What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-29 compared with 2021-08-03 · 186 added, 156 removed, 540 unchanged (39% of the section changed)

12 unchanged sentences

Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses.

At June 30, 2021, we had total assets of $57 billion.

At September 30, 2021, we had total assets of $56 billion.

Our common stock trades on the New York Stock Exchange under the symbol PSX.

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Reduced demand for refined petroleum products resulted in low refining margins and decreased volumes through refineries and logistics infrastructure in 2020.

Since the beginning of 2021, demand for refined petroleum products has started to recover following the administration of COVID-19 vaccines and the easing of pandemic restrictions.

Global refined product demand has been steadily recovering through 2021 due to the easing of pandemic restrictions and the administration of COVID-19 vaccines.

Consequently, refining margins have improved, as has volume throughput.

However, refining profitability remains challenged.

The depth and duration of the economic consequences of the COVID-19 pandemic remain uncertain and we continue to monitor our asset and investment portfolio.

The consequences of the sustained disruption of economic activities by the pandemic may include additional asset impairments and portfolio rationalization in the future.

In the second quarter of 2021, we reported earnings of $296 million and generated cash from operating activities of $1.7 billion, including a U.S.

federal income tax refund of $1.1 billion.

We used available cash for capital expenditures and investments of $380 million, dividend payments on our common stock of $394 million, and an additional member loan to an equity affiliate of $90 million.

We ended the second quarter of 2021 with $2.2 billion of cash and cash equivalents and approximately $5.7 billion of total committed capacity available under our revolving credit facilities.

In the third quarter of 2021, we reported earnings of $402 million and generated cash from operating activities of $2.2 billion.

We used available cash to fund capital expenditures and investments of $552 million, including our strategic investment in NOVONIX Limited (NOVONIX), repay the $500 million of outstanding borrowings under our 364-day delayed draw term loan facility due November 2023, and pay dividends on our common stock of $394 million.

We ended the third quarter of 2021 with $2.9 billion of cash and cash equivalents and approximately $5.7 billion of total committed capacity available under our revolving credit facilities.

In September 2021, we announced a set of company-wide greenhouse gas (GHG) emissions reduction targets that are impactful, attainable and measurable.

By 2030, we expect to reduce GHG emissions intensity by 30% for Scope 1 and 2 emissions from our operations and by 15% for Scope 3 emissions from our energy products, below 2019 levels.

Also in September 2021, we acquired a 16% interest in NOVONIX, a Brisbane, Australia-based company that develops and supplies materials for lithium-ion batteries.

This investment reflects our commitment to building a lower-carbon business platform.

On October 26, 2021, we entered into a definitive merger agreement with Phillips 66 Partners to acquire all of the publicly held common units representing limited partner interests in Phillips 66 Partners not already owned by us on the closing date of the transaction.

The agreement provides for an all-stock transaction in which each outstanding Phillips 66 Partners common unitholder would receive 0.50 shares of Phillips 66 common stock for each Phillips 66 Partners common unit.

Phillips 66 Partners’ perpetual convertible preferred units will be converted into common units at a premium to the original issuance price prior to exchange for Phillips 66 common stock.

This merger is expected to close in the first quarter of 2022, subject to customary closing conditions.

Upon closing, Phillips 66 Partners will become a wholly owned subsidiary of Phillips 66 and will no longer be a publicly traded partnership.

See Note 19—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the pending merger transaction.

Business Environment

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The Midstream segment also includes our 50% equity investment in DCP Midstream, LLC (DCP Midstream).

During the second quarter of 2021, NGL prices increased significantly, compared with the second quarter of 2020, due to strong demand as economic activities gradually recovered following the administration of COVID-19 vaccines and the easing of pandemic restrictions.

During the third quarter of 2021, NGL prices increased significantly, compared with the third quarter of 2020, due to strong demand as economic activities gradually recovered following the administration of COVID-19 vaccines and the easing of pandemic restrictions.

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 second quarter of 2021, the benchmark high-density polyethylene chain margin increased significantly, compared with the second quarter of 2020.

This significant increase was due to continued strong demand and tight supplies driven by the operational impacts caused by the winter storms that occurred in the Central and Gulf Coast regions in the first quarter of 2021.

During the third quarter of 2021, the benchmark high-density polyethylene chain margin increased significantly, compared with the third quarter of 2020.

This significant increase was due to continued strong demand and tight supply.

Our Refining segment results are driven by several factors, including refining margins, refinery throughput, feedstock costs, product yields, turnaround activity, and other operating costs.

The price of U.S.

benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $66.09 per barrel during the second quarter of 2021, compared with an average of $27.80 per barrel in the second quarter of 2020.

benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $70.58 per barrel during the third quarter of 2021, compared with an average of $40.91 per barrel in the third quarter of 2020.

Market crack spreads are used as indicators of refining margins and measure the difference between market prices for refined petroleum products and crude oil.

During the second quarter of 2021, worldwide market crack spreads were higher than the second quarter of 2020.

During the third quarter of 2021, worldwide market crack spreads were significantly higher than the third quarter of 2020.

