What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-04-29 compared with 2021-10-29 · 177 added, 310 removed, 416 unchanged (54% of the section changed)

11 unchanged sentences

EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT

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

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

Phillips 66 is a diversified energy company with midstream, chemicals, refining, and marketing and specialties businesses.

At March 31, 2022, we had total assets of $61 billion.

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

Executive Overview

The Coronavirus Disease 2019 ( COVID-19) pandemic continues to disrupt economic activities globally.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In the first quarter of 2022, we reported earnings of $582 million and generated cash from operating activities of $1.1 billion.

We used available cash to fund capital expenditures and investments of $370 million and pay dividends on our common stock of $404 million.

We ended the first quarter of 2022 with $3.3 billion of cash and cash equivalents and approximately $5.7 billion of total committed capacity available under our revolving credit facilities.

Our reported earnings for the first quarter of 2022, compared with the first quarter of 2021, reflect a recovery in global demand for refined petroleum products due to the administration of COVID-19 vaccines and the easing of pandemic restrictions that occurred throughout 2021, as well as recovery from effects of the winter storms that occurred in the first quarter of 2021.

The increase in global demand and recent market disruptions resulting from the conflict between Russia and Ukraine resulted in the widening of market crack spreads.

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

In addition, equity earnings from our Chemicals segment increased due to higher sales volumes.

However, as uncertainty remains regarding the impacts on the global economy of the lingering pandemic and the conflict between Russia and Ukraine, we will continue to be disciplined in our allocation of capital and monitor the performance of our portfolio.

In addition, we are progressing a multi-year business transformation focused on enterprise-wide opportunities to improve our cost structure.

We are targeting a sustainable cost reduction of at least $700 million per year by the end of the transformation period.

We will provide updates as the initiative progresses.

Phillips 66 Partners Merger

On March 9, 2022, we completed the previously announced merger between us and Phillips 66 Partners LP (Phillips 66 Partners).

The merger resulted in the acquisition of all limited partnership interests in Phillips 66 Partners not already owned by us.

Upon closing, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66 and its common units are no longer publicly traded.

See Note 18—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the merger transaction.

CEO Transition

On April 12, 2022, Greg C.

Garland, Chairman of the Board and Chief Executive Officer of Phillips 66 announced his intention to retire from his position as Chief Executive Officer effective July 1, 2022.

Garland will continue to serve as Executive Chairman of the Board with an expected retirement date from this position in 2024.

Lashier will become President and Chief Executive Officer effective July 1, 2022.

Business Environment

The Midstream segment includes our Transportation and NGL businesses.

Our Transportation business contains fee-based operations 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, LLC (DCP Midstream).

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

During the first quarter of 2022, NGL prices increased significantly, compared with the first quarter of 2021, due to strong demand and increased crude oil and natural gas prices.

The Chemicals segment consists of our 50% equity investment in Chevron Phillips Chemical Company LLC (CPChem).

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

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

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

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

During the first quarter of 2022, the benchmark high-density polyethylene chain margin decreased, compared with the first quarter of 2021.

This decrease was mainly due to higher feedstock cost.

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

The price of U.S.

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

benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $94.49 per barrel during the first quarter of 2022, compared with an average of $57.84 per barrel in the first quarter of 2021.

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

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

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

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

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

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 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 in the third quarter of 2021 has improved, compared with the third quarter of 2020.

Worldwide market crack spreads increased to an average of $21.93 per barrel during the first quarter of 2022, compared with an average of $13.23 per barrel in the first quarter of 2021.

The increases in crude oil prices and market crack spreads were mainly driven by tight supply due to a significant increase in demand for refined petroleum products as economic activities continue to recover as the COVID-19 pandemic recedes, as well as market disruptions from the conflict between Russia and Ukraine.

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

While marketing fuel and lubricant margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are influenced by trends in spot prices, and where applicable, retail prices for refined petroleum products in the regions and countries where we operate.

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

Demand for refined petroleum products has improved in the first quarter of 2022, compared with the first quarter of 2021, as economic activities continue to recover as the COVID-19 pandemic recedes.

RESULTS OF OPERATIONS

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

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

Consolidated Results

2 unchanged sentences

Three Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

Midstream $ 242 76

4 unchanged sentences

Income (loss) before income taxes 828 (771)

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

Income tax expense (benefit) 171 (132)

Net income (loss) 657 (639)

1 unchanged sentence

Net income (loss) attributable to Phillips 66 $ 582 (654)

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

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

The improvement was primarily due to:

1 unchanged sentence

• Higher equity earnings from CPChem.

