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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-07-29 · 267 added, 165 removed, 560 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 June 30, 2022, we had total assets of $63 billion.

At September 30, 2022, we had total assets of $77 billion.

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

Executive Overview

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.

In the third quarter of 2022, we reported earnings of $5.4 billion and generated cash from operating activities of $3.1 billion.

We used available cash to fund capital expenditures and investments of $735 million, repurchase $694 million of common stock, and pay dividends on our common stock of $466 million.

We ended the third quarter of 2022 with $3.7 billion of cash and cash equivalents and $6.7 billion of total committed capacity available under our revolving credit facility, DCP Midstream, LP’s (DCP LP) credit facility and DCP LP’s accounts receivable securitization facility.

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.

We recently started implementing initiatives and are targeting a sustainable run-rate cost reduction of at least $800 million and lower sustaining capital of at least $200 million per year by the end of 2023.

During the third quarter of 2022, we recorded restructuring costs of $74 million associated with our business transformation.

DCP Midstream and Gray Oak Holdings Merger

On August 17, 2022, we announced a realignment of our economic and governance interests in DCP LP and Gray Oak Pipeline, LLC (Gray Oak Pipeline) resulting from the merger of DCP Midstream, LLC (DCP Midstream) and Gray Oak Holdings LLC (Gray Oak Holdings).

In connection with the merger, we were delegated DCP Midstream’s governance rights over DCP LP and its general partner entities, referred to as DCP Midstream Class A Segment.

As a result, starting on August 18, 2022, the company’s financial results reflect the consolidation of DCP Midstream Class A Segment, as well as DCP Sand Hills Pipeline, LLC (DCP Sand Hills) and DCP Southern Hills Pipeline, LLC (DCP Southern Hills).

See Note 1—Interim Financial Information and Note 2—Business Combination, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings and the accounting treatment.

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Phillips 66 Partners Merger

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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 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.

See Note 21—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on this merger transaction.

Business Environment

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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 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.

Our NGL business, including DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022, forward, contains both fee-based operations and operations directly impacted by NGL, natural gas and condensate prices.

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

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

benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $91.76 per barrel during the third quarter of 2022, compared with an average of $70.58 per barrel in the third 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 $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.

Worldwide market crack spreads increased to an average of $36.29 per barrel during the third quarter of 2022, compared with an average of $19.44 per barrel in the third 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 Coronavirus Disease 2019 (COVID-19) pandemic recedes, as well as market and trade flow disruptions from the conflict between Russia and Ukraine.

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 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.

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RESULTS OF OPERATIONS

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.

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

In connection with the merger of DCP Midstream and Gray Oak Holdings, results for the three and nine months ended September 30, 2022, include the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022, forward.

See Note 1—Interim Financial Information, Note 2—Business Combination, and Note 14—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings.

Consolidated Results

A summary of income (loss) before income taxes by business segment with a reconciliation to net income (loss) attributable to Phillips 66 follows:

A summary of income before income taxes by business segment with a reconciliation to net income attributable to Phillips 66 follows:

Millions of Dollars

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

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Corporate and Other (320) (231) (829) (728)

Income (loss) before income taxes 4,106 436 4,934 (335)

Income before income taxes 7,158 448 12,092 113

Income tax expense (benefit) 1,618 (40) 2,713 (110)

Net income (loss) 3,182 374 3,839 (265)

Net income 5,540 488 9,379 223

net income attributable to noncontrolling interests 149 86 239 179

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

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 and marketing fuel margins.

• Higher equity earnings from DCP Midstream.

Net income attributable to Phillips 66 $ 5,391 402 9,140 44

Our net income attributable to Phillips 66 in the third quarter and nine-month period of 2022 was $5.4 billion and $9.1 billion, respectively, compared with $402 million and $44 million in the third quarter and nine-month period of 2021, respectively.

The improvements in both periods were primarily due to:

• Improved realized refining and international marketing fuel margins.

• An aggregate gain of $3,013 million recognized in our Midstream segment in connection with the merger of DCP Midstream and Gray Oak Holdings.

• Lower impairments in the Refining segment.

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 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 19—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 second quarter and six-month period of 2022 increased 80% and 74%, respectively, and purchased crude oil and products increased 69% and 68%, respectively.