The increases in crude oil prices and market crack spreads were mainly driven by a significant increase in demand for refined petroleum products, as economic activities gradually recovered following the administration of COVID-19 vaccines and the easing of pandemic restrictions, as well as a tightening supply.

In addition, in the second quarter of 2021, renewable identification number (RIN) costs increased significantly, compared with the corresponding period of 2020.

In addition, in the third quarter of 2021, renewable identification number (RIN) costs increased significantly, compared with the third quarter of 2020.

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.

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The global disruption caused by the COVID-19 pandemic resulted in reduced demand for refined petroleum and specialty products since March 2020.

Following the administration of COVID-19 vaccines in 2021 and the easing of pandemic restrictions, the global economy has begun to recover, and demand for refined petroleum and specialty products has significantly improved, compared with the second quarter of 2020.

Following the administration of COVID-19 vaccines in 2021 and the easing of pandemic restrictions, demand for refined petroleum and specialty products in the third quarter of 2021 has improved, compared with the third quarter of 2020.

RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three and six months ended June 30, 2021, is based on a comparison with the corresponding periods of 2020.

Unless otherwise indicated, discussion of results for the three and nine months ended September 30, 2021, is based on a comparison with the corresponding periods of 2020.

Consolidated Results

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Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

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Income (loss) before income taxes 448 (1,350) 113 (4,273)

Income tax expense (benefit) 62 (378) (70) (429)

Income tax benefit (40) (624) (110) (1,053)

Net income (loss) 488 (726) 223 (3,220)

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Net income (loss) attributable to Phillips 66 $ 402 (799) 44 (3,436)

Our net income attributable to Phillips 66 in the second quarter of 2021 was $296 million, compared with a net loss attributable to Phillips 66 of $141 million in the second quarter of 2020.

The improvement reflects increased equity earnings from affiliates in our Chemicals and M&S segments, improved realized marketing fuel margins and sales volumes and higher realized refining margins.

These increases were partially offset by an increase in income taxes.

Our net loss attributable to Phillips 66 for the six months ended June 30, 2021, was $358 million, compared with $2,637 million for the six months ended June 30, 2020.

The lower net loss attributable to Phillips 66 reflects a before-tax impairment of $198 million in the first quarter of 2021, compared with before-tax impairments of $3,006 million in the first quarter of 2020.

Excluding these impairments, after-tax results for the six months ended June 30, 2021, decreased primarily due to a higher before-tax loss from our Refining segment and a lower income tax benefit, partially offset by higher equity earnings from our Chemicals segment.

See the “Segment Results” section for additional information on our segment performance and Note 18—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information on income taxes.

Our net income attributable to Phillips 66 in the third quarter of 2021 was $402 million, compared with a net loss attributable to Phillips 66 of $799 million in third quarter of 2020.

The improvement was primarily due to:

• Improved realized refining margins.

• Higher equity earnings from CPChem.

• An unrealized gain on our investment in NOVONIX in our Midstream segment.

These improvements were partially offset by a lower income tax benefit and higher impairments.

Our net income attributable to Phillips 66 for the nine months ended September 30, 2021, was $44 million, compared with a net loss attributable to Phillips 66 of $3,436 million for the nine months ended September 30, 2020.

The improvement was primarily driven by:

• Lower impairments.

• Improved realized refining margins.

• Increased equity earnings from CPChem.

These improvements were partially offset by a lower income tax benefit.

See the “Segment Results” section for additional information on our segment performance, and Note 5—Investments, Loans and Long-Term Receivables, Note 7—Impairments, and Note 18—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information on our investment in NOVONIX, impairments and income taxes, respectively.

Statement of Operations Analysis

Sales and other operating revenues for the second quarter and six-month period of 2021 increased 147% and 53%, respectively, and purchased crude oil and products increased 162% and 61%, respectively.

Sales and other operating revenues for the third quarter and nine-month period of 2021 increased 90% and 65%, respectively, and purchased crude oil and products increased 90% and 71%, respectively.

These increases were mainly due to higher prices for refined petroleum products, crude oil and NGL, as well as increased volumes.

Equity in earnings of affiliates increased $673 million and $593 million in the second quarter and six-month period of 2021, respectively.

The increase in both periods was primarily due to higher equity earnings from CPChem.

Equity in earnings of affiliates increased $633 million and $1,226 million in the third quarter and nine-month period of 2021, respectively.

The increase in both periods was primarily due to higher equity earnings from CPChem mainly driven by increased margins, WRB Refining LP (WRB) resulting from improved realized refining margins and refinery production, and Excel Paralubes LLC (Excel) attributable to higher base oil margins.

See Chemicals segment analysis in the “Segment Results” section for additional information on CPChem.

Net gain on dispositions decreased 98% in both the second quarter and six-month period of 2021, primarily due to a before-tax gain of $84 million recognized in the second quarter of 2020 associated with a co-venturer’s acquisition of an ownership interest in the consolidated holding company that owns an interest in Gray Oak Pipeline, LLC.

Operating expenses increased 15% and 8% in the second quarter and six-month period of 2021, respectively.

The increase in the second quarter of 2021 was mainly due to higher refinery turnaround and maintenance expenses and increased utility costs.

