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Item 2. Management’s Discussion and Analysis

2024-04-29 compared with 2023-11-03 · 186 added, 359 removed, 434 unchanged (56% 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 (M&S) operating segments.

At September 30, 2023, we had total assets of $77.8 billion.

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

At March 31, 2024, we had total assets of $76.4 billion.

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

Executive Overview

In the third quarter of 2023, we reported earnings of $2.1 billion and generated cash from operating activities of $2.7 billion.

We used available cash to fund capital expenditures and investments of $855 million, repurchase $752 million of common stock, and pay dividends on our common stock of $465 million.

We ended the third quarter of 2023 with $3.5 billion of cash and cash equivalents.

Strategic Priorities Update

In November 2022, we announced financial and operational targets in furtherance of achieving the company’s strategic priorities.

On October 27, 2023, we announced updates to certain targets underpinning our strategic priorities that are intended to enhance long-term shareholder value:

• We increased our target for returns to shareholders through share repurchases and dividends from July 2022 through year-end 2024 to a range of $13 billion to $15 billion from a range of $10 billion to $12 billion.

We plan to return at least 50% of net cash provided by operating activities to shareholders through share repurchases and dividends.

In support of the increased target, our board of directors recently approved a $5 billion increase to our share repurchase authorization.

The amount and timing of future dividend payments and the level and timing of future share repurchases will depend on various factors including our share price, results of operations, financial condition and cash required for future business plans.

• We plan to monetize certain assets that are no longer considered to be a long-term strategic fit.

We expect to generate proceeds of over $3 billion from the disposition of these non-core assets, which we plan to use to further advance our strategic priorities, including returns to shareholders through share repurchases and dividends.

• We continue to progress our multi-year business transformation aimed at sustainably reducing our cost structure, and we are on track to exceed our targeted run-rate cost reduction of $800 million per year and sustaining capital reduction of $200 million per year by the end of 2023.

As such, we are now targeting a run-rate cost reduction of $1.1 billion per year and a sustaining capital reduction of $300 million per year by the end of 2024.

• We intend to enhance our commercial supply and trading capabilities to further increase integrated value.

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 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 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 indirect 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 Midstream, LP Merger (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 aggregate direct and indirect 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 these mergers.

In the first quarter of 2024, we reported earnings of $748 million and cash used in operating activities of $236 million, both of which were unfavorably impacted by lower realized refining margins and, in the case of operating cash flow, discretionary inventory builds.

Additionally, we received proceeds from debt issuances, net of debt repayments, of $802 million, funded capital expenditures and investments of $628 million, repurchased $1.2 billion of common stock, and paid dividends on our common stock of $448 million.

We ended the first quarter of 2024 with $1.6 billion of cash and cash equivalents and $3.5 billion of total committed capacity available under our revolving credit facility.

Rodeo Renewable Energy Complex

As part of the Rodeo Renewed project, we are converting the San Francisco Refinery into the Rodeo Renewable Energy Complex, expanding commercial scale production of renewable diesel and positioning Phillips 66 as a leader in renewable fuels production.

The Rodeo Renewed project has progressed during the first quarter of 2024 with the facility now processing only renewable feedstocks and having 30,000 barrels per day of renewable fuels production capacity.

The Rodeo Renewable Energy Complex is on track to increase production capacity to 50,000 barrels per day (800 million gallons per year) of renewable fuels by the end of the second quarter of 2024.

The Rodeo Renewed project design also provides the capability of producing renewable jet fuel, a key component of sustainable aviation fuel.

The project advances our strategy to expand our renewable fuels production, lower our carbon footprint, and provide reliable, affordable energy that we expect to create long-term value for our shareholders.

Business Environment

The Midstream segment includes our Transportation and NGL businesses.

The Midstream segment includes our Transportation and natural gas liquids (NGL) businesses.

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 2023, NGL and natural gas prices decreased, compared with the third quarter of 2022, due to higher inventories from increased supply from production and slower demand growth for NGLs.

Our NGL business, including DCP Midstream Class A Segment, DCP Sand Hills Pipeline, LLC (DCP Sand Hills) and DCP Southern Hills, LLC (DCP Southern Hills), contains both fee-based operations and operations directly impacted by NGL and natural gas prices.

During the first quarter of 2024, NGL and natural gas prices decreased, compared with the first quarter of 2023, as the result of increased production and limited growth in export infrastructure.

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 2023, the benchmark high-density polyethylene chain margin increased, compared with the third quarter of 2022, mainly due to lower feedstock prices during the quarter.

The benchmark high-density polyethylene chain margin slightly decreased in the first quarter of 2024, compared with the first quarter of 2023, mainly due to lower polyethylene sales prices as a result of industry oversupply driven by recent capacity additions.

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 $82.49 per barrel during the third quarter of 2023, compared with an average of $91.76 per barrel in the third 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 averaged $36.06 per barrel during the third quarter of 2023, compared with an average of $36.29 per barrel in the third quarter of 2022.

In the third quarter of 2023, compared with the third quarter of 2022, gasoline prices increased mainly due to lower inventories resulting from refinery maintenance, while diesel prices declined due to increased supply.

The composite 3:2:1 market crack spread for our business decreased to an average of $19.45 per barrel during the first quarter of 2024, from an average of $30.59 per barrel during the first quarter of 2023.

The decrease in the composite market crack spread was primarily driven by lower global prices for gasoline and higher crude oil prices.

The price of U.S.

benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $77.07 per barrel during the first quarter of 2024, from an average of $76.11 per barrel during the first quarter of 2023.

The increase in crude production in the United States limited significant escalation in crude prices.

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 and nine months ended September 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 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 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.

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 and nine months ended September 30, 2023, with the prior periods recast for comparability.

Unless otherwise indicated, discussion of results for the three months ended March 31, 2024, is based on a comparison with the corresponding periods of 2023.

Consolidated Results

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Three Months Ended

September 30 Nine Months Ended

2023 2022 2023 2022

Midstream $ 554 702

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Net income attributable to Phillips 66 $ 748 1,961

Our net income attributable to Phillips 66 in the third quarter and nine-month period of 2023 was $2.1 billion and $5.8 billion, respectively, compared with $5.4 billion and $9.1 billion in the third quarter and nine-month period of 2022, respectively.

The decreases in the third quarter and nine-month period of 2023 were primarily due to the recognition of an aggregate before-tax gain of $3 billion recognized by the Midstream segment in 2022 in connection with the DCP Midstream Merger and a decline in realized refining margins, partially offset by lower income tax expense.

In addition, the decrease in the nine-month period 2023 was also partially offset by lower unrealized losses related to our investment in NOVONIX Limited (NOVONIX).

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.

Our net income attributable to Phillips 66 in the first quarter of 2024 was $748 million, compared with $2 billion in the first quarter of 2023.

The decrease in net income attributable to Phillips 66 was primarily due to a decline in realized refining margins, partially offset by lower income tax expense.

See the “Segment Results” section for additional information on our segment results and Note 19—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information on income taxes.

Statement of Income Analysis

Sales and other operating revenues for the third quarter and nine-month period of 2023 decreased 12% and 16%, respectively, and purchased crude oil and products decreased 11% and 18%, respectively.

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

Equity in earnings of affiliates decreased 28% and 27% in the third quarter and nine-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 third quarter of 2023 also reflects lower equity earnings from WRB Refining LP (WRB), primarily due to lower margins, partially offset by improved operating costs.

See Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers, in the Notes to Consolidated Financial Statements, and the Chemicals segment analysis in the “Segment Results” section for additional information.

Net gain on dispositions increased $101 million and $122 million for the third quarter and nine-month period of 2023, respectively, primarily due to a before-tax gain recognized in the Midstream segment in the third quarter of 2023 associated with the sale of our 25% ownership interest in the South Texas Gateway Terminal.

Other income decreased $3,011 million and $2,536 million in the third quarter and nine-month period of 2023, respectively.

The decrease in both periods of 2023 was primarily due to an aggregate before-tax gain of $3,013 million recognized in the third quarter of 2022 in our Midstream segment in connection with the DCP Midstream Merger.

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

Selling, general and administrative expenses increased 21% in the nine-month period 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.

See Note 23—Restructuring, in the Notes to Consolidated Financial Statements, for additional information regarding restructuring costs.

Depreciation and amortization increased 13% and 29% in the third quarter and nine-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 29% and 38% in the third quarter and nine-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 40% and 59% in the third quarter and nine-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.

Income tax expense decreased 59% and 35% in the third quarter and nine-month period of 2023, respectively, primarily due to lower results.

Sales and other operating revenues for the first quarter of 2024 increased 4%, and purchased crude oil and products increased 10%.

The increases were mainly due to higher prices for crude oil, while the increase in sales was also attributable to higher refined petroleum product sales volumes, partially offset by lower prices for NGL, natural gas and refined petroleum products.

Equity in earnings of affiliates decreased 14% in the first quarter of 2024.

The decrease reflects lower equity earnings from WRB Refining LP (WRB), primarily due to lower realized refining margins.

Other income increased $49 million in the first quarter of 2024, primarily due to higher results from trading activities.

Impairments increased $157 million in the first quarter of 2024, primarily due to the recognition of before-tax impairment charges reported in our Refining and Midstream segments.

Refer to Note 8—Properties, Plants and Equipment, in the Notes to Consolidated Financial Statements, for additional information.

Taxes other than income taxes decreased 20% in the first quarter of 2024.

The decrease was primarily driven by tax credits received from renewable diesel blending activity, as well as lower property taxes.

Interest and debt expense increased 18% in the first quarter of 2024.

The increase was primarily driven by higher average debt principal balances.

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

Income tax expense decreased 65% in the first quarter of 2024, primarily due to lower income before income taxes.

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

Net income attributable to noncontrolling interests decreased 69% and 17% in the third quarter and nine-month period of 2023, respectively.

The decreases in both periods reflect the impacts of the DCP LP Merger in June 2023, and 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 decrease in the nine-month period was also 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.

Net income attributable to noncontrolling interests decreased 89% in the first quarter of 2024.

The decrease reflects the impacts of the DCP Midstream, LP Merger (DCP LP Merger) in June 2023.

See Note 2—DCP Midstream, LP Merger (DCP LP Merger), in the Notes to Consolidated Financial Statements for additional information.

Segment Results

Three Months Ended

September 30 Nine Months Ended

2023 2022 2023 2022

Millions of Dollars

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NGL production** 417 421

Wellhead Volume (Bcf/D)** 4.4 4.5

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

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

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

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This segment also includes our investment in NOVONIX.

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.

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

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

As a result of the 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 decreased $2,896 million and $2,060 million in the third quarter and nine-month period of 2023, respectively.

Results from our Transportation business decreased $25 million in the third quarter of 2023 and increased $37 million in the nine-month period of 2023.

The decrease in the third quarter of 2023 was primarily due to a before-tax gain of $182 million related to the transfer of an indirect economic interest in Gray Oak Pipeline as part of the DCP Midstream Merger in August 2022, partially offset by a $101 million before-tax gain on the sale of our 25% ownership interest in the South Texas Gateway Terminal in August 2023, lower operating costs and higher pipeline tariffs.

The increase for the nine-month period of 2023 was primarily due to the South Texas Gateway Terminal before-tax gain recognized in August 2023 and lower operating costs, partially offset by the DCP Midstream Merger before-tax gain recognized in August 2022.

Results from our NGL and Other business decreased $2,895 million and $2,492 million in the third quarter and nine-month period of 2023, respectively.

The decrease in both periods was primarily due to an aggregate before-tax gain of $2,831 million recognized in the third quarter of 2022 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 DCP Midstream Merger.

The fair value of our investment in NOVONIX declined by $9 million in the third quarter of 2023, compared with a decline of $33 million in the third quarter of 2022.

The fair value of our investment in NOVONIX declined by $36 million in the nine-month period of 2023, compared with a decline of $431 million in the nine-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.

Results from our Midstream segment decreased $148 million in the first quarter of 2024.

Results from our Transportation business decreased $63 million in the first quarter of 2024, primarily due to a before-tax impairment charge of $59 million recognized in the first quarter of 2024 associated with certain crude processing and logistics assets in California, as well as a before-tax gain of $36 million recognized in the first quarter of 2023 associated with the sale of a terminal in Louisiana.

These decreases were partially offset by higher pipeline tariffs and improved earnings from our equity affiliates primarily driven by increased volumes.

Results from our NGL and Other business decreased $102 million in the first quarter of 2024, primarily due to unfavorable pricing driven by falling natural gas prices and winter weather impacts.

The fair value of our investment in NOVONIX increased by $5 million in the first quarter of 2024, compared with a decline of $12 million in the first quarter of 2023.

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

Three Months Ended

September 30 Nine Months Ended

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 $31 million and $310 million in the third quarter and nine-month period of 2023, respectively.

The decrease in the third quarter and nine-month period of 2023 was primarily due to lower margins, partially offset by decreased utility costs and higher sales volumes.

The decrease in the nine-month period of 2023 also reflected lower equity earnings from CPChem’s equity affiliates.

Results from the Chemicals segment increased $7 million in the first quarter of 2024, primarily due to higher volumes and lower utility costs, partially offset by lower margins driven by decreased sales prices.

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

2023 2022 2023 2022

Millions of Dollars

Income Before Income Taxes

Income (Loss) Before Income Taxes

Atlantic Basin/Europe $ 80 142

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Dollars Per Barrel

Income Before Income Taxes

Income (Loss) Before Income Taxes

Atlantic Basin/Europe $ 1.70 3.60

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Worldwide 10.91 20.72

* 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 before income taxes per barrel.

Thousands of Barrels Daily

Three Months Ended

September 30 Nine Months Ended

Operating Statistics 2024 2023

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* Includes our share of equity affiliates.

** As part of our plans to convert the San Francisco Refinery into a renewable fuels facility, in the first quarter of 2023, we ceased operations at the Santa Maria facility in Arroyo Grande, California, which reduced net crude throughput capacity from 120 MBD to 75 MBD.

In October 2023, we further reduced net crude throughput capacity from 75 MBD to 52 MBD as we shut down one of the two crude units at the Rodeo facility.

Effective January 1, 2024, net crude throughput capacity was 52 MBD.

The remaining net crude throughput capacity came offline upon the shutdown of the Rodeo facility’s second crude unit in February 2024.

Accordingly, effective January 1, 2024, we have excluded the Rodeo facility from the operating statistics above.

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 decreased $1,197 million and $1,724 million in the third quarter and nine-month period of 2023, respectively.

The decrease in both periods was primarily due to lower realized margins, partially offset by higher volumes and decreased utility costs.

The decrease in realized margins in the third quarter of 2023 was primarily driven by unfavorable inventory hedging impacts, lower clean product differentials and a decline in market crack spreads.

The decrease in realized margins in the nine-month period of 2023 was primarily driven by a decline in market crack spreads.

Our worldwide refining crude oil capacity utilization rate was 95% and 93% in the third quarter and nine-month period of 2023, respectively, compared with 91% and 90% in the third quarter and nine-month period of 2022, respectively.

Results from our Refining segment decreased $1,477 million in the first quarter of 2024, primarily due to lower realized margins, partially offset by higher volumes.

The decrease in realized margins in the first quarter of 2024 was primarily driven by lower market crack spreads, feedstock advantage and secondary product margins.

Our worldwide refining crude oil capacity utilization rate was 92% in the first quarter of 2024, compared with 90% in the first quarter of 2023.

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

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Millions of Dollars

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Income Before Income Taxes

$ 2.60 2.16 2.30 2.05

International 5.08 4.93

Realized Marketing Fuel Margins*

$ 3.03 2.49 2.76 2.44

International 6.92 6.45

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Distillates 970 848

Other 18 16 19 17

2,226 2,141 2,142 2,150

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 decreased $195 million and $160 million in the third quarter and nine-month period of 2023, respectively.

The decrease in both periods was primarily driven by lower realized international marketing fuel margins and decreased equity earnings from affiliates, partially offset by higher U.S.

realized marketing fuel margins.

The decrease in the nine-month period of 2023 also reflected lower results from trading activities.

Before-tax income from the M&S segment decreased $22 million in the first quarter of 2024.

The decrease was primarily driven by lower U.S.

marketing margins, partially offset by higher U.S.

marketing volumes.

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

September 30 Nine Months Ended

2023 2022 2023 2022

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, 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 increased $27 million and $74 million, in the third quarter and nine-month period of 2023, respectively.

The increases in both periods were primarily driven by higher interest expense as a result of consolidating DCP Midstream Class A Segment, partially offset by increased interest income.

Additionally, the increase in net interest expense for the nine-month period of 2023 included a $53 million before-tax loss on the early redemption of DCP LP’s 5.850% junior subordinated notes.

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 $56 million in the nine-month period of 2023 primarily due to higher costs related to our business transformation.

See Note 23—Restructuring, in the Notes to Consolidated Financial Statements, for additional information regarding restructuring costs.

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

Net interest expense increased $61 million in the first quarter of 2024.

The increase was primarily driven by higher interest expense as a result of higher average debt principal balances, as well as lower interest income.

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

Corporate overhead and other costs decreased $14 million in the first quarter of 2024 primarily due to a decrease in consulting fees associated with our business transformation.

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 2023, we generated $4.8 billion of cash from operations and had net borrowings of $2.1 billion.

We used available cash primarily to repurchase $4 billion of noncontrolling interests in DCP LP, repurchase $2.9 billion of our common stock, fund capital expenditures and investments of $1.8 billion, and pay dividends on our common stock of $1.4 billion.

During the first nine months of 2023, cash and cash equivalents decreased to $3.5 billion.

During the first three months of 2024, we used $236 million of cash in our operations and we received proceeds from debt issuances, net of debt repayments, of $802 million.

We used available cash primarily to repurchase shares of our common stock for $1.2 billion, fund capital expenditures and investments of $628 million, and pay dividends on our common stock of $448 million.

During the first three months of 2024, cash and cash equivalents decreased to $1.6 billion.

Significant Sources of Capital

Operating Activities

During the first nine months of 2023, cash generated by operating activities was $4.8 billion, compared with $6.1 billion for the first nine months of 2022.

The decrease was primarily due to lower earnings, decreased distributions from equity affiliates and higher contributions to our pension plans.

During the first three months of 2024, cash used in our operations was $236 million, compared with cash provided by operations of $1.2 billion for the first three months of 2023.

The decrease was primarily due to lower realized refining margins, as well as larger net unfavorable working capital impacts.

The unfavorable working capital impacts were primarily driven by the effects of changes in commodity prices, the timing of payments and collections, and discretionary inventory builds.

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 can be volatile, and are driven by market conditions over which we have little or no control.

Prices and margins in our industry are typically 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.

The level and quality of output from our refineries also impact our cash flows.

The level and quality of output from our refineries also impacts our cash flows.

Factors such as operating efficiency, maintenance turnarounds, market conditions, feedstock availability, and weather conditions can affect output.

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Equity Affiliate Operating Distributions

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

During the first nine months of 2023, cash from operations included aggregate distributions of $969 million from our equity affiliates.

During the same period of 2022, cash from operations included aggregate distributions of $1.4 billion.

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

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

During the first three months of 2024, cash used in operations included aggregate distributions of $348 million from our equity affiliates, while cash from operations during the first three months of 2023 included aggregate distributions of $369 million from our equity affiliates.

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

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

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:

Senior Notes Issuances

On February 28, 2024, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, issued $1.5 billion aggregate principal amount of senior unsecured notes that are fully and unconditionally guaranteed by Phillips 66.

The senior unsecured notes issuance consisted of:

• $600 million aggregate principal amount of 5.250% Senior Notes due 2031 (2031 Notes).

• $400 million aggregate principal amount of 5.300% Senior Notes due 2033 (Additional 2033 Notes).

• $500 million aggregate principal amount of 5.650% Senior Notes due 2054 (2054 Notes).

Interest on the 2031 Notes and 2054 Notes is payable semi-annually on June 15 and December 15 of each year, commencing on June 15, 2024.

Interest on the Additional 2033 Notes is payable semi-annually on June 30 and December 30 of each year, commencing on June 30, 2024.

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 that are fully and unconditionally guaranteed by Phillips 66.

The senior unsecured notes issuance consisted 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.

Related Party Advance Term Loan Agreements

At September 30, 2023, and December 31, 2022, borrowings outstanding under Advance Term Loan agreements with WRB totaled $290 million and $25 million, respectively.

Borrowings under these agreements are due between 2035 and 2038 and bear interest at a floating rate based on Adjusted Term SOFR plus an applicable margin, payable on the last day of each month.

Term Loan Agreement

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.

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 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.

At September 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, in the Notes to Consolidated Financial Statements, for additional information regarding the DCP LP Merger.

Credit Facilities and Commercial Paper

Phillips 66 and Phillips 66 Company

We have a $5 billion revolving credit facility with Phillips 66 Company as the borrower and Phillips 66 as the guarantor and a $5 billion commercial paper program with Phillips 66 as the borrower that is supported by the revolving credit facility.

At both September 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.

On February 28, 2024, we entered into a new $5 billion revolving credit agreement (the Facility) with Phillips 66 Company as the borrower and Phillips 66 as the guarantor and a scheduled maturity date of February 28, 2029.

The Facility replaced our previous $5 billion revolving credit facility dated as of June 23, 2022, with Phillips 66 Company as the borrower and Phillips 66 as guarantor, and the previous revolving credit facility was terminated.

The Facility contains customary covenants 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.

The Facility 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 Facility, in whole or in part, without premium or penalty.

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

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

Outstanding borrowings under the Facility bear interest at either:

(a) the adjusted term Secured Overnight Financing Rate (as described in the Facility) in effect from time to time plus the applicable margin;

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

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

At March 31, 2024, and December 31, 2023, no amount had been drawn under our revolving credit facilities.

Phillips 66 also has a $5 billion uncommitted commercial paper program for short-term working capital needs that is supported by the Facility.

Commercial paper maturities are contractually limited to less than one year.

At March 31, 2024, $1.5 billion of commercial paper had been issued under this program.

At December 31, 2023, no borrowings were outstanding under this program.

DCP Midstream Class A Segment

At September 30, 2023, DCP LP had $110 million of borrowings outstanding under its $1.4 billion credit facility and $2 million of letters of credit had been issued that are supported by 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.

At September 30, 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.

On March 15, 2024, DCP LP terminated its $1.4 billion credit facility and its accounts receivable securitization facility that previously provided for up to $350 million of borrowing capacity.

At December 31, 2023, DCP LP had $25 million in borrowings outstanding under its $1.4 billion credit facility and $350 million of borrowings outstanding under its accounts receivable securitization facility, which were repaid during the three months ended March 31, 2024.

Total Committed Capacity Available

At September 30, 2023, and December 31, 2022, we had approximately $6.3 billion and $6.7 billion, respectively, of total committed capacity available under the credit facilities described above.

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

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

At March 31, 2024, and December 31, 2023, we had approximately $3.5 billion and $6.4 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, 2023.

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

We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at March 31, 2024.

We also have residual value guarantees associated with railcar, airplane and truck leases with maximum potential future exposures totaling $171 million.

These leases have remaining terms of one to ten years.

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The USACE also identified three “action” alternatives;

Two of them contemplate that the USACE would reissue the easement to Dakota Access under essentially the same terms as 2017 with either the same or a larger volume of oil allowed through the pipeline while the third option would decommission the current pipeline and require construction of a new line 39 miles upstream from the current location.

Although the USACE has not indicated when it will issue its final decision, no decision is expected until 2024.

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

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

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

At September 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).

two of them contemplate that the USACE would reissue the easement to Dakota Access under essentially the same terms as 2017 with either the same or a larger volume of oil allowed through the pipeline, while the third alternative would require decommissioning of the current pipeline and construction of a new line 39 miles upstream from the current location.

The public comment period concluded on December 13, 2023.

The USACE plans to review the comments and issue its final EIS in the fall of 2024.

The Record of Decision will follow within 30 to 60 days after the issuance of the final EIS.

Dakota Access and ETCO have guaranteed repayment of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access with an aggregate principal amount outstanding of $1.85 billion at March 31, 2024.

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

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

At September 30, 2023, our 25% share of the maximum potential equity contributions under the CECU was approximately $467 million.

At March 31, 2024, our 25% share of the maximum potential equity contributions under the CECU was approximately $467 million.

If the pipeline is required to cease operations, it may have a material adverse effect on our results of operations and cash flows.

Should operations cease and Dakota Access and ETCO not have sufficient funds to pay its expenses, we also 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, 2023.

On April 1, 2024, Dakota Access’ wholly owned subsidiary repaid $1 billion aggregate principal amount of its outstanding senior notes upon maturity.

We funded our 25% share of the repayment, or $250 million, with a capital contribution of $171 million in March 2024 and $79 million of distributions we elected not to receive from Dakota Access in the first quarter of 2024.

As a result of the debt repayment on April 1, 2024, our share of the maximum potential equity contributions under the CECU decreased to approximately $215 million, and our share of scheduled interest payments on the notes that we could be required to support decreased to approximately $10 million annually.

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

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Debt Financing

Our debt balance at September 30, 2023, and December 31, 2022, was $19.4 billion and $17.2 billion, respectively.

Our total debt-to-capital ratio was 38% and 34% at September 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.

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 aggregate direct and indirect 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.

DCP LP Preferred Units

On June 15, 2023, DCP LP redeemed its Series B preferred units with an aggregate liquidation preference of approximately $161 million.

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

On October 16, 2023, DCP LP redeemed its Series C preferred units with an aggregate liquidation preference of approximately $110 million.

DCP LP funded this redemption using cash on hand and borrowings under its accounts receivable securitization facility.

DCP LP Cash Distributions to Unitholders

DCP LP’s partnership agreement requires it to distribute all available cash within 45 days after the end of each quarter.

During the nine months ended September 30, 2023, DCP LP made cash distributions of $113 million to common unitholders other than Phillips 66 and its subsidiaries and $12 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 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 was paid on August 11, 2023, to unitholders of record on July 31, 2023.

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

On October 20, 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.

The distribution will be paid on November 10, 2023, to unitholders of record on October 31, 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 redemptions of DCP LP’s Series B and Series C preferred units.

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

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

On October 6, 2023, our board of directors declared a quarterly cash dividend of $1.05 per common share.

This dividend is payable on December 1, 2023, to shareholders of record as of the close of business on November 17, 2023.

Our debt balance at March 31, 2024, and December 31, 2023, was $20.2 billion and $19.4 billion, respectively.

Our total debt-to-capital ratio was 40% and 38% at March 31, 2024, and December 31, 2023, respectively.

On March 29, 2024, DCP LP early redeemed $300 million of its 5.375% Senior Notes due July 2025 at par with an aggregate principal amount of $825 million.

On March 4, 2024, Phillips 66 Company repaid $700 million of the $1.25 billion borrowed under its delayed draw term loan that matures in June 2026.

On February 15, 2024, upon maturity, Phillips 66 repaid its 0.900% senior notes due February 2024 with an aggregate principal amount of $800 million.

During the three months ended March 31, 2024, we repaid $375 million of borrowings that were outstanding under DCP LP’s credit and accounts receivable securitization facilities at December 31, 2023.

On March 15, 2023, DCP LP repaid its 3.875% senior unsecured notes due March 2023 with an aggregate principal amount of $500 million.

On February 7, 2024, our Board of Directors declared a quarterly cash dividend of $1.05 per common share.

This dividend was paid on March 1, 2024, to shareholders of record as of the close of business on February 20, 2024.

On April 3, 2024, our Board of Directors declared a quarterly cash dividend of $1.15 per common share.

This dividend is payable on June 3, 2024, to shareholders of record as of the close of business on May 20, 2024.

Share Repurchases

On October 25, 2023, our board of directors approved a $5 billion increase to our share repurchase authorization.

Since July 2012, our board of directors has authorized an aggregate of $25 billion of repurchases of our outstanding common stock.

The authorizations do not have expiration dates.

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

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

For the nine months ended September 30, 2023, we repurchased 28.1 million shares at an aggregate cost of approximately $2.9 billion.

Since July 2012, we have repurchased 204 million shares at an aggregate cost of $16.9 billion.

Since July 2012, our Board of Directors has authorized an aggregate of $25 billion of repurchases of our outstanding common stock under our share repurchase program.

Our share repurchase authorizations do not expire.

Any future share repurchases will be made at the discretion of management and will depend on various factors including our share price, results of operations, financial condition and cash required for future business plans.

For the three months ended March 31, 2024, we repurchased 8 million shares at an aggregate cost of approximately $1.2 billion.

Since July 2012, we have repurchased 222 million shares under our share repurchase program at an aggregate cost of $19.2 billion.

Shares of stock repurchased are held as treasury shares.

Employee Benefit Plan Contributions

During the nine months ended September 30, 2023, we contributed $401 million to our U.S.

During the three months ended March 31, 2024, we contributed $5 million to our U.S.

pension and other postretirement benefit plans and $1 million to our international pension plans.

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pension and other postretirement benefit plans and approximately $4 million to our international pension plans during the remainder of 2024.

Rodeo Renewed Project

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.

Our projected capital spend on the Rodeo Renewed project in 2023 is expected to be approximately $200 million higher than initially budgeted.

See the “Capital Spending” section below for further discussion regarding the increase in our 2023 capital budget.

Marketing and Specialties Acquisition

On August 1, 2023, we acquired a marketing business on the U.S.

West Coast for total consideration of $269 million.

This acquisition supports the placement of renewable diesel that will be produced by the Rodeo renewable fuels facility.

Capital Spending

Millions of Dollars

Nine Months Ended

Three Months Ended

Capital Expenditures and Investments

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CPChem 201 142

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

* Our share of joint ventures’ capital spending.

During the first nine months of 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 nine months of 2023, on a 100% basis, CPChem’s capital expenditures and investments were $1,545 million.

During the first three months of 2024, capital spending in our Midstream segment included:

• A contribution to Dakota Access to fund our 25% share of Dakota Access’ debt repayment in April 2024.

• Expansion of gathering systems in the DJ Basin and Permian Basin.

• Spending associated with other return projects, well connections, reliability and maintenance projects.

During the first three months of 2024, on a 100% basis, CPChem’s capital expenditures and investments were $401 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 2024.

Capital spending for the Refining segment during the first nine 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 three months of 2024 was primarily for projects to produce renewable fuels, enhance the yield of higher-value products, and sustain the reliability and safety of our facilities.

Major capital activities included:

• Engineering of facilities, procurement of long-lead items and construction to produce renewable fuels at the San Francisco refinery.

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

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

• Construction of facilities to produce renewable fuels at the Rodeo Renewable Energy Complex.

• Installation of facilities to improve market capture at the Lake Charles and Sweeny refineries, as well as the jointly owned Wood River Refinery.

• Capital spend to improve reliability at the Ponca City, Lake Charles and Sweeny refineries, as well as the jointly owned Wood River Refinery.

Marketing and Specialties

Capital spending for the M&S segment during the first nine months of 2023 was primarily for the acquisition of a marketing business on the U.S.

West Coast and continued development and enhancement of retail sites in Europe.

Capital spending for the M&S segment during the first three months of 2024 was primarily for the continued acquisition, development and enhancement of retail sites in Europe, spend associated with marketing and commercial fleet fueling businesses on the U.S.

West Coast, and marketing-related information technology enhancements.

Corporate and Other

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

2023 Budget Update

In October 2023, our Board of Directors authorized an increase of approximately $520 million to the 2023 planned capital budget previously reported in our 2022 Annual Report on Form 10-K.

The increased capital budget relates to our Refining and M&S segments and reflects additional capital for our Rodeo Renewed project and the acquisition of a marketing business on the U.S.

See Note 4—Business Combinations, in the Notes to the Consolidated Financial Statements, for additional information on the marketing business acquisition.

Capital spending for Corporate and Other during the first three months of 2024 was primarily related to information technology.

Contingencies

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For a discussion of the most significant international and federal environmental laws and regulations to which we are subject, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2023 Annual Report on Form 10-K.

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, 2023 and 2022, we incurred expenses of $242 million and $403 million, respectively, associated with our obligation to purchase RINs in the open market to comply with the RFS for our wholly owned refineries.

We are required to purchase renewable identification numbers (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, 2024 and 2023, we incurred expenses of $93 million and $238 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 $326 million and $296 million for the nine months ended September 30, 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 $59 million and $114 million for the three months ended March 31, 2024 and 2023, 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 September 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.

At March 31, 2024, and December 31, 2023, we had been notified of potential liability under CERCLA and comparable state laws at 21 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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Climate Change

There has been a broad range of proposed or promulgated state, national and international laws focusing on GHG emissions reduction, including various regulations proposed or issued by the EPA.

There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (GHG) emissions reduction, including various regulations proposed or issued by the EPA.

These proposed or promulgated laws apply or could apply in states and/or countries where we have interests or may have interests in the future.

Laws regulating GHG emissions continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws potentially could have a material impact on our results of operations and financial condition as a result of increasing costs of compliance, lengthening project implementation and agency reviews, or reducing demand for certain hydrocarbon products.

We continue to monitor legislative and regulatory actions and legal proceedings globally relating to GHG emissions for potential impacts on our operations.

For examples of legislation and regulation or precursors for possible regulation that do or could affect our operations, see the “Climate Change” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2023 Annual Report on Form 10-K.

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Data on our GHG emissions, legal requirements regulating such emissions, and the possible physical effects of climate change on our coastal assets are incorporated into our planning, investment, and risk management decision-making.

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

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

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

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

The 2050 target builds upon our 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.

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All guarantees are full and unconditional.

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

At March 31, 2024, $14 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 nine months ended September 30, 2023, and the summarized financial position at September 30, 2023, and December 31, 2022, for the Obligor Group on a combined basis were:

The summarized results of operations for the three months ended March 31, 2024, and the summarized financial position at March 31, 2024, and December 31, 2023, for the Obligor Group on a combined basis were:

Summarized Combined Statement of Income Millions of Dollars

Nine Months Ended September 30, 2023

Three Months Ended March 31, 2024

Sales and other operating revenues $ 26,834

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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 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.

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.

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 before income taxes to realized refining margins:

Millions of Dollars, Except as Indicated

Realized Refining Margins Atlantic Basin/

Coast Central

Corridor West

Coast Worldwide

Three Months Ended September 30, 2023

Income before income taxes $ 444 342 361 563 1,710

Taxes other than income taxes 12 28 23 30 93

Depreciation, amortization and impairments 53 61 42 55 211

Selling, general and administrative expenses 9 5 17 8 39

Operating expenses 252 286 223 381 1,142

Equity in (earnings) losses of affiliates 2 (1) (209) — (208)

Other segment (income) expense, net (7) — (4) 1 (10)

Proportional share of refining gross margins contributed by equity affiliates

22 — 394 — 416

Realized refining margins $ 787 721 847 1,038 3,393

Total processed inputs ( thousands of barrels )

46,731 53,120 24,242 32,207 156,300

Adjusted total processed inputs ( thousands of barrels )*

46,731 53,120 46,871 32,207 178,929

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

$ 9.50 6.44 14.89 17.48 10.94

Realized refining margins ( dollars per barrel )***

16.85 13.58 18.05 32.23 18.96

Three Months Ended September 30, 2022

Income before income taxes $ 530 770 1,343 264 2,907

Taxes other than income taxes

14 19 16 31 80

Depreciation, amortization and impairments

50 59 36 76 221

Selling, general and administrative expenses

Operating expenses

311 273 179 451 1,214

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

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

Proportional share of refining gross margins contributed by equity affiliates

22 — 517 — 539

Realized refining margins

$ 949 1,126 1,815 828 4,718

Total processed inputs ( thousands of barrels )

49,420 50,435 25,167 28,897 153,919

Adjusted total processed inputs ( thousands of barrels )*

49,420 50,435 46,857 28,897 175,609

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

$ 10.72 15.27 53.36 9.14 18.89

Realized refining margins ( dollars per barrel )***

19.22 22.30 38.76 28.64 26.87

* 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.

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

Millions of Dollars, Except as Indicated

3 unchanged sentences

Coast Worldwide

Nine Months Ended September 30, 2023

Income before income taxes $ 735 1,290 1,730 697 4,452

Three Months Ended March 31, 2024

Income (loss) before income taxes $ 80 118 210 (277) 131

Taxes other than income taxes 23 38 28 (3) 86

51 86 74 94 305

Depreciation, amortization and impairments 52 62 44 163 321

156 184 118 164 622

Selling, general and administrative expenses 7 6 24 10 47

27 13 55 26 121

Operating expenses 250 301 143 327 1,021

852 821 546 1,031 3,250

Equity in (earnings) losses of affiliates 1 (1) (108) — (108)

2 unchanged sentences

33 — 298 — 331

Special items:

Legal settlement — (7) — — (7)

Realized refining margins $ 448 518 637 220 1,823

$ 1,914 2,409 3,096 2,016 9,435

Total processed inputs ( thousands of barrels )

2 unchanged sentences

46,911 47,492 47,912 24,669 166,984

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

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

$ 1.70 2.49 8.20 (11.24) 0.91

1 unchanged sentence

9.55 10.91 13.27 8.89 10.91

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

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

11 unchanged sentences

26 — 402 — 428

Special items:

Regulatory compliance costs 9 26 22 13 70

Realized refining margins

9 unchanged sentences

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

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

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

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

8 unchanged sentences

Three Months Ended

September 30, 2023 Three Months Ended

September 30, 2022

International U.S.

International

Realized Marketing Fuel Margins

Income before income taxes $ 466 105 368 334

Depreciation and amortization 5 18 4 17

Selling, general and administrative expenses 217 65 218 59

Equity in earnings of affiliates (19) (32) (30) (31)

Other operating revenues* (134) (8) (141) (35)

Other (income) expense, net 8 (2) 6 (3)

Marketing margins 543 146 425 341

margin for nonfuel related sales — 13 — 12

Realized marketing fuel margins $ 543 133 425 329

Total fuel sales volumes ( thousands of barrels )

179,432 25,352 170,473 26,501

Income before income taxes per barrel ( dollars per barrel )

$ 2.60 4.14 2.16 12.60

Realized marketing fuel margins ( dollars per barrel )**

3.03 5.27 2.49 12.40

* 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

Nine Months Ended

September 30, 2023 Nine Months Ended

September 30, 2022

March 31, 2024 Three Months Ended

March 31, 2023

International U.S.

4 unchanged sentences

Selling, general and administrative expenses 186 64 181 62

602 190 610 184

Equity in earnings of affiliates (2) (25) (3) (22)

Other operating revenues* (108) (9) (108) (13)

Other (income) expense, net 17 9 18 (2)

Other expense, net 12 12 5 6

Special items:

Legal settlement (59) — — —

Marketing margins 280 191 351 176

1,403 524 1,246 633

margin for nonfuel related sales — 13 — 12

12 unchanged sentences

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 these 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.

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.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, 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 forecasted in any forward-looking statement.

Our sustainability-related goals are not guarantees or promises and may change.

Statements regarding our goals are not guarantees or promises that they will be met.

The information included in, and any issues identified as material for purposes of, our sustainability reports shall not be considered material for U.S.

Securities and Exchange Commission (SEC) reporting purposes.

Factors that could cause actual results to differ materially from those in our forward-looking statements include:

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

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

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

23 unchanged sentences

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

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

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

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

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

• Cybersecurity incidents or other disruptions that compromise our information and expose us to liability.

• 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 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

• The factors generally described in Item 1A.—Risk Factors in our 2023 Annual Report on Form 10-K.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our commodity price risk and interest rate risk at September 30, 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 March 31, 2024, did not differ materially from the risks disclosed under Item 7A of our 2023 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