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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-04 · 289 added, 159 removed, 482 unchanged (48% of the section changed)

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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.

At June 30, 2023, we had total assets of $74.9 billion.

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

Executive Overview

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

In the second quarter of 2023, we reported earnings of $1.7 billion and generated cash from operating activities of $1 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.

We used available cash to repurchase $4 billion of noncontrolling interests in DCP Midstream, LP (DCP LP), repurchase $1.3 billion of common stock, fund capital expenditures and investments of $551 million, and pay dividends on our common stock of $474 million.

We ended the second quarter of 2023 with $3 billion of cash and cash equivalents.

Business Transformation

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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.

We expect to achieve these targets by year end.

DCP Midstream, LLC and Gray Oak Holdings LLC Merger (DCP Midstream Merger)

As part of executing our natural gas liquids (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 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 DCP Midstream 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%.

Starting on August 18, 2022, our 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).

Since the DCP Midstream Merger, we have taken steps to integrate the operations and personnel of DCP Midstream Class A Segment to enable the capture of commercial and operational synergies.

DCP LP Merger

To further advance our NGL growth strategy on June 15, 2023, we completed the acquisition of all publicly held common units of DCP LP pursuant to the terms of the Agreement and Plan of Merger, dated as of January 5, 2023 (DCP LP Merger Agreement).

The DCP LP Merger Agreement was entered into with DCP LP, its subsidiaries and its general partner entities, pursuant to which one of our wholly owned subsidiaries merged with and into DCP LP, with DCP LP surviving as a Delaware limited partnership.

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

The DCP LP Merger increased our economic interest in DCP LP from 43.3% to 86.8%.

See Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers, in the Notes to Consolidated Financial Statements, for additional information regarding the DCP Midstream and DCP LP Mergers.

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 natural gas liquids (NGL), natural gas and condensate 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.

During the second quarter of 2023, NGL and natural gas prices decreased, compared with the second 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 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.

During the second quarter of 2023, the benchmark high-density polyethylene chain margin decreased, compared with the second quarter of 2022, mainly due to increased polyethylene supply coupled with softened 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, 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.

benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, decreased to an average of $73.78 per barrel during the second quarter of 2023, compared with an average of $108.66 per barrel in the second 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 $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.

Worldwide market crack spreads decreased to an average of $28.65 per barrel during the second quarter of 2023, compared with an average of $46.72 per barrel in the second quarter of 2022.

The decrease in market crack spreads were primarily driven by lower refined product and crude oil prices as a result of weaker diesel demand and energy supplies adjusting from the market instability caused by the outbreak of the Russia-Ukraine war in 2022.

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

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RESULTS OF OPERATIONS

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.

Unless otherwise indicated, discussion of results for the three and six months ended June 30, 2023, is based on a comparison with the corresponding periods 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.

Effective August 18, 2022, forward, in connection with the DCP Midstream Merger 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.

See Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers, Note 4—Business Combinations, and Note 15—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information regarding the DCP Midstream Merger.

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.

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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.

The segment realignment and business line reporting changes are presented for the three and six months ended June 30, 2023, with the prior periods recast for comparability.

Consolidated Results

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Three Months Ended

June 30 Six Months Ended

2023 2022 2023 2022

Midstream $ 604 258 1,306 470

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Net income attributable to Phillips 66 $ 1,697 3,167 3,658 3,749

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.

Our net income attributable to Phillips 66 in the second quarter of 2023 was $1.7 billion, compared with $3.2 billion in the second quarter of 2022.

The decrease in net income attributable to Phillips 66 was primarily due to lower realized refining margins, partially offset by higher Midstream results from the increase in economic interest in DCP LP as a result of the DCP Midstream and DCP LP Mergers, as well as lower income tax expense.

Our net income attributable to Phillips 66 for the six months ended June 30, 2023 and 2022, was $3.7 billion.

Our results were down slightly from the six months ended June 30, 2022 due to a decline in realized refining margins, lower equity earnings from CPChem and higher corporate restructuring costs.

These reductions to earnings were partly offset by higher Midstream results, which reflect the increase in economic interest in DCP LP as a result of the DCP Midstream and DCP LP Mergers.