The increase in the six-month period of 2021 was primarily attributable to higher utility, maintenance and repair costs driven by the winter storms that occurred in the Central and Gulf Coast regions in February 2021.

Selling, general and administrative expenses increased 16% in the six-month period of 2021, primarily due to increased employee-related expenses and higher selling expenses due to rising refined petroleum product prices and demand, as well as a benefit received from a legal settlement in the first quarter of 2020.

Impairments decreased $2,808 million in the six-month period of 2021.

During the first quarter of 2021, a before-tax impairment of $198 million was related to Phillips 66 Partners LP’s investment in the Liberty Pipeline project.

In the first quarter of 2020, before-tax impairments of $3,006 million were recorded for our investment in DCP Midstream and goodwill in our Refining segment.

See Note 7—Impairments, and Note 13—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information regarding these impairments.

Interest and debt expense increased 22% and 27% in the second quarter and six-month period of 2021, respectively.

Net gain on dispositions decreased 87% in the nine-month period of 2021, primarily due to a before-tax gain of $84 million recognized in the second quarter of 2020 associated with a co-venturer’s acquisition of an ownership interest in the consolidated holding company that owns an interest in Gray Oak Pipeline, LLC.

See Note 19—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information regarding the gain recognition.

Other income increased $218 million and $256 million in the third quarter and nine-month period of 2021, respectively.

The increase in both periods was primarily due to an unrealized gain of $224 million related to the change in fair value of our investment in NOVONIX, which we acquired in the third quarter of 2021.

Operating expenses increased 15% and 10% in the third quarter and nine-month period of 2021, respectively.

The increase in the third quarter of 2021 was primarily driven by higher utility, turnaround, maintenance and repair costs.

The increase in the nine-month period was mainly due to higher utility costs, and increased maintenance and repair costs primarily driven by the winter storms that occurred in the Central and Gulf Coast regions in February 2021.

Selling, general and administrative expenses increased 10% and 14% in the third quarter and nine-month period of 2021, respectively.

The increase in both periods was primarily due to increased employee-related expenses, as well as higher selling expenses due to rising refined petroleum product prices and demand.

The increase in the nine-month period also reflects a benefit received from a legal settlement in the first quarter of 2020.

Impairments increased $158 million in the third quarter of 2021 an d decreased $2,650 million in the nine-month period of 2021.

See Note 7—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments.

Taxes other than income taxes decreased 20% in the third quarter of 2021, primarily driven by tax credits received from renewable diesel blending activity at our San Francisco Refinery in the third quarter of 2021.

Interest and debt expense increased 14% and 22% in the third quarter and nine-month period of 2021, respectively.

The increase in both periods was primarily driven by lower capitalized interest due to the completion of capital projects and the placement of assets into service, as well as higher average debt principal balances.

We had income tax expense of $62 million and an income tax benefit of $70 million in the second quarter and six-month period of 2021, respectively, compared with an income tax benefit of $378 million and $429 million in the corresponding periods of 2020, respectively, reflecting before-tax income in the second quarter of 2021, and before-tax losses in the second quarter and six-month period of 2020 and the six-month period of 2021.

See Note 18—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our effective income tax rates.

Net income attributable to noncontrolling interests decreased 35% in the six-month period of 2021, primarily due to lower net income from Phillips 66 Partners LP (Phillips 66 Partners) resulting from the before-tax impairment of $198 million associated with its investment in the Liberty Pipeline project described above.

Income tax benefit decreased 94% and 90% in the third quarter and nine-month period of 2021, respectively.

See Note 18—Income Taxes, in the Notes to Consolidated Financial Statements, for discussion on the effective income tax rates.

Net income attributable to noncontrolling interests increased 18% in the third quarter of 2021 and decreased 17% in the nine-month period of 2021.

The increase in the third quarter of 2021 was primarily due to higher net income from Phillips 66 Partners.

The decrease in the nine-month period of 2021 was primarily due to lower net income from Phillips 66 Partners resulting from the before-tax impairment of $198 million associated with its investment in the Liberty Pipeline project.

See Note 7—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding the impairment.

Segment Results

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

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The Midstream segment provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, fractionation, processing and marketing services, mainly in the United States.

This segment includes our master limited partnership (MLP), Phillips 66 Partners, as well as our 50% equity investment in DCP Midstream, which includes the operations of DCP Midstream, LP (DCP Partners), its MLP.

Results from our Midstream segment decreased $12 million in the second quarter of 2021 and increased $766 million in the six-month period of 2021.

Results from our Transportation business increased $10 million in the second quarter of 2021, and decreased $183 million in the six-month period of 2021.

The increase in the second quarter of 2021 was mainly driven by higher pipeline volumes resulting from improved refinery utilization rates and increased earnings from equity affiliates.

These increases were partially offset by a before-tax gain of $84 million recognized in the second quarter of 2020 associated with a co-venturer’s acquisition of an ownership interest in the consolidated holding company that owns an interest in Gray Oak Pipeline, LLC.

The decrease in the six-month period of 2021 was primarily attributable to a before-tax impairment of $198 million associated with Phillips 66 Partners’ decision to exit the Liberty Pipeline project.

