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

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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 September 30, 2022, we had total assets of $77 billion. Our common stock trades on the New York Stock Exchange under the symbol PSX.

Executive Overview

In the third quarter of 2022, we reported earnings of $5.4 billion and generated cash from operating activities of $3.1 billion. We used available cash to fund capital expenditures and investments of $735 million, repurchase $694 million of common stock, and pay dividends on our common stock of $466 million. We ended the third quarter of 2022 with $3.7 billion of cash and cash equivalents and $6.7 billion of total committed capacity available under our revolving credit facility, DCP Midstream, LP’s (DCP LP) credit facility and DCP LP’s accounts receivable securitization facility.

We continue to progress our multi-year business transformation focused on enterprise-wide opportunities to improve our cost structure. We recently started implementing initiatives and are targeting a sustainable run-rate cost reduction of at least $800 million and lower sustaining capital of at least $200 million per year by the end of 2023. During the third quarter of 2022, we recorded restructuring costs of $74 million associated with our business transformation.

DCP Midstream and Gray Oak Holdings Merger

On August 17, 2022, we announced a realignment of our economic and governance interests in DCP LP and Gray Oak Pipeline, LLC (Gray Oak Pipeline) resulting from the merger of DCP Midstream, LLC (DCP Midstream) and Gray Oak Holdings LLC (Gray Oak Holdings). In connection with the merger, we were delegated DCP Midstream’s governance rights over DCP LP and its general partner entities, referred to as DCP Midstream Class A Segment. As a result, starting on August 18, 2022, the company’s financial results reflect the consolidation of DCP Midstream Class A Segment, as well as DCP Sand Hills Pipeline, LLC (DCP Sand Hills) and DCP Southern Hills Pipeline, LLC (DCP Southern Hills). See Note 1—Interim Financial Information and Note 2—Business Combination, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings and the accounting treatment.

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Phillips 66 Partners Merger

On March 9, 2022, we completed the 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 21—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on this merger transaction.

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, including DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022, forward, contains both fee-based operations and operations directly impacted by NGL, natural gas and condensate prices. During the third quarter of 2022, NGL and natural gas prices increased, compared with the third quarter of 2021, due to strong demand and higher crude oil 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 third quarter of 2022, the benchmark high-density polyethylene chain margin decreased, compared with the third quarter of 2021, mainly due to lower prices and higher feedstock costs.

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 $91.76 per barrel during the third quarter of 2022, compared with an average of $70.58 per barrel in the third 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 $36.29 per barrel during the third quarter of 2022, compared with an average of $19.44 per barrel in the third 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 Coronavirus Disease 2019 (COVID-19) pandemic recedes, as well as market and trade flow disruptions from the conflict between Russia and Ukraine.

Results for our Marketing and Specialties (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.

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RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three and nine months ended September 30, 2022, is based on a comparison with the corresponding periods of 2021.

In connection with the merger of DCP Midstream and Gray Oak Holdings, results for the three and nine months ended September 30, 2022, include the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022, forward. See Note 1—Interim Financial Information, Note 2—Business Combination, and Note 14—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings.

Consolidated Results

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

Millions of Dollars
Three Months Ended September 30Nine Months Ended September 30
2022202120222021
Midstream$3,6456294,1791,017
Chemicals1356318041,408
Refining2,851(1,126)6,010(2,895)
Marketing and Specialties8475451,9281,311
Corporate and Other(320)(231)(829)(728)
Income before income taxes7,15844812,092113
Income tax expense (benefit)1,618(40)2,713(110)
Net income5,5404889,379223
Less: net income attributable to noncontrolling interests14986239179
Net income attributable to Phillips 66$5,3914029,14044

Our net income attributable to Phillips 66 in the third quarter and nine-month period of 2022 was $5.4 billion and $9.1 billion, respectively, compared with $402 million and $44 million in the third quarter and nine-month period of 2021, respectively.

The improvements in both periods were primarily due to:

  • Improved realized refining and international marketing fuel margins.

  • An aggregate gain of $3,013 million recognized in our Midstream segment in connection with the merger of DCP Midstream and Gray Oak Holdings.

  • Lower impairments in the Refining segment.

These improvements were partially offset by lower equity earnings from CPChem, an unrealized decrease in the fair value of our investment in NOVONIX Limited (NOVONIX), and an increase in income tax expense.

See the “Segment Results” section for additional information on our segment performance and Note 19—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information on income taxes.

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Statement of Income Analysis

Sales and other operating revenues for the third quarter and nine-month period of 2022 increased 49% and 64%, respectively, and purchased crude oil and products increased 40% and 58%, respectively. These increases were mainly due to higher prices for refined petroleum products, crude oil and NGL.