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

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

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

The improvement was primarily driven by:

• Lower impairments.

• Improved realized refining margins.

• Increased equity earnings from CPChem.

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

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

• Lower impairments in the Midstream segment.

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

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

Statement of Operations Analysis

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

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

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

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

Sales and other operating revenues and purchased crude oil and products both increased 67% in the first quarter of 2022.

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

Equity in earnings of affiliates increased $400 million in the first quarter of 2022.

The increase was primarily due to higher equity earnings from CPChem mainly driven by improved margins and higher sales volumes and WRB Refining LP (WRB) resulting from improved realized refining margins and higher refinery production.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other income (loss) decreased $158 million in the first quarter of 2022.

The decrease was primarily due to an unrealized investment loss of $169 million related to the decrease in NOVONIX’s stock price during the first quarter of 2022.

We acquired this investment in September 2021.

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

Impairments decreased $198 million in the first quarter of 2022 due to a before-tax impairment of $198 million recorded in the first quarter of 2021 related to Phillips 66 Partners’ decision to exit the Liberty Pipeline project.

See Note 5—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding this impairment.

We had income tax expense of $171 million in the first quarter of 2022, compared with an income tax benefit of $132 million in the first quarter of 2021.

See Note 17—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our effective income tax rates.

Net income attributable to noncontrolling interests increased $60 million in the first quarter of 2022.

The increase was primarily driven by the allocation of a portion of the before-tax impairment recorded in the first quarter of 2021 related to the Liberty Pipeline project to the noncontrolling interest owners of Phillips 66 Partners.

Segment Results

Three Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

Millions of Dollars

3 unchanged sentences

DCP Midstream 31 34

NOVONIX (158) —

Total Midstream $ 242 76

10 unchanged sentences

Dollars Per Gallon

Market Indicator

Weighted-Average NGL Price* $ 1.10 0.69

DCP Midstream $ 0.91 0.44 0.77 0.38

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

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

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

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

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

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

Increased pipeline volumes were mainly driven by higher refinery utilization.

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

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

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

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

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

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

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

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

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

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

This segment includes our 50% equity investment in DCP Midstream, which includes the operations of DCP Midstream, LP (DCP Partners), its master limited partnership, and our 16% investment in NOVONIX.

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

Results from our Transportation business increased $271 million in the first quarter of 2022.

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

Results from our NGL and Other business increased $56 million in the first quarter of 2022.

This increase was primarily due to improved results from Fracs 1, 2, and 3 at the Sweeny Hub and revenues from the start-up of the C2G pipeline in December 2021.

Improved results from the Sweeny Fracs reflect recovery from the impacts of the winter storms that occurred in February 2021, which caused lower run rates and higher operating expenses in the first quarter of 2021.

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

The fair value of our investment in NOVONIX decreased by $158 million in the first quarter of 2022.

We acquired this investment in September 2021.

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

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

Three Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

Millions of Dollars

4 unchanged sentences

Specialties, Aromatics and Styrenics 1,174 981

6,128 6,189 17,691 18,881

* Represents 100% of CPChem’s outside sales of produced petrochemical products, as well as commission sales from equity affiliates.

5 unchanged sentences

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

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

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

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

Results from the Chemicals segment increased $242 million in the first quarter of 2022.

The increase was primarily due to improved O&P margins reflecting strong demand and higher sales volumes.

Results in the first quarter of 2021 were negatively impacted by the winter storms that occurred in the Central and Gulf Coast regions.

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

Three Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

Millions of Dollars

21 unchanged sentences

Three Months Ended

September 30 Nine Months Ended

Operating Statistics 2022 2021

23 unchanged sentences

* Includes our share of equity affiliates.

** Excludes operating statistics of the Alliance Refinery beginning on October 1, 2021.

The Refining segment refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates and aviation fuels, at 12 refineries in the United States and Europe.

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

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

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

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

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

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

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

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

In the fourth quarter of 2021, we shut down our Alliance Refinery and are in the process of converting it into a terminal.

Results from our Refining segment increased $1,163 million in the first quarter of 2022, primarily due to higher realized refining margins.