Results from our NGL and Other business increased $1 million in the second quarter of 2021, and decreased $143 million in the six-month period of 2021.

The decrease in the six-month period of 2021 was primarily due to higher operating expenses driven by the winter storms that occurred in the Gulf Coast region in February 2021, lower results from trading activities, reduced cargo margins at the Sweeny Hub, and decreased equity earnings.

These decreases were partially offset by increased fractionation volumes from the startup of Fracs 2 and 3 at the Sweeny Hub in late 2020, leading to higher exported cargos.

Results from our investment in DCP Midstream decreased $23 million in the second quarter of 2021, and increased $1,092 million in the six-month period of 2021.

The decrease in the second quarter of 2021 was primarily due to unfavorable impacts from DCP Midstream’s commodity price risk management activities.

The increase in the six-month period of 2021 was primarily due to a $1,161 million before-tax impairment of our investment in DCP Midstream recorded in the first quarter of 2020.

See Note 7—Impairments, and Note 13—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information regarding impairments related to the Liberty Pipeline project and our investment in DCP Midstream.

This segment includes our master limited partnership (MLP), Phillips 66 Partners, our 50% equity investment in DCP Midstream, which includes the operations of DCP Midstream, LP (DCP Partners), its MLP, and our investment in NOVONIX.

Results from our Midstream segment increased $483 million and $1,249 million in the third quarter and nine-month period of 2021, respectively.

Results from our Transportation business increased $247 million and $64 million in the third quarter and nine-month period of 2021, respectively.

The increase in the third quarter of 2021 reflects before-tax impairments of $204 million recorded in the third quarter of 2020 for the pipeline and terminal assets associated with the planned reconfiguration of our San Francisco Refinery into a renewable fuels plant and the cancellation of the Red Oak Pipeline project.

Excluding these impairments, the increase in the third quarter of 2021 was primarily due to higher earnings from equity affiliates driven by increased volumes.

The increase in the nine-month period of 2021 was primarily due to increased earnings from equity affiliates, and higher pipeline volumes and margins from our consolidated assets.

Increased pipeline volumes were mainly driven by higher refinery utilization.

The increase in the nine-month period of 2021 was partially offset by a before-tax gain of $84 million recognized in the second quarter of 2020 associated with a co-venturer’s acquisition of an ownership interest in the consolidated holding company that owns an interest in Gray Oak Pipeline, LLC.

Results from our NGL and Other business increased $255 million and $112 million in the third quarter and nine-month period of 2021, respectively.

The increase in both periods was primarily due to an unrealized gain of $224 million related to the change in fair value of our investment in NOVONIX, which we acquired in the third quarter of 2021.

The increase in the third quarter of 2021 also reflects higher fractionation volumes from the startup of Fracs 2 and 3 at the Sweeny Hub in late 2020.

The increase in the nine-month period of 2021 was partially offset by trading inventory impacts and higher operating expenses due to the winter storms that occurred in the Gulf Coast region in February 2021.

Results from our investment in DCP Midstream decreased $19 million in the third quarter of 2021, and increased $1,073 million in the nine-month period of 2021.

The decrease in the third quarter of 2021 was primarily due to unfavorable impacts from DCP Midstream’s commodity price risk management activities.

The increase in the nine-month period of 2021 reflects a $1,161 million before-tax impairment of our investment in DCP Midstream recorded in the first quarter of 2020.

Excluding the impairment, results from our investment in DCP Midstream decreased $88 million in the nine-month period of 2021, mainly driven by unfavorable impacts from DCP Midstream’s commodity price risk management activities.

See Note 7—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments in our Midstream segment.

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

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

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Olefins and Polyolefins (O&P) and Specialties, Aromatics and Styrenics (SA&S).

Results from the Chemicals segment increased $581 million and $566 million in the second quarter and six-month period of 2021, respectively.

The increase in both periods was primarily driven by higher margins reflecting strong demand, and tight supplies following the winter storms that occurred in the Central and Gulf Coast regions in February 2021.

Results from the Chemicals segment increased $400 million and $966 million in the third quarter and nine-month period of 2021, respectively.

The increase in both periods was primarily driven by improved margins, partially offset by higher utility, turnaround, maintenance and repair costs.

The increase in the third quarter of 2021 was also partially offset by a favorable lower-of-cost-or-market inventory adjustment recorded in the third quarter of 2020 attributable to petrochemical product price recovery.

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

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

Millions of Dollars

Loss Before Income Taxes

Income (Loss) Before Income Taxes

Atlantic Basin/Europe $ 90 (199) (173) (1,063)

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Dollars Per Barrel

Loss Before Income Taxes

Income (Loss) Before Income Taxes

Atlantic Basin/Europe $ 1.88 (4.61) (1.23) (8.60)

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Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

Operating Statistics 2021 2020 2021 2020

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

Results from our Refining segment improved by $149 million and $1,370 million, respectively, in the second quarter and six-month period of 2021.

The improved results in the second quarter of 2021 were primarily attributable to increased realized refining margins and higher refinery production driven by improved market demand, partially offset by higher refinery turnaround and other operating expenses.

