Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated, “the company,” “we,” “our,” “us” and “Phillips 66” are used in this report to refer to the businesses of Phillips 66 and its consolidated subsidiaries.

Management’s Discussion and Analysis is the company’s analysis of its financial performance, financial condition, and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions often identify forward-looking statements, but the absence of these words does not mean a statement is not forward-looking. The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”

The terms “earnings” or “loss” as used in Management’s Discussion and Analysis refer to net income (loss) attributable to Phillips 66. The terms “results,” “before-tax income” or “before-tax loss” as used in Management’s Discussion and Analysis refer to income (loss) before income taxes.

EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT

Phillips 66 is a diversified energy company with midstream, chemicals, refining, and marketing and specialties businesses. At March 31, 2022, we had total assets of $61 billion. Our common stock trades on the New York Stock Exchange under the symbol PSX.

Executive Overview

In the first quarter of 2022, we reported earnings of $582 million and generated cash from operating activities of $1.1 billion. We used available cash to fund capital expenditures and investments of $370 million and pay dividends on our common stock of $404 million. We ended the first quarter of 2022 with $3.3 billion of cash and cash equivalents and approximately $5.7 billion of total committed capacity available under our revolving credit facilities.

Our reported earnings for the first quarter of 2022, compared with the first quarter of 2021, reflect a recovery in global demand for refined petroleum products due to the administration of COVID-19 vaccines and the easing of pandemic restrictions that occurred throughout 2021, as well as recovery from effects of the winter storms that occurred in the first quarter of 2021. The increase in global demand and recent market disruptions resulting from the conflict between Russia and Ukraine resulted in the widening of market crack spreads. Consequently, margins and utilization for our Refining segment, sales volumes for our Marketing and Specialties (M&S) segment, and throughput volumes for our Transportation business have improved. In addition, equity earnings from our Chemicals segment increased due to higher sales volumes. However, as uncertainty remains regarding the impacts on the global economy of the lingering pandemic and the conflict between Russia and Ukraine, we will continue to be disciplined in our allocation of capital and monitor the performance of our portfolio.

In addition, we are progressing a multi-year business transformation focused on enterprise-wide opportunities to improve our cost structure. We are targeting a sustainable cost reduction of at least $700 million per year by the end of the transformation period. We will provide updates as the initiative progresses.

Phillips 66 Partners Merger

On March 9, 2022, we completed the previously announced merger between us and Phillips 66 Partners LP (Phillips 66 Partners). The merger resulted in the acquisition of all limited partnership interests in Phillips 66 Partners not already owned by us. Upon closing, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66 and its common units are no longer publicly traded. See Note 18—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the merger transaction.

CEO Transition

On April 12, 2022, Greg C. Garland, Chairman of the Board and Chief Executive Officer of Phillips 66 announced his intention to retire from his position as Chief Executive Officer effective July 1, 2022. Mr. Garland will continue to serve as Executive Chairman of the Board with an expected retirement date from this position in 2024. Mark E. Lashier will become President and Chief Executive Officer effective July 1, 2022.

Business Environment

The Midstream segment includes our Transportation and NGL businesses. Our Transportation business contains fee-based operations not directly exposed to commodity price risk. Our NGL business contains both fee-based operations and operations directly impacted by NGL prices. The Midstream segment also includes our 50% equity investment in DCP Midstream, LLC (DCP Midstream). During the first quarter of 2022, NGL prices increased significantly, compared with the first quarter of 2021, due to strong demand and increased crude oil and natural gas prices.

The Chemicals segment consists of our 50% equity investment in Chevron Phillips Chemical Company LLC (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. During the first quarter of 2022, the benchmark high-density polyethylene chain margin decreased, compared with the first quarter of 2021. This decrease was mainly due to higher feedstock cost.

Our Refining segment results are driven by several factors, including market crack spreads, 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, increased to an average of $94.49 per barrel during the first quarter of 2022, compared with an average of $57.84 per barrel in the first quarter of 2021. Market crack spreads are used as indicators of refining margins and measure the difference between market prices for refined petroleum products and crude oil. Worldwide market crack spreads increased to an average of $21.93 per barrel during the first quarter of 2022, compared with an average of $13.23 per barrel in the first quarter of 2021. The increases in crude oil prices and market crack spreads were mainly driven by tight supply due to a significant increase in demand for refined petroleum products as economic activities continue to recover as the COVID-19 pandemic recedes, as well as market disruptions from the conflict between Russia and Ukraine.