The improved realized refining margins were mainly attributable to increased market crack spreads, partially offset by decreased secondary product margins and lower clean product differentials.

Our worldwide refining crude oil capacity utilization rate was 89% in the first quarter of 2022, compared with 74% in the first quarter of 2021.

The increase was primarily driven by improved market demand for refined petroleum products following the administration of COVID-19 vaccines and the easing of pandemic restrictions, as well as less unplanned downtime caused by the winter storms that occurred in February 2021.

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

1 unchanged sentence

Three Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

Millions of Dollars

5 unchanged sentences

Income Before Income Taxes

$ 1.93 1.74 1.84 1.60

International 0.92 2.24

Realized Marketing Fuel Margins*

$ 2.29 2.23 2.30 2.03

International 2.30 4.01

9 unchanged sentences

Distillates 1,011 818

Other 17 15 18 17

Total 2,157 1,859

1 unchanged sentence

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 $130 million and $97 million in the third quarter and nine-month period of 2021, respectively.

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

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

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

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

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

Before-tax income from the M&S segment increased $26 million in the first quarter of 2022, primarily driven by higher results from our lubricants business reflecting increased finished lubricant and Excel Paralubes base oil margins, higher marketing sales volumes and improved results from our chartered marine vessel and other businesses.

These increases were partially offset by lower marketing fuel margins primarily due to spot prices increasing more significantly in the first quarter of 2022, compared with the first quarter of 2021.

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

2 unchanged sentences

Three Months Ended

September 30 Nine Months Ended

2021 2020 2021 2020

Loss Before Income Taxes

4 unchanged sentences

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

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

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

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

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

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

CAPITAL RESOURCES AND LIQUIDITY

11 unchanged sentences

To meet our short- and long-term liquidity requirements, we use a variety of funding sources but rely primarily on cash generated from operating activities and debt financing.

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

federal income tax refund of $1.1 billion.

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

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

During the first three months of 2022, we generated $1.1 billion of cash from operations.

We used available cash primarily for capital expenditures and investments of $370 million and dividend payments on our common stock of $404 million.

During the first three months of 2022, cash and cash equivalents increased $188 million to $3.3 billion.

Significant Sources of Capital

Operating Activities

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

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

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

During the first three months of 2022, cash generated by operating activities was $1.1 billion, compared with $271 million for the first three months of 2021.

The increase was primarily due to improved realized refining margins, partially offset by unfavorable working capital impacts.

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

5 unchanged sentences

Equity Affiliate Operating Distributions

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

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

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

During the first three months of 2022, cash from operations included aggregate distributions of $585 million from our equity affiliates, including $299 million from CPChem.

During the same period of 2021, cash from operations included aggregate distributions of $502 million, including $205 million from CPChem.

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

therefore, future dividend payments by these equity affiliates are not assured.

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

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

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

Term Loan Agreement

On April 6, 2021, Phillips 66 Partners entered into a $450 million term loan agreement and borrowed the full amount.

The term loan agreement has a maturity date of April 5, 2022, and the outstanding borrowings can be repaid at any time and from time to time, in whole or in part, without premium or penalty.

Borrowings bear interest at a floating rate based on either a Eurodollar rate or a reference rate, plus a margin of 0.875%.

Proceeds were primarily used to repay amounts borrowed under Phillips 66 Partners’ $750 million revolving credit facility.

At both March 31, 2022, and December 31, 2021, no amount had been drawn under Phillips 66’s $5 billion revolving credit facility or uncommitted $5 billion commercial paper program.

At March 31, 2022 and December 31, 2021, no borrowings were outstanding and $1 million in letters of credit had been drawn under Phillips 66 Partners’ $750 million revolving credit facility.

Off-Balance Sheet Arrangements

1 unchanged sentence

Under the operating lease agreement for our headquarters facility in Houston, Texas, we have the option, at the end of the lease term in September 2025, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale.

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

We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at March 31, 2022.

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

1 unchanged sentence

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 2020, the trial court presiding over litigation brought by the Standing Rock Sioux Tribe ordered the U.S.

Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) addressing an easement under Lake Oahe in North Dakota.

The court later vacated the easement.

Although the easement is vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS.

In May 2021, the Standing Rock Sioux Tribe’s request for an injunction to force a shutdown of the pipeline while the EIS is being prepared was denied.

In June 2021, the trial court dismissed the litigation entirely.

Once the EIS is completed, new litigation or challenges to the EIS could be filed.