The improved results in the six-month period reflect a $1,845 million before-tax goodwill impairment recorded in the first quarter of 2020.

Excluding this impairment, results decreased in the six-month period of 2021, mainly due to lower realized refining margins, and higher utility costs primarily driven by the winter storms that occurred in the Central and Gulf Coast regions in February 2021.

Realized refining margins were lower in the six-month period, as the benefit of improved market crack spreads was more than offset by higher RIN costs, lower clean product differentials and decreased secondary product margins.

Our worldwide refining crude oil capacity utilization rate was 88% and 81% in the second quarter and six-month period of 2021, respectively, compared with 75% and 79% in the second quarter and six-month period of 2020, respectively.

Results from our Refining segment increased $777 million and $2,147 million in the third quarter and nine-month period of 2021, respectively.

The increase in the third quarter was primarily due to improved realized refining margins, partially offset by higher impairments and increased utility, turnaround, maintenance and repair costs.

The increase in the nine-month period was primarily due to improved realized refining margins and lower impairments, partially offset by higher utility, maintenance and repair costs.

The improved realized refining margins in both periods were mainly attributable to increased market crack spreads, partially offset by higher RIN costs, lower clean product differentials, and decreased secondary products margins.

Our worldwide refining crude oil capacity utilization rate was 86% and 83% in the third quarter and nine-month period of 2021, respectively, compared with 77% and 79% in the third quarter and nine-month period of 2020, respectively.

The increase in both periods was primarily driven by improved market demand for refined petroleum products following the administration of COVID-19 vaccines and the easing of pandemic restrictions since the beginning of 2021.

During the third quarter of 2021, our Alliance Refinery sustained significant impacts from Hurricane Ida and is expected to remain shut down through the fourth quarter of 2021.

See Note 7—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments in our Refining segment.

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

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Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

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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 $190 million in the second quarter of 2021, and decreased $33 million in the six-month period of 2021.

The increase in the second quarter of 2021 was primarily due to higher realized U.S.

marketing fuel margins driven by improved demand for refined petroleum products in key markets, as well as increased equity earnings from Excel Paralubes LLC due to improved base oil margins and volumes.

The decrease in the six-month period of 2021 was primarily driven by lower realized international marketing fuel margins from rising spot prices, decreased margins from chartered marine vessels and a benefit received from a legal settlement in the first quarter of 2020.

These decreases were partially offset by higher realized U.S.

marketing fuel margins and sales volumes, as well as increased equity earnings from Excel Paralubes LLC due to improved base oil margins and volumes.

Before-tax income from the M&S segment increased $130 million and $97 million in the third quarter and nine-month period of 2021, respectively.

The increase in the third quarter of 2021 was primarily due to higher realized U.S.

marketing fuel margins and sales volumes, both driven by improved market demand for refined petroleum products, and increased equity earnings from Excel attributable to improved base oil margins.

The increase in the nine-month period of 2021 was primarily driven by higher realized U.S.

marketing fuel margins and increased equity earnings from Excel attributable to improved base oil margins.

The increase in the nine-month period was partially offset by lower realized international marketing fuel margins resulting from rising spot prices, and decreased margins from chartered marine vessels.

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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Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

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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 increased $27 million and $67 million, respectively, in the second quarter and six-month period of 2021.

Net interest expense increased $17 million and $84 million in the third quarter and nine-month period of 2021, respectively.

Corporate overhead and other remained flat in the second quarter of 2021, and increased $14 million in the six-month period of 2021.

The increase in the six-month period was primarily due to higher environmental costs.

Corporate overhead and other decreased $25 million and $11 million in the third quarter and nine-month period of 2021, respectively.

The decrease in both periods was primarily due to a property impairment charge of $25 million in the third quarter of 2020.

The decrease in the nine-month period was partially offset by higher environmental costs.

CAPITAL RESOURCES AND LIQUIDITY

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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 six months of 2021, we generated $2.0 billion of cash from operations, including a U.S.

During the first nine months of 2021, we generated $4.2 billion of cash from operations, including a U.S.

federal income tax refund of $1.1 billion.

We used available cash primarily for capital expenditures and investments of $711 million, dividend payments on our common stock of $788 million, repayment of $550 million of maturing debt, and an additional member loan to an equity affiliate of $245 million.

During the first six months of 2021, cash and cash equivalents decreased $307 million to $2.2 billion.

We used available cash primarily for capital expenditures and investments of $1.3 billion, dividend payments on our common stock of $1.2 billion, net debt repayment of $1.0 billion, and an additional member loan to an equity affiliate of $310 million.

During the first nine months of 2021, cash and cash equivalents increased $383 million to $2.9 billion.

Significant Sources of Capital

Operating Activities

During the first six months of 2021, cash generated by operating activities was $2,014 million, compared with $981 million for the first six months of 2020.

The increase was primarily due to a U.S.

federal income tax refund of $1.1 billion received in the second quarter of 2021.

During the first nine months of 2021, cash generated by operating activities was $4.2 billion, compared with $1.5 billion for the first nine months of 2020.

The increase was primarily due to improved realized refining margins, a U.S.

federal income tax refund of $1.1 billion received in the second quarter of 2021, and higher cash distributions from our equity affiliates.

Our short- and long-term operating cash flows are highly dependent upon refining and marketing margins, NGL prices and chemicals margins.

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Our operating cash flows are also impacted by distribution decisions made by our equity affiliates.

During the first six months of 2021, cash from operations included distributions of $1,114 million from our equity affiliates, compared with $820 million during the same period of 2020.

During the first nine months of 2021, cash from operations included distributions of $2.0 billion from our equity affiliates, compared with $1.1 billion during the same period of 2020.

We cannot control the amount of future dividends from equity affiliates;

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Revolving Credit Facilities and Commercial Paper

At June 30, 2021, borrowings of $15 million were outstanding and $1 million in letters of credit had been drawn under Phillips 66 Partners’ $750 million revolving credit facility, compared with outstanding borrowings of $415 million and $1 million in letters of credit drawn under the facility at December 31, 2020.

At both June 30, 2021, and December 31, 2020, no amount had been drawn under Phillips 66’s $5 billion revolving credit facility or uncommitted $5 billion commercial paper program.

At both September 30, 2021, and December 31, 2020, no amount had been drawn under Phillips 66’s $5 billion revolving credit facility or uncommitted $5 billion commercial paper program.

At September 30, 2021, no borrowings were outstanding and $1 million in letters of credit had been drawn under Phillips 66 Partners’ $750 million revolving credit facility, compared with outstanding borrowings of $415 million and $1 million in letters of credit drawn under the facility at December 31, 2020.

Term Loan Agreement

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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 June 30, 2021.

We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at September 30, 2021.

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.

These leases have remaining terms of up to ten years.

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

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Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) relating to an easement under Lake Oahe in North Dakota and later vacated the easement.

Although the easement has been vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS, which is expected to be completed in 2022.

Although the easement has been vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS, which is expected to be completed in the second half of 2022.

In May 2021, the court denied a request for an injunction to shut down the pipeline while the EIS is being prepared and in June 2021, dismissed the litigation.

It is possible that the litigation could be reopened or new litigation challenging the EIS, once completed, could be filed.

In September 2021, Dakota Access filed a writ of certiorari, requesting the U.S.

Supreme Court to review the lower court’s judgment that ordered the EIS and vacated the easement.

Dakota Access and ETCO have guaranteed repayment of $2.5 billion aggregate principal amount of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access.

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Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access in certain circumstances relating to the litigation described above.

At June 30, 2021, Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU was approximately $631 million.

At September 30, 2021, Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU was approximately $631 million.

If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, Phillips 66 Partners also could be required to support its share of the ongoing expenses, including scheduled interest payments on the notes of approximately $25 million annually, in addition to the potential obligations under the CECU.

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Debt Financing

Our total debt balance at June 30, 2021, and December 31, 2020, was $15.4 billion and $15.9 billion, respectively.

Our total debt-to-capital ratio was 43% and 42% at June 30, 2021, and December 31, 2020, respectively.

Our total debt balance at September 30, 2021, and December 31, 2020, was $14.9 billion and $15.9 billion, respectively.

Our total debt-to-capital ratio was 42% at both September 30, 2021, and December 31, 2020.

In September 2021, Phillips 66 repaid the $500 million of outstanding borrowings under its 364-day delayed draw term loan facility due November 2023, and classified $1 billion of its debt due within a year to long-term debt based on its intent and ability to refinance the obligation with long-term debt.

In April 2021, Phillips 66 Partners repaid $50 million of its tax-exempt bonds upon maturity.

In February 2021, Phillips 66 repaid $500 million outstanding principal balance of its floating-rate senior notes due February 2021.

In February 2021, Phillips 66 repaid $500 million outstanding principal balance of its floating-rate senior notes upon maturity.

In the fourth quarter of 2021, we expect to repay approximately $500 million of debt.

Joint Venture Loans

We and our co-venturer provided member loans to WRB.

At June 30, 2021, our 50% share of the outstanding member loan balance, including accrued interest, was $525 million.

At September 30, 2021, our 50% share of the outstanding member loan balance, including accrued interest, was $593 million.

The need for additional loans to WRB in the remainder of 2021, as well as WRB’s repayment schedule, will depend on market conditions.

On May 12, 2021, our board of directors declared a quarterly cash dividend of $0.90 per common share.

The dividend was paid on June 1, 2021, to shareholders of record as of the close of business on May 24, 2021.

Pending Merger with Phillips 66 Partners

Phillips 66 Partners’ perpetual convertible preferred units will be converted into common units at a premium to the original issuance price prior to exchange for Phillips 66 common stock.

This merger is expected to close in the first quarter of 2022, subject to customary closing conditions.

Based on the closing market prices of Phillips 66 common stock and Phillips 66 Partners common units on October 26, 2021, we currently expect to issue approximately 42 million shares of our common stock with a value of approximately $3.4 billion on the closing date of this transaction.

The number of shares of common stock we will issue and the value of those shares are subject to change until the merger is closed.

See Note 19—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the pending merger transaction.