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 marketing fuel and lubricant margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are influenced by trends in spot prices, and where applicable, retail prices for refined petroleum products in the regions and countries where we operate. In general, 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. Demand for refined petroleum products has improved in the first quarter of 2022, compared with the first quarter of 2021, as economic activities continue to recover as the COVID-19 pandemic recedes.

RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three months ended March 31, 2022, is based on a comparison with the corresponding period of 2021.

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
			Three Months Ended March 31
			2022						2021
Midstream			$	242					76
Chemicals			396						154
Refining			123						(1,040)
Marketing and Specialties			316						290
Corporate and Other			(249)						(251)
Income (loss) before income taxes			828						(771)
Income tax expense (benefit)			171						(132)
Net income (loss)			657						(639)
Less: net income attributable to noncontrolling interests			75						15
Net income (loss) attributable to Phillips 66			$	582					(654)

Our net income attributable to Phillips 66 in the first quarter of 2022 was $582 million, compared with a net loss attributable to Phillips 66 of $654 million in the first quarter of 2021. The improvement was primarily due to:

• Improved realized refining margins.

• Higher equity earnings from CPChem.

• Lower impairments in the Midstream segment.

These improvements were partially offset by an unrealized decrease in the fair value of our investment in NOVONIX Limited (NOVONIX), which we acquired in September 2021, as well as the recognition of income tax expense in the first quarter of 2022, compared with an income tax benefit in the first quarter of 2021.

See the “Segment Results” section for additional information on our segment performance and Note 17—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information on income taxes.

Statement of Operations Analysis

Sales and other operating revenues and purchased crude oil and products both increased 67% in the first quarter of 2022. These increases were mainly due to higher prices for refined petroleum products, crude oil and NGL, as well as increased sales volumes.

Equity in earnings of affiliates increased $400 million in the first quarter of 2022. The increase was primarily due to higher equity earnings from CPChem mainly driven by improved margins and higher sales volumes and WRB Refining LP (WRB) resulting from improved realized refining margins and higher refinery production. See Chemicals segment analysis in the “Segment Results” section for additional information on CPChem.

Other income (loss) decreased $158 million in the first quarter of 2022. The decrease was primarily due to an unrealized investment loss of $169 million related to the decrease in NOVONIX’s stock price during the first quarter of 2022. We acquired this investment in September 2021. See Note 5—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding our investment in NOVONIX.

Impairments decreased $198 million in the first quarter of 2022 due to a before-tax impairment of $198 million recorded in the first quarter of 2021 related to Phillips 66 Partners’ decision to exit the Liberty Pipeline project. See Note 5—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding this impairment.

We had income tax expense of $171 million in the first quarter of 2022, compared with an income tax benefit of $132 million in the first quarter of 2021. See Note 17—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our effective income tax rates.

Net income attributable to noncontrolling interests increased $60 million in the first quarter of 2022. The increase was primarily driven by the allocation of a portion of the before-tax impairment recorded in the first quarter of 2021 related to the Liberty Pipeline project to the noncontrolling interest owners of Phillips 66 Partners.

Segment Results

Midstream

			Three Months Ended March 31
			2022						2021
			Millions of Dollars
Income (Loss) Before Income Taxes
Transportation			$	278					7
NGL and Other			91						35
DCP Midstream			31						34
NOVONIX			(158)						—
Total Midstream			$	242					76

			Thousands of Barrels Daily
Transportation Volumes
Pipelines*			3,099						2,801
Terminals			2,900						2,675
Operating Statistics
NGL fractionated**			452						363
NGL production***			400						356

** 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
Market Indicator
Weighted-Average NGL Price*			$	1.10					0.69
** 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 50% equity investment in DCP Midstream, which includes the operations of DCP Midstream, LP (DCP Partners), its master limited partnership, and our 16% investment in NOVONIX.

Results from our Midstream segment increased $166 million in the first quarter of 2022.

Results from our Transportation business increased $271 million in the first quarter of 2022. The increase was primarily due to a before-tax impairment of $198 million recorded in the first quarter of 2021 related to Phillips 66 Partners’ decision to exit the Liberty Pipeline project, and higher results from both our equity affiliates and wholly owned assets due to increased volumes.

Results from our NGL and Other business increased $56 million in the first quarter of 2022. This increase was primarily due to improved results from Fracs 1, 2, and 3 at the Sweeny Hub and revenues from the start-up of the C2G pipeline in December 2021. Improved results from the Sweeny Fracs reflect recovery from the impacts of the winter storms that occurred in February 2021, which caused lower run rates and higher operating expenses in the first quarter of 2021.

Results from our investment in DCP Midstream decreased $3 million in the first quarter of 2022.

The fair value of our investment in NOVONIX decreased by $158 million in the first quarter of 2022. We acquired this investment in September 2021.

See Note 5—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding the Liberty Pipeline project impairment and our investment in NOVONIX.

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

Chemicals

			Three Months Ended March 31
			2022						2021
			Millions of Dollars
Income Before Income Taxes			$	396					154

			Millions of Pounds
CPChem Externally Marketed Sales Volumes*
Olefins and Polyolefins			5,065						4,570
Specialties, Aromatics and Styrenics			1,174						981
			6,239						5,551
** 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		%				79

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).

Results from the Chemicals segment increased $242 million in the first quarter of 2022. The increase was primarily due to improved O&P margins reflecting strong demand and higher sales volumes. Results in the first quarter of 2021 were negatively impacted by the winter storms that occurred in the Central and Gulf Coast regions.

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

Refining

			Three Months Ended March 31
			2022						2021
			Millions of Dollars
Income (Loss) Before Income Taxes
Atlantic Basin/Europe			$	143					(153)
Gulf Coast			4						(253)
Central Corridor			(135)						(248)
West Coast			111						(386)
Worldwide			$	123					(1,040)

			Dollars Per Barrel
Income (Loss) Before Income Taxes
Atlantic Basin/Europe			$	2.98					(3.57)
Gulf Coast			0.08						(4.64)
Central Corridor			(5.70)						(12.55)
West Coast			3.84						(14.89)
Worldwide			0.81						(7.27)
Realized Refining Margins*
Atlantic Basin/Europe			$	11.71					4.86
Gulf Coast			7.71						3.39
Central Corridor			7.89						5.97
West Coast			17.68						3.33
Worldwide			10.55						4.36

** 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.*

			Thousands of Barrels Daily
			Three Months Ended March 31
Operating Statistics			2022						2021
Refining operations*
Atlantic Basin/Europe
Crude oil capacity			537						537
Crude oil processed			503						438
Capacity utilization (percent)			94		%				82
Refinery production			538						482
Gulf Coast**
Crude oil capacity			529						784
Crude oil processed			497						553
Capacity utilization (percent)			94		%				71
Refinery production			590						603
Central Corridor
Crude oil capacity			531						531
Crude oil processed			453						384
Capacity utilization (percent)			85		%				72
Refinery production			474						398
West Coast
Crude oil capacity			364						364
Crude oil processed			294						268
Capacity utilization (percent)			81		%				74
Refinery production			321						288
Worldwide
Crude oil capacity			1,961						2,216
Crude oil processed			1,747						1,643
Capacity utilization (percent)			89		%				74
Refinery production			1,923						1,771
** Includes our share of equity affiliates.*
*** Excludes operating statistics of the Alliance Refinery beginning on October 1, 2021.*

The Refining segment refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates and aviation fuels, at 12 refineries in the United States and Europe. In the fourth quarter of 2021, we shut down our Alliance Refinery and are in the process of converting it into a terminal.

Results from our Refining segment increased $1,163 million in the first quarter of 2022, primarily due to higher realized refining margins. The improved realized refining margins were mainly attributable to increased market crack spreads, partially offset by decreased secondary product margins and lower clean product differentials.

Our worldwide refining crude oil capacity utilization rate was 89% in the first quarter of 2022, compared with 74% in the first quarter of 2021. The increase was primarily driven by improved market demand for refined petroleum products following the administration of COVID-19 vaccines and the easing of pandemic restrictions, as well as less unplanned downtime caused by the winter storms that occurred in February 2021.

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

Marketing and Specialties

			Three Months Ended March 31
			2022						2021
			Millions of Dollars
Income Before Income Taxes
Marketing and Other			$	203					211
Specialties			113						79
Total Marketing and Specialties			$	316					290

			Dollars Per Barrel
Income Before Income Taxes
U.S.			$	1.13					1.36
International			0.92						2.24
Realized Marketing Fuel Margins*
U.S.			$	1.59					1.94
International			2.30						4.01

** 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			$	3.05					2.01
Distillates			3.25						1.98
** On third-party branded petroleum product sales, excluding excise taxes.*

			Thousands of Barrels Daily
Marketing Petroleum Products Sales Volumes
Gasoline			1,129						1,023
Distillates			1,011						818
Other			17						18
Total			2,157						1,859

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.

Before-tax income from the M&S segment increased $26 million in the first quarter of 2022, primarily driven by higher results from our lubricants business reflecting increased finished lubricant and Excel Paralubes base oil margins, higher marketing sales volumes and improved results from our chartered marine vessel and other businesses. These increases were partially offset by lower marketing fuel margins primarily due to spot prices increasing more significantly in the first quarter of 2022, compared with the first quarter of 2021.

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

Corporate and Other

			Millions of Dollars
			Three Months Ended March 31
			2022						2021
Loss Before Income Taxes
Net interest expense			$	(132)					(143)
Corporate overhead and other			(117)						(108)
Total Corporate and Other			$	(249)					(251)

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.

Net interest expense decreased $11 million in the first quarter of 2022, primarily driven by lower average debt principal balances, reflecting debt repayments during 2021, as well as higher capitalized interest primarily due to the restart of the Sweeny Frac 4 capital project.

Corporate overhead and other increased $9 million in the first quarter of 2022, reflecting higher employee-related expenses.

CAPITAL RESOURCES AND LIQUIDITY

Financial Indicators

			Millions of Dollars, Except as Indicated
			March 31 2022						December 31 2021
Cash and cash equivalents			$	3,335					3,147
Short-term debt			1,474						1,489
Total debt			14,434						14,448
Total equity			22,121						21,637
Percent of total debt to capital*			39%						40
Percent of floating-rate debt to total debt			3%						3
** 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 the first three months of 2022, we generated $1.1 billion of cash from operations. We used available cash primarily for capital expenditures and investments of $370 million and dividend payments on our common stock of $404 million. During the first three months of 2022, cash and cash equivalents increased $188 million to $3.3 billion.

Significant Sources of Capital

Operating Activities

During the first three months of 2022, cash generated by operating activities was $1.1 billion, compared with $271 million for the first three months of 2021. The increase was primarily due to improved realized refining margins, partially offset by unfavorable working capital impacts.

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 level and quality of output from our refineries also impact 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.

Equity Affiliate Operating Distributions

Our operating cash flows are also impacted by distribution decisions made by our equity affiliates, including CPChem. During the first three months of 2022, cash from operations included aggregate distributions of $585 million from our equity affiliates, including $299 million from CPChem. During the same period of 2021, cash from operations included aggregate distributions of $502 million, including $205 million from CPChem. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these equity affiliates are not assured.

Revolving Credit Facilities and Commercial Paper

At both March 31, 2022, and December 31, 2021, no amount had been drawn under Phillips 66’s $5 billion revolving credit facility or uncommitted $5 billion commercial paper program. At March 31, 2022 and December 31, 2021, no borrowings were outstanding and $1 million in letters of credit had been drawn under Phillips 66 Partners’ $750 million revolving credit facility.

Off-Balance Sheet Arrangements

Lease Residual Value Guarantees

Under the operating lease agreement for our headquarters facility in Houston, Texas, we have the option, at the end of the lease term in September 2025, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at March 31, 2022. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling $221 million. These leases have remaining terms of up to ten years.

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

In 2020, the trial court presiding over litigation brought by the Standing Rock Sioux Tribe ordered the U.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) addressing an easement under Lake Oahe in North Dakota. The court later vacated the easement. Although the easement is vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS. In May 2021, the Standing Rock Sioux Tribe’s request for an injunction to force a shutdown of the pipeline while the EIS is being prepared was denied. In June 2021, the trial court dismissed the litigation entirely. Once the EIS is completed, new litigation or challenges to the EIS could be filed.

In September 2021, Dakota Access filed a writ of certiorari, requesting the U.S. Supreme Court to review the lower court’s decision to order the EIS and vacate the easement. In February 2022, the writ was denied, and the requirement to prepare the EIS stands. Completion of the EIS was expected in the fall of 2022, but now may be delayed as the USACE engages with the Standing Rock Sioux Tribe on their reasons for withdrawing as a cooperating agency with respect to preparation of the EIS.

Dakota Access and ETCO have guaranteed repayment of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access with an aggregate principal outstanding of $2.5 billion at March 31, 2022. In addition, Phillips 66 Partners, now a wholly owned subsidiary of Phillips 66, and its co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the above-mentioned ongoing litigation. At March 31, 2022, our share of the maximum potential equity contributions under the CECU was approximately $631 million.

If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we could be required to support our share of the ongoing expenses, including scheduled interest payments on the notes of approximately $25 million annually, in addition to the potential obligations under the CECU at March 31, 2022.

On April 1, 2022, Dakota Access’ wholly owned subsidiary repaid $650 million aggregate principal amount of its outstanding senior notes upon maturity. We funded our 25% share, or $163 million, with a capital contribution of $89 million in March 2022 and $74 million of distributions we elected not to receive from Dakota Access in the first quarter of 2022. As a result of the debt repayment, on April 1, 2022, our share of the maximum potential equity contributions under the CECU decreased to approximately $467 million, and our share of scheduled interest payments on the notes that we could be required to support decreased to approximately $20 million annually.

See Note 9—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.

Capital Requirements

Capital Expenditures and Investments

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

Debt Financing

Our total debt balance at both March 31, 2022, and December 31, 2021, was $14.4 billion. Our total debt-to-capital ratio was 39% and 40% at March 31, 2022, and December 31, 2021, respectively.

In early April 2022, upon maturity, Phillips 66 repaid its 4.300% senior notes with an aggregate principal amount of $1.0 billion and Phillips 66 Partners repaid its $450 million term loan. As our operating cash flows improve further, we will continue to prioritize debt reductions in 2022.

Debt Exchange

On April 6, 2022, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, announced offers to exchange (the Exchange Offers) all validly tendered notes of seven different series of notes issued by Phillips 66 Partners (collectively, the Old Notes), with an aggregate principal amount of approximately $3.5 billion, for notes to be issued by Phillips 66 Company (collectively, the New Notes). The New Notes will be fully and unconditionally guaranteed by Phillips 66 and will rank equally with Phillips 66 Company’s other unsecured and unsubordinated indebtedness, and the guarantees will rank equally with Phillips 66’s other unsecured and unsubordinated indebtedness. The Exchange Offers will expire on May 3, 2022, unless such date is extended (the Expiration Date). Phillips 66 Company currently expects the settlement of the Exchange Offers to occur on May 5, 2022, unless the Expiration Date is extended.

The New Notes will have the same interest rates, interest payment dates and maturity dates as the Old Notes. In addition, holders that validly tender before the end of the early participation period on April 19, 2022 (the Early Participation Date), will receive New Notes with an aggregate principal amount equivalent to the Old Notes, while holders that validly tender after the Early Participation Date, but before the Expiration Date, will receive New Notes with an aggregate principal amount that is 3% less than the Old Notes.

Through the end of the early participation period on April 19, 2022, Old Notes with an aggregate principal amount of approximately $3.2 billion had been validly tendered for exchange.

Joint Venture Loans

We and our co-venturer provided member loans to WRB. At March 31, 2022, our 50% share of the outstanding member loan balance, including accrued interest, was $597 million. The need for additional loans to WRB in the remainder of 2022, as well as WRB’s repayment schedule, will depend on market conditions.

Merger with Phillips 66 Partners

On March 9, 2022, we completed the previously announced merger between us and Phillips 66 Partners. The merger resulted in the acquisition of all limited partnership interests in Phillips 66 Partners not already owned by us in exchange for approximately 42 million shares of Phillips 66 common stock issued from treasury stock. Phillips 66 Partners common unitholders received 0.50 shares of Phillips 66 common stock for each outstanding Phillips 66 Partners common unit. Phillips 66 Partners’ perpetual convertible preferred units were converted into common units at a premium to the original issuance price prior to being exchanged for Phillips 66 common stock. Upon closing, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66 and its common units are no longer publicly traded. See Note 18—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the merger transaction.

Dividends

On February 9, 2022, our board of directors declared a quarterly cash dividend of $0.92 per common share. This dividend was paid on March 1, 2022, to shareholders of record as of the close of business on February 22, 2022.

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. Future 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. In April 2022, we announced plans to resume our share repurchase program in the second quarter of 2022.

Capital Spending

			Millions of Dollars
			Three Months Ended March 31
			2022						2021
Capital Expenditures and Investments
Midstream			$	164					100
Chemicals			—						—
Refining			171						184
Marketing and Specialties			11						22
Corporate and Other			24						25
Total Capital Expenditures and Investments			$	370					331
Selected Equity Affiliates*
DCP Midstream			$	11					7
CPChem			113						79
WRB			42						59
			$	166					145

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

Midstream

During the first three months of 2022, capital spending in our Midstream segment included:

• Contribution to Dakota Access to fund our 25% share of Dakota Access’ debt repayment in April 2022.

• Continued development of additional Gulf Coast fractionation capacity at our Sweeny Hub.

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

Chemicals

During the first three months of 2022, on a 100% basis, CPChem’s capital expenditures and investments were $225 million. The capital spending was primarily for the development of petrochemical projects on the U.S. Gulf Coast and in the Middle East, as well as sustaining, debottlenecking and optimization projects on existing assets. CPChem’s capital program was self-funded, and we expect CPChem to continue self-funding its capital program for the remainder of 2022.

Refining

Capital spending for the Refining segment during the first three months of 2022 was 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.

Major capital activities included:

• Installation of facilities to improve product value at the Lake Charles refinery.

• Engineering of facilities to produce biofuels at the San Francisco refinery.

Marketing and Specialties

Capital spending for the M&S segment during the first three months of 2022 was primarily for the continued development and enhancement of retail sites in Europe and for Lubricants reliability and maintenance projects.

Corporate and Other

Capital spending for Corporate and Other during the first three months of 2022 was primarily for information technology and facilities.

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 uncertain.

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

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.

Environmental

Like other companies in our industry, we are subject to numerous international, federal, state and local environmental laws and regulations. For a discussion of the most significant international and federal environmental laws and regulations to which we are subject, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K.

We are required to purchase RINs in the open market to satisfy the portion of our obligation under the Renewable Fuel Standard (RFS) that is not fulfilled by blending renewable fuels into the motor fuels we produce. For the three months ended March 31, 2022 and 2021, we incurred expenses of $152 million and $165 million, respectively, associated with our obligation to purchase RINs in the open market to comply with the RFS for our wholly owned refineries. These expenses are included in the “Purchased crude oil and products” line item on our consolidated statement of operations. Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $85 million and $63 million for the three months ended March 31, 2022 and 2021, respectively. These expenses are included in the “Equity in earnings of affiliates” line item on our consolidated statement of operations. The amount of these expenses and fluctuations between periods is primarily driven by the market price of RINs, refinery production, blending activities and renewable volume obligation requirements.

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 the Federal Comprehensive Environmental Response, Compensation and Liability Act (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. At December 31, 2021, we reported that we had been notified of potential liability under CERCLA and comparable state laws at 25 sites within the United States. In the first quarter of 2022, we were notified of one site that was deemed resolved and closed, accordingly, leaving 24 unresolved sites with potential liability at March 31, 2022.

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. We continue to monitor legislative and regulatory actions and legal proceedings globally relating to GHG emissions for potential impacts on our operations.

For examples of legislation and regulation or precursors for possible regulation that do or could affect our operations, see the “Climate Change” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K.

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.

In February 2022, we announced our intention by 2050 to reduce the GHG emissions intensity for Scope 1 and Scope 2 emissions from our operations by 50% compared to 2019 levels. This new target builds upon our previously announced 2030 GHG emissions intensity targets to reduce Scope 1 and Scope 2 emissions from our operations by 30% and Scope 3 emissions from our energy products by 15% compared to 2019 levels.

GUARANTOR FINANCIAL INFORMATION

At March 31, 2022, Phillips 66 had $10.3 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 (1) are 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.

See the “Significant Sources of Capital” section for additional information regarding the Exchange Offers by Phillips 66 Company for existing senior notes of Phillips 66 Partners that are expected to be settled in May 2022.

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 three months ended March 31, 2022, and the summarized financial position at March 31, 2022, and December 31, 2021, for the Obligor Group on a combined basis were:

Summarized Combined Statement of Operations			Millions of Dollars
			Three Months Ended March 31, 2022
Sales and other operating revenues			$	28,640
Revenues and other income—non-guarantor subsidiaries			867
Purchased crude oil and products—third parties			16,892
Purchased crude oil and products—related parties			4,646
Purchased crude oil and products—non-guarantor subsidiaries			6,000
Income before income taxes			433
Net income			341

			Millions of Dollars
Summarized Combined Balance Sheet			March 31 2022						December 31 2021
Accounts and notes receivable—third parties			$	5,732					3,772
Accounts and notes receivable—related parties			1,631						1,289
Due from non-guarantor subsidiaries, current			970						456
Total current assets			14,452						10,080
Investments and long-term receivables			10,241						10,324
Net properties, plants and equipment			11,522						11,541
Goodwill			1,047						1,047
Due from non-guarantor subsidiaries, noncurrent			3,068						5,699
Other assets associated with non-guarantor subsidiaries			2,466						2,565
Total noncurrent assets			30,103						32,935
Total assets			44,555						43,015
Due to non-guarantor subsidiaries, current			$	3,301					2,227
Total current liabilities			14,259						10,551
Long-term debt			9,370						9,364
Due to non-guarantor subsidiaries, noncurrent			6,711						9,341
Total noncurrent liabilities			21,472						24,094
Total liabilities			35,731						34,645
Total equity			8,824						8,370
Total liabilities and equity			44,555						43,015

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 “Executive Overview and Business Environment—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:

			Millions of Dollars, Except as Indicated
Realized Refining Margins			Atlantic Basin/ Europe			Gulf Coast			Central Corridor			West Coast			Worldwide
Three Months Ended March 31, 2022
Income (loss) before income taxes			$	143		4			(135)			111			123
Plus:
Taxes other than income taxes			19			27			18			24			88
Depreciation, amortization and impairments			52			51			35			60			198
Selling, general and administrative expenses			14			11			14			9			48
Operating expenses			296			307			184			305			1,092
Equity in losses of affiliates			3			2			16			—			21
Other segment (income) expense, net			12			—			(4)			1			9
Proportional share of refining gross margins contributed by equity affiliates			23			—			205			—			228
Realized refining margins			$	562		402			333			510			1,807
Total processed inputs (thousands of barrels)			48,015			52,151			23,691			28,877			152,734
Adjusted total processed inputs (thousands of barrels)*			48,015			52,151			42,267			28,877			171,310
Income (loss) before income taxes per barrel (dollars per barrel)**			$	2.98		0.08			(5.70)			3.84			0.81
Realized refining margins (dollars per barrel)***			11.71			7.71			7.89			17.68			10.55
Three Months Ended March 31, 2021
Loss before income taxes			$	(153)		(253)			(248)			(386)			(1,040)
Plus:
Taxes other than income taxes			20			27			15			23			85
Depreciation, amortization and impairments			52			77			34			54			217
Selling, general and administrative expenses			14			10			7			11			42
Operating expenses			230			321			205			382			1,138
Equity in losses of affiliates			2			3			117			—			122
Other segment (income) expense, net			—			—			(2)			2			—
Proportional share of refining gross margins contributed by equity affiliates			43			—			86			—			129
Realized refining margins			$	208		185			214			86			693
Total processed inputs (thousands of barrels)			42,826			54,560			19,754			25,917			143,057
Adjusted total processed inputs (thousands of barrels)*			42,826			54,560			35,711			25,917			159,014
Loss before income taxes per barrel (dollars per barrel)**			$	(3.57)		(4.64)			(12.55)			(14.89)			(7.27)
Realized refining margins (dollars per barrel)***			4.86			3.39			5.97			3.33			4.36
** 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.*

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
			Three Months Ended March 31, 2022									Three Months Ended March 31, 2021
			U.S.			International						U.S.			International
Realized Marketing Fuel Margins
Income before income taxes			$	191		23						199			48
Plus:
Depreciation and amortization			3			18						3			19
Selling, general and administrative expenses			182			63						165			60
Equity in earnings of affiliates			(7)			(26)						(2)			(24)
Other operating revenues*			(107)			(12)						(86)			(5)
Other expense, net			6			4						4			1
Marketing margins			268			70						283			99
Less: margin for nonfuel related sales			—			13						—			13
Realized marketing fuel margins			$	268		57						283			86
Total fuel sales volumes (thousands of barrels)			169,196			24,926						145,794			21,474
Income before income taxes per barrel (dollars per barrel)			$	1.13		0.92						1.36			2.24
Realized marketing fuel margins (dollars per barrel)**			1.59			2.30						1.94			4.01
** 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.*

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can normally identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions, but the absence of such words does not mean a statement is not forward-looking.

We based the forward-looking statements on our current expectations, estimates and projections about us, our operations, our joint ventures and entities in which we have equity interests, as well as the industries in which we and they operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:

• The negative impact on commercial activity and demand for refined petroleum products from any widespread public health crisis, as well as the extent and duration of recovery of economies and demand for our products following any such crisis.

• Fluctuations in NGL, crude oil, refined petroleum product and natural gas prices and refining, marketing and petrochemical margins.

• Changes in governmental policies relating to NGL, crude oil, natural gas or refined petroleum products pricing, regulation or taxation, including exports.

• Actions taken by OPEC and other countries impacting supply and demand and correspondingly, commodity prices.

• Unexpected changes in costs or technical requirements for constructing, modifying or operating our facilities or transporting our products.

• Unexpected technological or commercial difficulties in manufacturing, refining or transporting our products, including chemical products.

• Lack of, or disruptions in, adequate and reliable transportation for our NGL, crude oil, natural gas and refined petroleum products.

• The level and success of drilling and quality of production volumes around our Midstream assets.

• The inability to timely obtain or maintain permits, including those necessary for capital projects.

• The inability to comply with government regulations or make capital expenditures required to maintain compliance.

• Changes to worldwide government policies relating to renewable fuels and greenhouse gas emissions that adversely affect programs like the renewable fuel standards program, low carbon fuel standards and tax credits for biofuels.

• Failure to complete definitive agreements and feasibility studies for, and to complete construction of, announced and future capital projects on time and within budget.

• Potential disruption or interruption of our operations due to accidents, weather events, civil unrest, insurrections, political events, terrorism or cyberattacks.

• Potential disruption or damage to our facilities as a result of significant storms, flooding or other destructive climate events.

• The inability to meet our sustainability goals, including reducing our GHG emissions intensity, developing and protecting new technologies, and commercializing lower-carbon opportunities.

• General domestic and international economic and political developments including armed hostilities, expropriation of assets, and other political, economic or diplomatic developments, including those caused by public health issues, outbreaks of diseases and pandemics.

• Failure of new products and services to achieve market acceptance.

• International monetary conditions and exchange controls.

• Substantial investments required, or reduced demand for products, as a result of existing or future environmental rules and regulations, including GHG emissions reductions and reduced consumer demand for refined petroleum products.

• Liability resulting from litigation or for remedial actions, including removal and reclamation obligations under environmental regulations.

• Changes in tax, environmental and other laws and regulations (including alternative energy mandates) applicable to our business.

• Political and societal concerns about climate change that could result in changes to our business or increase expenditures, including litigation-related expenses.

• Changes in estimates or projections used to assess fair value of intangible assets, goodwill and property and equipment and/or strategic decisions or other developments with respect to our asset portfolio that cause impairment charges.

• Limited access to capital or significantly higher cost of capital related to changes to our credit profile or illiquidity or uncertainty in the domestic or international financial markets.

• The operation, financing and distribution decisions of our joint ventures that we do not control.

• The factors generally described in Item 1A.—Risk Factors in our 2021 Annual Report on Form 10-K.