Equity in earnings of affiliates decreased 20% in the third quarter of 2022 and increased 14% in the nine-month period of 2022. The decrease in the third quarter of 2022 was primarily due to lower equity earnings from CPChem, partially offset by increases in equity earnings from WRB due to improved realized refining margins, as well as Excel Paralubes LLC (Excel Paralubes). The increase in the nine-month period of 2022 was primarily attributable to higher equity earnings from WRB resulting from improved realized refining margins; DCP Midstream prior to the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills; and Excel Paralubes, partially offset by lower equity earnings from CPChem. See Chemicals and Marketing and Specialties segment analyses in the “Segment Results” section for additional information regarding CPChem and Excel Paralubes, respectively.

Other income increased $2,788 million and $2,394 million in the third quarter and nine-month period of 2022, respectively. The increase in both periods was primarily due to an aggregate gain of $3,013 million recognized in our Midstream segment in connection with the merger of DCP Midstream and Gray Oak Holdings. These increases were partially offset by unrealized investment losses related to decreases in the stock price of our investment in NOVONIX, which we acquired in September 2021. See Note 6—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding our investment in NOVONIX.

Operating expenses increased 38% and 18% in the third quarter and nine-month period of 2022, respectively. The increase in both periods was mainly attributable to higher utility costs driven by increased commodity prices and higher turnaround and other maintenance expenses.

Selling, general and administrative expenses increased 46% and 22% in the third quarter and nine-month period of 2022, respectively. The increase in both periods was primarily due to restructuring costs associated with our business transformation, higher selling expenses driven by rising refined petroleum product prices and increased employee-related expenses.

Depreciation and amortization increased 19% in the third quarter of 2022. The increase was primarily due to additional depreciation and amortization recorded from August 18, 2022, forward related to assets acquired as a result of the consolidation of DCP Midstream Class A Segment, DCP Southern Hills and DCP Sand Hills.

Impairments decreased in the third quarter and nine-month period of 2022. The decrease in both periods was due to a before-tax impairment of $1,298 million recorded in the third quarter of 2021 associated with our Alliance Refinery. The nine-month period of 2021 also included 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 8—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding these impairments.

Taxes other than income taxes increased 56% and 17% in the third quarter and nine-month period of 2022, respectively. The increase in both periods was primarily due to higher taxes at our San Francisco Refinery due to tax credits received from renewable diesel blending activity in the third quarter of 2021, as well as higher property and other taxes.

We had income tax expense of $1,618 million and $2,713 million in the third quarter and nine-month period of 2022, respectively, compared with an income tax benefit of $40 million and $110 million in the third quarter and nine-month period of 2021, respectively. The fluctuation in income taxes between periods is primarily due to improved results. See Note 19—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our effective income tax rates.

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Net income attributable to noncontrolling interests increased 73% and 34% in the third quarter and nine-month period of 2022. The increase was primarily driven by the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills, which resulted in us reflecting the additional noncontrolling interest owned by the public common and preferred unitholders of DCP LP, as well as Enbridge’s noncontrolling interest in DCP Midstream Class A Segment, on our consolidated income statement. These increases were partially offset by a decrease due to the merger between us and Phillips 66 Partners that occurred in the first quarter of 2022. Upon closing of the merger transaction, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66. See Note 21—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the merger transaction.

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Segment Results

Midstream

Three Months Ended September 30Nine Months Ended September 30
2022202120222021
Millions of Dollars
Income (Loss) Before Income Taxes
Transportation$411244939475
NGL and Other*3,2671613,671318
NOVONIX(33)224(431)224
Total Midstream$3,6456294,1791,017

** In the third quarter of 2022, we began presenting the results of DCP Midstream Class A Segment within the results of our NGL and Other business. Prior periods also have been updated to reflect the results from our equity investment in DCP Midstream prior to August 18, 2022, within the results of our NGL and Other business.*

Thousands of Barrels Daily
Transportation Volumes
Pipelines*3,0843,4833,0833,238
Terminals3,0662,7712,9622,744
Operating Statistics
NGL fractionated**508420477395
NGL production***434398424387

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

*** Includes 100% of DCP Midstream Class A Segment’s volumes from August 18, 2022, forward.*

**** Includes 100% of DCP Midstream Class A Segment’s volumes.*

Dollars Per Gallon
Market Indicator
Weighted-Average NGL Price*$0.980.911.080.77
** 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; NGL production, transportation, storage, fractionation, processing and marketing services; natural gas gathering, compressing, treating, processing, storage, transportation and marketing services; and condensate recovering, mainly in the United States. This segment also includes our 16% investment in NOVONIX.

In connection with the merger of DCP Midstream and Gray Oak Holdings, the results of our Transportation business reflect a decrease in our indirect economic interest in Gray Oak Pipeline to 6.5% from August 18, 2022, forward. Prior to August 18, 2022, the Transportation results presented in the table above reflect Gray Oak Holdings’ 65% economic interest in Gray Oak Pipeline. In addition, the results of our NGL and Other business include the consolidated results of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022, forward. Prior to August 18, 2022, our investments in DCP Midstream, DCP Sand Hills and DCP Southern Hills were accounted for using the equity method. As a result of the merger and consolidation, DCP Midstream’s results prior to the merger have been combined with the results of our NGL and Other business.