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

See also Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers, in the Notes to Consolidated Financial Statements, for additional information regarding these merger transactions.

Statement of Income Analysis

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

Sales and other operating revenues for the second quarter and six-month period of 2023 decreased 28% and 18%, respectively, and purchased crude oil and products decreased 28% and 21%, respectively.

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.

Equity in earnings of affiliates decreased 39% and 27% in the second quarter and six-month period of 2023, respectively.

The decrease in both periods reflects lower equity earnings from DCP Midstream, DCP Sand Hills, DCP Southern Hills and Gray Oak Pipeline due to the DCP Midstream Merger in August 2022, as well as lower equity earnings from CPChem primarily due to a decline in margins.

The second quarter of 2023 also reflects lower equity earnings from WRB, primarily due to lower margins, partially offset by improved operating costs.

The decrease in the six-month period of 2023 was partially offset by higher equity earnings from WRB, driven by lower operating costs and improved margins.

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

Net gain (loss) on dispositions increased $21 million for the six-month period of 2023, primarily due to a before-tax gain associated with the sale of the Belle Chasse Terminal.

We had other income of $99 million and $147 million in the second quarter and six-month period of 2023, respectively, compared with other loss of $185 million and $328 million in the second quarter and six-month period of 2022, respectively.

The improvements in both periods of 2023 were primarily driven by lower unrealized losses on our investment in NOVONIX and 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 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.

Selling, general and administrative expenses increased 22% and 30% in the second quarter and six-month period of 2023, respectively.

The increases were 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 38% and 39% in the second quarter and six-month period of 2023, respectively.

The increases were 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 47% and 43% in the second quarter and six-month period of 2023, respectively.

The increases were 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 $133 million and $190 million in the second quarter and six-month period of 2023, respectively.

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, as well as a $53 million before-tax loss on the early redemption of DCP LP’s 5.850% junior subordinated notes.

Income tax expense decreased $414 million in the six-month period of 2023, primarily due to lower results.

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

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.

Net income attributable to noncontrolling interests increased $22 million and $63 million in the second quarter and six-month period of 2023, respectively.

The increases in both periods reflect the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills and the derecognition of a noncontrolling interest related to Gray Oak Holdings as a result of the DCP Midstream Merger in August 2022.

The increase in the six-month period was also partially offset by a decrease due to the merger between us and Phillips 66 Partners LP (Phillips 66 Partners) that occurred in the first quarter of 2022.

See Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers, Note 21—DCP Midstream Class A Segment, and Note 22—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information regarding these merger transactions.

Segment Results

Three Months Ended

June 30 Six Months Ended

2023 2022 2023 2022

Millions of Dollars

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This segment also includes our investment in NOVONIX.

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

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

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

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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, 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.

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

In the Notes to Consolidated Financial Statements, see Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers, for additional information regarding the DCP Midstream Merger.

Results from our Midstream segment increased $346 million in the second quarter of 2023 and $836 million in the six-month period of 2023.

Results from our Transportation business increased $34 million and $62 million in the second quarter and six-month period of 2023, respectively.

The increase in the second quarter of 2023 was primarily due to higher volumes and lower operating costs.

The increase in the six-month period of 2023 included a gain of $36 million from the sale of the Belle Chasse Terminal.

Excluding the gain on sale, results were up slightly from higher volumes and improved operating costs, partially offset by lower equity earnings driven by a decrease in our indirect economic interest in Gray Oak Pipeline in connection with the DCP Midstream Merger.

Results from our NGL and Other business increased $87 million and $403 million in the second quarter and six-month period of 2023, respectively.

The increase in both periods was primarily due to the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022 forward.

Additionally, for both periods, the benefit of improved volume and margin at the Sweeny Hub was partially offset by lower results from DCP Midstream Class A Segment driven by lower prices and restructuring costs.

The fair value of our investment in NOVONIX declined by $15 million in the second quarter of 2023, compared with $240 million in the second quarter of 2022.

The fair value of our investment in NOVONIX declined by $27 million in the six-month period of 2023, compared with $398 million in the six-month period 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.

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Three Months Ended

June 30 Six Months Ended

2023 2022 2023 2022

Millions of Dollars

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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.

Results from the Chemicals segment decreased $81 million and $279 million in the second quarter and six-month period of 2023, respectively.

The decrease in both periods was primarily due to a decline in margins, lower equity earnings from CPChem’s equity affiliates, partially offset by improved utility costs.

The decline in margins in both periods was driven by lower sales prices.

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

Three Months Ended

June 30 Six Months Ended

2023 2022 2023 2022

Millions of Dollars

Income (Loss) Before Income Taxes

Income Before Income Taxes

Atlantic Basin/Europe $ 149 1,102 291 1,254

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Dollars Per Barrel

Income (Loss) Before Income Taxes

Income Before Income Taxes

Atlantic Basin/Europe $ 3.33 22.10 3.45 12.81

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Worldwide 15.32 28.62 17.94 19.78

* 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.

Thousands of Barrels Daily

Three Months Ended

June 30 Six Months Ended

Operating Statistics 2023 2022 2023 2022

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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.

Results from our Refining segment decreased $1,962 million and $527 million in the second quarter and six-month period of 2023, respectively.

The decrease in the second quarter of 2023 was primarily due to lower realized margins, partially offset by higher volumes.

The decrease in the six-month period of 2023 was primarily due to lower realized margins.

The decrease in realized margins in both periods was primarily driven by a decline in market crack spreads, partially offset by improved feedstock advantage.

Our worldwide refining crude oil capacity utilization rate was 93% and 91% in the second quarter and six-month period of 2023, compared with 90% in the second quarter and six-month period of 2022.

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

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Three Months Ended

June 30 Six Months Ended

2023 2022 2023 2022

Millions of Dollars

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Income Before Income Taxes

$ 2.45 2.86 2.14 2.00

International 5.67 7.30 5.30 4.14

Realized Marketing Fuel Margins*

$ 2.88 3.24 2.61 2.42

International 7.28 8.20 6.87 5.27

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Distillates 975 960 912 986

Other 20 19 19 18

2,220 2,155 2,099 2,156

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.

Before-tax income from the M&S segment decreased $95 million in the second quarter of 2023, primarily driven by lower realized marketing fuel margins.

Before-tax income from the M&S segment increased $35 million for the six-month period of 2023, primarily driven by higher realized marketing fuel margins, partially offset by lower results from trading activities and decreased equity earnings.

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

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Three Months Ended

June 30 Six Months Ended

2023 2022 2023 2022

Loss Before Income Taxes

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Corporate overhead and other includes general and administrative expenses, technology costs, environmental costs associated with sites no longer in operation, 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.

Net interest expense increased $55 million and $47 million, in the second quarter and six-month period of 2023, respectively.

The increases were primarily driven by higher interest expense as a result of consolidating DCP Midstream Class A Segment and early redemption of DCP LP’s 5.850% junior subordinated notes, partially offset by increased interest income.

See Note 11—Debt, in the Notes to Consolidated Financial Statements, for additional information regarding DCP LP’s redemption of its junior subordinated notes.

Corporate overhead and other costs increased $15 million and $57 million in the second quarter and six-month period of 2023, respectively.

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

During the first three months of 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.

During the first six months of 2023, we generated $2.2 billion of cash from operations and had net borrowings of $2.6 billion.

We used available cash primarily to repurchase $4 billion of noncontrolling interests in DCP LP, repurchase $2.1 billion of our common stock, pay dividends on our common stock of $960 million, and fund capital expenditures and investments of $929 million.

During the first six months of 2023, cash and cash equivalents decreased to $3 billion.

Significant Sources of Capital

Operating Activities

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.

During the first six months of 2023, cash generated by operating activities was $2.2 billion, compared with $2.9 billion for the first six months of 2022.

The decrease was primarily due to lower distributions from equity affiliates and unfavorable working capital impacts.

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

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

During the first three months of 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.

During the first six months of 2023, cash from operations included aggregate distributions of $608 million from our equity affiliates.

During the same period of 2022, cash from operations included aggregate distributions of $1.1 billion.

The decrease in equity distributions was primarily due to lower distributions from CPChem.

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

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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.

Related Party Advance Term Loan Agreement

On May 31, 2023, we borrowed $75 million from WRB Refining LP under an Advance Term Loan agreement.

The debt matures on May 31, 2038.

Borrowings will bear interest at a floating rate of 1.042% plus Adjusted Term SOFR, payable on the last day of each month.

On July 31, 2023, we borrowed an additional $130 million under the Advance Term Loan agreement.

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.

On March 27, 2023, 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 during a 90-day period commencing on the closing date, which borrowing was contingent upon the completion of the DCP LP Merger.

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.

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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:

Outstanding borrowings under the Term Loan Agreement 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.

As of June 30, 2023, $1.25 billion was borrowed under the Term Loan Agreement, which matures in June 2026.

See Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers, for additional information regarding the DCP LP Merger.

Credit Facilities and Commercial Paper

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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.

At both June 30, 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

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 June 30, 2023, DCP LP had $850 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.

As of June 30, 2023, and December 31, 2022, $280 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.

At June 30, 2023, and December 31, 2022, we had approximately $5.6 billion and $6.7 billion, respectively, of total committed capacity available under the credit facilities described above.

On February 28, 2023, we closed on the sale of the Belle Chasse Terminal for approximately $76 million.

On August 1, 2023, we sold our 25% ownership interest in the South Texas Gateway Terminal for approximately $275 million.

Off-Balance Sheet Arrangements

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

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

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

These leases have remaining terms of four to ten years.

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

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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 the second quarter of 2023.

The draft EIS process resumed in August of 2022, and release is expected in the third 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 March 31, 2023, the aggregate principal amount outstanding of Dakota Access’ senior unsecured notes was $1.85 billion.

At June 30, 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 March 31, 2023, 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 March 31, 2023.

See Note 12—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.

At June 30, 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 regarding our guarantees.

Capital Requirements

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Debt Financing

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.

Our debt balance at June 30, 2023, and December 31, 2022, was $19.9 billion and $17.2 billion, respectively.

Our total debt-to-capital ratio was 39% and 34% at June 30, 2023, and December 31, 2022, respectively.

On May 19, 2023, DCP LP redeemed its 5.850% junior subordinated notes due May 2043 with an aggregate principal amount outstanding of $550 million using borrowings under its revolving credit and accounts receivable securitization facilities.

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.

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.

DCP LP Merger

On June 15, 2023, we completed the acquisition of all publicly held common units of DCP LP pursuant to the terms of the Agreement and Plan of Merger, dated as of January 5, 2023.

The DCP LP Merger increased our economic interest in DCP LP from 43.3% to 86.8%.

We paid approximately $3.8 billion in cash consideration, funded through a combination of cash generated from operating activities and proceeds from the offering of the Notes and borrowings under the Term Loan Agreement.

See Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers, Note 11—Debt and Note 21—DCP Midstream Class A Segment, in the Notes to the Consolidated Financial Statements, for additional information regarding the DCP Midstream and DCP LP Mergers.

DCP LP Preferred Units

DCP LP redeemed its Series B preferred units with an aggregate liquidation preference of approximately $161 million in June 2023.

DCP LP funded this redemption with borrowings under its credit facilities.

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.

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.

During the six months ended June 30, 2023, DCP LP made cash distributions of $102 million to common unitholders other than Phillips 66 and its subsidiaries and $10 million to preferred unitholders.

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.

The distribution on the common units was paid on May 15, 2023, to unitholders of record on May 1, 2023.

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

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

On July 14, 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 C preferred units of $0.4969 per unit.

The distribution on the common units will be paid on August 11, 2023, to unitholders of record on July 31, 2023.

The Series C distribution will be paid on October 16, 2023, to preferred unitholders of record on October 2, 2023.

See Note 21—DCP Midstream Class A Segment, in the Notes to the Consolidated Financial Statements, for additional information regarding the DCP LP public common unit acquisition and the redemption of DCP LP’s Series B preferred units.

On May 10, 2023, our board of directors declared a quarterly cash dividend of $1.05 per common share.

The dividend was paid on June 1, 2023, to shareholders of record at the close of business on May 22, 2023.

On July 12, 2023, our board of directors declared a quarterly cash dividend of $1.05 per common share.

This dividend is payable on September 1, 2023, to shareholders of record as of the close of business on August 18, 2023.

Share Repurchases

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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.

For the six months ended June 30, 2023, we repurchased 21.5 million shares at an aggregate cost of approximately $2.1 billion.

Since the inception of our share repurchase program in 2012, we have repurchased 197.5 million shares at an aggregate cost of $16.2 billion.

Shares of stock repurchased are held as treasury shares.

Employee Benefit Plan Contributions

During the six months ended June 30, 2023, we contributed $44 million to our U.S.

pension and other postretirement benefit plans and $10 million to our international pension plans.

We currently expect to make additional contributions of approximately $375 million to our U.S.

pension and other postretirement benefit plans and approximately $10 million to our international pension plans during the remainder of 2023.

Rodeo Renewed

We expect the total capital project cost for the ongoing conversion of the San Francisco refinery in Rodeo, California into a renewable fuels facility to be approximately $1.25 billion.

As a result, our projected capital spend on the Rodeo Renewed renewable fuels facility project in 2023 is expected to be approximately $200 million higher than budgeted.

Marketing and Specialties Acquisition

On August 1, 2023, we acquired certain marketing operations on the U.S.

West Coast for cash consideration of approximately $260 million plus an adjustment for net working capital.

The acquisition of these operations support the placement of renewable fuels that will be produced by the Rodeo Renewed facility.

Capital Spending

Millions of Dollars

Three Months Ended

Six Months Ended

Capital Expenditures and Investments

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** Our share of joint ventures’ capital spending.

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.

During the first six 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, along with other return projects, well connections, reliability and maintenance projects.

During the first six months of 2023, on a 100% basis, CPChem’s capital expenditures and investments were $1,038 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.

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.

Capital spending for the Refining segment during the first six 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:

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• 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.

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

Marketing and Specialties

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.

Capital spending for the M&S segment during the first six 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 three months of 2023 was primarily for information technology.

Capital spending for Corporate and Other during the first six months of 2023 was primarily for information technology and certain business transformation initiatives.

Contingencies

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

For the three months ended March 31, 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.

For the six months ended June 30, 2023 and 2022, we incurred expenses of $293 million and $271 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 $114 million and $85 million for the three months ended March 31, 2023 and 2022, respectively.

Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $217 million and $175 million for the six months ended June 30, 2023 and 2022, respectively.

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

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

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

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

On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties.

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 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.

At June 30, 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.

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All guarantees are full and unconditional.

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.

At June 30, 2023, $13.3 billion of senior unsecured notes outstanding has been guaranteed by the Obligor Group.

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

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

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

The summarized results of operations for the six months ended June 30, 2023, and the summarized financial position at June 30, 2023, and December 31, 2022, for the Obligor Group on a combined basis were:

Summarized Combined Statement of Income Millions of Dollars

Three Months Ended March 31, 2023

Six Months Ended June 30, 2023

Sales and other operating revenues $ 51,438

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We believe realized refining margin per barrel calculated on a similar basis as industry crack spreads provides a useful measure of how well we performed relative to benchmark industry refining margins.

The GAAP performance measure most directly comparable to realized refining margin per barrel is the Refining segment’s “income (loss) before income taxes per barrel.” Realized refining margin per barrel excludes items that are typically included in a manufacturer’s gross margin, such as depreciation and operating expenses, and other items used to determine income (loss) before income taxes, such as general and administrative expenses.

The GAAP performance measure most directly comparable to realized refining margin per barrel is the Refining segment’s “income before income taxes per barrel.” Realized refining margin per barrel excludes items that are typically included in a manufacturer’s gross margin, such as depreciation and operating expenses, and other items used to determine income before income taxes, such as general and administrative expenses.

It also includes our proportional share of joint venture refineries’ realized refining margins and excludes special items.

Because realized refining margin per barrel is calculated in this manner, and because realized refining margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool.

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

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

Millions of Dollars, Except as Indicated

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Coast Worldwide

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023

Income before income taxes $ 149 243 630 112 1,134

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10.94 11.84 22.62 16.27 15.32

Three Months Ended March 31, 2022

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

Three Months Ended June 30, 2022

Income before income taxes $ 1,102 906 491 597 3,096

Taxes other than income taxes

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296 320 264 306 1,186

Equity in losses of affiliates 3 2 16 — 21

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

Other segment expense, net 8 1 2 — 11

Proportional share of refining gross margins contributed by equity affiliates

26 — 469 — 495

Special items:

Regulatory compliance costs 9 26 22 13 70

Realized refining margins

$ 1,515 1,350 1,087 1,006 4,958

Total processed inputs ( thousands of barrels )

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

Adjusted total processed inputs ( thousands of barrels )*

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

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

$ 22.10 17.25 21.69 19.77 19.95

Realized refining margins ( dollars per barrel )***

30.39 25.71 26.72 33.31 28.62

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

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

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

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

Millions of Dollars, Except as Indicated

Realized Refining Margins Atlantic Basin/

Coast Central

Corridor West

Coast Worldwide

Six Months Ended June 30, 2023

Income before income taxes $ 291 948 1,369 134 2,742

Taxes other than income taxes

39 58 51 64 212

Depreciation, amortization and impairments

103 123 76 109 411

Selling, general and administrative expenses

18 8 38 18 82

Operating expenses

600 535 323 650 2,108

Equity in (earnings) losses of affiliates 4 (1) (319) — (316)

Other segment (income) expense, net 24 17 (4) 3 40

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84,253 101,615 91,156 59,662 336,686

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

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

$ 3.45 9.33 25.65 2.25 9.17

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13.37 16.61 24.68 16.39 17.94

Six Months Ended June 30, 2022

Income before income taxes $ 1,254 947 356 712 3,269

Taxes other than income taxes

33 49 36 43 161

Depreciation, amortization and impairments

103 123 71 123 420

Selling, general and administrative expenses

13 9 26 15 63

Operating expenses

592 637 448 612 2,289

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

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

Proportional share of refining gross margins contributed by equity affiliates

49 — 674 — 723

Special items:

Regulatory compliance costs 9 26 22 13 70

Realized refining margins

$ 2,078 1,797 1,419 1,519 6,813

Total processed inputs ( thousands of barrels )

97,869 104,674 46,326 59,076 307,945

Adjusted total processed inputs ( thousands of barrels )*

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

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

$ 12.81 9.05 7.68 12.05 10.62

Realized refining margins ( dollars per barrel )***

21.22 17.18 17.12 25.70 19.78

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

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

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

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

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Three Months Ended

March 31, 2023 Three Months Ended

March 31, 2022

June 30, 2023 Three Months Ended

June 30, 2022

International U.S.

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Other operating revenues* (122) (2) (139) (9)

Other (income) expense, net 4 5 6 (3)

Marketing margins 509 202 553 222

margin for nonfuel related sales — 16 — 14

Realized marketing fuel margins $ 509 186 553 208

Total fuel sales volumes ( thousands of barrels )

176,349 25,569 170,899 25,329

Income before income taxes per barrel ( dollars per barrel )

$ 2.45 5.67 2.86 7.30

Realized marketing fuel margins ( dollars per barrel )**

2.88 7.28 3.24 8.20

* Includes other nonfuel revenues.

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

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

Millions of Dollars, Except as Indicated

Six Months Ended

June 30, 2023 Six Months Ended

June 30, 2022

International U.S.

International

Realized Marketing Fuel Margins

Income before income taxes $ 705 270 680 208

Depreciation and amortization

Selling, general and administrative expenses

385 125 392 125

Equity in earnings of affiliates (15) (52) (23) (58)

Other operating revenues* (230) (15) (246) (21)

Other expense, net 9 11 12 1

Marketing margins

860 378 821 292

margin for nonfuel related sales — 28 — 27

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

• 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.

• The ability to achieve the expected benefits of the DCP LP integration.

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

5 unchanged sentences

• Changes to worldwide government policies relating to renewable fuels, 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.

• 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, rising interest rates, 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.

12 unchanged sentences

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

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

• The factors generally described in Item 1A.—Risk Factors in our 2022 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

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.

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