Phillips 66 10-Q 2024-09-30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Phillips 66

(Exact name of registrant as specified in its charter)

2331 CityWest Blvd., Houston, Texas 77042

(Address of principal executive offices) (Zip Code)

832-765-3010

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had 412,989,227 shares of common stock, $0.01 par value, outstanding as of September 30, 2024.

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PHILLIPS 66

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PART I. FINANCIAL INFORMATION

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See Notes to Consolidated Financial Statements.

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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 forward-looking statements made in this Quarterly Report on Form 10-Q are based on events or circumstances as of the date on which the statements are made. The company does not undertake to update, revise or correct any of the forward-looking information included in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events unless required to do so pursuant to applicable law. 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 term “earnings” as used in Management’s Discussion and Analysis refers to net income 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 uniquely positioned as a leading integrated downstream energy provider operating with Midstream, Chemicals, Refining, Marketing and Specialties (M&S), and Renewable Fuels segments. At September 30, 2024, we had total assets of $75.1 billion. Our common stock trades on the New York Stock Exchange under the symbol PSX.

Executive Overview

In the third quarter of 2024, we reported earnings of $346 million and cash provided by operating activities of $1.1 billion. During the quarter, we funded capital expenditures and investments of $358 million, completed the acquisition of Pinnacle Midland Parent LLC (Pinnacle Midstream) for total cash consideration of $567 million, purchased government obligations of $1.1 billion that were ultimately used to extinguish debt, and received proceeds from asset dispositions of $219 million. Additionally, we received proceeds from debt issuances, net of debt repayments, of $1.1 billion, repurchased $800 million of common stock, and paid dividends on our common stock of $477 million. We ended the third quarter of 2024 with $1.6 billion of cash and cash equivalents and $5.3 billion of total committed capacity available under our credit facilities. See Note 12—Debt, in the Notes to Consolidated Financial Statements for additional information regarding our purchase of government obligations used to extinguish debt.

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Strategic Priorities Update

In October 2024, we announced progress on our strategic priorities intended to enhance long-term shareholder value.

• We have distributed $12.5 billion through share repurchases and dividends since July 2022 and are on pace to achieve our $13 billion to $15 billion target by year-end 2024.

• We achieved $1.4 billion in run-rate business transformation savings, delivering on our cost reduction target.

• We expanded our Midstream NGL wellhead-to-market business with the acquisition of Pinnacle Midstream and approved a follow-on processing plant expansion in the Midland Basin expected to be completed in mid-year 2025.

• We have achieved our target of over $400 million of run-rate synergies from the integration of DCP Midstream Class A Segment.

• We have received proceeds of $1.3 billion since 2022 toward our $3 billion asset disposition target. In addition, we recently agreed to sell our 49% interest in a Switzerland-based retail joint venture for cash proceeds of 1.06 billion Swiss francs (approximately $1.24 billion), and our interests in non-core Midstream assets in North Dakota for $140 million. Refer to Note 8—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements for additional information.

Basis of Presentation

Effective April 1, 2024, we changed the internal financial information reviewed by our chief executive officer to evaluate performance and allocate resources to our operating segments. This included changes in the composition of our operating segments, as well as measurement changes for certain activities between our operating segments. The primary effects are summarized below. Prior period information has been recast for comparability.

• Establishment of a Renewable Fuels operating segment, which includes renewable fuels activities and assets historically reported in our Refining, M&S and Midstream segments.

• Change in method of allocating results for certain Gulf Coast distillate export activities from our M&S segment to our Refining segment.

• Reclassification of certain crude oil and international clean products trading activities between our M&S segment and our Refining segment.

• Change in reporting of our 16% investment in NOVONIX from our Midstream segment to Corporate and Other.

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Business Environment

The Midstream segment includes our Transportation and natural gas liquids (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 Pipeline, LLC (DCP Sand Hills) and DCP Southern Hills Pipeline, LLC (DCP Southern Hills), contains both fee-based operations and operations directly impacted by NGL and natural gas prices. The weighted-average NGL price was $0.64 per gallon during the third quarter of 2024, compared with $0.67 per gallon during the third quarter of 2023. The Henry Hub natural gas price was $2.09 per million British thermal units (MMBtu) during the third quarter of 2024, compared with $2.58 per MMBtu during the third quarter of 2023. The decrease in NGL prices and natural gas prices was partially due to constraints on Permian natural gas exit capacity.

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. The benchmark high-density polyethylene chain margin increased in the third quarter of 2024, compared with the third quarter of 2023, mainly due to improved polyethylene sales prices and lower natural gas and ethane prices.

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. Market cracks are used as indicators of refining margins and measure the difference between market prices for refined petroleum products and crude oil. The composite 3:2:1 market cra

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Our commodity price risk and interest rate risk at September 30, 2024, did not differ materially from the risks disclosed under Item 7A of our 2023 Annual Report on Form 10-K.

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2024, with the participation of management, our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer carried out an evaluation, pursuant to Rule 13a-15(b) of the Act, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of September 30, 2024.

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the quarterly period ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

From time to time, we may be involved in litigation and claims arising out of our operations in the normal course of business. Additionally, we have elected a $300,000 threshold to disclose certain proceedings arising under federal, state or local environmental laws when a governmental authority is a party to the proceedings. During the third quarter of 2024, four new matters arose, which are described below, and there was a material development with respect to a matter previously reported but still unresolved, which is described below. Except as otherwise set forth herein, we do not currently believe that the eventual outcome of any matters previously reported but still unresolved, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Further, our U.S. refineries are implementing two separate consent decrees, regarding alleged violations of the Federal Clean Air Act, with the EPA, five states and one local air pollution agency. Some of the requirements and limitations contained in the decrees provide for stipulated penalties for violations. Stipulated penalties under the decrees are not automatic, but must be requested by one of the agency signatories. As part of periodic reports under the decrees or other reports required by permits or regulations, we occasionally report matters that could be subject to a request for stipulated penalties. If a specific request for stipulated penalties meeting the reporting threshold set forth in U.S. Securities and Exchange Commission (SEC) rules is made pursuant to these decrees based on a given reported exceedance, we will separately report that matter and the amount of the proposed penalty.

Material Development to Matter Previously Reported

In the first quarter of 2023, we received a penalty demand under the corporate-wide Clean Air Act consent decree for alleged stipulated penalties arising from self-reported Clean Air Act violations at our Alliance, Borger, Sweeny, and Wood River Refineries. In December 2023, the Company paid $2,470,000 in alleged stipulated penalties related to self-reported violations at the Alliance Refinery. In June 2024, the court released the Company from its obligations and liabilities under the Consent Decree from February 28, 2023, forward as a result of the sale of the facility to Harvest Louisiana Terminals, LLC. In the third quarter of 2024, the Company paid $799,500 in satisfaction of a stipulated penalty demand for the Sweeny Refinery.

New Matters

As described further in the “Legal Proceedings” section of Note 14—Contingencies and Commitments, in the Notes to Consolidated Financial Statements, on February 17, 2022, Propel Fuels, Inc. (Propel Fuels) filed a lawsuit in the Superior Court of California, County of Alameda (the Court), alleging that Phillips 66 Company misappropriated trade secrets related to Propel Fuels’ renewable fuels business. On October 16, 2024, a jury returned a verdict against Phillips 66 Company for $604.9 million in compensatory damages and issued a willfulness finding. In 2025, the Court is expected to rule on motions anticipated to be filed by Propel Fuels seeking exemplary damages and attorneys’ fees. Phillips 66 Company expects that Propel Fuels will ask the Court to grant treble damages. Also in 2025, the Court is expected to rule on Phillips 66 Company’s motions for a judgment in its favor as a matter of law, or in the alternative to reduce the jury’s verdict or to grant a new trial. Phillips 66 Company denies any wrongdoing and intends to vigorously defend its position. While Phillips 66 Company believes the jury verdict is not legally or factually supported and intends to pursue post-judgment remedies and file an appeal, there can be no assurances that such defense efforts will be successful. To the extent Phillips 66 Company is required to pay exemplary damages, it may have a material adverse effect on our financial position and results of operations.

On August 30, 2024, the Colorado Department of Public Health & Environment, Air Pollution Control Division (APCD) sent DCP Operating Company, LP (DCP) a Compliance Order on Consent alleging violations at its Enterprise Compressor Station of AQCC Regulation 7 and DCP’s permit conditions. APCD has proposed a penalty of $446,250. The Parties are in ongoing settlement discussions of their respective understanding of the facts and the associated proposed penalty. Resolution is anticipated in the fourth quarter of 2024.

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On May 12, 2023, the US Environmental Protection Agency (EPA), Region 6, sent DCP a Notice of Violation and Opportunity to Confer regarding alleged violations of 40 C.F.R. Part 60, Subpart OOOOa (NOV). The NOV alleges non-compliances at the Artesia and Eunice Natural Gas Processing Plants in New Mexico. In the third quarter of 2024, EPA proposed a settlement of the matter that would include injunctive relief with regards to implementation of Subpart OOOOa and an administrative penalty in excess of $300,000. The Parties remain in ongoing discussion of their respective understanding of the facts and the associated level of penalty. Resolution is anticipated by the first quarter of 2025.

In December of 2021, the EPA notified the Company of alleged violations of Section 112(r)(1) and 112(r)(7) of the Clean Air Act (CAA), 42 U.S.C. § 7412(r)(1) and 7412(r)(7), and the Risk Management Plan (RMP) provisions of the CAA implementing regulations at 40 C.F.R. Part 68 at the Company’s Billings, Ferndale, Los Angeles, and Wood River Refineries. Phillips 66 has provided, and continues to provide, information to the U.S. EPA and the US. Department of Justice (DOJ) about the Company’s RMP program. In 2023, EPA alleged CAA violations at the Company’s Borger Refinery related to an incident at the facility in 2022. In 2024, EPA alleged additional CAA violations at the Company’s Borger Refinery related to incidents at facility in 2024. The Company is engaged in confidential discussions with the U.S. EPA and U.S. DOJ. In September 2024, EPA made a penalty demand in excess of $300,000 to resolve these allegations. The company is continuing its discussions with the agency to potentially resolve the allegations that would include a penalty amount to be determined and certain other injunctive relief. The Company believes it has legal and factual defenses and will vigorously defend any allegation of noncompliance and the factors that could apply in the assessment of any fines and penalties. Resolution of the matter is expected in 2025.

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

See the “Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)” section of Note 8—Investments, Loans and Long-Term Receivables and Note 14—Contingencies and Commitments, in the Notes to Consolidated Financial Statements for additional information regarding Legal Proceedings and other regulatory actions.

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There have been no material changes from the risk factors disclosed in Item 1A of our 2023 Annual Report on Form 10-K.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

During the quarter ended September 30, 2024, no director or Section 16 officer adopted, modified or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (in each case, as defined in Item 408(a) of Regulation S-K).

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