining Margins			Atlantic Basin/Europe			Gulf Coast			Central Corridor			West Coast			Worldwide
Year Ended December 31, 2018
Income before income taxes			$	567		1,040			2,817			111			4,535
Plus:
Taxes other than income taxes			56			88			43			100			287
Depreciation, amortization and impairments			201			268			135			237			841
Selling, general and administrative expenses			63			57			34			50			204
Operating expenses			950			1,312			488			1,040			3,790
Equity in (earnings) losses of affiliates			10			6			(812)			—			(796)
Other segment (income) expense, net			(11)			3			(13)			(9)			(30)
Proportional share of refining gross margins contributed by equity affiliates			87			—			1,565			—			1,652
Special items:
Certain tax impacts			(5)			—			—			—			(5)
Realized refining margins			$	1,918		2,774			4,257			1,529			10,478
Total processed inputs (thousands of barrels)			186,042			292,665			106,299			136,332			721,338
Adjusted total processed inputs (thousands of barrels)*			186,042			292,665			191,561			136,332			806,600
Income before income taxes per barrel (dollars per barrel)**			$	3.05		3.55			26.50			0.81			6.29
Realized refining margins (dollars per barrel)***			10.32			9.48			22.22			11.20			12.99
** Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate.*
*** Income before income taxes divided by total processed inputs.*
**** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts.*

Index to Financial Statements

Marketing

Our realized marketing fuel margins measure the difference between (a) sales and other operating revenues derived from the sale of fuels in our M&S segment and (b) costs of those fuels. The realized marketing fuel margins are adjusted to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized marketing fuel margins are converted to a per-barrel basis by dividing them by sales volumes measured on a barrel basis. We believe realized 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 M&S segment, the GAAP performance measure most directly comparable to realized marketing fuel margin per barrel is the marketing business’ “income before income taxes per barrel.” Realized 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 income before income taxes, such as general and administrative expenses. Because realized marketing fuel margin per barrel excludes these items, and because realized marketing fuel margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. Following are reconciliations of income before income taxes to realized marketing fuel margins:

			Millions of Dollars, Except as Indicated
			U.S.												International
			2020			2019			2018						2020			2019			2018
Realized Marketing Fuel Margins
Income before income taxes			$	870		916			843						454			380			505
Plus:
Taxes other than income taxes			1			5			(2)						5			6			2
Depreciation, amortization and impairment			12			10			13						70			65			71
Selling, general and administrative expenses			623			743			763						246			249			280
Equity in earnings of affiliates			(31)			(27)			(8)						(108)			(99)			(91)
Other operating revenues*			(327)			(379)			(379)						(27)			(37)			(32)
Other segment expense, net			—			—			—						1			1			2
Special items:
Certain tax impacts			—			(90)			(100)						—			—			—
Marketing margins			1,148			1,178			1,130						641			565			737
Less: margin for nonfuel related sales			—			—			—						46			44			44
Realized marketing fuel margins			$	1,148		1,178			1,130						595			521			693
Total fuel sales volumes (thousands of barrels)			613,869			752,064			697,696						93,773			106,263			100,949
Income before income taxes per barrel (dollars per barrel)			$	1.42		1.22			1.21						4.84			3.58			5.00
Realized marketing fuel margins (dollars per barrel)**			1.87			1.57			1.62						6.34			4.90			6.87
** Includes other nonfuel revenues.*
*** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts.*

Index to Financial Statements