What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-24 · 300 added, 327 removed, 744 unchanged (46% of the section changed)

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It should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

The terms “earnings” and “loss” refer to net income (loss) attributable to Phillips 66.

The terms “before-tax income” or “before-tax loss” refer to income (loss) before income taxes.

The terms “earnings” and “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

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Executive Overview

The COVID-19 pandemic continues to disrupt economic activities globally.

Actions taken by governments to prevent the spread of the disease, including travel and business restrictions, have resulted in substantial decreases in the demand for many refined petroleum products, particularly gasoline and jet fuel.

The lack of demand for petroleum products has resulted in low crude oil prices and refining margins.

Accordingly, crude oil producers have shut in high cost production, and refiners have reduced crude oil processing rates.

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

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

• Temporarily suspended our share repurchase program.

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

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

In 2020, we reported a loss of $4.0 billion and generated $2.1 billion in cash from operating activities.

We used available cash and the debt financing noted above to fund capital expenditures and investments of $2.9 billion, pay dividends of $1.6 billion, and repurchase $0.4 billion of our common stock.

We reported earnings of $1.3 billion and generated $6.0 billion in cash from operating activities for the full year of 2021.

During 2021, we used available cash to fund capital expenditures and investments of $1.9 billion, pay dividends on our common stock of $1.6 billion, and pay down $1.5 billion in debt.

We ended 2021 with $3.1 billion of cash and cash equivalents and approximately $5.7 billion of total committed capacity available under our credit facilities.

Our results in 2020 reflect the adverse effects of the COVID-19 pandemic, including asset and investment impairments.

These adverse effects may continue to be significant in the near term.

The depth and duration of the economic consequences of the COVID-19 pandemic remain unknown.

We continuously monitor our asset and investment portfolio for impairments, as well as optimization opportunities, in this challenging business environment.

As such, additional impairments may be required in the future.

Our reported earnings for 2021 continued to reflect the ongoing impacts of the disruption to global economic activities caused by the Coronavirus Disease 2019 (COVID-19) pandemic, primarily on our Refining segment.

However, through 2021 global refined petroleum product demand steadily recovered due to the easing of pandemic restrictions and the administration of COVID-19 vaccines.

Consequently, margins and utilization for our Refining segment, margins and sales volumes for our Marketing and Specialities (M&S) segment, and throughput volumes for our Transportation business improved.

In addition, equity earnings from our Chemicals segment increased significantly due to higher margins driven by strong demand and tight product supply.

However, as uncertainty remains regarding the ongoing impact of the pandemic on the global economy, we will continue to be disciplined in our allocation of capital and monitor the performance of our portfolio.

In 2021, we progressed strategic initiatives to position Phillips 66 for a lower-carbon future as a part of our commitment to play an important role in addressing climate change.

In September 2021, we announced a set of company-wide greenhouse gas (GHG) emission intensity reduction targets that we consider to be impactful, attainable and measurable.

By 2030, we expect to reduce GHG emission 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 Limited (NOVONIX), a company that develops technology and supplies materials for lithium-ion batteries.

In October 2021, we entered into a definitive merger agreement with Phillips 66 Partners to acquire all of the 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 would 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 March 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 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the pending merger transaction.

Index to Financial Statements

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We employ rigorous training and audit programs to drive ongoing improvement in both personal and process safety as we strive for zero incidents.

In 2020, we achieved a 0.11 total recordable incident rate—the lowest since our inception.

In 2021, we achieved a 0.12 total recordable rate.

Since we cannot control commodity prices, controlling operating expenses and overhead costs, within the context of our commitment to safety and environmental stewardship, is a high priority.

Senior management actively monitors these costs.

Senior management actively monitors these costs and assesses opportunities for permanent cost reductions.

We are committed to protecting the environment and strive to reduce our environmental footprint throughout our operations.

Optimizing utilization rates at our refineries through reliable and safe operations enables us to capture the value available in the market in terms of prices and margins.

During 2020, our worldwide refining crude oil capacity utilization rate was 76%, mainly driven by the decrease in market demand for refined petroleum products due to negative impacts from the COVID-19 pandemic.

Optimizing utilization rates and product yield at our refineries through reliable and safe operations enables us to capture the value available in the market in terms of prices and margins.

During 2021, our worldwide refining crude oil capacity utilization rate was 84% and our worldwide refining clean product yield was 83%.

A disciplined capital allocation process ensures we invest in projects that are expected to generate competitive returns.

Our strategy primarily focuses on investing in growth opportunities in the Midstream and Chemicals segments.

In response to the challenging market conditions caused by the COVID-19 pandemic, we reduced our 2021 capital budget to $1.7 billion.

We are prioritizing sustaining capital spending and completion of in-progress growth projects, as well as advancing our investments in renewable fuels.

In the third quarter of 2020, we announced Rodeo Renewed, a project to reconfigure our San Francisco Refinery in Rodeo, California, to produce renewable fuels.

In 2021, we have budgeted $615 million for Midstream capital expenditures and investments, including $305 million for Phillips 66 Partners.

Capital will be used to complete near-term committed and optimization projects and to maintain our integrated logistics infrastructure network.

In Chemicals, our share of expected self-funded capital spending by CPChem is $410 million.

CPChem plans to use its growth capital to fund expansion of its normal alpha olefins production, optimization and debottleneck opportunities in the olefins and polyolefins chains, as well as continuing development of petrochemical projects on the U.S.

Gulf Coast and in Qatar.

We recently formed an Emerging Energy organization.

This group is charged with establishing a lower-carbon business platform that delivers attractive returns.

It will focus on opportunities within our portfolio, such as Rodeo Renewed, as well as commercializing emerging energy technologies for a sustainable future.

We plan to enhance Refining returns by increasing throughput of advantaged feedstocks, improving yields, portfolio optimization and an ongoing commitment to operating excellence.

For 2021, capital in Refining will be directed toward high-return projects to enhance the yield of higher-value products and other high-return, quick-payout projects, as well as investments to competitively position the company for a lower-carbon future.

M&S will continue to develop and enhance our retail network and brands in the United States and Europe.

Our strategy primarily focuses on investing in returns-focused growth opportunities in the Midstream and Chemicals segments, as well as our investments in renewable fuels projects to advance a lower-carbon future.

In 2022, we have budgeted $426 million in growth capital for our Midstream segment, which includes construction completion of Frac 4 at the Sweeny Hub.

In Chemicals, our share of expected self-funded growth capital spending by Chevron Phillips Chemical Company LLC (CPChem) is $502 million.

Gulf Coast and Qatar.

In Refining, we have budgeted $408 million of growth capital, primarily for the reconfiguration of the San Francisco Refinery in Rodeo, California, to a renewable fuels production facility, as part of the Rodeo Renewed project.

We plan to enhance Refining returns by increasing throughput of advantaged feedstocks, improving yields, optimizing our portfolio, and remaining committed to operating excellence.

For 2022, our M&S segment will continue to develop and enhance our retail network, including energy transition opportunities.

• Distributions.

We believe shareholder value is enhanced through, among other things, consistent growth of regular dividends, complemented by share repurchases.

We believe shareholder value is enhanced through, among other things, a secure, competitive and growing dividend, complemented by share repurchases.

In the fourth quarter of 2021, we increased our quarterly dividend by 2% to $0.92 per common share.

Regular dividends demonstrate the confidence our Board of Directors and management have in our capital structure and operations’ capability to generate free cash flow throughout the business cycle.

In 2020, despite the challenging business environment, we maintained stable quarterly dividend distributions to shareholders and repurchased $443 million of common stock before suspending our share repurchase program in March 2020 to preserve liquidity.

We suspended our share repurchase program in March 2020 to preserve liquidity.

As operating cash flows improve further, we will prioritize shareholder returns and debt repayment.

• High-Performing Organization.

We strive to attract, develop and retain individuals with the knowledge and skills to implement our business strategy and who support our values and culture.

Throughout the company, we focus on getting results in the right way, embrace our values as a common bond, and believe success is both what we do and how we do it.

Throughout the company, we focus on promoting an inclusive workplace that enables our diverse workforce to innovate, create value and deliver extraordinary performance.

We also focus on getting results in the right way and embracing our values as a common bond, and we believe success is both what we do and how we do it.

We encourage collaboration throughout our company, while valuing differences, respecting diversity, and creating a great place to work.

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The Midstream segment includes our Transportation and NGL businesses.

Our Transportation business contains fee-based operations that are not directly exposed to commodity price risk.