On July 14, 2021, our board of directors declared a quarterly cash dividend of $0.90 per common share.

This dividend is payable on September 1, 2021, to shareholders of record as of the close of business on August 18, 2021.

The dividend was paid on September 1, 2021, to shareholders of record as of the close of business on August 18, 2021.

On October 8, 2021, our board of directors declared a quarterly cash dividend of $0.92 per common share.

This dividend is payable on December 1, 2021, to shareholders of record as of the close of business on November 17, 2021.

Share Repurchases

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Millions of Dollars

Six Months Ended

Nine Months Ended

Capital Expenditures and Investments

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

During the first six months of 2021, capital spending in our Midstream segment included:

During the first nine months of 2021, capital spending in our Midstream segment included:

• Investments in NOVONIX and a renewable feedstock processing plant.

• Construction activities on Phillips 66 Partners’ C2G Pipeline, a new 16-inch ethane pipeline that connects Phillips 66 Partners’ Clemens Caverns storage facility to petrochemical facilities in Gregory, Texas, near Corpus Christi, Texas.

• Construction activities on a new 35-mile, 12-inch hydrogen gas pipeline connecting Alliance Refinery to hydrogen gas sources.

• Contributions to Dakota Access by Phillips 66 Partners for a pipeline optimization project.

• Investment in a renewable feedstock processing plant.

• Contributions by Phillips 66 Partners to complete the South Texas Gateway Terminal development activities.

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

• Contributions by Phillips 66 Partners to complete the South Texas Gateway Terminal development activities.

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

During the first six months of 2021, on a 100% basis, CPChem’s capital expenditures and investments were $301 million.

The capital spending was primarily for optimization, debottlenecking and sustaining projects on existing assets.

During the first nine months of 2021, on a 100% basis, CPChem’s capital expenditures and investments were $478 million.

The capital spending was primarily for sustaining, debottlenecking and optimization projects on existing assets, as well as growth projects.

CPChem’s capital program was self-funded, and we expect CPChem to continue self-funding its capital program for the remainder of 2021.

Capital spending for the Refining segment during the first six months of 2021 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.

In the second quarter of 2021, we started up facilities to improve product value at the Ponca City Refinery and facilities to provide flexibility to produce renewable diesel at the San Francisco Refinery.

Capital spending for the Refining segment during the first nine months of 2021 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.

In the second quarter of 2021, we started up facilities to improve product value at our Ponca City Refinery and facilities to provide flexibility to produce renewable diesel at our San Francisco Refinery.

Other major construction activities included installation of facilities to improve product value at the jointly owned Wood River Refinery.

Marketing and Specialties

Capital spending for the M&S segment during the first six months of 2021 was primarily for an investment in a retail marketing joint venture in the Central region and the development and enhancement of retail sites in Europe.

Capital spending for the M&S segment during the first nine months of 2021 was primarily for an investment in a retail marketing joint venture in the Central region and the development and enhancement of retail sites in Europe.

Corporate and Other

Capital spending for Corporate and Other during the first six months of 2021 was primarily for information technology and facilities.

Capital spending for Corporate and Other during the first nine months of 2021 was primarily for information technology and facilities.

Contingencies

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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 six months ended June 30, 2021 and 2020, we incurred expenses of $422 million and $147 million, respectively, associated with our obligation to purchase RINs in the open market to comply with the RFS for our wholly owned refineries.

For the nine months ended September 30, 2021 and 2020, we incurred expenses of $584 million and $227 million, respectively, associated with our obligation to purchase RINs in the open market to comply with the RFS for our wholly owned refineries.

These expenses are included in the “Purchased crude oil and products” line item on our consolidated statement of operations.

Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $178 million and $50 million for the six months ended June 30, 2021 and 2020, respectively.

Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $284 million and $88 million for the nine months ended September 30, 2021 and 2020, respectively.

These expenses are included in the “Equity in earnings of affiliates” line item on our consolidated statement of operations.

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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 June 30, 2021, and December 31, 2020, we had been notified of potential liability under CERCLA and comparable state laws at 25 sites within the United States.

At September 30, 2021, and December 31, 2020, we had been notified of potential liability under CERCLA and comparable state laws at 25 sites within the United States.

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 those costs and liabilities could be material.

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Climate Change

There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (GHG) emissions reduction, including various regulations proposed or issued by the EPA.

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.

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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 2020 Annual Report on Form 10-K.

In September 2021, we announced a set of company-wide GHG emissions reduction targets that are impactful, attainable and measurable.

By 2030, we expect to reduce GHG emissions intensity by 30% for Scope 1 and 2 emissions from our operations and by 15% for Scope 3 emissions from our energy products, below 2019 levels.

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.

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GUARANTOR FINANCIAL INFORMATION

At June 30, 2021, Phillips 66 had $10.8 billion of senior unsecured notes outstanding guaranteed by Phillips 66 Company, a direct, wholly owned operating subsidiary of Phillips 66.

At September 30, 2021, Phillips 66 had $10.8 billion of senior unsecured notes outstanding guaranteed by Phillips 66 Company, a direct, wholly owned operating subsidiary of Phillips 66.