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Results from our Midstream segment increased $3,016 million in the third quarter of 2022 and increased $3,162 million in the nine-month period of 2022.

Results from our Transportation business increased $167 million and $464 million in the third quarter and nine-month period of 2022, respectively. The increase in both periods was primarily due to a gain of $182 million from the transfer of a 35.75% indirect economic interest in Gray Oak Pipeline to our co-venturer as part of the merger of DCP Midstream and Gray Oak Holdings. In addition, the increase in the nine-month period of 2022 was also 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.

Results from our NGL and Other business increased $3,106 million and $3,353 million in the third quarter and nine-month period of 2022, respectively. The increase in both periods was primarily due to gains totaling $2,831 million recognized from remeasuring our previously held equity investments in DCP Midstream, DCP Sand Hills and DCP Southern Hills to their fair values in connection with the merger of DCP Midstream and Gray Oak Holdings.

The fair value of our investment in NOVONIX decreased by $257 million and $655 million in the third quarter and nine-month period of 2022, respectively. We acquired this investment in September 2021.

In the Notes to Consolidated Financial Statements, see Note 6—Investments, Loans and Long-Term Receivables, for additional information on our investment in NOVONIX, and Note 8—Impairments, for information regarding the Liberty Pipeline project impairment.

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

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Chemicals

Three Months Ended September 30Nine Months Ended September 30
2022202120222021
Millions of Dollars
Income Before Income Taxes$1356318041,408
Millions of Pounds
CPChem Externally Marketed Sales Volumes*
Olefins and Polyolefins4,7494,91214,64314,260
Specialties, Aromatics and Styrenics1,2201,2163,6223,431
5,9696,12818,26517,691
** 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)90%1029594

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 decreased $496 million and $604 million in the third quarter and nine-month period of 2022, respectively. The decrease in the third quarter of 2022 was primarily due to compressed O&P margins driven by lower sales prices and higher feedstock costs, higher utility and maintenance costs, and lower sales volumes. The decrease in the nine-month period of 2022 is primarily due to lower O&P margins and higher utility and maintenance costs, partially offset by higher sales volumes.

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

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Refining

Three Months Ended September 30Nine Months Ended September 30
2022202120222021
Millions of Dollars
Income (Loss) Before Income Taxes
Atlantic Basin/Europe$521901,757(173)
Gulf Coast726(1,333)1,593(1,850)
Central Corridor1,3422291,697(101)
West Coast262(112)963(771)
Worldwide$2,851(1,126)6,010(2,895)
Dollars Per Barrel
Income (Loss) Before Income Taxes
Atlantic Basin/Europe$10.541.8811.93(1.23)
Gulf Coast14.39(20.82)10.27(9.84)
Central Corridor53.328.6823.74(1.45)
West Coast9.07(3.67)10.95(9.11)
Worldwide18.52(6.67)13.01(6.00)
Realized Refining Margins*
Atlantic Basin/Europe$19.229.2720.556.28
Gulf Coast21.295.7517.913.72
Central Corridor38.7612.4724.938.53
West Coast28.647.4626.584.83
Worldwide26.588.5721.885.68

** 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.*

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Thousands of Barrels Daily
Three Months Ended September 30Nine Months Ended September 30
Operating Statistics2022202120222021
Refining operations*
Atlantic Basin/Europe
Crude oil capacity537537537537
Crude oil processed525487518479
Capacity utilization (percent)98%919689
Refinery production539523543519
Gulf Coast**
Crude oil capacity529784529784
Crude oil processed481623493621
Capacity utilization (percent)91%809379
Refinery production557700578689
Central Corridor
Crude oil capacity531531531531
Crude oil processed492493460447
Capacity utilization (percent)93%938784
Refinery production512510477461
West Coast
Crude oil capacity364364364364
Crude oil processed290302297286
Capacity utilization (percent)80%838178
Refinery production312329321308
Worldwide
Crude oil capacity1,9612,2161,9612,216
Crude oil processed1,7881,9051,7681,833
Capacity utilization (percent)91%869083
Refinery production1,9202,0621,9191,977
** 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 subsequently converted it into a terminal.

Results from our Refining segment increased $3,977 million and $8,905 million in the third quarter and nine-month period of 2022, respectively, primarily due to higher realized refining margins driven by improved market crack spreads, partially offset by higher operating costs. In addition, the third quarter and nine-month period of 2021 included a pre-tax impairment of $1,288 million associated with our Alliance Refinery. See Note 8—Impairments, in the Notes to Consolidated Financial Statements, for information regarding this impairment.

Our worldwide refining crude oil capacity utilization rate was 91% and 90% in the third quarter and nine-month period of 2022, respectively, compared with 86% and 83% in the third quarter and nine-month period of 2021, respectively. The increase in both periods was primarily driven by improved demand for refined petroleum products as the COVID-19 pandemic recedes and supply constraints caused by the conflict between Russia and Ukraine, partially offset by higher maintenance activity. See the “Executive Overview and Business Environment” section for information on market factors impacting this quarter’s results.

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Marketing and Specialties

Three Months Ended September 30Nine Months Ended September 30
2022202120222021
Millions of Dollars
Income Before Income Taxes
Marketing and Other$7174521,5761,052
Specialties13093352259
Total Marketing and Specialties$8475451,9281,311
Dollars Per Barrel
Income Before Income Taxes
U.S.$2.161.932.051.84
International12.604.847.063.09
Realized Marketing Fuel Margins*
U.S.$2.492.292.442.30
International12.406.757.734.63

** 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$3.372.653.442.39
Distillates3.962.483.882.25
** On third-party branded petroleum product sales, excluding excise taxes.*
Thousands of Barrels Daily
Marketing Petroleum Products Sales Volumes
Gasoline1,1901,1891,1651,130
Distillates9351,074968947
Other16171718
Total2,1412,2802,1502,095

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 $302 million and $617 million in the third quarter and nine-month period of 2022, primarily driven by higher realized international marketing fuel margins, increased finished lubricant margins, higher equity earnings from Excel Paralubes, and improved results from our other businesses.

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

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Corporate and Other

Millions of Dollars
Three Months Ended September 30Nine Months Ended September 30
2022202120222021
Loss Before Income Taxes
Net interest expense$(136)(148)(395)(432)
Corporate overhead and other(184)(83)(434)(296)
Total Corporate and Other$(320)(231)(829)(728)

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 $12 million and $37 million, respectively, in the third quarter and nine-month period of 2022. The decrease in both periods was primarily driven by increased interest income and higher capitalized interest. The decrease in the third quarter of 2022 was partially offset by increased interest expense as a result of consolidating DCP Midstream Class A Segment from August 18, 2022, forward. See Note 10—Debt, in the Notes to Consolidated Financial Statements, for additional information regarding debt.

Corporate overhead and other costs increased $101 million and $138 million in the third quarter and nine-month period of 2022, respectively. The increase in both periods was primarily due to restructuring costs associated with our business transformation and higher employee-related expenses. See Note 22—Restructuring, in the Notes to Consolidated Financial Statements, for additional information regarding restructuring costs.

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CAPITAL RESOURCES AND LIQUIDITY

Financial Indicators

Millions of Dollars, Except as Indicated
September 30 2022December 31 2021
Cash and cash equivalents$3,7443,147
Short-term debt1,0321,489
Total debt17,65714,448
Total equity33,30921,637
Percent of total debt to capital*35%40
Percent of floating-rate debt to total debt—%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 nine months of 2022, we generated $6.1 billion of cash from operations. We used available cash primarily to pay down $2.0 billion in debt, pay dividends on our common stock of $1.3 billion, fund capital expenditures and investments of $1.5 billion, and repurchase $760 million of our common stock. During the first nine months of 2022, cash and cash equivalents increased $597 million to $3.7 billion.

Significant Sources of Capital

Operating Activities

During the first nine months of 2022, cash generated by operating activities was $6.1 billion, compared with $4.2 billion for the first nine months of 2021. The increase was primarily due to improved earnings, partially offset by unfavorable working capital impacts and decreased distributions from equity affiliates.

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 nine months of 2022, cash from operations included aggregate distributions of $1.4 billion from our equity affiliates, including $556 million from CPChem. During the same period of 2021, cash from operations included aggregate distributions of $2.0 billion, including $1.2 billion from CPChem. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these equity affiliates are not assured.

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Credit Facilities and Commercial Paper

Phillips 66 and Phillips 66 Company

On June 23, 2022, we entered into a new $5 billion revolving credit facility (the Facility) with Phillips 66 Company as the borrower and Phillips 66 as the guarantor and a scheduled maturity date of June 22, 2027. The Facility replaced our previous $5 billion revolving credit facility with Phillips 66 as the borrower and Phillips 66 Company as the guarantor. The Facility contains usual and customary covenants that are similar to the previous revolving credit facility, including a maximum consolidated net debt-to-capitalization ratio of 65% as of the last day of each fiscal quarter. We have the 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, subject to, among other things, the consent of the lenders holding the majority of the commitments and of each lender extending its commitment. Outstanding borrowings under the Facility bear interest at either (a) the Adjusted Term Secured Overnight Financing Rate (SOFR) (as described in the Facility) 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 our senior unsecured long-term debt from time to time. We may at any time prepay outstanding borrowings, in whole or in part, without premium or penalty. At September 30, 2022, no amount has been drawn under the Facility. At September 30, 2022, no amount had been drawn under the Facility or Phillips 66 Company’s $5 billion uncommitted commercial paper program supported by the Facility.

DCP Midstream Class A Segment

DCP LP also has a credit facility that matures on March 18, 2027, under its amended credit agreement (the Credit Agreement), with a borrowing capacity of up to $1.4 billion. The credit facility bears interest at either the term SOFR or the base rate plus, in each case, an applicable margin based on DCP LP’s credit rating. The Credit Agreement also grants DCP LP the option to increase the revolving loan commitment by an aggregate principal amount of up to $500 million and also to extend the term for up to two additional one-year periods, subject to requisite lender approval. Loans under the Credit Agreement may be used for working capital and other general partnership purposes including acquisitions. Indebtedness under the Credit Agreement bears interest at either: (1) an adjusted SOFR (as described in the Credit Agreement) plus the applicable margin; or (2) the base rate (as described in the Credit Agreement) plus an applicable margin. The Credit Agreement also provides for customary fees, including commitment fees. The cost of borrowing under the Credit Agreement is determined by a ratings-based pricing grid based on DCP LP’s credit rating. As of September 30, 2022, DCP LP had unused borrowing capacity of $1,390 million, net of $10 million of letters of credit, under the Credit Agreement, of which $1,390 million was available to borrow for working capital and other general partnership purposes based on the financial covenants set forth in the Credit Agreement. Except in the event of a default, amounts under the Credit Agreement will not become due prior to the March 18, 2027, maturity date.

DCP LP has an accounts receivable securitization facility (the Securitization Facility) that provides for up to $350 million of borrowing capacity through August 2024 at an adjusted SOFR that includes an uncommitted option to increase the total commitments under the Securitization Facility by up to an additional $400 million. Under the Securitization Facility, certain of DCP LP’s wholly owned subsidiaries sell or contribute receivables to another of DCP LP’s consolidated subsidiaries, DCP Receivables LLC (DCP Receivables), a bankruptcy-remote special purpose entity created for the sole purpose of the Securitization Facility. As of September 30, 2022, DCP LP had unused borrowing capacity of $350 million under the Securitization Facility, secured by its accounts receivable at DCP Receivables.

Phillips 66 Partners

In connection with entering into the Facility, we terminated Phillips 66 Partners’ $750 million revolving credit facility.

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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 September 30, 2022. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling $209 million. These leases have remaining terms of up to nine 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 (the 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 no plans to stop pipeline operations while it proceeds with the EIS, and the Tribe’s request for a shutdown was denied in May of 2021. In June 2021, the trial court dismissed the litigation entirely. Once the EIS is completed, new litigation or challenges may be filed.

In February 2022, the U.S. Supreme Court (the Court) denied Dakota Access’s writ of certiorari requesting the Court to review the lower court’s decision to order the EIS and vacate the easement. Therefore, the requirement to prepare the EIS stands. Also in February 2022, the Tribe withdrew as a cooperating agency, causing the USACE to halt the EIS process while the USACE engaged with the Tribe on their reasons for withdrawing. The draft EIS process resumed in August of 2022, and release is expected in Spring of 2023.

Dakota Access and ETCO have guaranteed repayment of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access in March 2019. 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. At September 30, 2022, the aggregate principal amount outstanding of Dakota Access’ senior unsecured notes was $1.85 billion.

In conjunction with the notes offering, Phillips 66 Partners, now a wholly owned subsidiary of Phillips 66, and its co-venturers in Dakota Access also provided a Contingent Equity Contribution Undertaking (CECU). 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 September 30, 2022, our 25% share of the maximum potential equity contributions under the CECU was approximately $467 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 25% share of the ongoing expenses, including scheduled interest payments on the notes of approximately $20 million annually, in addition to the potential obligations under the CECU at September 30, 2022.

See Note 11—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.

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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 September 30, 2022, and December 31, 2021, was $17.7 billion and $14.4 billion, respectively. Our total debt-to-capital ratio was 35% and 40% at September 30, 2022, and December 31, 2021, respectively.

After the merger, DCP LP repaid $470 million of debt, related to its accounts receivable securitization facility and revolving credit facility.

In 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.

We plan to repay our $500 million 3.700% senior notes due April 2023 by the end of 2022.

Debt Exchange

On May 5, 2022, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, completed 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 issued by Phillips 66 Company (collectively, the New Notes). The New Notes are fully and unconditionally guaranteed by Phillips 66 and rank equally with Phillips 66 Company’s other unsecured and unsubordinated indebtedness, and the guarantees rank equally with Phillips 66’s other unsecured and unsubordinated indebtedness.

Old Notes with an aggregate principal amount of approximately $3.2 billion were tendered in the Exchange Offers. The New Notes have the same interest rates, interest payment dates and maturity dates as the Old Notes. Holders that validly tendered before the end of the early participation period on April 19, 2022 (the Early Participation Date), received New Notes with an aggregate principal amount equivalent to the Old Notes, while holders that validly tendered after the Early Participation Date, but before the Expiration Date, received New Notes with an aggregate principal amount 3% less than the Old Notes. Substantially all of the Old Notes exchanged were tendered during the Early Participation Period.

Joint Venture Loans

We and our co-venturer have provided member loans to WRB. At September 30, 2022, our 50% share of the outstanding member loan balance, including accrued interest, was $433 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.

DCP Midstream and Gray Oak Holdings Merger

On August 17, 2022, we and our co-venturer, Enbridge, agreed to merge DCP Midstream and Gray Oak Holdings with DCP Midstream as the surviving entity. As part of the merger, we made a net cash payment of $306 million.

On August 17, 2022, we announced the submission of a non-binding proposal to the board of the general partner of DCP LP offering to acquire all publicly held common units of DCP LP for cash consideration of $34.75 per unit, or approximately $3.1 billion. We are evaluating a combination of cash and debt to fund this transaction. The proposed transaction is subject to the negotiation and execution of a definitive agreement, and approval of such definitive agreement and transactions contemplated therein by the board of the general partner of DCP LP and the special committee appointed by the board. There can be no assurance that the definitive agreement will be executed or that any transaction will be consummated on the terms described above, or at all.

See Note 1—Interim Financial Information and Note 20—DCP Midstream Class A Segment, in the Notes to the Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings.

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DCP LP Cash Distributions to Unitholders

DCP LP’s partnership agreement requires that, within 45 days after the end of each quarter, DCP LP distributes all available cash. There were no material cash distributions made in the period following the merger.

On October 13, 2022, the board of directors of DCP LP declared a quarterly distribution on DCP LP’s common units of $0.43 per common unit, a semi-annual distribution on DCP LP’s Series A Preferred Units of $36.875 per unit, and a quarterly distribution on DCP LP’s Series B and Series C Preferred Units of $0.4922 and $0.4969 per unit, respectively. The distribution for the common units will be paid on November 14, 2022, to unitholders of record on October 28, 2022. The distribution for the Series A Preferred Units will be paid on December 15, 2022, to unitholders of record on December 1, 2022. The Series B distributions will be paid on December 15, 2022, to unitholders of record on December 1, 2022. The Series C distribution will be paid on January 17, 2023, to unitholders of record on January 3, 2023.

DCP LP Preferred Units

DCP LP expects to redeem its Series A preferred units with an aggregate liquidation preference of $500 million in December 2022. DCP LP expects to fund this redemption from available cash and borrowings under its credit facilities.

Merger with Phillips 66 Partners

On March 9, 2022, we completed the 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 21—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the merger transaction.

Dividends

On July 12, 2022, our board of directors declared a quarterly cash dividend of $0.97 per common share. This dividend was paid on September 1, 2022, to shareholders of record as of the close of business on August 18, 2022. On October 7, 2022, our board of directors declared a quarterly cash dividend of $0.97 per common share. This dividend is payable on December 1, 2022, to shareholders of record as of the close of business on November 17, 2022.

Share Repurchases

We temporarily suspended repurchasing shares under our share repurchase program in mid-March 2020 to preserve liquidity in response to the global economic disruption caused by the COVID-19 pandemic. In the second quarter of 2022, we resumed repurchasing shares. On November 7, 2022, our Board of Directors approved a $5 billion increase to our share repurchase program. Since July 2012, our board of directors has authorized an aggregate of $20 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 169 million shares at an aggregate cost of $13.2 billion. Shares of stock repurchased are held as treasury shares.

Employee Benefit Plan Contributions

During the nine months ended September 30, 2022, we contributed $122 million to our U.S. pension and other postretirement benefit plans and $18 million to our international pension plans. We currently expect to make additional contributions of approximately $16 million to our U.S. pension and other postretirement benefit plans and approximately $5 million to our international pension plans during the remainder of 2022.

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Capital Spending

Millions of Dollars
Nine Months Ended September 30
20222021
Capital Expenditures and Investments
Midstream*$732569
Chemicals——
Refining601528
Marketing and Specialties6072
Corporate and Other8894
Total Capital Expenditures and Investments$1,4811,263
Selected Equity Affiliates**
CPChem432239
WRB125167
$557406
** Includes 100% of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills capital expenditures and investments from August 18, 2022, forward, net of acquired cash.*
*** Our share of joint ventures’ capital spending.*

Midstream

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

  • Net cash payment in connection with the merger of DCP Midstream and Gray Oak Holdings.

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

  • 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 nine months of 2022, on a 100% basis, CPChem’s capital expenditures and investments were $864 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.

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Refining

Capital spending for the Refining segment during the first nine 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 and procurement of long-lead items to produce biofuels at the San Francisco refinery.

  • Installation of facilities to improve product value at the jointly owned Borger refinery.

Marketing and Specialties

Capital spending for the M&S segment during the first nine 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 nine months of 2022 was primarily for information technology.

2022 Budget Update

In October 2022, our Board of Directors authorized an increase of approximately $400 million to the 2022 planned capital budget previously reported in our 2021 Annual Report on Form 10-K. The increased capital budget relates to our Midstream segment and reflects the net cash paid in connection with the merger of DCP Midstream and Gray Oak Holdings. In the Notes to Consolidated Financial Statements, see Note 1—Interim Financial Information, and Note 2—Business Combination, for additional information regarding the merger of DCP Midstream and Gray Oak Holdings.

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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.

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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 nine months ended September 30, 2022 and 2021, we incurred expenses of $403 million and $584 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 income. Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $296 million and $284 million for the nine months ended September 30, 2022 and 2021, respectively. These expenses are included in the “Equity in earnings of affiliates” line item on our consolidated statement of income. 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 nine months of 2022, we were notified of one potentially new site through a CERCLA Section 104(e) information request issued by the EPA, and three sites that were deemed resolved and closed, accordingly, leaving 23 unresolved sites with potential liability at September 30, 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.

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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 to reduce our Scope 1 and Scope 2 GHG emissions intensity related to our operations by 50% of 2019 levels by the year 2050. 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.

CRITICAL ACCOUNTING ESTIMATES

Business Combination

In accounting for a business combination, assets acquired, liabilities assumed and noncontrolling interests are recorded based on estimated fair values as of the date of acquisition. The excess or shortfall of the purchase price when compared to the fair value of the net tangible and identifiable intangible assets acquired, if any, is recorded as goodwill or a bargain purchase gain, respectively. A significant amount of judgment is made in estimating the individual fair value of property, plant and equipment, intangible assets, noncontrolling interests and other assets and liabilities. We use available information to make these fair value determinations and engage third-party specialists in the valuation process as necessary.

The fair values of assets acquired, liabilities assumed and noncontrolling interests as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity specific differences. The estimates used in determining fair values are based on assumptions believed to be reasonable, but which are inherently uncertain. Accordingly, actual results may differ materially from the estimated results used to determine fair value.

See Note 2—Business Combination, and Note 14—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings and fair value measurements.

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GUARANTOR FINANCIAL INFORMATION

We have various cross guarantees between Phillips 66 and its wholly owned subsidiary Phillips 66 Company (the Obligor Group) with respect to publicly held debt securities. 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. Phillips 66 has fully and unconditionally guaranteed the payment obligations of Phillips 66 Company with respect to its publicly held debt securities. In addition, Phillips 66 Company has fully and unconditionally guaranteed the payment obligations of Phillips 66 with respect to its publicly held debt securities. All guarantees are full and unconditional. At September 30, 2022, $12.5 billion of senior unsecured notes outstanding has been guaranteed by the Obligor Group.

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 settled in May 2022.

Summarized financial information of 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.

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The summarized results of operations for the nine months ended September 30, 2022, and the summarized financial position at September 30, 2022, and December 31, 2021, for the Obligor Group on a combined basis were:

Summarized Combined Statement of IncomeMillions of Dollars
Nine Months Ended September 30, 2022
Sales and other operating revenues$101,633
Revenues and other income—non-guarantor subsidiaries3,111
Purchased crude oil and products—third parties57,755
Purchased crude oil and products—related parties16,463
Purchased crude oil and products—non-guarantor subsidiaries19,737
Income before income taxes5,984
Net income4,612
Summarized Combined Balance SheetMillions of Dollars
September 30 2022December 31 2021
Accounts and notes receivable—third parties$7,3523,772
Accounts and notes receivable—related parties1,9411,289
Due from non-guarantor subsidiaries, current667456
Total current assets15,77210,080
Investments and long-term receivables10,24110,324
Net properties, plants and equipment11,57411,541
Goodwill1,0471,047
Due from non-guarantor subsidiaries, noncurrent2,1405,699
Other assets associated with non-guarantor subsidiaries2,2512,565
Total noncurrent assets29,02832,935
Total assets44,80043,015
Due to non-guarantor subsidiaries, current$2,5922,227
Total current liabilities12,89410,551
Long-term debt12,0579,364
Due to non-guarantor subsidiaries, noncurrent7,2949,341
Total noncurrent liabilities25,05124,094
Total liabilities37,94534,645
Total equity6,8558,370
Total liabilities and equity44,80043,015

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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:

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Millions of Dollars, Except as Indicated
Realized Refining MarginsAtlantic Basin/ EuropeGulf CoastCentral CorridorWest CoastWorldwide
Three Months Ended September 30, 2022
Income before income taxes$5217261,3422622,851
Plus:
Taxes other than income taxes1418163179
Depreciation, amortization and impairments50543676216
Selling, general and administrative expenses271217965
Operating expenses3112631784521,204
Equity in (earnings) losses of affiliates21(294)—(291)
Other segment (income) expense, net2—4(1)5
Proportional share of refining gross margins contributed by equity affiliates22—517—539
Realized refining margins$9491,0741,8168294,668
Total processed inputs (thousands of barrels)49,42050,43525,16728,897153,919
Adjusted total processed inputs (thousands of barrels)*49,42050,43546,85728,897175,609
Income before income taxes per barrel (dollars per barrel)**$10.5414.3953.329.0718.52
Realized refining margins (dollars per barrel)***19.2221.2938.7628.6426.58
Three Months Ended September 30, 2021
Income (loss) before income taxes$90(1,333)229(112)(1,126)
Plus:
Taxes other than income taxes151312444
Depreciation, amortization and impairments521,36134571,504
Selling, general and administrative expenses1915101155
Operating expenses239312126266943
Equity in (earnings) losses of affiliates31(31)—(27)
Other segment (income) expense, net6(1)—27
Proportional share of refining gross margins contributed by equity affiliates19—201—220
Realized refining margins$4433685812281,620
Total processed inputs (thousands of barrels)47,79264,01626,37330,558168,739
Adjusted total processed inputs (thousands of barrels)*47,79264,01646,59230,558188,958
Income (loss) before income taxes per barrel (dollars per barrel)**$1.88(20.82)8.68(3.67)(6.67)
Realized refining margins (dollars per barrel)***9.275.7512.477.468.57
** 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.*

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Millions of Dollars, Except as Indicated
Realized Refining MarginsAtlantic Basin/ EuropeGulf CoastCentral CorridorWest CoastWorldwide
Nine Months Ended September 30, 2022
Income before income taxes$1,7571,5931,6979636,010
Plus:
Taxes other than income taxes47665274239
Depreciation, amortization and impairments153169107199628
Selling, general and administrative expenses57374427165
Operating expenses9038816261,0633,473
Equity in (earnings) losses of affiliates76(506)—(493)
Other segment expense, net2212—25
Proportional share of refining gross margins contributed by equity affiliates71—1,191—1,262
Special items:
Regulatory compliance costs926221370
Realized refining margins$3,0262,7793,2352,33911,379
Total processed inputs (thousands of barrels)147,289155,10971,49387,973461,864
Adjusted total processed inputs (thousands of barrels)*147,289155,109129,75387,973520,124
Income before income taxes per barrel (dollars per barrel)**$11.9310.2723.7410.9513.01
Realized refining margins (dollars per barrel)***20.5517.9124.9326.5821.88
Nine Months Ended September 30, 2021
Loss before income taxes$(173)(1,850)(101)(771)(2,895)
Plus:
Taxes other than income taxes53653849205
Depreciation, amortization and impairments1561,5151021681,941
Selling, general and administrative expenses51392432146
Operating expenses6869324569293,003
Equity in losses of affiliates74151—162
Other segment (income) expense, net(2)(7)(10)2(17)
Proportional share of refining gross margins contributed by equity affiliates104—412—516
Realized refining margins$8826981,0724093,061
Total processed inputs (thousands of barrels)140,597187,94069,59384,633482,763
Adjusted total processed inputs (thousands of barrels)*140,597187,940125,49284,633538,662
Loss before income taxes per barrel (dollars per barrel)**$(1.23)(9.84)(1.45)(9.11)(6.00)
Realized refining margins (dollars per barrel)***6.283.728.534.835.68
** 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.*

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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 September 30, 2022Three Months Ended September 30, 2021
U.S.InternationalU.S.International
Realized Marketing Fuel Margins
Income before income taxes$368334354128
Plus:
Depreciation and amortization417318
Selling, general and administrative expenses2185920164
Equity in earnings of affiliates(30)(31)(18)(30)
Other operating (revenues) expenses*(141)(35)(120)9
Other (income) expense, net6(3)22
Marketing margins425341422191
Less: margin for nonfuel related sales—12—13
Realized marketing fuel margins$425329422178
Total fuel sales volumes (thousands of barrels)170,47326,501183,33226,427
Income before income taxes per barrel (dollars per barrel)$2.1612.601.934.84
Realized marketing fuel margins (dollars per barrel)**2.4912.402.296.75
** 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.*

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Millions of Dollars, Except as Indicated
Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
U.S.InternationalU.S.International
Realized Marketing Fuel Margins
Income before income taxes$1,048542919224
Plus:
Depreciation and amortization10541156
Selling, general and administrative expenses610184564184
Equity in earnings of affiliates(53)(89)(35)(85)
Other operating revenues*(387)(56)(316)(6)
Other (income) expense, net18(2)83
Marketing margins1,2466331,151376
Less: margin for nonfuel related sales—39—41
Realized marketing fuel margins$1,2465941,151335
Total fuel sales volumes (thousands of barrels)510,56876,756499,35472,440
Income before income taxes per barrel (dollars per barrel)$2.057.061.843.09
Realized marketing fuel margins (dollars per barrel)**2.447.732.304.63
** 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.*

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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 that convey the prospective nature of events or outcomes, 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 not to place undue reliance on these forward-looking statements as they are not guarantees of future performance and 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 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.

  • The amount of natural gas we gather, compress, treat, process, transport, store and sell, or the NGL we produce, fractionate, transport, store and sell, may be reduced if the pipelines, storage and fractionation facilities to which we deliver the natural gas or NGL are capacity constrained and cannot, or will not, accept the natural gas or NGL or we may be required to find alternative markets and arrangements for our natural gas and NGL.

  • Actions taken by OPEC and non-OPEC oil producing countries impacting supply and demand and correspondingly, commodity prices.

  • The outcome of our proposed transaction to acquire all of the publicly held common units of DCP LP, and the timing and cost associated therewith.

  • The ability to achieve the expected benefits of the integration of DCP LP and the further benefits from the proposed transaction, if consummated.

  • 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.

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

  • 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.

  • 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 operations 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 creditworthiness of our customers and the counterparties to our transactions, including the impact of bankruptcies.

  • 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.

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