Our NGL business contains both fee-based operations and operations that are directly impacted by NGL prices.

Our Transportation business contains fee-based operations not directly exposed to commodity price risk.

Our NGL business contains both fee-based operations and operations directly impacted by NGL prices.

The Midstream segment also includes our 50% equity investment in DCP Midstream.

NGL prices were significantly lower in 2020, compared with 2019, due to negative economic impacts caused by the COVID-19 pandemic.

During 2021, NGL prices increased significantly, compared with 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 CPChem.

The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on supply and demand, as well as cost factors.

Compared with 2019, the benchmark high-density polyethylene chain margin was lower in the first three quarters of 2020, before rebounding strongly in the fourth quarter of 2020.

The lower margin in the first three quarters of 2020 was mainly due to lower polyethylene sales prices.

The significant margin increase in the fourth quarter of 2020 was primarily driven by tight supply caused by hurricane impacts in the Gulf Coast region and a strong global market demand.

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

Compared with 2020, the benchmark high-density polyethylene chain margin increased significantly in 2021, due to continued strong demand and tight supply.

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, decreased to an average of $39.31 per barrel during 2020, compared with an average of $57.02 per barrel in 2019, due to a significant decline in global demand driven by the adverse impacts of the COVID-19 pandemic.

benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $67.96 per barrel during 2021, compared with an average of $39.31 per barrel in 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 2020, the worldwide market crack spreads were significantly lower compared with 2019, mainly driven by a sharp decline in demand for refined petroleum products resulting from the COVID-19 global pandemic.

Worldwide market crack spreads increased to an average of $17.09 per barrel during 2021, compared with an average of $8.33 per barrel in 2020.

The increases in crude oil prices and market crack spreads were primarily 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 tightening supply.

In 2021, renewable identification number (RIN) prices increased significantly, compared with 2020.

Results for our M&S segment depend largely on marketing fuel and lubricant margins, and sales volumes of our refined petroleum and other specialty products.

While M&S margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are influenced by the trend in spot prices for refined petroleum products.

Generally speaking, a downward trend of spot prices has a favorable impact on marketing fuel margins, while an upward trend of spot prices has an unfavorable impact on marketing fuel margins.

The global disruption caused by the COVID-19 pandemic significantly reduced demand for our refined petroleum and specialty products in 2020 compared with 2019.

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.

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, demand for refined petroleum and specialty products improved in 2021, compared with 2020.

Index to Financial Statements

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Net income (loss) attributable to Phillips 66 $ 1,317 (3,975) 3,076

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

Net income attributable to Phillips 66 for the year ended December 31, 2021, was $1,317 million, compared with a net loss attributable to Phillips 66 of $3,975 million for the year ended December 31, 2020.

The improvement was primarily due to lower impairments, improved realized refining margins and higher equity earnings from CPChem, partially offset by income tax impacts from improved results.

Net loss attributable to Phillips 66 for the year ended December 31, 2020, was $3,975 million, compared with net income attributable to Phillips 66 of $3,076 million for the year ended December 31, 2019.

The decrease was mainly attributable to:

• Lower realized refining margins and decreased refinery production.

• A goodwill impairment in our Refining segment.

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

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

• Higher impairments of equity investments in our Midstream segment.

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

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

• Lower realized refining and marketing margins.

• Impairments associated with our equity investment in DCP Midstream.

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

These decreases were partially offset by:

• Lower income tax expense.

• Improved results from our NGL and transportation businesses.

See Note 9—Impairments, and Note 16—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for information on impairments recorded in 2021, 2020 and 2019.

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

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Statement of Operations Analysis

Sales and other operating revenues and purchased crude oil and products increased 74% and 77%, respectively, in 2021.

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

Equity in earnings of affiliates increased $1,713 million in 2021.

The increase 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 higher 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 83% in 2021, mainly reflecting 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 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information.

Other income increased $388 million in 2021, primarily driven by an unrealized gain of $365 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 13% in 2021, mainly attributable to higher utility costs driven by increased commodity prices, higher employee-related expenses, and increased maintenance and repair costs.

Selling, general and administrative expenses increased 13% in 2021, primarily driven by higher selling expenses due to rising refined petroleum product prices and demand, increased employee-related expenses, and a benefit received from a legal settlement in the first quarter of 2020.

Depreciation and amortization increased 15% in 2021, mainly due to asset retirements related to the shutdown of our Alliance Refinery in connection with plans to convert it to a terminal.

See Note 7—Properties, Plants and Equipment, in the Notes to Consolidated Financial Statements, for additional information regarding asset retirements related to our Alliance Refinery.

Impairments decreased 65% in 2021.

See Note 9—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments.

Taxes other than income taxes decreased 12% in 2021, primarily driven by tax credits received from renewable diesel blending activity at our San Francisco Refinery in 2021, and lower property and franchise taxes.

Interest and debt expense increased 16% in 2021, 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 resulting from new debt issuances in the second and fourth quarters of 2020.

We had income tax expense of $146 million in 2021, compared with an income tax benefit of $1,250 million in 2020, primarily due to before-tax income in 2021 versus a before-tax loss in 2020.

See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes.

Index to Financial Statements

Sales and other operating revenues and purchased crude oil and products both decreased 40% in 2020.

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

We had an income tax benefit of $1,250 million in 2020, compared with income tax expense of $801 million in 2019, primarily due to a net loss in 2020 versus net income in 2019.

See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes.

Sales and other operating revenues and purchased crude oil and products decreased 4% and 2%, respectively, in 2019.

The decreases were mainly driven by lower prices for refined petroleum products, crude oil and NGL.

Equity in earnings of affiliates decreased 21% in 2019.

The decrease was mainly due to lower margins at WRB and CPChem, partially offset by improved results from our Transportation and NGL joint venture assets.

Lower equity earnings in 2019 also reflected higher goodwill and other asset impairments at DCP Midstream.

See the “Segment Results” section for additional information.

Other income increased $58 million in 2019.

The increase was mainly driven by trading activities not directly related to our physical business.

See Note 15—Derivatives and Financial Instruments, in the Notes to Consolidated Financial Statements, for additional information associated with our commodity derivatives.

Impairments increased $853 million in 2019.

The increase was driven by an $853 million before-tax impairment associated with our investment in DCP Midstream recognized in the third quarter of 2019.

See Note 9—Impairments, and Note 16—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information associated with this impairment.

Income tax expense (benefit) decreased 49% in 2019.

The decrease in income tax expense was primarily attributable to lower income before income taxes.

We had an income tax benefit of $1,250 million in 2020, compared with income tax expense of $801 million in 2019, primarily due to a before-tax loss in 2020 versus before-tax income in 2019.

See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes.

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Dollars Per Gallon

Market Indicator

Weighted-Average NGL Price* $ 0.83 0.41 0.51

DCP Midstream $ 0.41 0.51 0.75

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

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

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

This segment includes our MLP, Phillips 66 Partners, our 50% equity investment in DCP Midstream, which includes the operations of its MLP, DCP Partners, and our 16% investment in NOVONIX.

Results from our Midstream segment increased $1,619 million in 2021, compared with 2020.

Results from our Transportation business increased $170 million in 2021, compared with 2020.

The increase was primarily due to improved earnings from our equity affiliates, lower asset impairments, and increased pipeline volumes and tariffs.

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, and increased depreciation and amortization expense from asset retirements related to the shutdown of the Alliance Refinery in the fourth quarter of 2021.

Results from our NGL and Other business increased $306 million in 2021, compared with 2020.

The increase in 2021 was primarily driven by a $370 million increase in the value of our investment in NOVONIX, which we acquired in the third quarter of 2021, partially offset by higher utility costs due to increased natural gas prices.

Index to Financial Statements

Results from our investment in DCP Midstream increased $1,143 million in 2021, compared with 2020.

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

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

See the “Executive Overview and Business Environment” section for information on market factors impacting 2021 results.

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

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

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

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

Index to Financial Statements

Results from our NGL and Other business decreased $81 million in 2020, compared with 2019.

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See Note 6—Investments, Loans and Long-Term Receivables, and Note 9—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding the impairments and the associated basis difference amortization related to our investment in DCP Midstream.

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

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

Before-tax income from our Transportation business increased $176 million in 2019, compared with 2018.

The increase was mainly driven by higher volumes and pipeline tariffs from our portfolio of consolidated and joint venture assets.

Before-tax income from our NGL and Other business increased $217 million in 2019, compared with 2018.

The increase was mainly due to improved margins and volumes, primarily at the Sweeny Hub, and higher equity earnings from certain pipeline affiliates driven by higher volumes.

Before-tax income from our investment in DCP Midstream decreased $890 million in 2019, compared with 2018.

The decrease was primarily due to an $853 million before-tax impairment associated with our investment in DCP Midstream and lower equity earnings driven by higher goodwill and other asset impairments at DCP Partners in 2019.

See Note 6—Investments, Loans and Long-Term Receivables, Note 9—Impairments, and Note 16—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information regarding our investment in DCP Midstream.

Index to Financial Statements

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Unless otherwise noted, amounts referenced below reflect our net 50% interest in CPChem.

Before-tax income from the Chemicals segment decreased $244 million in 2020, compared with 2019.

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

Before-tax income from the Chemicals segment increased $1,209 million in 2021, compared with 2020.

The increase was primarily due to improved margins driven by increased sale prices reflecting strong demand and tight supply, partially offset by higher utility, turnaround, maintenance and repair costs.

See the “Executive Overview and Business Environment” section for information on market factors impacting CPChem’s 2021 results.

Before-tax income from the Chemicals segment decreased $244 million in 2020, compared with 2019.

The decrease was mainly due to lower polyethylene margins attributable to additional industry capacity and slower demand growth in Asia.

In addition, CPChem recorded lower-of-cost-or-market write-downs of LIFO-valued inventories during 2019, and our portion of the write-downs reduced our equity earnings from CPChem by $65 million, before-tax.

The decreases were partially offset by higher polyethylene sales volumes and lower turnaround and maintenance activity during 2019.

Index to Financial Statements

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* Includes our share of equity affiliates.

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

** 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, as well as renewable fuels, at 12 refineries in the United States and Europe.

Our Alliance Refinery sustained significant impacts from Hurricane Ida in August 2021, and in the fourth quarter of 2021, we announced the shutdown of the refinery in connection with plans to convert it to a terminal.

Results from the Refining segment increased $3,606 million in 2021, compared with 2020.

The improved results in 2021 were primarily due to higher realized refining margins and lower asset impairments, partially offset by increased utility expenses and higher costs related to the shutdown of our Alliance Refinery.

The improved realized refining margins in 2021 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 84% and 76% in 2021 and 2020, respectively.

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

See Note 9—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments recorded in our Refining segment during 2021 and 2020.

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

Index to Financial Statements

Results from the Refining segment decreased $8,141 million in 2020, compared with 2019.

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In addition, hurricane impacts contributed to the lower refinery production in the Gulf Coast region in 2020.

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

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

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

Index to Financial Statements

Our worldwide refining crude oil capacity utilization rate was 76% and 94% in 2020 and 2019, respectively.

The lower utilization rate in 2020 was primarily due to reduced refining runs driven by lower demand for refined petroleum products as a result of the COVID-19 pandemic, as well as hurricane impacts in the Gulf Coast region.

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

Before-tax income for the Refining segment decreased $2,549 million in 2019, compared with 2018.

The decrease was primarily driven by lower realized refining margins and lower refinery production at certain refineries due to turnaround activities and unplanned downtime.

In 2019, the decrease in realized refining margins was primarily due to lower feedstock advantage driven by narrowing heavy crude differentials.

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

See Note 9—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments recorded in our Refining segment during 2020.

Index to Financial Statements

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2,130 1,933 2,352

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.

The M&S segment purchases for resale and markets refined petroleum products, such as gasoline, distillates and aviation fuels, as well as renewable 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 $363 million in 2021, compared with 2020.

The increase was primarily attributable to higher realized marketing fuel margins, partially offset by lower sales volumes for refined petroleum and specialty products driven by decreased demand.

The increase in 2021 was primarily driven by higher realized U.S.

marketing fuel margins and increased equity earnings from Excel due to improved base oil margins, partially offset by lower realized international marketing fuel margins.

See the “Executive Overview and Business Environment” section for information on marketing fuel margins and other market factors impacting 2021 results.

Before-tax income from the M&S segment decreased $124 million in 2019, compared with 2018.

The decrease was primarily due to lower realized marketing fuel margins, mainly driven by international marketing, partially offset by higher sales volumes.

Before-tax income from the M&S segment increased $13 million in 2020, compared with 2019.

The increase was primarily attributable to higher realized marketing fuel margins, partially offset by lower sales volumes for refined petroleum and specialty products driven by decreased demand.

Index to Financial Statements

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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 $98 million in 2021, compared with 2020, primarily driven by lower capitalized interest due to the completion of capital projects and the placement of assets into service, and higher average debt principal balances reflecting debt issuances in the second and fourth quarters of 2020, as well as costs associated with early debt retirement in 2021.

See Note 12—Debt, in the Notes to Consolidated Financial Statements, for additional information on the debt issuances in 2020 and debt repayment in 2021.

Corporate overhead and other decreased $5 million in 2021, compared with 2020.

Net interest expense increased $70 million in 2020, compared with 2019, primarily due to higher average debt principal balances, reflecting new debt issuances during 2020, along with decreased interest income driven by lower interest rates in 2020.

See Note 12—Debt, in the Notes to Consolidated Financial Statements, for additional information on the debt issuances in 2020.

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

Corporate overhead and other increased $7 million in 2020, compared with 2019.

Index to Financial Statements

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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 2020, we generated $2.1 billion in cash from operations and had net borrowings of $4.1 billion.

We used available cash primarily for capital expenditures and investments of $2.9 billion and dividend payments on our common stock of $1.6 billion.

During the first quarter of 2020, we repurchased $443 million of common stock before suspending our share repurchase program in March 2020.

During 2021, we generated $6.0 billion in cash from operations.

We used available cash to fund capital expenditures and investments of $1.9 billion, pay dividends on our common stock of $1.6 billion, pay down $1.5 billion in debt, and fund an additional member loan to an equity affiliate of $310 million.

During 2021, cash and cash equivalents increased $633 million to $3.1 billion.

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Operating Activities

During 2020, cash generated by operating activities was $2,111 million, a 56% decrease compared with 2019.

During 2021, cash generated by operating activities was $6.0 billion, a $3.9 billion increase compared with 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, partially offset by higher operating expenses.

During 2020, cash generated by operating activities was $2.1 billion, a 56% decrease compared with 2019.

The decrease was primarily due to lower realized refining margins, driven by the global economic disruption caused by the COVID-19 pandemic, partially offset by lower cash income taxes paid.

During 2019, cash generated by operating activities was $4,808 million, a 37% decrease compared with 2018.

The decrease was mainly driven by lower realized refining margins and decreased distributions from our equity affiliates, along with unfavorable working capital impacts, partially offset by improved results from our Transportation and NGL and Other businesses.

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

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Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows.

The recent decline in demand for refined petroleum products has led to a decrease in refining margins.

If the global economic disruption associated with the COVID-19 pandemic sustains, we expect refining margins to remain challenged in the near term, all of which could have an unfavorable impact on our future operating cash flows.

The level and quality of output from our refineries also impacts our cash flows.

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.

However, the recent decline in demand for refined petroleum products has led to a reduction of our refinery production.

If the global economic disruption associated with the COVID-19 pandemic sustains, we expect refinery production, along with marketing, transportation and terminaling volumes, to remain challenged in the near term, which could have an unfavorable impact on our future operating cash flows.

Our worldwide refining crude oil capacity utilization was 84%, 76% and 94% in 2021, 2020 and 2019, respectively.

Index to Financial Statements

Our worldwide refining clean product yield was 83%, 84% and 84% in 2021, 2020 and 2019, respectively.

Equity Affiliate Operating Distributions

Our operating cash flows are also impacted by distribution decisions made by our equity affiliates, including CPChem, DCP Midstream and WRB.

Over the three years ended December 31, 2020, our operating cash flows included aggregate distributions from our equity affiliates of $6,406 million, including $290 million from DCP Midstream, $2,490 million from CPChem and $1,230 million from WRB.

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

Over the three years ended December 31, 2021, our operating cash flows included aggregate distributions from our equity affiliates of $6,285 million, including $3,101 million from CPChem.

We cannot control the amount or timing of future distributions from equity affiliates;

therefore, future distributions are not assured.

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

Phillips 66 Partners

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

Ownership and Restructuring Transaction

On August 1, 2019, Phillips 66 Partners completed a restructuring transaction to eliminate the incentive distribution rights (IDRs) held by us and to convert our 2% economic general partner interest into a noneconomic general partner interest in exchange for 101 million Phillips 66 Partners common units.