Phillips 66 conducts substantially all of its operations through subsidiaries, including Phillips 66 Company, and those subsidiaries generate substantially all of its operating income and cash flow.

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Significant intercompany transactions and receivable/payable balances between the Obligor Group and non-guarantor subsidiaries are presented separately in the summarized financial information.

The summarized results of operations for the six months ended June 30, 2021, and the summarized financial position at June 30, 2021, and December 31, 2020, for the Obligor Group on a combined basis were:

The summarized results of operations for the nine months ended September 30, 2021, and the summarized financial position at September 30, 2021, and December 31, 2020, for the Obligor Group on a combined basis were:

Summarized Combined Statement of Operations Millions of Dollars

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Sales and other operating revenues $ 61,089

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Purchased crude oil and products—non-guarantor subsidiaries 12,620

Impairments 1,288

Loss before income taxes (677)

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Millions of Dollars

Summarized Combined Balance Sheet June 30

Summarized Combined Balance Sheet September 30

2021 December 31

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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 loss before income taxes to realized refining margins:

Following are reconciliations of income (loss) before income taxes to realized refining margins:

Millions of Dollars, Except as Indicated

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Coast Worldwide

Three Months Ended June 30, 2021

Loss before income taxes $ (110) (264) (82) (273) (729)

Three Months Ended September 30, 2021

Income (loss) before income taxes $ 90 (1,333) 229 (112) (1,126)

Taxes other than income taxes 15 13 12 4 44

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Operating expenses 239 312 126 266 943

Equity in losses of affiliates 2 — 65 — 67

Other segment income, net (8) (6) (8) (2) (24)

Equity in (earnings) losses of affiliates 3 1 (31) — (27)

Other segment (income) expense, net 6 (1) — 2 7

Proportional share of refining gross margins contributed by equity affiliates

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47,792 64,016 46,592 30,558 188,958

Loss before income taxes per barrel ( dollars per barrel )**

Income (loss) before income taxes per barrel ( dollars per barrel )**

$ 1.88 (20.82) 8.68 (3.67) (6.67)

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9.27 5.75 12.47 7.46 8.57

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Loss before income taxes $ (199) (405) (132) (1,167) (1,903)

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180 258 111 235 784

Equity in (earnings) losses of affiliates

3 (1) 79 — 81

Other segment expense, net 3 — 3 1 7

Equity in losses of affiliates 2 1 118 — 121

Other segment (income) expense, net — (1) (1) 1 (1)

Proportional share of refining gross margins contributed by equity affiliates

16 — 92 — 108

Special items:

Lower-of-cost-or-market inventory adjustments — — (35) — (35)

Realized refining margins

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* Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate.

** Loss before income taxes divided by total processed inputs.

** 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.

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Coast Worldwide

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Loss before income taxes $ (173) (1,850) (101) (771) (2,895)

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Equity in losses of affiliates 7 4 151 — 162

Other segment income, net (8) (6) (10) — (24)

Other segment (income) expense, net (2) (7) (10) 2 (17)

Proportional share of refining gross margins contributed by equity affiliates

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6.28 3.72 8.53 4.83 5.68

* Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate.

** 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.

Millions of Dollars, Except as Indicated

Realized Refining Margins Atlantic Basin/

Coast Central

Corridor West

Coast Worldwide

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Loss before income taxes $ (1,063) (1,613) (463) (1,903) (5,042)

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7 (1) 248 — 254

Other segment expense, net 1 1 — 2 4

Other segment (income) expense, net 1 — (1) 3 3

Proportional share of refining gross margins contributed by equity affiliates

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Three Months Ended

June 30, 2021 Three Months Ended

June 30, 2020

September 30, 2021 Three Months Ended

September 30, 2020

International U.S.

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Equity in earnings of affiliates (18) (30) (10) (31)

Other operating revenues* (110) (10) (71) (4)

Other operating (revenues) expenses* (120) 9 (90) (7)

Other segment (income) expense, net — 1 — (1)

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2.29 6.75 2.23 6.28

* Includes other nonfuel revenues.

* Includes other nonfuel revenues and expenses.

** 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.

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Millions of Dollars, Except as Indicated

Six Months Ended

June 30, 2021 Six Months Ended

June 30, 2020

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020

International U.S.

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(316) (6) (245) (9)

Other segment (income) expense, net — (2) — 1

Other segment income, net — (1) — —

Marketing margins

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2.30 4.63 2.03 6.78

* Includes other nonfuel revenues.

* Includes other nonfuel revenues and expenses.

** 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.

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• 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 (including as a result of climate change), civil unrest, insurrections, political events, terrorism or cyberattacks.

• 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 or other destructive climate events.

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

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

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

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

• 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.

• The timing and completion of the agreement to purchase all of the outstanding common units of Phillips 66 Partners not already owned.

• 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.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our commodity price risk and interest rate risk at June 30, 2021, did not differ materially from the risks disclosed under Item 7A of our 2020 Annual Report on Form 10-K.

Our commodity price risk and interest rate risk at September 30, 2021, did not differ materially from the risks disclosed under Item 7A of our 2020 Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis