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Item 2. Management’s Discussion and Analysis

2022-07-29 compared with 2022-04-29 · 253 added, 121 removed, 472 unchanged (44% of the section changed)

12 unchanged sentences

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.

At June 30, 2022, we had total assets of $63 billion.

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

Executive Overview

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.

In the second quarter of 2022, we reported earnings of $3.2 billion and generated cash from operating activities of $1.8 billion.

We used available cash to repay $1.5 billion of debt, pay dividends on our common stock of $467 million and fund capital expenditures and investments of $376 million.

We ended the second quarter of 2022 with $2.8 billion of cash and cash equivalents and $5.0 billion of total committed capacity available under our revolving credit facility.

Our reported earnings for the second quarter of 2022, compared with the second quarter of 2021, reflect a significant improvement in realized refining margins from widening market crack spreads due to a recovery in global demand for refined petroleum products as the COVID-19 pandemic recedes and the market disruptions caused by the ongoing conflict between Russia and Ukraine.

This improvement was partially offset by lower equity earnings from our Chemicals segment, as margins in the second quarter of 2022 were impacted by higher feedstock costs, while margins in the second quarter of 2021 benefited from higher prices due to strong demand and tight supplies following the winter storms that occurred in the Central and Gulf Coast regions in the first quarter of 2021.

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

We continue to progress our multi-year business transformation focused on enterprise-wide opportunities to improve our cost structure.

We recently started implementing initiatives and are targeting a sustainable run-rate cost reduction of at least $700 million per year by the end of 2023.

During the second quarter of 2022, we recorded restructuring costs of $25 million associated with our business transformation.

Phillips 66 Partners Merger

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

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

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

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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.

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

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

Business Environment

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

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.

During the second quarter of 2022, NGL prices increased significantly, compared with the second quarter of 2021, due to strong demand and higher 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 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.

During the second quarter of 2022, the benchmark high-density polyethylene chain margin decreased, compared with the second quarter of 2021, mainly due to lower prices and higher feedstock costs.

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

The price of U.S.

benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $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.

benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $108.66 per barrel during the second quarter of 2022, compared with an average of $66.09 per barrel in the second quarter of 2021.

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

Worldwide market crack spreads increased to an average of $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.

Worldwide market crack spreads increased to an average of $46.72 per barrel during the second quarter of 2022, compared with an average of $17.76 per barrel in the second 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 and trade flow 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.

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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 months ended March 31, 2022, is based on a comparison with the corresponding period of 2021.

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

Consolidated Results

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Three Months Ended

June 30 Six Months Ended

2022 2021 2022 2021

Midstream $ 292 312 534 388

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Net income (loss) attributable to Phillips 66 $ 3,167 296 3,749 (358)

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.

Our net income attributable to Phillips 66 in the second quarter of 2022 was $3.2 billion, compared with $296 million in the second quarter of 2021.

The improvement was primarily due to:

• Improved realized refining margins.

• Higher equity earnings from CPChem.

• Improved realized refining and marketing fuel margins.

• Higher equity earnings from DCP Midstream.

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

Our net income attributable to Phillips 66 for the six months ended June 30, 2022, was $3.7 billion, compared with a net loss attributable to Phillips 66 of $358 million for the six months ended June 30, 2021.

The improvement was primarily due to:

• Improved realized refining and marketing fuel margins.

• Higher equity earnings from DCP Midstream.

• 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.

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

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 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.

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.

Sales and other operating revenues for the second quarter and six-month period of 2022 increased 80% and 74%, respectively, and purchased crude oil and products increased 69% and 68%, respectively.

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

Equity in earnings of affiliates increased 10% and 44% in the second quarter and six-month period of 2022, respectively.

The increase in both periods was primarily due to higher equity earnings from WRB Refining LP (WRB) resulting from improved realized refining margins and increased equity earnings from our Midstream segment equity affiliates, partially offset by lower equity earnings from CPChem.

See Midstream and Chemicals segment analyses in the “Segment Results” section for additional information on our Midstream equity affiliates and CPChem, respectively.

Other income (loss) decreased $236 million and $394 million in the second quarter and six-month period of 2022, respectively.

The decrease in both periods was primarily due to unrealized investment losses related to decreases in the stock price of our investment in NOVONIX, which we acquired 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.

Operating expenses increased 22% in the second quarter of 2022, mainly attributable to higher utility costs driven by increased commodity prices, as well as higher turnaround expenses.

Selling, general and administrative expenses increased 13% and 10% in the second quarter and six-month period of 2022, respectively.

The increase in both periods was primarily due to restructuring costs associated with our business transformation, higher selling expenses driven by rising refined petroleum product prices and increased employee-related expenses.

Impairments decreased 99% in the six-month period 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.

We had income tax expense of $924 million and $1,095 million in the second quarter and six-month period of 2022, respectively, compared with income tax expense of $62 million in the second quarter of 2021, and an income tax benefit of $70 million in the six-month period of 2021.

The fluctuation in income taxes between periods is primarily due to improved results.

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.

Net income attributable to noncontrolling interests decreased 81% in the second quarter of 2022.

The decrease was primarily driven by the merger between us and Phillips 66 Partners that occurred in the first quarter of 2022.

Upon closing of the merger transaction, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66.

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

Segment Results

Three Months Ended

June 30 Six Months Ended

2022 2021 2022 2021

Millions of Dollars

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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.

Results from our Midstream segment decreased $20 million in the second quarter of 2022 and increased $146 million in the six-month period of 2022.

Results from our Transportation business increased $26 million and $297 million in the second quarter and six-month period of 2022, respectively.

The increase in the second quarter of 2022 was primarily due to higher results from our wholly owned assets and increased equity earnings.

The increase in the six-month period of 2022 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, as well as higher results from our wholly owned assets and equity affiliates.

Results from our NGL and Other business increased $73 million and $129 million in the second quarter and six-month period of 2022, respectively.

The increase in both periods was primarily due to improved results from Fracs 1, 2 and 3 at the Sweeny Hub, favorable trading activities and higher equity earnings.

Results from our investment in DCP Midstream increased $121 million and $118 million in the second quarter of 2022 and six-month period of 2022, respectively.

The increase in both periods was primarily due to improved gathering and processing results and hedging impacts.

The fair value of our investment in NOVONIX decreased by $240 million and $398 million in the second quarter and six-month period of 2022, respectively.

We acquired this investment in September 2021.

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Three Months Ended

June 30 Six Months Ended

2022 2021 2022 2021

Millions of Dollars

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Specialties, Aromatics and Styrenics 1,228 1,234 2,402 2,215

6,057 6,012 12,296 11,563

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

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

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.

Results from the Chemicals segment decreased $350 million and $108 million in the second quarter and six-month period of 2022, respectively.

The decrease in both periods was primarily due to lower O&P margins driven by increased feedstock costs, as well as higher utility and maintenance costs, partially offset by improved sales volumes.

In addition, O&P margins in the second quarter of 2021 benefited from higher prices due to strong demand and tight supplies, following the winter storms that occurred in the Central and Gulf Coast regions in the first quarter of 2021.

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

Three Months Ended

June 30 Six Months Ended

2022 2021 2022 2021

Millions of Dollars

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Three Months Ended

June 30 Six Months Ended

Operating Statistics 2022 2021 2022 2021

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

In the fourth quarter of 2021, we shut down our Alliance Refinery and 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.

In the fourth quarter of 2021, we shut down our Alliance Refinery and subsequently converted it into a terminal.

Results from our Refining segment increased $3,765 million and $4,928 million in the second quarter and six-month period of 2022, respectively, primarily due to higher realized refining margins driven by improved market crack spreads.

Our worldwide refining crude oil capacity utilization rate was 90% in the second quarter and six-month period of 2022, compared with 88% and 81% in the second quarter and six-month period of 2021, respectively.

The increase in both periods was primarily driven by improved market demand for refined petroleum products as the COVID-19 pandemic recedes, as well as refinery optimization to meet demand following supply constraints caused by the conflict between Russia and Ukraine.

The increase in the second quarter of 2022 was partially offset by higher turnaround and planned maintenance activity.

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

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Three Months Ended

June 30 Six Months Ended

2022 2021 2022 2021

Millions of Dollars

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Income Before Income Taxes

$ 2.86 2.15 2.00 1.79

International 7.30 1.96 4.14 2.09

Realized Marketing Fuel Margins*

$ 3.24 2.62 2.42 2.31

International 8.20 2.89 5.27 3.41

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Distillates 960 947 986 882

Other 19 18 18 18

Total 2,155 2,141 2,156 2,000

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In addition, this segment includes the manufacturing and marketing of specialty products, such as base oils and lubricants.

Before-tax income from the M&S segment increased $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.

Before-tax income from the M&S segment increased $289 million in the second quarter of 2022, primarily driven by higher realized marketing fuel margins.

Before-tax income from the M&S segment increased $315 million for the six-month period of 2022, primarily driven by higher realized marketing fuel margins and volumes, improved results from our chartered marine vessel business and increased finished lubricant and Excel Paralubes base oil margins.

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

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Three Months Ended

June 30 Six Months Ended

2022 2021 2022 2021

Loss Before Income Taxes

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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 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.

Net interest expense decreased $14 million and $25 million, respectively, in the second quarter and six-month period of 2022, primarily driven by lower average debt principal balances, increased interest income, and higher capitalized interest primarily related to the Sweeny Frac 4 capital project.

Corporate overhead and other costs increased $28 million and $37 million in the second quarter and six-month period of 2022, respectively.

The increase in both periods is primarily due to restructuring costs associated with our business transformation and higher employee-related expenses, partially offset by lower environmental costs.

See Note 19—Restructuring, in the Notes to Consolidated Financial Statements, for additional information regarding restructuring costs.

CAPITAL RESOURCES AND LIQUIDITY

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

During the first 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.

During the first six months of 2022, we generated $2.9 billion of cash from operations.

We used available cash primarily to pay down $1.5 billion in debt, pay dividends on our common stock of $871 million, fund capital expenditures and investments of $746 million, and repurchase $66 million of our common stock.

During the first six months of 2022, cash and cash equivalents decreased $338 million to $2.8 billion.

Significant Sources of Capital

Operating Activities

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.

During the first six months of 2022, cash generated by operating activities was $2.9 billion, compared with $2.0 billion for the first six months of 2021.

The increase was primarily due to improved realized refining and marketing fuel 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.

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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.

During the first six months of 2022, cash from operations included aggregate distributions of $1.1 billion from our equity affiliates, including $515 million from CPChem.

During the same period of 2021, cash from operations included aggregate distributions of $1.1 billion, including $527 million from CPChem.

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

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Revolving Credit Facilities and Commercial Paper

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.

On June 23, 2022, we entered into a new $5 billion revolving credit facility (the Facility) with Phillips 66 Company as the borrower and Phillips 66 as the guarantor and a scheduled maturity date of June 22, 2027.

The Facility replaced our previous $5 billion revolving credit facility with Phillips 66 as the borrower and Phillips 66 Company as the guarantor.

The Facility contains usual and customary covenants that are similar to the previous revolving credit facility, including a maximum consolidated net debt-to-capitalization ratio of 65% as of the last day of each fiscal quarter.

We have the option to increase the overall capacity to $6 billion, subject to certain conditions.

We also have the option to extend the scheduled maturity of the Facility for up to two additional one-year terms, subject to, among other things, the consent of the lenders holding the majority of the commitments and of each lender extending its commitment.

Outstanding borrowings under the Facility bear interest at either (a) the Adjusted Term Secured Overnight Financing Rate (as described in the Facility) in effect from time to time plus the applicable margin;

or (b) the reference rate (as described in the Facility) plus the applicable margin.

The Facility also provides for customary fees, including commitment fees.

The pricing levels for the commitment fees and interest-rate margins are determined based on the ratings in effect for our senior unsecured long-term debt from time to time.

We may at any time prepay outstanding borrowings, in whole or in part, without premium or penalty.

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

At June 30, 2022, no amount had been drawn under the Facility or Phillips 66 Company’s $5 billion uncommitted commercial paper program supported by the Facility.

Off-Balance Sheet Arrangements

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

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

We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at June 30, 2022.

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

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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.

Dakota Access and ETCO have guaranteed repayment of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access in March 2019.

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

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

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.

At June 30, 2022, the aggregate principal amount outstanding of Dakota Access’ senior unsecured notes was $1.85 billion.

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

At June 30, 2022, our 25% share of the maximum potential equity contributions under the CECU was approximately $467 million.

If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we could be required to support our 25% share of the ongoing expenses, including scheduled interest payments on the notes of approximately $20 million annually, in addition to the potential obligations under the CECU at June 30, 2022.

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

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Debt Financing

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.

Our total debt balance at June 30, 2022, and December 31, 2021, was $13.0 billion and $14.4 billion, respectively.

Our total debt-to-capital ratio was 35% and 40% at June 30, 2022, and December 31, 2021, respectively.

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

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.

On May 5, 2022, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, completed offers to exchange (the Exchange Offers) all validly tendered notes of seven different series of notes issued by Phillips 66 Partners (collectively, the Old Notes), with an aggregate principal amount of approximately $3.5 billion, for notes issued by Phillips 66 Company (collectively, the New Notes).

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

Old Notes with an aggregate principal amount of approximately $3.2 billion were tendered in the Exchange Offers.

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

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

Substantially all of the Old Notes exchanged were tendered during the Early Participation Period.

Joint Venture Loans

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

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

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

At June 30, 2022, our 50% share of the outstanding member loan balance, including accrued interest, was $570 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.

Merger with Phillips 66 Partners

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

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

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

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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.

On May 11, 2022, our board of directors declared a quarterly cash dividend of $0.97 per common share.

This dividend was paid on June 1, 2022, to shareholders of record as of the close of business on May 23, 2022.

On July 12, 2022, our board of directors declared a quarterly cash dividend of $0.97 per common share.

This dividend is payable on September 1, 2022, to shareholders of record as of the close of business on August 18, 2022.

Share Repurchases

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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.

We resumed our share repurchase program in the second quarter of 2022.

Employee Benefit Plan Contributions

During the six months ended June 30, 2022, we contributed $91 million to our U.S.

pension and other postretirement benefit plans and $12 million to our international pension plans.

We currently expect to make additional contributions of approximately $45 million to our U.S.

pension and other postretirement benefit plans and approximately $12 million to our international pension plans during the remainder of 2022.

Capital Spending

Millions of Dollars

Three Months Ended

Six Months Ended

Capital Expenditures and Investments

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* Our share of joint venture’s capital spending.

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.

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

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

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

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

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

During the first six months of 2022, on a 100% basis, CPChem’s capital expenditures and investments were $547 million.

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

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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 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.

Capital spending for the Refining segment during the first six 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.

• Engineering of facilities and procurement of long-lead items to produce biofuels at the San Francisco refinery.

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

Marketing and Specialties

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.

Capital spending for the M&S segment during the first six 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 three months of 2022 was primarily for information technology and facilities.

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

Contingencies

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

For the 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.

For the six months ended June 30, 2022 and 2021, we incurred expenses of $271 million and $422 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 $85 million and $63 million for the three months ended March 31, 2022 and 2021, respectively.

Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $175 million and $178 million for the six months ended June 30, 2022 and 2021, respectively.

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

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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.

In the first six months of 2022, we were notified of one potentially new site through a CERCLA Section 104(e) information request issued by the EPA, and two sites that were deemed resolved and closed, accordingly, leaving 24 unresolved sites with potential liability at June 30, 2022.

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

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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.

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

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

GUARANTOR FINANCIAL INFORMATION

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.

We have various cross guarantees between Phillips 66 and its wholly owned subsidiary Phillips 66 Company (the Obligor Group) with respect to publicly held debt securities.

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

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.

Phillips 66 has fully and unconditionally guaranteed the payment obligations of Phillips 66 Company with respect to its publicly held debt securities.

In addition, Phillips 66 Company has fully and unconditionally guaranteed the payment obligations of Phillips 66 with respect to its publicly held debt securities.

All guarantees are full and unconditional.

At June 30, 2022, $12.5 billion of senior unsecured notes outstanding has been guaranteed by the Obligor Group.

Summarized financial information of the Obligor Group is presented on a combined basis.

Intercompany transactions among the members of the Obligor Group have been eliminated.

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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 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:

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

Summarized Combined Statement of Operations Millions of Dollars

Three Months Ended March 31, 2022

Six Months Ended June 30, 2022

Sales and other operating revenues $ 67,250

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Net income 2,627

Millions of Dollars

Summarized Combined Balance Sheet March 31

Summarized Combined Balance Sheet Millions of Dollars

2022 December 31

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Coast Worldwide

Three Months Ended March 31, 2022

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

Three Months Ended June 30, 2022

Income before income taxes $ 1,093 863 490 590 3,036

Taxes other than income taxes 14 21 18 19 72

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Operating expenses 296 311 264 306 1,177

Equity in (earnings) losses of affiliates 2 3 (228) — (223)

Other segment expense, net 8 1 2 — 11

Proportional share of refining gross margins contributed by equity affiliates

26 — 469 — 495

Special items:

Regulatory compliance costs 9 26 22 13 70

Realized refining margins $ 1,515 1,303 1,086 1,000 4,904

Total processed inputs ( thousands of barrels )

49,854 52,523 22,635 30,199 155,211

Adjusted total processed inputs ( thousands of barrels )*

49,854 52,523 40,629 30,199 173,205

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

$ 21.92 16.43 21.65 19.54 19.56

Realized refining margins ( dollars per barrel )***

30.39 24.80 26.72 33.13 28.31

Three Months Ended June 30, 2021

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

Taxes other than income taxes

18 25 11 22 76

Depreciation, amortization and impairments

52 77 34 57 220

Selling, general and administrative expenses

18 14 7 10 49

Operating expenses

217 299 125 281 922

Equity in losses of affiliates 2 — 65 — 67

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

Proportional share of refining gross margins contributed by equity affiliates

42 — 125 — 167

Realized refining margins

$ 231 145 277 95 748

Total processed inputs ( thousands of barrels )

49,979 69,364 23,466 28,158 170,967

Adjusted total processed inputs ( thousands of barrels )*

49,979 69,364 43,189 28,158 190,690

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

$ (2.20) (3.81) (3.49) (9.70) (4.26)

Realized refining margins ( dollars per barrel )***

4.63 2.10 6.40 3.37 3.92

* 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

Six Months Ended June 30, 2022

Income before income taxes $ 1,236 867 355 701 3,159

Taxes other than income taxes

33 48 36 43 160

Depreciation, amortization and impairments 103 115 71 123 412

Selling, general and administrative expenses

30 25 27 18 100

Operating expenses

592 618 448 611 2,269

Equity in (earnings) losses of affiliates 5 5 (212) — (202)

Other segment (income) expense, net 20 1 (2) 1 20

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49 — 674 — 723

Special items:

Regulatory compliance costs 9 26 22 13 70

Realized refining margins

$ 2,077 1,705 1,419 1,510 6,711

Total processed inputs ( thousands of barrels )

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97,869 104,674 82,896 59,076 344,515

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

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

$ 12.63 8.28 7.66 11.87 10.26

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21.22 16.29 17.12 25.58 19.48

Three Months Ended March 31, 2021

Six Months Ended June 30, 2021

Loss before income taxes $ (263) (517) (330) (659) (1,769)

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Equity in losses of affiliates 4 3 182 — 189

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

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

Proportional share of refining gross margins contributed by equity affiliates

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Three Months Ended

March 31, 2022 Three Months Ended

March 31, 2021

June 30, 2022 Three Months Ended

June 30, 2021

International U.S.

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Other operating revenues* (139) (9) (110) (10)

Other (income) expense, net 6 (3) 2 —

Marketing margins 553 222 446 86

margin for nonfuel related sales — 14 — 15

Realized marketing fuel margins $ 553 208 446 71

Total fuel sales volumes ( thousands of barrels )

170,899 25,329 170,228 24,539

Income before income taxes per barrel ( dollars per barrel )

$ 2.86 7.30 2.15 1.96

Realized marketing fuel margins ( dollars per barrel )**

3.24 8.20 2.62 2.89

* Includes other nonfuel revenues.

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

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

Millions of Dollars, Except as Indicated

Six Months Ended

June 30, 2022 Six Months Ended

June 30, 2021

International U.S.

International

Realized Marketing Fuel Margins

Income before income taxes $ 680 208 565 96

Depreciation and amortization

Selling, general and administrative expenses

392 125 363 120

Equity in earnings of affiliates (23) (58) (17) (55)

Other operating revenues*

(246) (21) (196) (15)

Other expense, net 12 1 6 1

Marketing margins

821 292 729 185

margin for nonfuel related sales — 27 — 28

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• 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.

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

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

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

Our commodity price risk and interest rate risk at June 30, 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