No distributions were made for the general partner interest after August 1, 2019.

At December 31, 2020, we owned 170 million Phillips 66 Partners common units, representing 74% of Phillips 66 Partners’ limited partner units.

We consolidate Phillips 66 Partners as a variable interest entity for financial reporting purposes.

See Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on why we consolidate the partnership.

As a result of this consolidation, the public common and preferred unitholders’ interests in Phillips 66 Partners are reflected as noncontrolling interests of $2,219 million in our consolidated balance sheet at December 31, 2020.

Debt and Equity Financings

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

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

• In March 2019, Phillips 66 Partners entered into a senior unsecured term loan facility with a borrowing capacity of $400 million due March 20, 2020.

Phillips 66 Partners borrowed an aggregate amount of $400 million under the facility during the first half of 2019, which was repaid in full in September 2019.

• Phillips 66 Partners has authorized an aggregate of $750 million under three $250 million continuous offerings of common units, or at-the-market (ATM) programs.

Phillips 66 Partners completed the first two programs in June 2018 and December 2019, respectively.

For the three years ended December 31, 2020, net proceeds of $303 million have been received under these programs.

Phillips 66 Partners primarily used these net proceeds to fund the cash portion of acquisitions of assets from Phillips 66 and for capital spending and investments.

See Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information regarding Phillips 66 Partners.

Index to Financial Statements

Transfers of Equity Interests

Gray Oak Pipeline, LLC was formed to develop and construct the Gray Oak Pipeline, which transports crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi, Texas, and the Sweeny area, including our Sweeny Refinery.

Phillips 66 Partners has a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC.

In December 2018, a third party acquired a 35% interest in the holding company.

Because the holding company’s sole asset was its ownership interest in Gray Oak Pipeline, LLC, which was considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in the holding company during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP at that time.

The Gray Oak Pipeline commenced full operations in the second quarter of 2020, and the restrictions placed on the co-venturer were lifted on June 30, 2020, resulting in the recognition of the sale under GAAP.

Accordingly, at June 30, 2020, the co-venturer’s 35% interest in the holding company was recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet, and the premium of $84 million previously paid by the co-venturer in 2019 was recharacterized from a long-term obligation to a gain in our consolidated statement of operations.

For the year ended December 31, 2020, the co-venturer contributed an aggregate of $61 million to the holding company to fund its portion of Gray Oak Pipeline, LLC’s cash calls.

Phillips 66 Partners’ effective ownership interest in Gray Oak Pipeline, LLC is 42.25% , after considering the co-venturer’s 35% interest in the consolidated holding company.

See Note 6—Investments, Loans and Long-Term Receivables, for further discussion regarding Phillips 66 Partners’ investment in Gray Oak Pipeline, LLC.

We received a U.S.

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

Revolving Credit Facilities and Commercial Paper

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At December 31, 2021 and 2020, no borrowings were outstanding under the program.

Index to Financial Statements

Phillips 66 Partners has a $750 million revolving credit facility which may be used for direct bank borrowings and as support for issuances of letters of credit.

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Borrowings under this facility may be short-term or long-term in duration, and Phillips 66 Partners may at any time prepay outstanding borrowings under the facility, in whole or in part, without premium or penalty.

At December 31, 2020, borrowings of $415 million were outstanding under this facility, compared with no borrowings outstanding at December 31, 2019.

At December 31, 2021, no borrowings were outstanding under this facility, compared with borrowings of $415 million at December 31, 2020.

At both December 31, 2021 and 2020, $1 million in letters of credit had been issued that were supported by this facility.

We had approximately $5.7 billion and $5.3 billion of total committed capacity available under our revolving credit facilities at December 31, 2021 and 2020, respectively.

Index to Financial Statements

Other Debt Issuances and Financings

Senior Unsecured Notes

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

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

In November 2021, Phillips 66 closed its public offering of $1 billion aggregate principal amount of 3.300% senior unsecured notes due 2052.

Interest on the Senior Notes due 2052 is payable semiannually on March 15 and September 15 of each year, commencing on March 15, 2022.

Proceeds received from the public offering were $982 million, net of underwriters’ discounts and commissions, as well as debt issuance costs.

In December 2021, Phillips 66 used the proceeds from this offering, together with cash on hand, to repay $1 billion in aggregate principal amount of its $2 billion 4.300% Senior Notes due April 2022.

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

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

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

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

The Floating Rate Notes will bear interest at a floating rate, reset quarterly, equal to the three-month London Interbank Offered Rate (LIBOR) plus 0.62% per year, subject to adjustment.

The Floating Rate Senior Notes bear interest at a floating rate, reset quarterly, equal to the three-month London Interbank Offered Rate plus 0.62% per year, subject to adjustment.

In December 2021, we used cash on hand to repay the $450 million Floating Rate Senior Notes due 2024.

Interest on the Senior Notes due 2024 and 2026 is payable semiannually on February 15 and August 15 of each year, commencing on February 15, 2021.

Proceeds received from the public offering of senior unsecured notes on November 18, 2020, were $1.74 billion, net of underwriters’ discounts and commissions, as well as debt issuance costs.

On November 19, 2020, a portion of these proceeds were used to repay $500 million of outstanding borrowings under the term loan facility that Phillips 66 entered into in March 2020 (see the “Term Loan Facility” section below for a full description of the term loan facility).

In addition, a portion of the proceeds will be used to repay the $500 million aggregate principal amount of our outstanding Floating Rate Senior Notes due February 2021.

The remainder of the proceeds are being used for general corporate purposes.

Index to Financial Statements

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

Proceeds received from the public offering of senior unsecured notes in November 2020 were $1.74 billion, net of underwriters’ discounts and commissions, as well as debt issuance costs.

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

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

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

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

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

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

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Interest on the Senior Notes due 2023 is payable semiannually on April 6 and October 6 of each year, commencing on October 6, 2020.

The Senior Notes due 2025 issued on June 10, 2020, constitute a further issuance of the Senior Notes due 2025 originally issued on April 9, 2020.

The Senior Notes due 2025 issued in June 2020 constitute a further issuance of the Senior Notes due 2025 originally issued in April 2020.

The $650 million in aggregate principal amount of Senior Notes due 2025 is treated as a single class of debt securities.

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Interest on the Senior Notes due 2030 is payable semiannually on June 15 and December 15 of each year, commencing on December 15, 2020.

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

These proceeds are being used for general corporate purposes.

Proceeds received from the public offerings of senior unsecured notes in June and April of 2020 were $1,008 million exclusive of accrued interest received, and $993 million, respectively, net of underwriters’ discounts or premiums and commissions, as well as debt issuance costs.

Term Loan Facility

On March 19, 2020, Phillips 66 entered into a $1 billion 364-day delayed draw term loan agreement (the Facility) and borrowed $1 billion under the Facility shortly thereafter.

On April 6, 2020, Phillips 66 increased the size of the Facility to $2 billion, and in June 2020, the Facility was amended to extend the commitment period to September 19, 2020.

We did not draw additional amounts under the Facility before the end of the commitment period or further extend the commitment period.

In November 2020, we repaid $500 million of borrowings outstanding under the Facility, and the Facility was amended to extend the maturity date of the remaining $500 million outstanding borrowings from March 18, 2021, to November 20, 2023.

Borrowings under the Facility bear interest at a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by the credit rating of Phillips 66’s senior unsecured long-term debt.

Phillips 66 is using the proceeds for general corporate purposes.

In March 2020, we entered into a $1 billion 364-day delayed draw term loan agreement (the Facility) and borrowed $1 billion under the Facility shortly thereafter.

In November 2020, we repaid $500 million of borrowings outstanding under the Facility, and the Facility was amended to extend the maturity date of the remaining $500 million to November 20, 2023.

In September 2021, we repaid the outstanding borrowings of $500 million.

Index to Financial Statements

Availability of Debt Financing

We have a BBB+ credit rating, with a negative outlook, from Standard & Poor’s and an A3 credit rating, with a negative outlook, from Moody’s Investors Service.

We have an A3 credit rating, with a stable outlook, from Moody’s Investors Service and a BBB+ credit rating, with a stable outlook, from Standard & Poor’s.

In the fourth quarter of 2021, both rating agencies updated their outlooks on our credit ratings from negative to stable.

These investment grade ratings have served to lower our borrowing costs and facilitate access to a variety of lenders.

We do not have any ratings triggers on any of our corporate debt that would cause an automatic default, and thereby impact our access to liquidity, in the event of a rating downgrade.

Failure to maintain strong investment grade ratings could prohibit us from accessing the commercial paper market, although we would expect to be able to access funds under our liquidity facilities mentioned above.

We do not have any ratings triggers on any of our corporate debt that would cause an automatic default, and thereby impact our access to liquidity, in the event of a rating downgrade by one or both rating agencies.

Failure to maintain investment grade ratings could prohibit us from accessing the commercial paper market, although we would expect to be able to access funds under our liquidity facilities mentioned above.

Phillips 66 Partners’ Debt and Equity Financings

In 2013, we formed Phillips 66 Partners, a publicly traded MLP, which owns and operates primarily fee-based midstream assets.

At December 31, 2021, we owned 170 million Phillips 66 Partners common units, representing a 74% limited partner interest, while the public owned a 26% limited partner interest and 13.5 million perpetual convertible preferred units.

We consolidate Phillips 66 Partners as a variable interest entity for financial reporting purposes.

As a result of this consolidation, the public common and preferred unitholders’ interests in Phillips 66 Partners are reflected as noncontrolling interests of $2,169 million in our consolidated balance sheet at December 31, 2021.

During the three years ended December 31, 2021, Phillips 66 Partners raised proceeds, primarily used for its capital spending and investments, from the following third-party debt and equity offerings:

• In April 2021, Phillips 66 Partners entered into a $450 million term loan agreement and borrowed the full amount.

Proceeds from this term loan were primarily used to repay the outstanding borrowings under its $750 million revolving credit facility.

• In March 2019, Phillips 66 Partners entered into a senior unsecured term loan facility with a borrowing capacity of $400 million due March 20, 2020.

Phillips 66 Partners borrowed an aggregate amount of $400 million under the facility during the first half of 2019, which was repaid in full in September 2019.

• Phillips 66 Partners has authorized an aggregate of $750 million under three $250 million continuous offerings of common units, or at-the-market (ATM) programs.

Phillips 66 Partners completed the first two programs in June 2018 and December 2019, respectively.

For the three years ended December 31, 2021, net proceeds of $175 million have been received under these programs.

See Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information regarding Phillips 66 Partners.

Index to Financial Statements

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Lease Residual Value Guarantees

In September 2020, we amended the operating lease agreement for our headquarters facility in Houston, Texas, and extended the lease term from June 2021 to September 2025.

Under this agreement, we have the option, at the end of the lease term, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale.

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 December 31, 2021.

We also have residual value guarantees associated with railcar and airplane leases with maximum potential future payments totaling $381 million.

These operating leases have remaining terms of up to nine years.

We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling $221 million.

These leases have remaining terms of up to ten years.

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

In 2020, the trial court presiding over litigation regarding the Dakota Access Pipeline ordered the U.S.

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 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.

In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of $2.5 billion aggregate principal amount of senior unsecured notes consisting of:

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Dakota Access and ETCO have guaranteed repayment of the notes.

In addition, Phillips 66 Partners and its coventurers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering.

Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the ongoing litigation related to an easement granted by the U.S.

Army Corps of Engineers (USACE) to allow the pipeline to be constructed under Lake Oahe in North Dakota.

In addition, Phillips 66 Partners and its co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering.

Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the above mentioned ongoing litigation.

Contributions may be required if Dakota Access determines that the issues included in any such final judgment cannot be remediated and Dakota Access has or is projected to have insufficient funds to satisfy repayment of the notes.

If Dakota Access undertakes remediation to cure issues raised in a final judgment, contributions may be required if any series of the notes become due, whether by acceleration or at maturity, during such time, to the extent Dakota Access has or is projected to have insufficient funds to pay such amounts.

At December 31, 2020, Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU was approximately $631 million and the aggregate book value of Phillips 66 Partners’ investments in Dakota Access and ETCO was $577 million.

In March 2020, the trial court presiding over this litigation ordered the USACE to prepare an Environmental Impact Statement (EIS) and requested additional information to enable a decision on whether the Dakota Access Pipeline should be shut down while the EIS is being prepared.

In July 2020, the trial court ordered the Dakota Access Pipeline to be shut down and emptied of crude oil within 30 days and that the pipeline should remain shut down pending the preparation of the EIS by the USACE, which the USACE has indicated is expected to take approximately 13 months.

Dakota Access filed an appeal and a request for a stay of the order, which was granted.

In January 2021, the appellate court affirmed the trial court’s order that:

(1) vacated Dakota Access’s easement under Lake Oahe, and (2) directed the USACE to prepare an EIS.

The appellate court did not affirm the trial court’s order that the Dakota Access Pipeline be shut down and emptied of crude oil.

However, the appellate court acknowledged the precise consequences of the vacated easement remain uncertain.

Since the pipeline is now an encroachment, the USACE could seek a shutdown of the pipeline during the preparation of the EIS.

Alternatively, the trial court could again issue an injunction that the pipeline be shut down, assuming it makes all findings necessary for injunctive relief.

A status hearing is scheduled for April 9, 2021, at which time the parties will discuss the appellate court’s decision and how the USACE plans to proceed given the vacating of the easement.

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

Index to Financial Statements

Gray Oak Pipeline, LLC

Gray Oak Pipeline, LLC had a third-party term loan facility with a borrowing capacity of $1,379 million, inclusive of accrued interest.

Phillips 66 Partners and its co-venturers provided a guarantee through an equity contribution agreement requiring proportionate equity contributions to Gray Oak Pipeline, LLC up to the total outstanding loan amount, plus any additional accrued interest and associated fees, if Gray Oak Pipeline, LLC defaulted on certain of its obligations thereunder.

In September 2020, Gray Oak Pipeline, LLC fully repaid the outstanding balance of the term loan facility, and the associated equity contribution agreement was terminated.

At December 31, 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.

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

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Our debt balance at December 31, 2021, was $14.4 billion and our total debt-to-capital ratio was 40%.

In 2021, we paid down $1.5 billion in debt and will continue to prioritize debt reduction in 2022.

As our operating cash flows improve further, we expect to reduce our debt to pre-COVID-19 pandemic levels over the next couple of years.

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

Debt Incurred During 2020

As noted in “Significant Sources of Capital,” Phillips 66 received approximately $4.7 billion in proceeds from debt issuances during 2020, while repaying approximately $1.0 billion of debt.

Phillips 66 Partners had net borrowings of $415 million under its revolving credit facility during 2020.

The net increase in debt of $4.1 billion reflects our response to the COVID-19 pandemic’s negative impacts on our operating cash flows.

As economic conditions improve and our operating cash flows return to more typical levels, we will continue to prioritize funding sustaining capital expenditures and the company’s dividend.

After these cash flow needs, we expect to prioritize repayment of debt, with an objective of maintaining our investment grade credit ratings and reducing our debt to pre-pandemic levels.

We intentionally structured the maturities and call options of our debt issued in 2020 to facilitate these objectives.

Additionally, restarting our share repurchase program remains a priority once operating cash flows exceed amounts needed to fulfill the other priorities stated above and assuming our shares are trading below intrinsic value.

Joint Venture Loans

During 2020, we and our co-venturer provided member loans to WRB.

At December 31, 2020, our share of the loan balance was $277 million.

During 2020 and 2021, we and our co-venturer provided member loans to WRB.

At December 31, 2021, our share of the outstanding member loan balance, including accrued interest, was $595 million.

The need for additional loans to WRB in 2022, as well as WRB’s repayment schedule, will depend on market conditions.

On February 9, 2022, our Board of Directors declared a quarterly cash dividend of $0.92 per common share, payable March 1, 2022, to holders of record at the close of business on February 22, 2022.

We expect that our Board of Directors will continue to declare quarterly dividends in 2021.

We expect that our Board of Directors will continue to declare a competitive and growing dividend in 2022.

Share Repurchases

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Shares of stock repurchased are held as treasury shares.

We suspended share repurchases in mid-March 2020 to preserve liquidity in response to the global economic disruption caused by the COVID-19 pandemic.

We suspended our share repurchase program in March 2020 to preserve liquidity.

As operating cash flows improve further, we will prioritize shareholder returns and debt repayment.

Pending Merger with Phillips 66 Partners

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

Phillips 66 Partners’ perpetual convertible preferred units would 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 March 2022, subject to customary closing conditions.

Based on the closing market prices of Phillips 66 common stock and Phillips 66 Partners common units on December 31, 2021, we would issue approximately 44 million shares of our common stock with a value of approximately $3.2 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 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the pending merger.

Index to Financial Statements

Contractual Obligations

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

Millions of Dollars

Payments Due by Period

Debt obligations (a) $ 15,716 965 3,000 2,700 9,051

Finance lease obligations 264 16 30 32 186

Software obligations 19 6 10 3 —

Total debt 15,999 987 3,040 2,735 9,237

Interest on debt 7,434 568 998 866 5,002

Operating lease obligations 1,372 406 455 240 271

Purchase obligations (b) 76,887 28,946 9,742 8,099 30,100

Other long-term liabilities (c)

Asset retirement obligations 309 9 40 29 231

Accrued environmental costs 427 70 131 65 161

Repatriation income tax liability (d) 88 9 27 52 —

Total $ 102,516 30,995 14,433 12,086 45,002

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

(b) Represents any agreement to purchase goods or services that is enforceable, legally binding and specifies all significant terms.

We expect these purchase obligations will be fulfilled with operating cash flows in the applicable maturity period.

The majority of the purchase obligations are market-based contracts, including exchanges and futures, for the purchase of products such as crude oil and raw NGL.

Our contractual obligations primarily consist of purchase obligations, outstanding debt principal and interest obligations, operating and finance lease obligations, and asset retirement and environmental obligations.

Purchase Obligations

Our purchase obligations represent agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms.

We expect these purchase obligations will be fulfilled with operating cash flows in the period when due.

As of December 31, 2021, our purchase obligations totaled $113.9 billion, with $43.0 billion due within one year.

The majority of our purchase obligations are market-based contracts, including exchanges and futures, for the purchase of products such as crude oil and raw NGL.

The products are used to supply our refineries and fractionators and optimize our supply chain.

Product purchase commitments with third parties totaled $29,551 million.

Related party purchase commitments totaled $31,729 million and included purchases from CPChem, DCP Midstream and other equity affiliates.

Purchase obligations of $4,027 million are related to agreements to access and utilize the capacity of third-party equipment and facilities, including pipelines and product terminals, to transport, process, treat, and store products.

The remainder is primarily our net share of purchase commitments for materials and services for jointly owned facilities where we are the operator.

From 2021 through 2025, we expect to contribute an average of $125 million per year to our qualified and nonqualified pension and other postretirement benefit plans in the United States and an average of $30 million per year to our non-U.S.

five-year average consists of approximately $40 million for 2021 and $145 million per year for the remaining four years.

Our minimum funding in 2021 is expected to be $40 million in the United States and $30 million outside the United States.

This amount also excludes unrecognized tax benefits of $56 million because the ultimate disposition and timing of any tax payments to be made with regard to such amounts are not reasonably estimable or the amounts relate to potential refunds.

This amount also excludes interest of $5 million.

Although unrecognized tax benefits are not a contractual obligation, they represent potential demands on our liquidity.

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

The amount represents the remaining income tax liability.

At December 31, 2021, product purchase commitments with third parties and related parties were $44.8 billion and $51.3 billion, respectively.

The remaining purchase obligations mainly represent agreements to access and utilize the capacity of third-party equipment and facilities, including pipelines and product terminals, to transport, process, treat, and store products, and our net share of purchase commitments for materials and services for jointly owned facilities where we are the operator.

Debt Principal and Interest Obligations

As of December 31, 2021, our aggregate principal amount of outstanding debt was $14.3 billion, with $1.5 billion due within one year.

Our obligations for interest on the debt totaled $7.5 billion, with $513 million due within one year.

See Note 12—Debt, in the Notes to Consolidated Financial Statements, for additional information regarding our outstanding debt principal and interest obligations.

Finance and Operating Lease Obligations

See Note 18—Leases, in the Notes to Consolidated Financial Statements, for information regarding our lease obligations and timing of our expected lease payments.

Asset Retirement and Environmental Obligations

See Note 10—Asset Retirement Obligations and Accrued Environmental Costs, in the Notes to Consolidated Financial Statements, for information regarding asset retirement and environmental obligations.

Index to Financial Statements

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

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

• Continued development of additional Gulf Coast fractionation capacity.

During 2020, Phillips 66 commenced operations of two new NGL fractionators (Frac 2 and Frac 3) at the Sweeny Hub in Texas.

Capital spending in our Midstream segment was $4.8 billion for the three-year period ended December 31, 2021, including:

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

We completed two NGL fractionators (Sweeny Fracs 2 and 3) which commenced operations in 2020.

In 2021, we resumed the construction of Sweeny Frac 4.

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

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

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

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

• Completion of 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.

• Investments in NOVONIX and a renewable feedstock processing plant.

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

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

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

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

Index to Financial Statements

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

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

Index to Financial Statements

In March 2020, the development and construction of our Red Oak Pipeline system and Sweeny Frac 4, as well as Phillips 66 Partners’ Liberty Pipeline system projects, were deferred as a result of the challenging business environment.

In the third quarter of 2020, the Red Oak Pipeline project was canceled.

We plan to resume construction of Sweeny Frac 4 in the second half of 2021.

During the three-year period ended December 31, 2021, DCP Midstream’s self-funded capital expenditures and investments were $1.3 billion on a 100% basis.

Capital spending during this period was primarily for expansion projects and maintenance capital expenditures for existing assets.

Expansion projects included construction of the Latham II offload facilities, the Cheyenne Connector, and the Mewbourn 3 and O’Connor 2 plants, as well as investments in the Sand Hills, Southern Hills and Gulf Coast Express pipeline joint ventures.

Expansion projects included construction of the Latham II offload facilities, the Cheyenne Connector, and the O’Connor 2 plant, as well as investments in the Sand Hills, Southern Hills and Gulf Coast Express pipeline joint ventures.

During the three-year period ended December 31, 2021, CPChem had a self-funded capital program that totaled $2.1 billion on a 100% basis.

The capital spending was primarily for the development of U.S.

Gulf Coast petrochemical projects, debottlenecking projects on existing assets, and the development of a petrochemicals complex in Qatar.

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.

Capital spending for the Refining segment during the three-year period ended December 31, 2021, was $2.6 billion, primarily for refinery upgrade projects to enhance the yield of high-value products, renewable diesel projects, improvements to the operating integrity of key processing units, and safety-related projects.

Key projects completed during the three-year period included:

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

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

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

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

• Installation of facilities to improve product value at our Ponca City Refinery and facilities to provide flexibility to produce renewable diesel at our San Francisco Refinery.

• Installation of facilities to improve clean product yield at the Ponca City and Lake Charles refineries, as well as the jointly owned Borger Refinery.

• Installation of facilities to improve product value at the Sweeny, Humber and Los Angeles refineries.

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

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

Marketing and Specialties

Capital spending for the M&S segment during the three-year period ended December 31, 2020, was primarily for an investment in a U.S.

West Coast retail marketing joint venture, and the acquisition, development and enhancement of retail sites in Europe.

Capital spending for the M&S segment during the three-year period ended December 31, 2021, was primarily for investment in retail marketing joint ventures in the U.S.

West Coast and Central regions;

the continued acquisition, development and enhancement of retail sites in Europe;

and acquisition of a commercial fleet fueling business in California, which will provide further placement opportunities for renewable diesel production to end-use customers.

Corporate and Other

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Index to Financial Statements

Our 2021 capital budget is $1.7 billion, including $305 million of Phillips 66 Partners’ planned capital spending.

Our projected $1.7 billion capital budget excludes our portion of planned capital spending by our major joint ventures DCP Midstream, CPChem and WRB totaling $707 million.

Phillips 66 Partners’ planned capital spending of $305 million includes $5 million of capital expected to be funded by a joint venture partner.

The Midstream capital budget is $615 million, of which $5 million is expected to be funded by a joint venture partner.

The Midstream growth capital budget is directed toward completing near-term committed and optimization projects, including the construction of Sweeny Frac 4 and the completion of the C2G Pipeline.

Sustaining capital will be used to enhance asset integrity and reliability.

Refining’s capital budget of $776 million includes $521 million of sustaining capital for reliability, safety and environmental projects.

The Refining budget includes $255 million for high-return, quick-payout projects to enhance margins by improving clean product yields and reducing feedstock costs, as well as investments to competitively position the company for a lower carbon future.

The Refining budget also includes pre-construction engineering and design costs related to the company’s plans to reconfigure the San Francisco Refinery in Rodeo, California, to produce renewable fuels.

The M&S capital budget of $116 million primarily reflects the development and improvement of our international retail sites.

The Corporate and Other capital budget of $166 million will primarily fund digital transformation projects, including a new enterprise resource planning system.

Index to Financial Statements

Our 2022 capital budget is $1.9 billion, including $992 million for sustaining capital and $916 million for growth capital.

Approximately 45% of growth capital supports lower-carbon opportunities.

Our projected $1.9 billion capital budget excludes our portion of planned capital spending by our major joint ventures CPChem, WRB and DCP Midstream totaling $1.1 billion.

The Midstream capital budget of $703 million includes a growth capital budget of $426 million which will be directed toward completing construction of Sweeny Frac 4, repayment of Phillips 66 Partners’ 25% share of Dakota Access’ debt due in 2022, and investment opportunities to advance our lower-carbon efforts.

The Midstream capital budget also includes $277 million for sustaining projects.

In Refining, the total capital budget of $896 million consists of $488 million for reliability, safety and environmental projects and $408 million of growth capital primarily for the reconfiguration of our San Francisco Refinery as part of the Rodeo Renewed project.

The M&S capital budget of $144 million reflects the continued development and enhancement of our retail network, including energy transition opportunities.

The Corporate and Other capital budget is $165 million primarily for digital transformation projects.

Contingencies

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If applicable, we accrue receivables for probable insurance or other third-party recoveries.

In the case of income tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

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.

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See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information about income tax-related contingencies.

Index to Financial Statements

Environmental

We are subject to international, federal, state and local environmental laws and regulations.

We are subject to numerous international, federal, state and local environmental laws and regulations.

Among the most significant of these international and federal environmental laws and regulations are the:

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

Index to Financial Statements

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

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

• European Union Trading Directive resulting in the European Union Emissions Trading Scheme (EU ETS), which uses a market-based mechanism to incentivize the reduction of greenhouse gas (GHG) emissions, as well as the United Kingdom Emissions Trading Scheme (UK ETS), which replaced the EU ETS in the United Kingdom on January 1, 2021, but the United Kingdom had the obligation and retained the ability to enforce the EU ETS obligations until April 30, 2021.

These laws and their implementing regulations set limits on emissions and, in the case of discharges to water, establish water quality limits.

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For example, in California the South Coast Air Quality Management District (SCAQMD) approved amendments to the Regional Clean Air Incentives Market (RECLAIM) that became effective in 2016, which require a phased reduction of nitrogen oxide emissions through 2022, affecting refineries in the Los Angeles metropolitan area.

In 2017, SCAQMD required additional nitrogen dioxide emissions reductions through 2025 and is now promulgating new regulations to replace the RECLAIM program with a traditional command and control regulatory regime.

In 2017, SCAQMD required additional nitrogen dioxide emissions reductions through 2025 and, on November 5, 2021, promulgated new regulations to replace the RECLAIM program with a traditional command and control regulatory regime.

The ultimate financial impact arising from environmental laws and regulations is neither clearly known nor easily determinable as new standards, such as air emission standards, water quality standards and stricter fuel regulations, continue to evolve.

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Notable areas of potential impacts include air emissions compliance and remediation obligations in the United States.

Index to Financial Statements

An example of this in the fuels area is the Energy Independence and Security Act of 2007 (EISA).

It requires fuel producers and importers to provide additional renewable fuels for transportation motor fuels and stipulates a mix of various types.

RINs form the mechanism used by the EPA to record compliance with the Renewable Fuel Standard.

RINs form the mechanism used by the EPA to record compliance with the Renewable Fuel Standard (RFS).

If an obligated party has more RINs than it needs to meet its obligation, it may sell or trade the extra RINs, or instead choose to “bank” them for use the following year.

We have met the stringent requirements to date while establishing implementation, operating and capital strategies, along with advanced technology development, to address projected future requirements.

It is uncertain how various future requirements contained in EISA, and the regulations promulgated thereunder, may be implemented and what their full impact may be on our operations.

For the 2020 compliance year, the EPA set volumes of advanced and total renewable fuels required to be blended into transportation fuels at higher levels than in previous years;

it is uncertain if these increased obligations will be achievable by fuel producers and shippers without drawing on the RIN bank.

We have met the requirements to date while establishing implementation, operating and capital strategies, along with advanced technology development, to address projected future renewable volume obligation (RVO) requirements.

On December 7, 2021, the EPA proposed RVO for the 2021 and 2022 compliance years, which essentially holds the 2021 RVO to actual volumes of biofuel consumption, while increasing the volumes in 2022.

The EPA also re-proposed the compliance year 2020 RVO, also holding them to actual volumes.

It is uncertain how various future RVO requirements contained in EISA, and the regulations promulgated thereunder, may be implemented and what their full impact may be on our operations.

Additionally, we may experience a decrease in demand for refined petroleum products due to the regulatory program as currently promulgated.

This program continues to be the subject of possible Congressional review and re-promulgation in revised form, and the EPA’s regulations pertaining to the 2019 and 2020 compliance years are subject to legal challenge, further creating uncertainty regarding renewable fuel volume requirements and obligations.

Uncertainty also exists surrounding compliance year 2021, as the EPA has not yet promulgated standards for that compliance year, although we expect the EPA to follow its past practice of using its authority to reduce the statutorily required volumes under EISA of advanced and total renewable fuels required to be blended into transportation fuels.

This program continues to be the subject of possible Congressional review and re-promulgation in revised form, and the EPA’s final regulations establishing RVO requirements have been and continue to be subject to legal challenge, further creating uncertainty regarding RVO requirements.

Compliance with the regulation has been further complicated as the market for RINs has been the subject of fraudulent third-party activity, and it is possible that some RINs that we have purchased may be determined to be invalid.

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Although the cost for replacing any fraudulently marketed RINs is not reasonably estimable at this time, we would not expect such costs to have a material impact on our results of operations or financial condition.

Index to Financial Statements

We are required to purchase RINs in the open market to satisfy the portion of our obligation under the RFS that is not fulfilled by blending renewable fuels into the motor fuels we produce.

For the years ended December 31, 2021, 2020 and 2019, we incurred expenses of $441 million, $342 million and $111 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 $351 million, $133 million and $74 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

The amount of these expenses and fluctuations between periods is primarily driven by the market price of RINs, refinery production, blending activities, and RVO requirements.

We also are subject to certain laws and regulations relating to environmental remediation obligations associated with current and past operations.

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Federal and state laws require contamination caused by such underground storage tank releases be assessed and remediated to meet applicable standards.

In addition to other cleanup standards, many states have adopted cleanup criteria for methyl tertiary-butyl ether (MTBE) for both soil and groundwater.

In addition to other cleanup standards, many states have adopted cleanup criteria for methyl tertiary-butyl ether (MTBE) for both soil and groundwater and both the EPA and many states may adopt cleanup standards for per- and polyfluoroalkyl substances (PFAS), which may have been a constituent in certain firefighting foams used or stored at or near some of our facilities.

At RCRA-permitted facilities, we are required to assess environmental conditions.

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

During 2020, we were notified of one previously resolved site that was returned to active status and three sites that were deemed resolved and closed, leaving 25 unresolved sites with potential liability at December 31, 2020.

During 2021, there were no new sites for which we received notice of potential liability nor were any existing sites deemed resolved and closed, leaving 25 unresolved sites with potential liability at December 31, 2021.

Index to Financial Statements

For the majority of Superfund sites, our potential liability will be less than the total site remediation costs because the percentage of waste attributable to us, versus that attributable to all other potentially responsible parties, is relatively low.

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There are relatively few sites where we are a major participant, and given the timing and amounts of anticipated expenditures, neither the cost of remediation at those sites nor such costs at all CERCLA sites, in the aggregate, is expected to have a material adverse effect on our competitive or financial condition.

Expensed environmental costs were $610 million in 2020 and are expected to be approximately $720 million per year in 2021 and 2022.

We incur costs related to the prevention, control, abatement or elimination of environmental pollution.

Expensed environmental costs were $726 million in 2021 and are expected to be approximately $725 million and $775 million in 2022 and 2023, respectively.

Capitalized environmental costs were $96 million in 2021 and are expected to be approximately $115 million and $165 million, in 2022 and 2023, respectively.

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Therefore, it is difficult to develop reasonable estimates of future site remediation costs.

Index to Financial Statements

Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in certain of our operations and products, and there can be no assurance that those costs and liabilities will not be material.

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EU ETS impacts factories, power stations and other installations across all EU member states.

As a result of the United Kingdom’s exit from the European Union (BREXIT), those types of entities in the United Kingdom will be subject to the UK ETS, rather than the EU ETS, beginning April 30, 2021.

As a result of the United Kingdom’s exit from the European Union (BREXIT), those types of entities in the United Kingdom became subject to the UK ETS, rather than the EU ETS, after the EU ETS 2020 scheme year ended on April 30, 2021.

Index to Financial Statements

• California’s Senate Bill No.

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Other GHG emissions programs in the western U.S.

states have been enacted or are under consideration or development, including amendments to California's Low Carbon Fuel Standard, Oregon's Low Carbon Fuel Standard, and Washington's carbon reduction programs.

states have been enacted or are under consideration or development, including amendments to California's Low Carbon Fuel Standard, Oregon's Low Carbon Fuel Standard and Climate Protection Plan, and Washington's carbon reduction programs.

Supreme Court decision in Massachusetts v.

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Phase IV runs from January 1, 2021 through 2030 and sectors covered under the ETS must reduce their GHG emissions by 43% compared to 2005 levels.

From April 30, 2021, the United Kingdom will no longer be part of the EU ETS and has launched the UK ETS.

Phillips 66 has assets that are subject to the EU ETS and assets that will be subject to the UK ETS.

Index to Financial Statements

Since January 1, 2021, the United Kingdom is no longer part of the EU ETS and, instead, has been under the UK ETS.

However, the United Kingdom had the obligation and retained the ability to enforce the EU ETS obligations until April 30, 2021.

Phillips 66 has assets that are subject to the EU ETS and assets that are subject to the UK ETS.

From November 30 to December 12, 2015, more than 190 countries, including the United States, participated in the United Nations Climate Change Conference in Paris, France.

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The United States officially rejoined the Paris Agreement in February 2021, which could lead to additional GHG emission reduction requirements for sources in the United States.

In the United States, some additional form of regulation is likely to be forthcoming in the future at the state or federal levels with respect to GHG emissions.

In the United States, some additional form of regulation is likely to be forthcoming at the state or federal levels with respect to GHG emissions.

Such regulation could take any of several forms that may result in additional financial burden in the form of taxes, the restriction of output, investments of capital to maintain compliance with laws and regulations, or required acquisition or trading of emission allowances.

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Such laws and regulations could also increase demand for less carbon intensive energy sources.

Index to Financial Statements

An example of one such program is California’s cap and trade program, which was promulgated pursuant to the State’s Global Warming Solutions Act.

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We are working to continuously improve operational and energy efficiency through resource and energy conservation throughout our operations.

In September 2021, we announced a set of company-wide GHG emission intensity reduction targets that we consider to be impactful, attainable and measurable.

By 2030, we expect to reduce GHG emission 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.

In addition to the disclosures above, we have issued our 2021 Sustainability Report that is accessible on our website and provides more detailed information on our Environmental, Social and Corporate Governance (ESG) initiatives, including detailed information on environmental metrics.

Index to Financial Statements

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Some of these accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts would have been reported under different conditions, or if different assumptions had been used.

The following discussion of critical accounting estimates, along with the discussion of contingencies in this report, address all important accounting areas where the nature of accounting estimates or assumptions could be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change.

The following discussion of critical accounting estimates, along with the discussion of contingencies in this report, addresses all important accounting areas where the nature of accounting estimates or assumptions could be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change.

Impairment of Long-Lived Assets and Equity Method Investments

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Asset Retirement Obligations

Under various contracts, permits and regulations, we have legal obligations to remove tangible equipment and restore the land at the end of operations at certain operational sites.

Our largest asset removal obligations involve asbestos abatement at refineries.

Under various contracts, permits and regulations, we have legal obligations to remove tangible long-lived assets and restore the land at the end of operations at certain operational sites.

Estimating the timing and cost of future asset removals is difficult.

Most of these removal obligations are many years, or decades, in the future, and the contracts and regulations often have vague descriptions of what removal practices and criteria must be met when the removal event actually occurs.

Our recognized asset retirement obligations primarily involve asbestos abatement at our refineries;

decommissioning, removal or dismantlement of certain assets at refineries that have or will be shut down;

and dismantlement or removal of assets at certain leased international marketing sites.

Many of these removal obligations are many years, or decades, in the future, and the contracts and regulations often have vague descriptions of what removal practices and criteria must be met when the removal event actually occurs.

Asset removal technologies and costs, regulatory and other compliance considerations, expenditure timing, and other inputs into valuation of the obligation, including discount and inflation rates, are also subject to change.

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As long as these intangible assets are determined to have indefinite lives, they will be subject to at least annual impairment tests that require management’s judgment of their estimated fair value.

At December 31, 2020, we had $1.4 billion of goodwill recorded in conjunction with past business combinations.

At December 31, 2021, we had $1.5 billion of goodwill primarily related to past business combinations.

Goodwill is not amortized.

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Management uses available information to make this fair value determination, including estimated future cash flows, cost of capital, observed market earnings multiples of comparable companies, our common stock price and associated total company market capitalization.

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

We completed our annual qualitative assessment of goodwill as of October 1, 2021, and concluded that the fair values of our reporting units exceeded their respective carrying values (including goodwill).

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As such, we continue to monitor for indicators of impairment until our next annual impairment assessment is performed.

Index to Financial Statements

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At December 31, 2021, Phillips 66 had $10.3 billion of senior unsecured notes outstanding guaranteed by Phillips 66 Company, a direct, wholly owned operating subsidiary of Phillips 66.

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

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 flows.

The guarantees (1) are unsecured obligations of Phillips 66 Company, (2) rank equally with all of Phillips 66 Company’s other unsecured and unsubordinated indebtedness, and (3) are full and unconditional.

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

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

Summarized Combined Statement of Operations Millions of Dollars

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Impairments 1,290

Loss before income taxes (5,111)

Net loss (3,882)

Income before income taxes 397

Net income 428

Summarized Combined Balance Sheet Millions of Dollars

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The realized refining margins are adjusted to include our proportional share of our joint venture refineries’ realized margins, as well as to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized refining margins are converted to a per-barrel basis by dividing them by total refinery processed inputs (primarily crude oil) measured on a barrel basis, including our share of inputs processed by our joint venture refineries.

Our realized refining margin per barrel is intended to be comparable with industry refining margins, which are known as “crack spreads.” As discussed in “Business Environment,” industry crack spreads measure the difference between market prices for refined petroleum products and crude oil.

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.

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Year Ended December 31, 2021

Loss before income taxes $ (1,224) (2,077) (641) (2,213) (6,155)

Income (loss) before income taxes $ (36) (1,889) 70 (694) (2,549)

Taxes other than income taxes

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Certain tax impacts (4) — — — (4)

Regulatory compliance costs (20) (28) (27) (13) (88)

Realized refining margins

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188,697 240,859 173,230 112,994 715,780

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

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

$ (0.19) (7.84) 0.73 (6.14) (3.99)

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Year Ended December 31, 2020

Income (loss) before income taxes $ 608 364 1,338 (324) 1,986

Loss before income taxes $ (1,224) (2,077) (641) (2,213) (6,155)

Taxes other than income taxes

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774 1,354 498 1,000 3,626

Equity in (earnings) losses of affiliates

11 2 (331) — (318)

Equity in losses of affiliates 10 3 363 — 376

Other segment (income) expense, net

(16) (3) — 5 (14)

Proportional share of refining gross margins contributed by equity affiliates

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Special items:

Pending claims and settlements — — (21) — (21)

Certain tax impacts (6) — — — (6)

Realized refining margins

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170,536 213,871 162,693 110,602 657,702

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

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

$ (7.18) (9.71) (6.96) (20.01) (10.48)

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Year Ended December 31, 2019

Income before income taxes

$ 567 1,040 2,817 111 4,535

Income (loss) before income taxes $ 608 364 1,338 (324) 1,986

Taxes other than income taxes

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Special items:

Certain tax impacts

(5) — — — (5)

Pending claims and settlements — — (21) — (21)

Realized refining margins

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195,506 293,666 188,045 130,014 807,231

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

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

$ 3.11 1.24 12.95 (2.49) 2.75

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

** Income 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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(48) (31) (27) (113) (108) (99)

Other operating revenues*

(327) (379) (379) (27) (37) (32)

Other operating (revenues) expenses* (424) (327) (379) 8 (27) (37)

Other segment expense, net — — — 1 1 1

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2.19 1.87 1.57 5.96 6.34 4.90

* 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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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-K

Item 7. Management’s Discussion and Analysis