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Statement of Income Analysis

Sales and other operating revenues for the third quarter and nine-month period of 2022 increased 49% and 64%, respectively, and purchased crude oil and products increased 40% and 58%, 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.

Equity in earnings of affiliates decreased 20% in the third quarter of 2022 and increased 14% in the nine-month period of 2022.

The decrease in the third quarter of 2022 was primarily due to lower equity earnings from CPChem, partially offset by increases in equity earnings from WRB due to improved realized refining margins, as well as Excel Paralubes LLC (Excel Paralubes).

The increase in the nine-month period of 2022 was primarily attributable to higher equity earnings from WRB resulting from improved realized refining margins;

DCP Midstream prior to the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills;

and Excel Paralubes, partially offset by lower equity earnings from CPChem.

See Chemicals and Marketing and Specialties segment analyses in the “Segment Results” section for additional information regarding CPChem and Excel Paralubes, respectively.

Other income increased $2,788 million and $2,394 million in the third quarter and nine-month period of 2022, respectively.

The increase in both periods was primarily due to an aggregate gain of $3,013 million recognized in our Midstream segment in connection with the merger of DCP Midstream and Gray Oak Holdings.

These increases were partially offset by unrealized investment losses related to decreases in the stock price of our investment in NOVONIX, which we acquired in September 2021.

See Note 6—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding our investment in NOVONIX.

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.

Operating expenses increased 38% and 18% in the third quarter and nine-month period of 2022, respectively.

The increase in both periods was mainly attributable to higher utility costs driven by increased commodity prices and higher turnaround and other maintenance expenses.

Selling, general and administrative expenses increased 46% and 22% in the third quarter and nine-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 $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.

Depreciation and amortization increased 19% in the third quarter of 2022.

The increase was primarily due to additional depreciation and amortization recorded from August 18, 2022, forward related to assets acquired as a result of the consolidation of DCP Midstream Class A Segment, DCP Southern Hills and DCP Sand Hills.

Impairments decreased in the third quarter and nine-month period of 2022.

The decrease in both periods was due to a before-tax impairment of $1,298 million recorded in the third quarter of 2021 associated with our Alliance Refinery.

The nine-month period of 2021 also included 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 8—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding these impairments.

Taxes other than income taxes increased 56% and 17% in the third quarter and nine-month period of 2022, respectively.

The increase in both periods was primarily due to higher taxes at our San Francisco Refinery due to tax credits received from renewable diesel blending activity in the third quarter of 2021, as well as higher property and other taxes.

We had income tax expense of $1,618 million and $2,713 million in the third quarter and nine-month period of 2022, respectively, compared with an income tax benefit of $40 million and $110 million in the third quarter and nine-month period of 2021, respectively.

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

See Note 19—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our effective income tax rates.

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.

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Net income attributable to noncontrolling interests increased 73% and 34% in the third quarter and nine-month period of 2022.

The increase was primarily driven by the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills, which resulted in us reflecting the additional noncontrolling interest owned by the public common and preferred unitholders of DCP LP, as well as Enbridge’s noncontrolling interest in DCP Midstream Class A Segment, on our consolidated income statement.

These increases were partially offset by a decrease due to 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 21—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the merger transaction.

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Segment Results

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

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NGL and Other* 3,267 161 3,671 318

DCP Midstream 130 9 161 43

NOVONIX (33) 224 (431) 224

Total Midstream $ 3,645 629 4,179 1,017

* In the third quarter of 2022, we began presenting the results of DCP Midstream Class A Segment within the results of our NGL and Other business.

Prior periods also have been updated to reflect the results from our equity investment in DCP Midstream prior to August 18, 2022, within the results of our NGL and Other business.

Thousands of Barrels Daily

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NGL production*** 434 398 424 387

* Pipelines represent the sum of volumes transported through each separately tariffed consolidated pipeline segment.

** Excludes DCP Midstream.

*** Includes 100% of DCP Midstream’s volumes.

* Pipelines represent the sum of volumes transported through each separately tariffed consolidated pipeline segment, excluding NGL pipelines.

** Includes 100% of DCP Midstream Class A Segment’s volumes from August 18, 2022, forward.

*** Includes 100% of DCP Midstream Class A Segment’s volumes.

Dollars Per Gallon

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* 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 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 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.