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

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

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

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 in certain circumstances relating to the litigation described above.

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

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

Supreme Court to review the lower court’s decision to order the EIS and vacate the easement.

In February 2022, the writ was denied, and the requirement to prepare the EIS stands.

Completion of the EIS was expected in the fall of 2022, but now may be delayed as the USACE engages with the Standing Rock Sioux Tribe on their reasons for withdrawing as a cooperating agency with respect to preparation of the EIS.

Dakota Access and ETCO have guaranteed repayment of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access with an aggregate principal outstanding of $2.5 billion at March 31, 2022.

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

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

At March 31, 2022, our share of the maximum potential equity contributions under the CECU was approximately $631 million.

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

On April 1, 2022, Dakota Access’ wholly owned subsidiary repaid $650 million aggregate principal amount of its outstanding senior notes upon maturity.

We funded our 25% share, or $163 million, with a capital contribution of $89 million in March 2022 and $74 million of distributions we elected not to receive from Dakota Access in the first quarter of 2022.

As a result of the debt repayment, on April 1, 2022, our share of the maximum potential equity contributions under the CECU decreased to approximately $467 million, and our share of scheduled interest payments on the notes that we could be required to support decreased to approximately $20 million annually.

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

3 unchanged sentences

Debt Financing

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

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

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

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

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

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

Our total debt balance at both March 31, 2022, and December 31, 2021, was $14.4 billion.

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

In early April 2022, upon maturity, Phillips 66 repaid its 4.300% senior notes with an aggregate principal amount of $1.0 billion and Phillips 66 Partners repaid its $450 million term loan.

As our operating cash flows improve further, we will continue to prioritize debt reductions in 2022.

Debt Exchange

On April 6, 2022, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, announced offers to exchange (the Exchange Offers) all validly tendered notes of seven different series of notes issued by Phillips 66 Partners (collectively, the Old Notes), with an aggregate principal amount of approximately $3.5 billion, for notes to be issued by Phillips 66 Company (collectively, the New Notes).

The New Notes will be fully and unconditionally guaranteed by Phillips 66 and will rank equally with Phillips 66 Company’s other unsecured and unsubordinated indebtedness, and the guarantees will rank equally with Phillips 66’s other unsecured and unsubordinated indebtedness.

The Exchange Offers will expire on May 3, 2022, unless such date is extended (the Expiration Date).

Phillips 66 Company currently expects the settlement of the Exchange Offers to occur on May 5, 2022, unless the Expiration Date is extended.

The New Notes will have the same interest rates, interest payment dates and maturity dates as the Old Notes.

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

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

Joint Venture Loans

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

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

At March 31, 2022, our 50% share of the outstanding member loan balance, including accrued interest, was $597 million.

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

Pending Merger with Phillips 66 Partners

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

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

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

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

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

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

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

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

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

Merger with Phillips 66 Partners

On March 9, 2022, we completed the previously announced merger between us and Phillips 66 Partners.

The merger resulted in the acquisition of all limited partnership interests in Phillips 66 Partners not already owned by us in exchange for approximately 42 million shares of Phillips 66 common stock issued from treasury stock.

Phillips 66 Partners common unitholders received 0.50 shares of Phillips 66 common stock for each outstanding Phillips 66 Partners common unit.

Phillips 66 Partners’ perpetual convertible preferred units were converted into common units at a premium to the original issuance price prior to being exchanged for Phillips 66 common stock.

Upon closing, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66 and its common units are no longer publicly traded.

See Note 18—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the merger transaction.

On February 9, 2022, our board of directors declared a quarterly cash dividend of $0.92 per common share.

This dividend was paid on March 1, 2022, to shareholders of record as of the close of business on February 22, 2022.

Share Repurchases

1 unchanged sentence

The authorizations do not have expiration dates.

The share repurchases are expected to be funded primarily through available cash.

Future share repurchases are expected to be funded primarily through available cash.

We are not obligated to repurchase any shares of common stock pursuant to these authorizations and may commence, suspend or terminate repurchases at any time.

2 unchanged sentences

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

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

Capital Spending

Our capital expenditures and investments represent consolidated capital spending.

Our adjusted capital spending is a non-GAAP financial measure that demonstrates our net share of capital spending, and reflects an adjustment for the portion of our consolidated capital spending funded by a joint venture partner.

Millions of Dollars

Nine Months Ended

Three Months Ended

Capital Expenditures and Investments

5 unchanged sentences

Total Capital Expenditures and Investments $ 370 331

capital spending funded by a joint venture partner* — 64

Adjusted Capital Spending $ 1,263 2,350

Selected Equity Affiliates *

1 unchanged sentence

CPChem 113 79

* Included in the Midstream segment.

* Our share of joint venture’s capital spending.

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

• Investments in NOVONIX and a renewable feedstock processing plant.

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

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

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

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

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

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

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

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

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

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

During the first three months of 2022, on a 100% basis, CPChem’s capital expenditures and investments were $225 million.

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

Gulf Coast and in the Middle East, as well as sustaining, debottlenecking and optimization projects on existing assets.

CPChem’s capital program was self-funded, and we expect CPChem to continue self-funding its capital program for the remainder of 2022.

Capital spending for the Refining segment during the first nine months of 2021 was primarily for refinery upgrade projects to enhance the yield of high-value products, renewable diesel projects, improvements to the operating integrity of key processing units, and safety-related projects.

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

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

Capital spending for the Refining segment during the first three months of 2022 was primarily for refinery upgrade projects to enhance the yield of high-value products, renewable diesel projects, improvements to the operating integrity of key processing units, and safety-related projects.

Major capital activities included:

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

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

Marketing and Specialties

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

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

Corporate and Other

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

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

Contingencies

23 unchanged sentences

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

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

For the three months ended March 31, 2022 and 2021, we incurred expenses of $152 million and $165 million, respectively, associated with our obligation to purchase RINs in the open market to comply with the RFS for our wholly owned refineries.

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

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

Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $85 million and $63 million for the three months ended March 31, 2022 and 2021, respectively.

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

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

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

We occasionally receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging that we are a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or an equivalent state statute.

1 unchanged sentence

These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations.

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

Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in certain of our operations and products, and those costs and liabilities could be material.

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

In the first quarter of 2022, we were notified of one site that was deemed resolved and closed, accordingly, leaving 24 unresolved sites with potential liability at March 31, 2022.

However, we currently do not expect any material adverse effect on our results of operations or financial position as a result of compliance with current environmental laws and regulations.

5 unchanged sentences

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

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

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

We consider and take into account anticipated future GHG emissions in designing and developing major facilities and projects, and implement energy efficiency initiatives to reduce GHG emissions.

1 unchanged sentence

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

In February 2022, we announced our intention by 2050 to reduce the GHG emissions intensity for Scope 1 and Scope 2 emissions from our operations by 50% compared to 2019 levels.

This new target builds upon our previously announced 2030 GHG emissions intensity targets to reduce Scope 1 and Scope 2 emissions from our operations by 30% and Scope 3 emissions from our energy products by 15% compared to 2019 levels.

GUARANTOR FINANCIAL INFORMATION

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

At March 31, 2022, Phillips 66 had $10.3 billion of senior unsecured notes outstanding guaranteed by Phillips 66 Company, a direct, wholly owned operating subsidiary of Phillips 66.

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

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

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

Summarized financial information of Phillips 66 and Phillips 66 Company (the Obligor Group) is presented on a combined basis.

2 unchanged sentences

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

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

Summarized Combined Statement of Operations Millions of Dollars

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Sales and other operating revenues $ 28,640

3 unchanged sentences

Purchased crude oil and products—non-guarantor subsidiaries 6,000

Impairments 1,288

Loss before income taxes (677)

Net loss (413)

Income before income taxes 433

Net income 341

Millions of Dollars

Summarized Combined Balance Sheet September 30

Summarized Combined Balance Sheet March 31

2022 December 31

32 unchanged sentences

Coast Worldwide

Three Months Ended September 30, 2021

Three Months Ended March 31, 2022

Income (loss) before income taxes $ 143 4 (135) 111 123

3 unchanged sentences

Operating expenses 296 307 184 305 1,092

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

Equity in losses of affiliates 3 2 16 — 21

Other segment (income) expense, net 12 — (4) 1 9

10 unchanged sentences

11.71 7.71 7.89 17.68 10.55

Three Months Ended September 30, 2020

Three Months Ended March 31, 2021

Loss before income taxes $ (153) (253) (248) (386) (1,040)

4 unchanged sentences

Selling, general and administrative expenses

Operating expenses

14 10 7 11 42

Equity in losses of affiliates 2 1 118 — 121

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

Proportional share of refining gross margins contributed by equity affiliates

Realized refining margins

$ 71 (31) 192 68 300

Total processed inputs ( thousands of barrels )

43,176 51,543 24,682 30,615 150,016

Adjusted total processed inputs ( thousands of barrels )*

43,176 51,543 42,979 30,615 168,313

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

$ (4.61) (7.86) (5.35) (38.12) (12.69)

Realized refining margins ( dollars per barrel )***

1.65 (0.61) 4.46 2.23 1.78

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

** Income (loss) before income taxes divided by total processed inputs.

*** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels.

As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts.

Millions of Dollars, Except as Indicated

Realized Refining Margins Atlantic Basin/

Coast Central

Corridor West

Coast Worldwide

Nine Months Ended September 30, 2021

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

Taxes other than income taxes

53 65 38 49 205

Depreciation, amortization and impairments 156 1,515 102 168 1,941

Selling, general and administrative expenses

51 39 24 32 146

Operating expenses

14 unchanged sentences

4.86 3.39 5.97 3.33 4.36

Nine Months Ended September 30, 2020

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

Taxes other than income taxes

48 92 42 69 251

Depreciation, amortization and impairments

591 891 535 1,401 3,418

Selling, general and administrative expenses

31 28 20 28 107

Operating expenses

564 1,027 367 734 2,692

Equity in (earnings) losses of affiliates

7 (1) 248 — 254

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

Proportional share of refining gross margins contributed by equity affiliates

50 — 250 — 300

Realized refining margins

$ 229 424 998 332 1,983

Total processed inputs ( thousands of barrels )

123,632 176,641 68,805 84,229 453,307

Adjusted total processed inputs ( thousands of barrels )*

123,632 176,641 123,337 84,229 507,839

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

$ (8.60) (9.13) (6.73) (22.59) (11.12)

Realized refining margins ( dollars per barrel )***

1.86 2.40 8.09 3.94 3.91

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

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

** Income (loss) before income taxes divided by total processed inputs.

*** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels.

8 unchanged sentences

Three Months Ended

September 30, 2021 Three Months Ended

September 30, 2020

International U.S.

International

Realized Marketing Fuel Margins

Income before income taxes $ 354 128 271 121

Taxes other than income taxes 2 1 — 1

Depreciation and amortization 3 18 3 18

Selling, general and administrative expenses 201 64 174 62

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

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

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

Marketing margins 422 191 348 163

margin for nonfuel related sales — 13 — 11

Realized marketing fuel margins $ 422 178 348 152

Total fuel sales volumes ( thousands of barrels )

183,332 26,427 155,948 24,164

Income before income taxes per barrel ( dollars per barrel )

$ 1.93 4.84 1.74 5.01

Realized marketing fuel margins ( dollars per barrel )**

2.29 6.75 2.23 6.28

* 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.

As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts.

Millions of Dollars, Except as Indicated

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

March 31, 2022 Three Months Ended

March 31, 2021

International U.S.

2 unchanged sentences

Income before income taxes $ 191 23 199 48

Taxes other than income taxes 8 4 4 4

Depreciation and amortization 3 18 3 19

Selling, general and administrative expenses 182 63 165 60

564 184 452 182

Equity in earnings of affiliates (7) (26) (2) (24)

Other operating revenues* (107) (12) (86) (5)

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

Other segment income, net — (1) — —

Other expense, net 6 4 4 1

Marketing margins 268 70 283 99

1,151 376 948 507

margin for nonfuel related sales — 13 — 13

6 unchanged sentences

1.59 2.30 1.94 4.01

* Includes other nonfuel revenues and expenses.

* Includes other nonfuel revenues.

** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels.

8 unchanged sentences

Any differences could result from a variety of factors, including the following:

• The continuing effects of the COVID-19 pandemic and its negative impact on commercial activity and demand for refined petroleum products, as well as the extent and duration of recovery of economies and demand for our products after the pandemic subsides.

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

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

10 unchanged sentences

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

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

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

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

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

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

1 unchanged sentence

• International monetary conditions and exchange controls.

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

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

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

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

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

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

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

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

2 unchanged sentences

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Our commodity price risk and interest rate risk at March 31, 2022, did not differ materially from the risks disclosed under Item 7A of our 2021 Annual Report on Form 10-K.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis