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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-09 · 204 added, 390 removed, 437 unchanged (58% of the section changed)

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EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT

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

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

Phillips 66 is a diversified energy company with Midstream, Chemicals, Refining, and Marketing and Specialties (M&S) operating segments.

At March 31, 2023, 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 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.

In the first quarter of 2023, we reported earnings of $2 billion and generated cash from operating activities of $1.2 billion.

In addition, we had net borrowings of $1.3 billion.

We used available cash to repurchase $800 million of common stock, pay dividends on our common stock of $486 million, and fund capital expenditures and investments of $378 million.

We ended the first quarter of 2023 with $7 billion of cash and cash equivalents.

Business Transformation

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 $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

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.

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

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

In 2022, we started implementing initiatives designed to achieve a targeted 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.

Midstream NGL Merger Transactions

As part of executing our NGL growth strategy to build a wellhead-to-market value chain, on August 17, 2022, we announced a realignment of our economic and governance interests in DCP Midstream, LP (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, and acquired an economic interest in DCP LP of 43.3%.

As a result of the governance rights granted to us, we began consolidating the financial results of DCP Midstream Class A Segment, DCP Sand Hills Pipeline, LLC (DCP Sand Hills) and DCP Southern Hills Pipeline, LLC (DCP Southern Hills) from the merger date forward.

To further advance our NGL growth strategy on January 5, 2023, we entered into a definitive agreement with DCP LP, its subsidiaries and its general partner entities, pursuant to which one of our wholly owned subsidiaries will merge with and into DCP LP, with DCP LP surviving as a Delaware limited partnership.

Under the terms of the agreement, at the effective time of the merger, each publicly held common unit representing a limited partner interest in DCP LP (other than the common units owned by DCP Midstream and DCP Midstream GP, LP) issued and outstanding as of immediately prior to the effective time will be converted into the right to receive $41.75 per common unit in cash, without interest.

The merger will increase our economic interest in DCP LP from 43.3% to 86.8%.

The transaction is expected to close in the second quarter of 2023, subject to customary closing conditions.

Since August 17, 2022, we also have been taking steps to integrate the operations of DCP Midstream Class A Segment to enable the capture of commercial and operational synergies.

On April 1, 2023, we achieved a significant integration milestone with the transition of DCP Midstream’s employees to Phillips 66.

See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings and Note 21—DCP Midstream Class A Segment, in the Notes to Consolidated Financial Statements, for additional information on the common unit acquisition.

Business Environment

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

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.

During the first quarter of 2023, NGL and natural gas prices decreased, compared with the first quarter of 2022, due to warmer than usual weather, which negatively impacted heating demand.

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

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

During the third quarter of 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.

During the first quarter of 2023, the benchmark high-density polyethylene chain margin decreased, compared with the first quarter of 2022, mainly due to excess polyethylene capacity and weaker demand.

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 $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.

benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, decreased to an average of $76.11 per barrel during the first quarter of 2023, compared with an average of $94.49 per barrel in the first quarter of 2022.

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 $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.

Worldwide market crack spreads increased to an average of $30.59 per barrel during the first quarter of 2023, compared with an average of $21.93 per barrel in the first quarter of 2022.

The increases in market crack spreads were primarily driven by improved demand for refined petroleum products, low refined product inventories and reduced crude oil prices.

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

Unless otherwise indicated, discussion of results for the three months ended March 31, 2023, is based on a comparison with the corresponding period of 2022.

Basis of Presentation

Effective August 18, 2022, forward, in connection with the merger of DCP Midstream and Gray Oak Holdings we began consolidating the results of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills.

As a result of this transaction, 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 of our equity investment in DCP Midstream prior to August 18, 2022, within the results of our NGL and Other business.

See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger, Note 4—Business Combinations, and Note 15—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings.

Effective October 1, 2022, we changed the organizational structure of the internal financial information reviewed by our President and Chief Executive Officer, and determined this resulted in a change in the composition of our operating segments.

As part of the realignment, we moved the results and net assets of our Merey Sweeny vacuum distillation and delayed coker units at our Sweeny Refinery and the isomerization unit at our Lake Charles Refinery from our Midstream segment to our Refining segment.

Additionally, commissions charged to the Refining segment by the M&S segment related to sales of specialty products were eliminated and the costs of the sales organization were reclassified from the M&S segment to the Refining segment.

Further, we are no longer presenting disaggregated business line results for our Chemicals and M&S segments to align with changes in our internal financial reporting.

The segment realignment and business line reporting changes are presented for the three months ended March 31, 2023, with the prior periods recast for comparability.

Consolidated Results

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Three Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

Midstream $ 702 212

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Income before income taxes 2,651 828

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

Income tax expense 574 171

Net income 2,077 657

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Net income attributable to Phillips 66 $ 1,961 582

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 in the first quarter of 2023 was $2 billion, compared with $582 million in the first quarter of 2022.

The increase in net income attributable to Phillips 66 was primarily due to improved realized refining margins, partially offset by higher income tax expense.

See the “Segment Results” section for additional information on our segment performance and Note 20—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information on income taxes.

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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 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.

Sales and other operating revenues for the first quarter of 2023 decreased 5%, and purchased crude oil and products decreased 12%.

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

Equity in earnings of affiliates decreased 11% in the first quarter of 2023.

The decrease was primarily due to lower equity earnings from CPChem due to lower margins, as well as DCP Midstream, DCP Sand Hills, DCP Southern Hills and Gray Oak Pipeline due to the merger of DCP Midstream and Gray Oak Holdings in August 2022.

Decreases in equity earnings from the above entities were partially offset by higher equity earnings from WRB Refining LP (WRB) due to improved realized refining margins.

See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger and the Chemicals segment analysis in the “Segment Results” section for additional information regarding CPChem.

Net gain on dispositions increased $33 million in the first quarter of 2023.

The increase was primarily due to a before-tax gain of $36 million recognized in the first quarter of 2023 associated with the sale of the Belle Chasse Terminal.

We had other income of $48 million in the first quarter of 2023, compared with other loss of $143 million in the first quarter of 2022.

The improvement was primarily driven by an unrealized loss on our investment in NOVONIX of $12 million in the first quarter of 2023, compared with an unrealized loss of $158 million in the first quarter of 2022, as well as higher interest income.

See Note 8—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding our investment in NOVONIX.

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.

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.

Operating expenses increased 18% first quarter of 2023.

The increase was primarily due to consolidating DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills starting in August 2022, as well as higher turnaround and other maintenance expenses, partially offset by lower operating costs due to the sale of the Belle Chasse Terminal and lower employee-related costs.

Selling, general and administrative expenses increased 40% in the first quarter of 2023.

The increase was primarily due to consolidating DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills starting in August 2022, as well as restructuring costs associated with our business transformation.

Depreciation and amortization increased 41% in the first quarter of 2023.

The increase was primarily due to additional depreciation and amortization related to assets acquired as a result of consolidating DCP Midstream Class A Segment, DCP Southern Hills and DCP Sand Hills starting in August 2022.

Taxes other than income taxes increased 39% in the first quarter of 2023.

The increase was primarily due to consolidating DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills starting in August 2022 and higher crude oil and refined petroleum product excise taxes.

Interest and debt expense increased 42% in the first quarter of 2023.

The increase was primarily driven by higher average debt principal balances as a result of consolidating DCP Midstream Class A Segment, DCP Southern Hills and DCP Sand Hills starting in August 2022.

We had income tax expense of $574 million in the first quarter of 2023, compared with an income tax expense of $171 million in the first quarter of 2022.

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

See Note 20—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our effective income tax rates.

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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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Net income attributable to noncontrolling interests increased 55% in the first quarter of 2023.

The increase was primarily driven by consolidating DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills starting in August 2022.

This merger resulted in us reflecting additional noncontrolling interests on our consolidated income statement for the interests in DCP LP owned by public common and preferred unitholders and the interest in DCP Midstream Class A Segment held by Enbridge Inc.

The increase from the merger above was 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 this merger transaction, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66.

See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger and Note 22—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on these merger transactions.

Segment Results

Three Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

Millions of Dollars

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Total Midstream $ 702 212

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

and condensate recovering, mainly in the United States.

and condensate recovery.

These activities are mainly in the United States.

This segment also includes our investment in NOVONIX.

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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.

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.

As a result of the merger and consolidation, equity earnings from our investment in DCP Midstream prior to the merger have been included with the results of our NGL and Other business.

Results from our Midstream segment increased $490 million in the first quarter of 2023.

Results from our Transportation business increased $28 million in the first quarter of 2023.

The increase was primarily due to a gain of $36 million from the sale of the Belle Chasse Terminal.

Excluding the gain on sale, results were down slightly as lower equity earnings driven by a decrease in our indirect economic interest in Gray Oak Pipeline in connection with the merger of DCP Midstream and Gray Oak Holdings were mostly offset by the impact of higher volumes and lower operating costs.

Results from our NGL and Other business increased $316 million in the first quarter of 2023.

The increase was primarily due to the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022 forward, improved hedging results for DCP Midstream’s Class A Segment, as well as higher Sweeny Hub and trading results.

The fair value of our investment in NOVONIX decreased by $12 million in the first quarter of 2023, compared with a decrease of $158 million in the first quarter of 2022.

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

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

September 30 Nine Months Ended

2022 2021 2022 2021

Millions of Dollars

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CPChem Externally Marketed Sales Volumes* 5,706 6,239

Olefins and Polyolefins 4,749 4,912 14,643 14,260

Specialties, Aromatics and Styrenics 1,220 1,216 3,622 3,431

5,969 6,128 18,265 17,691

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

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These products are then marketed and sold or used as feedstocks to produce plastics and other chemicals.

We structure our reporting of CPChem’s operations around two primary business lines:

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

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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CPChem produces and markets ethylene and other olefin products.

Ethylene produced is primarily consumed within CPChem for the production of polyethylene, normal alpha olefins and polyethylene pipe.

CPChem manufactures and markets aromatics and styrenics products, such as benzene, cyclohexane, styrene and polystyrene, as well as manufactures and/or markets a variety of specialty chemical products.

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

Results from the Chemicals segment decreased $198 million in the first quarter of 2023.

The decrease was primarily due to lower margins driven by a decline in sales prices due to higher market supply.

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

Three Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

Millions of Dollars

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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

September 30 Nine Months Ended

Operating Statistics 2023 2022

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* Includes our share of equity affiliates.

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

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

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 $3,977 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.

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

Results from our Refining segment increased $1,435 million in the first quarter of 2023, primarily due to higher realized refining margins driven by improved clean product differentials and market crack spreads, partially offset by lower volumes.

Our worldwide refining crude oil capacity utilization rate was 90% in the first quarter of 2023, compared with 89% in the first quarter of 2022.

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

September 30 Nine Months Ended

2022 2021 2022 2021

Millions of Dollars

Income Before Income Taxes $ 426 296

Marketing and Other $ 717 452 1,576 1,052

Specialties 130 93 352 259

Total Marketing and Specialties $ 847 545 1,928 1,311

Dollars Per Barrel

Income Before Income Taxes

$ 2.16 1.93 2.05 1.84

International 4.93 0.92

Realized Marketing Fuel Margins*

$ 2.49 2.29 2.44 2.30

International 6.45 2.30

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Thousands of Barrels Daily

Marketing Petroleum Products Sales Volumes

Marketing Refined Petroleum Product Sales

Gasoline 1,111 1,129

Distillates 848 1,011

Other 16 17 17 18

Total 2,141 2,280 2,150 2,095

The M&S segment purchases for resale and markets refined petroleum products, such as gasoline, distillates and aviation fuels, mainly in the United States and Europe.

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 $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.

The M&S segment purchases for resale and markets refined petroleum products, such as gasoline, distillates and aviation fuels, as well as renewable fuels, mainly in the United States and Europe.

In addition, this segment includes the manufacturing and marketing of base oils and lubricants.

Before-tax income from the M&S segment increased $130 million in the first quarter of 2023, primarily driven by higher realized marketing fuel margins, partially offset by lower results from trading activities.

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

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Three Months Ended

September 30 Nine Months Ended

2022 2021 2022 2021

Loss Before Income Taxes

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Net interest expense consists of interest and financing expense, net of interest income and capitalized interest.

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 $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.

Corporate overhead and other includes general and administrative expenses, technology costs, environmental costs associated with sites no longer in operation, restructuring costs related to our business transformation, foreign currency transaction gains and losses, and other costs not directly associated with an operating segment.

Net interest expense decreased $8 million, in the first quarter of 2023.

The decrease was primarily driven by increased interest income, partially offset by higher interest expense as a result of consolidating DCP Midstream Class A Segment.

Corporate overhead and other costs increased $42 million in the first quarter of 2023.

The increase was primarily due to restructuring costs associated with our business transformation, mainly related to consulting fees.

See Note 23—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 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.

During the first three months of 2023, we generated $1.2 billion of cash from operations and had net borrowings of $1.3 billion.

We used available cash primarily to repurchase $800 million of our common stock, pay dividends on our common stock of $486 million, and fund capital expenditures and investments of $378 million.

During the first three months of 2023, cash and cash equivalents increased $832 million to $7 billion.

Significant Sources of Capital

Operating Activities

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.

During the first three months of 2023, cash generated by operating activities was $1.2 billion, compared with $1.1 billion for the first three months of 2022.

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.

Prices and margins in our industry are typically volatile, and are driven by market conditions over which we have little or no control.

Prices and margins in our industry can be volatile, and are driven by market conditions over which we have little or no control.

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

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

During the first three months of 2023, cash from operations included aggregate distributions of $369 million from our equity affiliates.

During the same period of 2022, cash from operations included aggregate distributions of $585 million, including $299 million from CPChem.

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

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

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Senior Note Issuances

On March 29, 2023, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, issued $1.25 billion aggregate principal amount of senior unsecured notes consisting of:

• $750 million aggregate principal amount of 4.950% Senior Notes due December 2027 (2027 Notes).

• $500 million aggregate principal amount of 5.300% Senior Notes due June 2033 (2033 Notes).

The 2027 Notes and 2033 Notes (collectively, the Notes) are fully and unconditionally guaranteed by Phillips 66.

Interest on the 2027 Notes is payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2023.

Interest on the 2033 Notes is payable semi-annually on June 30 and December 30 of each year, commencing on December 30, 2023.

The Notes are required to be redeemed at a price equal to 101% of the principal amount, plus accrued and unpaid interest, at the earliest occurrence of any of the following events:

the DCP LP public common unit acquisition is not completed on or prior to December 31, 2023;

the agreement to acquire the DCP LP public common units is terminated;

or we notify the trustee of the notes in writing that the DCP LP public common unit acquisition will not be consummated on or prior to December 31, 2023.

See Note 21—DCP Midstream Class A Segment, for additional information regarding the definitive agreement we executed on January 5, 2023, to acquire an incremental interest in DCP LP.

Term Loan Agreement

On March 27, 2023 (the Closing Date), Phillips 66 Company, a wholly owned subsidiary of Phillips 66, entered into a $1.5 billion delayed draw term loan agreement guaranteed by Phillips 66 (the Term Loan Agreement).

The Term Loan Agreement provides for a single borrowing (the date of such borrowing, the Funding Date) during a 90-day period commencing on the Closing Date, contingent upon us completing the DCP LP public common unit acquisition, and matures on the third anniversary of the Funding Date.

The Term Loan Agreement contains customary covenants similar to those contained in our revolving credit agreement, including a maximum consolidated net debt-to-capitalization ratio of 65% as of the last day of each fiscal quarter.

The Term Loan Agreement has customary events of default, such as nonpayment of principal when due;

nonpayment of interest, fees or other amounts after grace periods;

and violation of covenants.

We may at any time prepay outstanding borrowings under the Term Loan Agreement, in whole or in part, without premium or penalty.

Outstanding borrowings under the Term Loan Agreement will bear interest at either:

(a) Adjusted Term SOFR in effect from time to time plus the applicable margin;

or (b) the reference rate plus the applicable margin, as defined in the Term Loan Agreement.

As of March 31, 2023, no borrowings are outstanding under the Term Loan Agreement.

See Note 21—DCP Midstream Class A Segment, for additional information regarding the definitive agreement we executed on January 5, 2023, to acquire an incremental interest in DCP LP.

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.

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 (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.

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.

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.

On June 23, 2022, we entered into a $5 billion revolving credit facility with Phillips 66 Company as the borrower and Phillips 66 as the guarantor.

At both March 31, 2023, and December 31, 2022, no amount had been drawn under the $5 billion revolving credit facility or $5 billion uncommitted commercial paper program.

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.

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At March 31, 2023, DCP LP had $225 million of borrowings outstanding under its $1.4 billion credit facility and $2 million of letters of credit had been issued that supported the credit facility.

At December 31, 2022, DCP LP had no borrowings outstanding under its $1.4 billion credit facility, and $10 million in letters of credit had been issued that are supported by the credit facility.

As of March 31, 2023, and December 31, 2022, $350 million and $40 million of borrowings, respectively, were outstanding under DCP LP’s accounts receivable securitization facility, which are secured by its accounts receivable at DCP Receivables LLC.

Total Committed Capacity Available

At March 31, 2023, and December 31, 2022, we had approximately $6.2 billion and $6.7 billion, respectively, of total committed capacity available under the credit facilities described above.

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 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 nine years.

We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at March 31, 2023.

We also have residual value guarantees associated with railcar, truck and airplane leases with maximum potential future exposures totaling $164 million.

These leases have remaining terms of five to ten years.

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

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The court later vacated the easement.

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.

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 2021.

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

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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.

Supreme Court (the Court) denied Dakota Access’ 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.

The draft EIS process resumed in August of 2022, and release is expected in the second quarter 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 September 30, 2022, the aggregate principal amount outstanding of Dakota Access’ senior unsecured notes was $1.85 billion.

At March 31, 2023, 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 September 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 September 30, 2022.

At March 31, 2023, our 25% share of the maximum potential equity contributions under the CECU was approximately $467 million.

See Note 12—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 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

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 have provided member loans to WRB.

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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Our debt balance at March 31, 2023, and December 31, 2022, was $18.5 billion and $17.2 billion, respectively.

Our total debt-to-capital ratio was 35% and 34% at March 31, 2023, and December 31, 2022, respectively.

On March 15, 2023, DCP LP repaid its 3.875% senior unsecured notes due March 2023 with an aggregate principal amount of $500 million using borrowings under its revolving credit and accounts receivable securitization facilities.

On April 19, 2023, DCP LP announced its intent to redeem its 5.850% junior subordinated notes due May 2043 with an aggregate principal amount outstanding of $550 million on or about May 21, 2023.

DCP LP expects to use borrowings under its revolving credit and accounts receivable securitization facilities.

DCP LP Public Common Unit Acquisition

On January 5, 2023, we entered into a definitive agreement with DCP LP, its subsidiaries and its general partner entities, pursuant to which one of our wholly owned subsidiaries will merge with and into DCP LP, with DCP LP surviving as a Delaware limited partnership.

The merger will increase our economic interest in DCP LP from 43.3% to 86.8%.

The transaction is expected to close in the second quarter of 2023, subject to customary closing conditions.

If the merger is successfully completed, we will pay approximately $3.8 billion in cash consideration, which we expect to fund through a combination of cash generated from operating activities, proceeds from the offering of the Notes and borrowings under the Term Loan Agreement.

The transaction was unanimously approved by the board of the general partner of DCP LP, based on the unanimous approval and recommendation of its special committee comprised entirely of independent directors after evaluation of the transaction by the special committee in consultation with independent financial and legal advisors.

Concurrently with the execution of the agreement, affiliates of Phillips 66, which together own greater than a majority of the outstanding DCP LP common units, delivered their consent to approve the transaction.

As a result, DCP LP has not solicited and is not soliciting approval of the transaction by any other holders of DCP LP common units.

See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger and Note 21—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.

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

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.

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

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

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

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

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

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.

During the first quarter of 2023, DCP LP made cash distributions of $51 million to common unitholders other than Phillips 66, $3 million to Series B preferred unitholders and $2 million to Series C preferred unitholders.

See Note 21—DCP Midstream Class A Segment, in the Notes to the Consolidated Financial Statements, for additional information.

On April 19, 2023, the board of directors of DCP Midstream GP, LLC, declared a quarterly distribution on DCP LP’s common units of $0.43 per common 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 on the common units will be paid on May 15, 2023, to unitholders of record on May 1, 2023.

The Series B distribution will be paid on June 15, 2023, to unitholders of record on June 1, 2023.

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

Pending Acquisition

On April 10, 2023, we entered into an agreement to acquire certain marketing assets on the U.S.

West Coast for cash consideration of approximately $260 million plus an adjustment for net working capital that will be determined at closing.

The transaction is expected to close in the second or early third quarter of 2023, subject to regulatory approval and completion of other customary closing conditions.

On February 8, 2023, our Board of Directors declared a quarterly cash dividend of $1.05 per common share, representing an 8% increase from the prior quarter.

The dividend was paid on March 1, 2023, to holders of record at the close of business on February 21, 2023.

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

For the three months ended March 31, 2023, we repurchased 7.9 million shares at an aggregate cost of approximately $807 million.

Since the inception of our share repurchase program in 2012, we have repurchased 183.8 million shares at an aggregate cost of $14.8 billion.

Shares of stock repurchased are held as treasury shares.

Employee Benefit Plan Contributions

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.

We currently expect to make additional contributions of approximately $16 million to our U.S.

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

Nine Months Ended

Three Months Ended

Capital Expenditures and Investments

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** 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.

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

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

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

During the first three months of 2023, capital spending in our Midstream segment, including DCP LP, was primarily driven by expansion of gathering systems in the DJ Basin and Permian Basin, other return projects, as well as reliability and maintenance projects.

During the first three months of 2023, on a 100% basis, CPChem’s capital expenditures and investments were $283 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 2023.

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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.

Capital spending for the Refining segment during the first three months of 2023 was primarily for refinery upgrade projects to enhance the yield of high-value products, produce renewable diesel, improve 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 and procurement of long-lead items to produce biofuels at the San Francisco refinery.

• Engineering of facilities, procurement of long-lead items and construction to produce biofuels at the San Francisco 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 nine 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 three months of 2023 was primarily for the continued development and enhancement of retail sites in Europe.

Corporate and Other

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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Capital spending for Corporate and Other during the first three months of 2023 was primarily for information technology.

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 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.

For the three months ended March 31, 2023 and 2022, we incurred expenses of $238 million and $152 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.

Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $114 million and $85 million for the three months ended March 31, 2023 and 2022, respectively.

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

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

At 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 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.

At March 31, 2023 and December 31, 2022, we had been notified of potential liability under CERCLA and comparable state laws at 22 sites within the United States.

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

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.

We have various cross guarantees between Phillips 66 and its wholly owned subsidiary Phillips 66 Company (together, 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.

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All guarantees are full and unconditional.

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

At March 31, 2023, $13.3 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.

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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:

The summarized results of operations for the three months ended March 31, 2023, and the summarized financial position at March 31, 2023, and December 31, 2022, for the Obligor Group on a combined basis were:

Summarized Combined Statement of Income Millions of Dollars

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

Sales and other operating revenues $ 24,824

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Total liabilities and equity 45,306 44,775

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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 September 30, 2022

Three Months Ended March 31, 2023

Income before income taxes $ 142 705 739 22 1,608

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16.13 21.28 26.86 16.53 20.72

Three Months Ended September 30, 2021

Three Months Ended March 31, 2022

Income (loss) before income taxes $ 152 41 (135) 115 173

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Selling, general and administrative expenses

19 15 10 11 55

Operating expenses

296 317 184 306 1,103

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

19 — 201 — 220

Realized refining margins

$ 443 368 581 228 1,620

Total processed inputs ( thousands of barrels )

47,792 64,016 26,373 30,558 168,739

Adjusted total processed inputs ( thousands of barrels )*

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

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

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

Realized refining margins ( dollars per barrel )***

9.27 5.75 12.47 7.46 8.57

* 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.

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Millions of Dollars, Except as Indicated

Realized Refining Margins Atlantic Basin/

Coast Central

Corridor West

Coast Worldwide

Nine Months Ended September 30, 2022

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

Taxes other than income taxes

47 66 52 74 239

Depreciation, amortization and impairments 153 169 107 199 628

Selling, general and administrative expenses

57 37 44 27 165

Operating expenses

903 881 626 1,063 3,473

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

Other segment expense, net 22 1 2 — 25

Proportional share of refining gross margins contributed by equity affiliates

71 — 1,191 — 1,262

Special items:

Regulatory compliance costs 9 26 22 13 70

Realized refining margins

$ 3,026 2,779 3,235 2,339 11,379

Total processed inputs ( thousands of barrels )

147,289 155,109 71,493 87,973 461,864

Adjusted total processed inputs ( thousands of barrels )*

147,289 155,109 129,753 87,973 520,124

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

$ 11.93 10.27 23.74 10.95 13.01

Realized refining margins ( dollars per barrel )***

20.55 17.91 24.93 26.58 21.88

Nine Months Ended September 30, 2021

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

Taxes other than income taxes

53 65 38 49 205

Depreciation, amortization and impairments

156 1,515 102 168 1,941

Selling, general and administrative expenses

51 39 24 32 146

Operating expenses

686 932 456 929 3,003

Equity in losses of affiliates 3 2 16 — 21

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48,015 52,151 42,267 28,877 171,310

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

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

$ 3.17 0.79 (5.70) 3.98 1.13

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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

September 30, 2022 Three Months Ended

September 30, 2021

International U.S.

International

Realized Marketing Fuel Margins

Income before income taxes $ 368 334 354 128

Depreciation and amortization 4 17 3 18

Selling, general and administrative expenses 218 59 201 64

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

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

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

Marketing margins 425 341 422 191

margin for nonfuel related sales — 12 — 13

Realized marketing fuel margins $ 425 329 422 178

Total fuel sales volumes ( thousands of barrels )

170,473 26,501 183,332 26,427

Income before income taxes per barrel ( dollars per barrel )

$ 2.16 12.60 1.93 4.84

Realized marketing fuel margins ( dollars per barrel )**

2.49 12.40 2.29 6.75

* 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.

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Millions of Dollars, Except as Indicated

Nine Months Ended

September 30, 2022 Nine Months Ended

September 30, 2021

March 31, 2023 Three Months Ended

March 31, 2022

International U.S.

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Selling, general and administrative expenses 181 62 182 63

610 184 564 184

Equity in earnings of affiliates (3) (22) (7) (26)

Other operating revenues* (108) (13) (107) (12)

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

Other expense, net 5 6 6 4

Marketing margins 351 176 268 70

1,246 633 1,151 376

margin for nonfuel related sales — 12 — 13

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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

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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 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 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.

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

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

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

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

• 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.

• Capacity constraints in, or other limitations on, the pipelines, storage and fractionation facilities to which we deliver natural gas or NGL and the availability of 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.

• The ability to achieve the expected benefits of the integration of DCP LP and any other benefits that may result from the buy-in of DCP’s publicly-held common units, if consummated.

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

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• The inability to comply with government regulations or make capital expenditures required to maintain compliance.

• 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.

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

• Domestic and international economic and political developments including armed hostilities, such as the Russia-Ukraine war, instability in the financial services and banking sector, excess inflation, expropriation of assets and changes in fiscal policy.

• The 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.

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

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

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

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

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

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• The factors generally described in Item 1A.—Risk Factors in our 2022 Annual Report on Form 10-K.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our commodity price risk and interest rate risk at March 31, 2023, did not differ materially from the risks disclosed under Item 7A of our 2022 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