The Midstream segment provides crude oil and refined petroleum product transportation, terminaling and processing services;

NGL production, transportation, storage, fractionation, processing and marketing services;

natural gas gathering, compressing, treating, processing, storage, transportation and marketing services;

and condensate recovering, mainly in the United States.

This segment also includes our 16% investment in NOVONIX.

In connection with the merger of DCP Midstream and Gray Oak Holdings, the results of our Transportation business reflect a decrease in our indirect economic interest in Gray Oak Pipeline to 6.5% from August 18, 2022, forward.

Prior to August 18, 2022, the Transportation results presented in the table above reflect Gray Oak Holdings’ 65% economic interest in Gray Oak Pipeline.

In addition, the results of our NGL and Other business include the consolidated results of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022, forward.

Prior to August 18, 2022, our investments in DCP Midstream, DCP Sand Hills and DCP Southern Hills were accounted for using the equity method.

As a result of the merger and consolidation, DCP Midstream’s results prior to the merger have been combined with the results of our NGL and Other business.

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Results from our Midstream segment increased $3,016 million in the third quarter of 2022 and increased $3,162 million in the nine-month period of 2022.

Results from our Transportation business increased $167 million and $464 million in the third quarter and nine-month period of 2022, respectively.

The increase in both periods was primarily due to a gain of $182 million from the transfer of a 35.75% indirect economic interest in Gray Oak Pipeline to our co-venturer as part of the merger of DCP Midstream and Gray Oak Holdings.

In addition, the increase in the nine-month period of 2022 was also 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.

Results from our NGL and Other business increased $3,106 million and $3,353 million in the third quarter and nine-month period of 2022, respectively.

The increase in both periods was primarily due to gains totaling $2,831 million recognized from remeasuring our previously held equity investments in DCP Midstream, DCP Sand Hills and DCP Southern Hills to their fair values in connection with the merger of DCP Midstream and Gray Oak Holdings.

The fair value of our investment in NOVONIX decreased by $257 million and $655 million in the third quarter and nine-month period of 2022, respectively.

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.

In the Notes to Consolidated Financial Statements, see Note 6—Investments, Loans and Long-Term Receivables, for additional information on our investment in NOVONIX, and Note 8—Impairments, for information regarding the Liberty Pipeline project impairment.

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

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Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

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

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.

Results from the Chemicals segment decreased $496 million and $604 million in the third quarter and nine-month period of 2022, respectively.

The decrease in the third quarter of 2022 was primarily due to compressed O&P margins driven by lower sales prices and higher feedstock costs, higher utility and maintenance costs, and lower sales volumes.

The decrease in the nine-month period of 2022 is primarily due to lower O&P margins and higher utility and maintenance costs, partially offset by higher sales volumes.

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

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Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

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* See the “Non-GAAP Reconciliations” section for a reconciliation of this non-GAAP measure to the most directly comparable measure under generally accepted accounting principles in the United States (GAAP), income (loss) before income taxes per barrel.

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Thousands of Barrels Daily

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

Operating Statistics 2022 2021 2022 2021

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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.

Results from our Refining segment increased $3,977 million and $8,905 million in the third quarter and nine-month period of 2022, respectively, primarily due to higher realized refining margins driven by improved market crack spreads, partially offset by higher operating costs.

In addition, the third quarter and nine-month period of 2021 included a pre-tax impairment of $1,288 million associated with our Alliance Refinery.

See Note 8—Impairments, in the Notes to Consolidated Financial Statements, for information regarding this impairment.

Our worldwide refining crude oil capacity utilization rate was 91% and 90% in the third quarter and nine-month period of 2022, respectively, compared with 86% and 83% in the third quarter and nine-month period of 2021, respectively.

The increase in both periods was primarily driven by improved demand for refined petroleum products as the COVID-19 pandemic recedes and supply constraints caused by the conflict between Russia and Ukraine, partially offset by higher maintenance activity.

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

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Marketing and Specialties

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

25 unchanged sentences

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 $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.

Before-tax income from the M&S segment increased $302 million and $617 million in the third quarter and nine-month period of 2022, primarily driven by higher realized international marketing fuel margins, increased finished lubricant margins, higher equity earnings from Excel Paralubes, and improved results from our other businesses.

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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Corporate and Other

1 unchanged sentence

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

5 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 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.

Net interest expense decreased $12 million and $37 million, respectively, in the third quarter and nine-month period of 2022.

The decrease in both periods was primarily driven by increased interest income and higher capitalized interest.

The decrease in the third quarter of 2022 was partially offset by increased interest expense as a result of consolidating DCP Midstream Class A Segment from August 18, 2022, forward.

See Note 10—Debt, in the Notes to Consolidated Financial Statements, for additional information regarding debt.

Corporate overhead and other costs increased $101 million and $138 million in the third quarter and nine-month period of 2022, respectively.

The increase in both periods was primarily due to restructuring costs associated with our business transformation and higher employee-related expenses.

See Note 22—Restructuring, in the Notes to Consolidated Financial Statements, for additional information regarding restructuring costs.

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CAPITAL RESOURCES AND LIQUIDITY

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

During the first six months of 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.

During the first nine months of 2022, we generated $6.1 billion of cash from operations.

We used available cash primarily to pay down $2.0 billion in debt, pay dividends on our common stock of $1.3 billion, fund capital expenditures and investments of $1.5 billion, and repurchase $760 million of our common stock.

During the first nine months of 2022, cash and cash equivalents increased $597 million to $3.7 billion.

Significant Sources of Capital

Operating Activities

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.

During the first nine months of 2022, cash generated by operating activities was $6.1 billion, compared with $4.2 billion for the first nine months of 2021.

The increase was primarily due to improved earnings, partially offset by unfavorable working capital impacts and decreased distributions from equity affiliates.

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

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

During the first nine months of 2022, cash from operations included aggregate distributions of $1.4 billion from our equity affiliates, including $556 million from CPChem.

During the same period of 2021, cash from operations included aggregate distributions of $2.0 billion, including $1.2 billion from CPChem.

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

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

Revolving Credit Facilities and Commercial Paper

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Credit Facilities and Commercial Paper

Phillips 66 and Phillips 66 Company

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.

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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;

Outstanding borrowings under the Facility bear interest at either (a) the Adjusted Term Secured Overnight Financing Rate (SOFR) (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.

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

At September 30, 2022, no amount has been drawn under the Facility.

At September 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.

DCP Midstream Class A Segment

DCP LP also has a credit facility that matures on March 18, 2027, under its amended credit agreement (the Credit Agreement), with a borrowing capacity of up to $1.4 billion.

The credit facility bears interest at either the term SOFR or the base rate plus, in each case, an applicable margin based on DCP LP’s credit rating.

The Credit Agreement also grants DCP LP the option to increase the revolving loan commitment by an aggregate principal amount of up to $500 million and also to extend the term for up to two additional one-year periods, subject to requisite lender approval.

Loans under the Credit Agreement may be used for working capital and other general partnership purposes including acquisitions.

Indebtedness under the Credit Agreement bears interest at either:

(1) an adjusted SOFR (as described in the Credit Agreement) plus the applicable margin;

or (2) the base rate (as described in the Credit Agreement) plus an applicable margin.

The Credit Agreement also provides for customary fees, including commitment fees.

The cost of borrowing under the Credit Agreement is determined by a ratings-based pricing grid based on DCP LP’s credit rating.

As of September 30, 2022, DCP LP had unused borrowing capacity of $1,390 million, net of $10 million of letters of credit, under the Credit Agreement, of which $1,390 million was available to borrow for working capital and other general partnership purposes based on the financial covenants set forth in the Credit Agreement.

Except in the event of a default, amounts under the Credit Agreement will not become due prior to the March 18, 2027, maturity date.

DCP LP has an accounts receivable securitization facility (the Securitization Facility) that provides for up to $350 million of borrowing capacity through August 2024 at an adjusted SOFR that includes an uncommitted option to increase the total commitments under the Securitization Facility by up to an additional $400 million.

Under the Securitization Facility, certain of DCP LP’s wholly owned subsidiaries sell or contribute receivables to another of DCP LP’s consolidated subsidiaries, DCP Receivables LLC (DCP Receivables), a bankruptcy-remote special purpose entity created for the sole purpose of the Securitization Facility.

As of September 30, 2022, DCP LP had unused borrowing capacity of $350 million under the Securitization Facility, secured by its accounts receivable at DCP Receivables.

Phillips 66 Partners

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.

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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 June 30, 2022.

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

We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling $209 million.

These leases have remaining terms of up to ten years.

These leases have remaining terms of up to nine years.

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

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

In 2020, the trial court presiding over litigation brought by the Standing Rock Sioux Tribe (the 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.

Although the easement is vacated, the USACE has no plans to stop pipeline operations while it proceeds with the EIS, and the Tribe’s request for a shutdown was denied in May of 2021.

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 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.

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

In February 2022, the U.S.

Supreme Court (the Court) denied Dakota Access’s writ of certiorari requesting the Court to review the lower court’s decision to order the EIS and vacate the easement.

Therefore, the requirement to prepare the EIS stands.

Also in February 2022, the Tribe withdrew as a cooperating agency, causing the USACE to halt the EIS process while the USACE engaged with the Tribe on their reasons for withdrawing.

The draft EIS process resumed in August of 2022, and release is expected in Spring of 2023.

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

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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.

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

At September 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).

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 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.

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

See Note 11—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.

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Capital Requirements

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Debt Financing

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.

Our total debt balance at September 30, 2022, and December 31, 2021, was $17.7 billion and $14.4 billion, respectively.

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

After the merger, DCP LP repaid $470 million of debt, related to its accounts receivable securitization facility and revolving credit facility.

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.

We plan to repay our $500 million 3.700% senior notes due April 2023 by the end of 2022.

Debt Exchange

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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.

At September 30, 2022, our 50% share of the outstanding member loan balance, including accrued interest, was $433 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.

DCP Midstream and Gray Oak Holdings Merger

On August 17, 2022, we and our co-venturer, Enbridge, agreed to merge DCP Midstream and Gray Oak Holdings with DCP Midstream as the surviving entity.

As part of the merger, we made a net cash payment of $306 million.

On August 17, 2022, we announced the submission of a non-binding proposal to the board of the general partner of DCP LP offering to acquire all publicly held common units of DCP LP for cash consideration of $34.75 per unit, or approximately $3.1 billion.

We are evaluating a combination of cash and debt to fund this transaction.

The proposed transaction is subject to the negotiation and execution of a definitive agreement, and approval of such definitive agreement and transactions contemplated therein by the board of the general partner of DCP LP and the special committee appointed by the board.

There can be no assurance that the definitive agreement will be executed or that any transaction will be consummated on the terms described above, or at all.

See Note 1—Interim Financial Information and Note 20—DCP Midstream Class A Segment, in the Notes to the Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings.

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DCP LP Cash Distributions to Unitholders

DCP LP’s partnership agreement requires that, within 45 days after the end of each quarter, DCP LP distributes all available cash.

There were no material cash distributions made in the period following the merger.

On October 13, 2022, the board of directors of DCP LP declared a quarterly distribution on DCP LP’s common units of $0.43 per common unit, a semi-annual distribution on DCP LP’s Series A Preferred Units of $36.875 per unit, and a quarterly distribution on DCP LP’s Series B and Series C Preferred Units of $0.4922 and $0.4969 per unit, respectively.

The distribution for the common units will be paid on November 14, 2022, to unitholders of record on October 28, 2022.

The distribution for the Series A Preferred Units will be paid on December 15, 2022, to unitholders of record on December 1, 2022.

The Series B distributions will be paid on December 15, 2022, to unitholders of record on December 1, 2022.

The Series C distribution will be paid on January 17, 2023, to unitholders of record on January 3, 2023.

DCP LP Preferred Units

DCP LP expects to redeem its Series A preferred units with an aggregate liquidation preference of $500 million in December 2022.

DCP LP expects to fund this redemption from available cash and borrowings under its credit facilities.

Merger with Phillips 66 Partners

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See Note 21—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the merger transaction.

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.

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

On October 7, 2022, our board of directors declared a quarterly cash dividend of $0.97 per common share.

This dividend is payable on December 1, 2022, to shareholders of record as of the close of business on November 17, 2022.

Share Repurchases

We temporarily suspended repurchasing shares under our share repurchase program in mid-March 2020 to preserve liquidity in response to the global economic disruption caused by the COVID-19 pandemic.

In the second quarter of 2022, we resumed repurchasing shares.

On November 7, 2022, our Board of Directors approved a $5 billion increase to our share repurchase program.

Since July 2012, our board of directors has authorized an aggregate of $20 billion of repurchases of our outstanding common stock.

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Shares of stock repurchased are held as treasury shares.

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

We 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.

During the nine months ended September 30, 2022, we contributed $122 million to our U.S.

pension and other postretirement benefit plans and $18 million to our international pension plans.

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pension and other postretirement benefit plans and approximately $5 million to our international pension plans during the remainder of 2022.

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Capital Spending

Millions of Dollars

Six Months Ended

Nine Months Ended

Capital Expenditures and Investments

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Selected Equity Affiliates **

DCP Midstream $ 31 21

CPChem 432 239

* Our share of joint venture’s capital spending.

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

* Includes 100% of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills capital expenditures and investments from August 18, 2022, forward, net of acquired cash.

** Our share of joint ventures’ capital spending.

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

• Net cash payment in connection with the merger of DCP Midstream and Gray Oak Holdings.

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

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

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

During the first nine months of 2022, on a 100% basis, CPChem’s capital expenditures and investments were $864 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 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.

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Capital spending for the Refining segment during the first nine 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:

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• 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.

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

Marketing and Specialties

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.

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

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

2022 Budget Update

In October 2022, our Board of Directors authorized an increase of approximately $400 million to the 2022 planned capital budget previously reported in our 2021 Annual Report on Form 10-K.

The increased capital budget relates to our Midstream segment and reflects the net cash paid in connection with the merger of DCP Midstream and Gray Oak Holdings.

In the Notes to Consolidated Financial Statements, see Note 1—Interim Financial Information, and Note 2—Business Combination, for additional information regarding the merger of DCP Midstream and Gray Oak Holdings.

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Contingencies

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In the case of income tax-related contingencies, we monitor tax legislation and court decisions, the status of tax audits and the statute of limitations within which a taxing authority can assert a liability.

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Environmental

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

For the six months ended June 30, 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 $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.

For the nine months ended September 30, 2022 and 2021, we incurred expenses of $403 million and $584 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 income.

Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $296 million and $284 million for the nine months ended September 30, 2022 and 2021, respectively.

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

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.

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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 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.

In the first nine months of 2022, we were notified of one potentially new site through a CERCLA Section 104(e) information request issued by the EPA, and three sites that were deemed resolved and closed, accordingly, leaving 23 unresolved sites with potential liability at September 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.

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.

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Climate Change

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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.

CRITICAL ACCOUNTING ESTIMATES

Business Combination

In accounting for a business combination, assets acquired, liabilities assumed and noncontrolling interests are recorded based on estimated fair values as of the date of acquisition.

The excess or shortfall of the purchase price when compared to the fair value of the net tangible and identifiable intangible assets acquired, if any, is recorded as goodwill or a bargain purchase gain, respectively.

A significant amount of judgment is made in estimating the individual fair value of property, plant and equipment, intangible assets, noncontrolling interests and other assets and liabilities.

We use available information to make these fair value determinations and engage third-party specialists in the valuation process as necessary.

The fair values of assets acquired, liabilities assumed and noncontrolling interests as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate;

the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates;

and the market approach which uses market data and adjusts for entity specific differences.

The estimates used in determining fair values are based on assumptions believed to be reasonable, but which are inherently uncertain.

Accordingly, actual results may differ materially from the estimated results used to determine fair value.

See Note 2—Business Combination, and Note 14—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings and fair value measurements.

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GUARANTOR FINANCIAL INFORMATION

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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.

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

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 settled in May 2022.

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

The summarized results of operations for the six months ended June 30, 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

Six Months Ended June 30, 2022

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

Summarized Combined Statement of Income Millions of Dollars

Nine Months Ended September 30, 2022

Sales and other operating revenues $ 101,633

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Total liabilities and equity 44,800 43,015

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NON-GAAP RECONCILIATIONS

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

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Millions of Dollars, Except as Indicated

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Coast Worldwide

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Income before income taxes $ 521 726 1,342 262 2,851

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Equity in (earnings) losses of affiliates 2 1 (294) — (291)

Other segment expense, net 8 1 2 — 11

Other segment (income) expense, net 2 — 4 (1) 5

Proportional share of refining gross margins contributed by equity affiliates

22 — 517 — 539

Special items:

Regulatory compliance costs 9 26 22 13 70

Realized refining margins $ 949 1,074 1,816 829 4,668

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19.22 21.29 38.76 28.64 26.58

Three Months Ended June 30, 2021

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

Three Months Ended September 30, 2021

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

Taxes other than income taxes

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239 312 126 266 943

Equity in losses of affiliates 2 — 65 — 67

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

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

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

Proportional share of refining gross margins contributed by equity affiliates

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

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

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

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

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

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Millions of Dollars, Except as Indicated

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Coast Worldwide

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Income before income taxes $ 1,757 1,593 1,697 963 6,010

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Equity in (earnings) losses of affiliates 7 6 (506) — (493)

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

Other segment expense, net 22 1 2 — 25

Proportional share of refining gross margins contributed by equity affiliates

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20.55 17.91 24.93 26.58 21.88

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

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

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Equity in losses of affiliates 7 4 151 — 162

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

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

Proportional share of refining gross margins contributed by equity affiliates

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

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Our realized marketing fuel margins measure the difference between (a) sales and other operating revenues derived from the sale of fuels in our M&S segment and (b) costs of those fuels.

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Three Months Ended

June 30, 2022 Three Months Ended

June 30, 2021

September 30, 2022 Three Months Ended

September 30, 2021

International U.S.

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

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

Other operating (revenues) expenses* (141) (35) (120) 9

Other (income) expense, net 6 (3) 2 2

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

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Millions of Dollars, Except as Indicated

Six Months Ended

June 30, 2022 Six Months Ended

June 30, 2021

Nine Months Ended

September 30, 2022 Nine Months Ended

September 30, 2021

International U.S.

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Other operating revenues* (387) (56) (316) (6)

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

Other expense, net 12 1 6 1

Other (income) expense, net 18 (2) 8 3

Marketing margins

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

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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

You can normally identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions, but the absence of such words does not mean a statement is not forward-looking.

You can normally identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions that convey the prospective nature of events or outcomes, but the absence of such words does not mean a statement is not forward-looking.

We based the forward-looking statements on our current expectations, estimates and projections about us, our operations, our joint ventures and entities in which we have equity interests, as well as the industries in which we and they operate in general.

We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict.

We caution you not to place undue reliance on these forward-looking statements as they are not guarantees of future performance and involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict.

In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate.

Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements.

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

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

• 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.

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• Changes in governmental policies relating to NGL, crude oil, natural gas or refined petroleum products pricing, regulation or taxation, including exports.

• Actions taken by OPEC and other countries impacting supply and demand and correspondingly, commodity prices.

• The amount of natural gas we gather, compress, treat, process, transport, store and sell, or the NGL we produce, fractionate, transport, store and sell, may be reduced if the pipelines, storage and fractionation facilities to which we deliver the natural gas or NGL are capacity constrained and cannot, or will not, accept the natural gas or NGL or we may be required to find alternative markets and arrangements for our natural gas and NGL.

• Actions taken by OPEC and non-OPEC oil producing countries impacting supply and demand and correspondingly, commodity prices.

• The outcome of our proposed transaction to acquire all of the publicly held common units of DCP LP, and the timing and cost associated therewith.

• The ability to achieve the expected benefits of the integration of DCP LP and the further benefits from the proposed transaction, if consummated.

• Unexpected changes in costs or technical requirements for constructing, modifying or operating our facilities or transporting our products.

5 unchanged sentences

• Changes to worldwide government policies relating to renewable fuels and greenhouse gas emissions that adversely affect programs like the renewable fuel standards program, low carbon fuel standards and tax credits for biofuels.

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

• Failure to complete definitive agreements and feasibility studies for, and to complete construction of, announced and future capital projects on time and within budget.

2 unchanged sentences

• 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.

• Failure of new products and services to achieve market acceptance.

6 unchanged sentences

• 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.

• The creditworthiness of our customers and the counterparties to our transactions, including the impact of bankruptcies.

• The operation, financing and distribution decisions of our joint ventures that we do not control.

• The factors generally described in Item 1A.—Risk Factors in our 2021 Annual Report on Form 10-K.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis