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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-35349

Phillips 66
(Exact name of registrant as specified in its charter) 
Delaware   45-3779385
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

2331 CityWest Blvd., Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
281-293-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 Par Value PSX New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer
Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  
The registrant had 437,989,408 shares of common stock, $0.01 par value, outstanding as of June 30, 2021.


PHILLIPS 66

TABLE OF CONTENTS
 



PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
 
Consolidated Statement of Operations Phillips 66

  Millions of Dollars
  Three Months Ended
June 30
Six Months Ended
June 30
  2021  2020  2021  2020 
Revenues and Other Income
Sales and other operating revenues $ 27,002  10,913  48,629  31,791 
Equity in earnings of affiliates 830  157  1,115  522 
Net gain on dispositions 2  85  2  86 
Other income 51  28  66  28 
Total Revenues and Other Income 27,885  11,183  49,812  32,427 
Costs and Expenses
Purchased crude oil and products 25,218  9,608  45,283  28,048 
Operating expenses 1,175  1,026  2,555  2,367 
Selling, general and administrative expenses 433  409  841  728 
Depreciation and amortization 364  343  720  685 
Impairments   —  198  3,006 
Taxes other than income taxes 119  114  258  271 
Accretion on discounted liabilities 6  12  11 
Interest and debt expense 143  117  289  228 
Foreign currency transaction (gains) losses (9) (9)
Total Costs and Expenses 27,449  11,628  50,147  35,350 
Income (loss) before income taxes 436  (445) (335) (2,923)
Income tax expense (benefit) 62  (378) (70) (429)
Net Income (Loss) 374  (67) (265) (2,494)
Less: net income attributable to noncontrolling interests 78  74  93  143 
Net Income (Loss) Attributable to Phillips 66 $ 296  (141) (358) (2,637)
Net Income (Loss) Attributable to Phillips 66 Per Share of Common Stock (dollars)
Basic
$ 0.66  (0.33) (0.83) (6.00)
Diluted
0.66  (0.33) (0.83) (6.00)
Weighted-Average Common Shares Outstanding (thousands)
Basic 439,940  438,756  439,722  440,050 
Diluted 440,396  438,756  439,722  440,050 
See Notes to Consolidated Financial Statements.
1

Consolidated Statement of Comprehensive Income (Loss) Phillips 66
 
  Millions of Dollars
  Three Months Ended
June 30
Six Months Ended
June 30
  2021  2020  2021  2020 
Net Income (Loss) $ 374  (67) (265) (2,494)
Other comprehensive income (loss)
Defined benefit plans
Net actuarial gain (loss) arising during the period 210  (300) 210  (300)
Amortization of net actuarial loss, prior service credit and settlements 47  55  69  78 
Plans sponsored by equity affiliates 23  29 
Income taxes on defined benefit plans (68) 59  (74) 54 
Defined benefit plans, net of income taxes 212  (183) 234  (163)
Foreign currency translation adjustments 19  26  4  (196)
Income taxes on foreign currency translation adjustments   —   
Foreign currency translation adjustments, net of income taxes 19  26  4  (195)
Cash flow hedges 1  —  3  (9)
Income taxes on hedging activities (1) —  (1)
Hedging activities, net of income taxes   —  2  (7)
Other Comprehensive Income (Loss), Net of Income Taxes 231  (157) 240  (365)
Comprehensive Income (Loss) 605  (224) (25) (2,859)
Less: comprehensive income attributable to noncontrolling interests 78  74  93  143 
Comprehensive Income (Loss) Attributable to Phillips 66 $ 527  (298) (118) (3,002)
See Notes to Consolidated Financial Statements.
2

Consolidated Balance Sheet Phillips 66
 
  Millions of Dollars
  June 30
2021
December 31
2020
Assets
Cash and cash equivalents $ 2,207  2,514 
Accounts and notes receivable (net of allowances of $46 million in 2021 and $37 million in 2020)
6,627  5,688 
Accounts and notes receivable—related parties 1,435  834 
Inventories 4,752  3,893 
Prepaid expenses and other current assets 759  347 
Total Current Assets 15,780  13,276 
Investments and long-term receivables 13,520  13,624 
Net properties, plants and equipment 23,688  23,716 
Goodwill 1,425  1,425 
Intangibles 825  843 
Other assets 1,739  1,837 
Total Assets $ 56,977  54,721 
Liabilities
Accounts payable $ 8,066  5,171 
Accounts payable—related parties 879  378 
Short-term debt 2,489  987 
Accrued income and other taxes 1,362  1,351 
Employee benefit obligations 412  573 
Other accruals 1,343  1,058 
Total Current Liabilities 14,551  9,518 
Long-term debt 12,924  14,906 
Asset retirement obligations and accrued environmental costs 694  657 
Deferred income taxes 5,879  5,644 
Employee benefit obligations 1,148  1,341 
Other liabilities and deferred credits 1,179  1,132 
Total Liabilities 36,375  33,198 
Equity
Common stock (2,500,000,000 shares authorized at $0.01 par value)
     Issued (2021—649,761,235 shares; 2020—648,643,223 shares)
Par value 6 
Capital in excess of par 20,463  20,383 
Treasury stock (at cost: 2021 and 2020—211,771,827 shares)
(17,116) (17,116)
Retained earnings 15,345  16,500 
Accumulated other comprehensive loss (549) (789)
Total Stockholders’ Equity 18,149  18,984 
Noncontrolling interests 2,453  2,539 
Total Equity 20,602  21,523 
Total Liabilities and Equity $ 56,977  54,721 
See Notes to Consolidated Financial Statements.
3

Consolidated Statement of Cash Flows Phillips 66
  Millions of Dollars
  Six Months Ended
June 30
  2021  2020 
Cash Flows From Operating Activities
Net loss $ (265) (2,494)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization 720  685 
Impairments 198  3,006 
Accretion on discounted liabilities 12  11 
Deferred income taxes 163  (21)
Undistributed equity earnings (1) 298 
Net gain on dispositions (2) (86)
Other 258 
Working capital adjustments
Accounts and notes receivable (1,518) 3,814 
Inventories (821) (1,416)
Prepaid expenses and other current assets (413) (126)
Accounts payable 3,482  (3,121)
Taxes and other accruals 201  424 
Net Cash Provided by Operating Activities 2,014  981 
Cash Flows From Investing Activities
Capital expenditures and investments (711) (1,862)
Return of investments in equity affiliates 158  88 
Proceeds from asset dispositions 24 
Advances/loans—related parties (245) (231)
Collection of advances/loans—related parties   44 
Other (45) (64)
Net Cash Used in Investing Activities (819) (2,024)
Cash Flows From Financing Activities
Issuance of debt 465  3,230 
Repayment of debt (979) (541)
Issuance of common stock 24 
Repurchase of common stock   (443)
Dividends paid on common stock (788) (789)
Distributions to noncontrolling interests (158) (127)
Repurchase of noncontrolling interests (24) — 
Other (27) (13)
Net Cash Provided by (Used in) Financing Activities (1,487) 1,323 
Effect of Exchange Rate Changes on Cash and Cash Equivalents (15) (4)
Net Change in Cash and Cash Equivalents (307) 276 
Cash and cash equivalents at beginning of period 2,514  1,614 
Cash and Cash Equivalents at End of Period $ 2,207  1,890 
See Notes to Consolidated Financial Statements.
4

Consolidated Statement of Changes in Equity Phillips 66

Millions of Dollars
Three Months Ended June 30
  Attributable to Phillips 66  
  Common Stock      
  Par Value Capital in Excess of Par Treasury Stock Retained Earnings Accum. Other Comprehensive Loss Noncontrolling Interests Total
March 31, 2021 $ 20,420  (17,116) 15,449  (780) 2,478  20,457 
Net income       296    78  374 
Other comprehensive income         231    231 
Dividends paid on common stock ($0.90 per share)
      (394)     (394)
Benefit plan activity   43    (4)     39 
Distributions to noncontrolling interests
          (82) (82)
Repurchase of noncontrolling interests       (2)   (21) (23)
June 30, 2021 $ 6  20,463  (17,116) 15,345  (549) 2,453  20,602 
March 31, 2020 $ 20,305  (17,116) 19,168  (991) 2,267  23,639 
Net income (loss) —  —  —  (141) —  74  (67)
Other comprehensive loss —  —  —  —  (157) —  (157)
Dividends paid on common stock ($0.90 per share)
—  —  —  (393) —  —  (393)
Benefit plan activity —  37  —  (3) —  —  34 
Transfer of equity interest —  —  —  —  —  305  305 
Distributions to noncontrolling interests —  —  —  —  —  (66) (66)
June 30, 2020 $ 20,342  (17,116) 18,631  (1,148) 2,580  23,295 


Shares
Three Months Ended June 30
  Common Stock Issued Treasury Stock
March 31, 2021 649,638,881  211,771,827 
Repurchase of common stock    
Shares issued—share-based compensation 122,354   
June 30, 2021 649,761,235  211,771,827 
March 31, 2020 648,446,534  211,771,827 
Repurchase of common stock —  — 
Shares issued—share-based compensation 21,953  — 
June 30, 2020 648,468,487  211,771,827 
See Notes to Consolidated Financial Statements.





5

Consolidated Statement of Changes in Equity Phillips 66
Millions of Dollars
Six Months Ended June 30
Attributable to Phillips 66
Common Stock
Par Value Capital in Excess of Par Treasury Stock Retained Earnings Accum. Other Comprehensive Loss Noncontrolling Interests Total
December 31, 2020 $ 20,383  (17,116) 16,500  (789) 2,539  21,523 
Net income (loss)       (358)   93  (265)
Other comprehensive income         240    240 
Dividends paid on common stock ($1.80 per share)
      (788)     (788)
Benefit plan activity   80    (7)     73 
Distributions to noncontrolling interests           (158) (158)
Repurchase of noncontrolling interests       (2)   (21) (23)
June 30, 2021 $ 6  20,463  (17,116) 15,345  (549) 2,453  20,602 
December 31, 2019 $ 20,301  (16,673) 22,064  (788) 2,259  27,169 
Net income (loss) —  —  —  (2,637) —  143  (2,494)
Other comprehensive loss —  —  —  —  (365) —  (365)
Dividends paid on common stock ($1.80 per share)
—  —  —  (789) —  —  (789)
Repurchase of common stock —  —  (443) —  —  —  (443)
Benefit plan activity —  41  —  (5) —  —  36 
Transfer of equity interest —  —  —  —  —  305  305 
Distributions to noncontrolling interests —  —  —  —  —  (127) (127)
Other —  —  —  (2) — 
June 30, 2020 $ 20,342  (17,116) 18,631  (1,148) 2,580  23,295 

Shares
Six Months Ended June 30
Common Stock Issued Treasury Stock
December 31, 2020 648,643,223  211,771,827 
Repurchase of common stock    
Shares issued—share-based compensation 1,118,012   
June 30, 2021 649,761,235  211,771,827 
December 31, 2019 647,416,633  206,390,806 
Repurchase of common stock —  5,381,021 
Shares issued—share-based compensation 1,051,854  — 
June 30, 2020 648,468,487  211,771,827 
See Notes to Consolidated Financial Statements.

6

Notes to Consolidated Financial Statements Phillips 66

Note 1—Interim Financial Information

The unaudited interim financial information presented in the financial statements included in this report is prepared in accordance with generally accepted accounting principles in the United States (GAAP) and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2020 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2021, are not necessarily indicative of the results expected for the full year.


Note 2—Sales and Other Operating Revenues

Disaggregated Revenues
The following tables present our disaggregated sales and other operating revenues:

  Millions of Dollars
  Three Months Ended
June 30
Six Months Ended
June 30
  2021  2020  2021  2020 
Product Line and Services
Refined petroleum products $ 21,876  8,701  38,219  24,858 
Crude oil resales 3,204  1,490  6,393  4,367 
Natural gas liquids (NGL) 1,943  700  3,717  1,679 
Services and other*
(21) 22  300  887 
Consolidated sales and other operating revenues
$ 27,002  10,913  48,629  31,791 
Geographic Location**
United States $ 21,297  8,377  37,909  24,087 
United Kingdom 2,835  972  5,122  3,281 
Germany 1,038  613  1,855  1,471 
Other foreign countries 1,832  951  3,743  2,952 
Consolidated sales and other operating revenues
$ 27,002  10,913  48,629  31,791 
* Includes derivatives-related activities. See Note 12—Derivatives and Financial Instruments, for additional information.
** Sales and other operating revenues are attributable to countries based on the location of the operations generating the revenues.



7

Contract-Related Assets and Liabilities
At June 30, 2021, and December 31, 2020, receivables from contracts with customers were $5,948 million and $3,911 million, respectively. Significant noncustomer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.

Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At June 30, 2021, and December 31, 2020, our asset balances related to such payments were $426 million and $404 million, respectively.

Our contract liabilities represent advances from our customers prior to product or service delivery. At June 30, 2021, and December 31, 2020, contract liabilities were immaterial.

Remaining Performance Obligations
Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We do not disclose remaining performance obligations for these contracts as the expected duration is one year or less or because the variable consideration has been allocated entirely to the unsatisfied performance obligations. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing. At June 30, 2021, the remaining performance obligations related to these minimum volume commitment contracts were immaterial.


Note 3—Credit Losses

We are exposed to credit losses primarily through our sales of refined petroleum products, crude oil and NGL. We assess each counterparty’s ability to pay for the products we sell by conducting a credit review. The credit review considers our expected billing exposure and timing for payment and the counterparty’s established credit rating or our assessment of the counterparty’s creditworthiness based on our analysis of their financial statements when a credit rating is not available. We also consider contract terms and conditions, country and political risk, and business strategy in our evaluation. A credit limit is established for each counterparty based on the outcome of this review. We may require collateralized asset support or a prepayment to mitigate credit risk.

We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliations, dispute resolution and payment confirmations. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

The negative economic impacts associated with Coronavirus Disease 2019 (COVID-19) have increased the probability that certain of our counterparties may not be able to completely fulfill their obligations in a timely manner. In response, we have enhanced our credit monitoring, sought collateral to support some transactions, and required prepayments from higher-risk counterparties.

At June 30, 2021, and December 31, 2020, we reported $8,062 million and $6,522 million of accounts and notes receivable, net of allowances of $46 million and $37 million, respectively. Based on an aging analysis at June 30, 2021, more than 95% of our accounts receivable were outstanding less than 60 days.

We are also exposed to credit losses from off-balance sheet exposures, such as guarantees of joint venture debt and standby letters of credit. See Note 10—Guarantees, and Note 11—Contingencies and Commitments, for more information on these off-balance sheet exposures.


8

Note 4—Inventories

Inventories consisted of the following:

  Millions of Dollars
  June 30
2021
December 31
2020
Crude oil and petroleum products $ 4,365  3,536 
Materials and supplies 387  357 
$ 4,752  3,893 


Inventories valued on the last-in, first-out (LIFO) basis totaled $4,170 million and $3,368 million at June 30, 2021, and December 31, 2020, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $5.8 billion and $2.7 billion at June 30, 2021, and December 31, 2020, respectively.

Certain planned reductions in inventory that are not expected to be replaced by the end of the year cause liquidations of LIFO inventory values. LIFO inventory liquidations decreased our net income by $54 million in the second quarter of 2021, and increased our net loss by $82 million in the first six months of 2021. The impact was immaterial for the corresponding periods of 2020.


9

Note 5—Investments, Loans and Long-Term Receivables

Equity Investments

Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In 2020, the trial court presiding over litigation regarding the Dakota Access Pipeline ordered the U.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) relating to an easement under Lake Oahe in North Dakota and later vacated the easement. Although the easement has been vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS, which is expected to be completed in 2022. In May 2021, the court denied a request for an injunction to shut down the pipeline while the EIS is being prepared and in June 2021, dismissed the litigation. It is possible that the litigation could be reopened or new litigation challenging the EIS, once completed, could be filed.

Dakota Access and ETCO have guaranteed repayment of $2.5 billion aggregate principal amount of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access. In addition, Phillips 66 Partners LP (Phillips 66 Partners) and its co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access in certain circumstances relating to the litigation described above. At June 30, 2021, Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU was approximately $631 million.

If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, Phillips 66 Partners also could be required to support its share of the ongoing expenses, including scheduled interest payments on the notes of approximately $25 million annually, in addition to the potential obligations under the CECU.

At June 30, 2021, the aggregate book value of Phillips 66 Partners’ investments in Dakota Access and ETCO was $577 million.

CF United LLC (CF United)
We hold a 50% voting interest and a 48% economic interest in CF United, a retail marketing joint venture with operations primarily on the U.S. West Coast. CF United is considered a variable interest entity (VIE) because our co-venturer has an option to require us to purchase its interest based on a fixed multiple. The put option becomes effective July 1, 2023, and expires on March 31, 2024. The put option is viewed as a variable interest as the purchase price on the exercise date may not represent the then-current fair value of CF United. We have determined that we are not the primary beneficiary because we and our co-venturer jointly direct the activities of CF United that most significantly impact economic performance. At June 30, 2021, our maximum exposure to loss was comprised of our $267 million investment in CF United, and any potential future loss resulting from the put option should the purchase price based on a fixed multiple exceed the then-current fair value of CF United.

OnCue Holdings, LLC (OnCue)
We hold a 50% interest in OnCue, a joint venture that owns and operates retail convenience stores. We fully guaranteed various debt agreements of OnCue and our co-venturer did not participate in the guarantees. This entity is considered a VIE because our debt guarantees resulted in OnCue not being exposed to all potential losses. We have determined we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact economic performance. At June 30, 2021, our maximum exposure to loss was $184 million, which represented the book value of our investment in OnCue of $106 million and guaranteed debt obligations of $78 million.

10

Liberty Pipeline LLC (Liberty)
In the first quarter of 2021, Phillips 66 Partners’ decision to exit the Liberty Pipeline project resulted in a $198 million before-tax impairment of its investment in Liberty. The impairment is included in the “Impairments” line item on our consolidated statement of operations for the six months ended June 30, 2021. See Note 7—Impairments, and Note 13—Fair Value Measurements, for additional information regarding the impairment and the techniques used to determine the fair value of Phillips 66 Partners’ investment in Liberty. In April 2021, Phillips 66 Partners transferred its ownership interest in Liberty to its co-venturer for cash and certain pipeline assets with a value that approximated its book value of $46 million at March 31, 2021.

Related Party Loans
We and our co-venturer provided member loans to WRB Refining LP (WRB). At June 30, 2021, our 50% share of the outstanding member loan balance, including accrued interest, was $525 million.


Note 6—Properties, Plants and Equipment

Our gross investment in properties, plants and equipment (PP&E) and the associated accumulated depreciation and amortization (Accum. D&A) balances were as follows:

  Millions of Dollars
  June 30, 2021 December 31, 2020
  Gross
PP&E
Accum.
D&A
  Net
PP&E
Gross
PP&E
Accum.
D&A
Net
PP&E
Midstream $ 12,289  2,885  9,404  12,313  2,815  9,498 
Chemicals       —  —  — 
Refining 25,293  12,569  12,724  24,647  12,019  12,628 
Marketing and Specialties 1,805  1,023  782  1,815  1,007  808 
Corporate and Other 1,485  707  778  1,448  666  782 
$ 40,872  17,184  23,688  40,223  16,507  23,716 


11

Note 7—Impairments

Millions of Dollars
  Three Months Ended
June 30
Six Months Ended
June 30
  2021 2020 2021 2020
Midstream $   —  198  1,161 
Refining   —    1,845 
Total impairments $   —  198  3,006 


Equity Investments

Liberty
In the first quarter of 2021, Phillips 66 Partners decided to exit the Liberty Pipeline project, which had previously been deferred due to the challenging business environment caused by the COVID-19 pandemic. As a result, Phillips 66 Partners recorded a $198 million before-tax impairment to reduce the book value of its investment in Liberty at March 31, 2021, to estimated fair value.

DCP Midstream, LLC (DCP Midstream)
In the first quarter of 2020, the market value of DCP Partners, LP (DCP Partners) common units declined by approximately 85%. As a result, at March 31, 2020, the fair value of our investment in DCP Midstream was significantly lower than its book value. We concluded this difference was not temporary primarily due to its magnitude, and we recorded a $1,161 million before-tax impairment of our investment in the first quarter of 2020.

Goodwill
Our stock price declined significantly in the first quarter of 2020, mainly due to the disruption in global commodity and equity markets related to the COVID-19 pandemic. We assessed our goodwill for impairment due to the decline in our market capitalization and concluded that the carrying value of our Refining reporting unit at March 31, 2020, was greater than its fair value by an amount in excess of its goodwill balance. Accordingly, we recorded a before-tax goodwill impairment charge of $1,845 million in our Refining segment during the first quarter of 2020.

These impairment charges are included within the “Impairments” line item on our consolidated statement of operations. See Note 13—Fair Value Measurements, for additional information on the determination of fair value used to record these impairments.

Outlook
The COVID-19 pandemic continues to disrupt economic activities globally. Reduced demand for refined petroleum products resulted in low refining margins and decreased volumes through refineries and logistics infrastructure in 2020. Since the beginning of 2021, demand for refined petroleum products has started to recover following the administration of COVID-19 vaccines and the easing of pandemic restrictions. Consequently, refining margins have improved, as has volume throughput. However, refining profitability remains challenged. The depth and duration of the economic consequences of the COVID-19 pandemic remain uncertain and we continue to monitor our asset and investment portfolio. The consequences of the sustained disruption of economic activities by the pandemic may include additional asset impairments and portfolio rationalization in the future.


12

Note 8—Earnings (Loss) Per Share

The numerator of basic earnings (loss) per share (EPS) is net income (loss) attributable to Phillips 66, adjusted for noncancelable dividends paid on unvested share-based employee awards during the vesting period (participating securities) and the premium paid for the repurchase of noncontrolling interests. The denominator of basic EPS is the sum of the daily weighted-average number of common shares outstanding during the periods presented and fully vested stock and unit awards that have not yet been issued as common stock. The numerator of diluted EPS is also based on net income (loss) attributable to Phillips 66, which is reduced by dividend equivalents paid on participating securities for which the dividends are more dilutive than the participation of the awards in the earnings (loss) of the periods presented, and the premium paid for the repurchase of noncontrolling interests. To the extent unvested stock, unit or option awards and vested unexercised stock options are dilutive, they are included with the weighted-average common shares outstanding in the denominator. Treasury stock is excluded from the denominator in both basic and diluted EPS.

  Three Months Ended
June 30
Six Months Ended
June 30
  2021 2020 2021 2020
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
Amounts Attributed to Phillips 66 Common Stockholders (millions):
Net income (loss) attributable to Phillips 66 $ 296  296  (141) (141) (358) (358) (2,637) (2,637)
Income allocated to participating securities (3) (3) (2) (2) (6) (6) (4) (4)
Premium paid for the repurchase of noncontrolling interests (2) (2) —  —  (2) (2) —  — 
Net income (loss) available to common stockholders $ 291  291  (143) (143) (366) (366) (2,641) (2,641)
Weighted-average common shares outstanding (thousands):
437,909  439,940  436,688  438,756  437,639  439,722  437,851  440,050 
Effect of share-based compensation 2,031  456  2,068  —  2,083    2,199  — 
Weighted-average common shares
    outstanding—EPS
439,940  440,396  438,756  438,756  439,722  439,722  440,050  440,050 
Earnings (Loss) Per Share of Common Stock (dollars)
$ 0.66  0.66  (0.33) (0.33) (0.83) (0.83) (6.00) (6.00)


Note 9—Debt

2021 Debt Issuances and Repayments
At June 30, 2021, borrowings of $15 million were outstanding and $1 million in letters of credit had been drawn under Phillips 66 Partners’ $750 million revolving credit facility, compared with outstanding borrowings of $415 million and $1 million in letters of credit drawn under the facility at December 31, 2020.

In April 2021, Phillips 66 Partners entered into a $450 million term loan agreement and borrowed the full amount. The term loan agreement has a maturity date of April 5, 2022, and the outstanding borrowings can be repaid at any time and from time to time, in whole or in part, without premium or penalty. Borrowings bear interest at a floating rate based on either a Eurodollar rate or a reference rate, plus a margin of 0.875%. Proceeds were primarily used to repay amounts borrowed under Phillips 66 Partners’ $750 million revolving credit facility.

In April 2021, Phillips 66 Partners repaid $50 million of its tax-exempt bonds upon maturity.

In February 2021, Phillips 66 repaid $500 million outstanding principal balance of its floating-rate senior notes due February 2021.


13

2020 Debt Issuances and Repayments

Senior Unsecured Notes
On June 10, 2020, Phillips 66 closed its public offering of $1 billion aggregate principal amount of senior unsecured notes consisting of:

$150 million aggregate principal amount of 3.850% Senior Notes due 2025.
$850 million aggregate principal amount of 2.150% Senior Notes due 2030.

On April 9, 2020, Phillips 66 closed its public offering of $1 billion aggregate principal amount of senior unsecured notes consisting of:

$500 million aggregate principal amount of 3.700% Senior Notes due 2023.
$500 million aggregate principal amount of 3.850% Senior Notes due 2025.

Interest on the Senior Notes due 2023 is payable semiannually on April 6 and October 6 of each year, commencing on October 6, 2020. The Senior Notes due 2025 issued on June 10, 2020, constitute a further issuance of the Senior Notes due 2025 originally issued on April 9, 2020. The $650 million in aggregate principal amount of Senior Notes due 2025 is treated as a single class of debt securities. Interest on the Senior Notes due 2025 is payable semiannually on April 9 and October 9 of each year, commencing on October 9, 2020. Interest on the Senior Notes due 2030 is payable semiannually on June 15 and December 15 of each year, commencing on December 15, 2020.

Proceeds received from the public offerings of senior unsecured notes on June 10, 2020, and April 9, 2020, were $1,008 million exclusive of accrued interest received, and $993 million, respectively, net of underwriters’ discounts or premiums and commissions, as well as debt issuance costs. These proceeds were used for general corporate purposes.

Term Loan Facility
On March 19, 2020, Phillips 66 entered into a $1 billion 364-day delayed draw term loan agreement (the Facility) and borrowed $1 billion under the Facility shortly thereafter. On April 6, 2020, Phillips 66 increased the size of the Facility to $2 billion, and in June 2020, the Facility was amended to extend the commitment period to September 19, 2020. We did not draw additional amounts under the Facility before the end of the commitment period or further extend the commitment period. In November 2020, we repaid $500 million of borrowings outstanding under the Facility, and the Facility was amended to extend the maturity date of the remaining $500 million outstanding borrowings from March 18, 2021, to November 20, 2023. Borrowings under the Facility bear interest at a floating rate based on either a Eurodollar rate or a reference rate, plus a margin determined by the credit rating of Phillips 66’s senior unsecured long-term debt. Phillips 66 used the proceeds for general corporate purposes.

Other Debt Repayments
In April 2020, Phillips 66 repaid $300 million outstanding principal balance of its floating-rate notes due April 2020 and the $200 million outstanding principal balance of its term loan facility due April 2020. Also in April 2020, Phillips 66 Partners repaid $25 million of its tax-exempt bonds upon maturity.


14

Note 10—Guarantees

At June 30, 2021, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantees and expect future performance to be either immaterial or have only a remote chance of occurrence.

Lease Residual Value Guarantees
Under the operating lease agreement for our headquarters facility in Houston, Texas, we have the option, at the end of the lease term in September 2025, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at June 30, 2021. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling $209 million. These leases have remaining terms of up to nine years.

Guarantees of Joint Venture and Other Obligations
In March 2019, Phillips 66 Partners and its co-venturers in Dakota Access provided a CECU in conjunction with a senior unsecured notes offering. See Note 5—Investments, Loans and Long-Term Receivables, for additional information on Dakota Access and the CECU.

At June 30, 2021, we also had other guarantees outstanding primarily for our portion of certain joint venture debt, which have remaining terms of up to seven years. The maximum potential future exposures under these guarantees were approximately $148 million. Payment would be required if a joint venture defaults on its obligations.

Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnification. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses, employee claims, and real estate tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. At June 30, 2021, and December 31, 2020, the carrying amount of recorded indemnifications was $149 million and $145 million, respectively.

We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information to support the reversal. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. At June 30, 2021, and December 31, 2020, environmental accruals for known contamination of $108 million and $104 million, respectively, were included in the carrying amount of the recorded indemnifications noted above. These environmental accruals were primarily included in the “Asset retirement obligations and accrued environmental costs” line item on our consolidated balance sheet. For additional information about environmental liabilities, see Note 11—Contingencies and Commitments.

Indemnification and Release Agreement
In 2012, in connection with our separation from ConocoPhillips, we entered into an Indemnification and Release Agreement. This agreement governs the treatment between ConocoPhillips and us of matters relating to indemnification, insurance, litigation responsibility and management, and litigation document sharing and cooperation arising in connection with the separation. Generally, the agreement provides for cross indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of ConocoPhillips’ business with ConocoPhillips. The agreement also establishes procedures for handling claims subject to indemnification and related matters.



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Note 11—Contingencies and Commitments

A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is uncertain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

Environmental
We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using information available at the time. We measure estimates and base contingent liabilities on currently available facts, existing technology and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring contingent environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the EPA or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.

Although liability for environmental remediation costs is generally joint and several for federal sites and frequently so for state sites, we are usually only one of many companies alleged to have liability at a particular site. Due to such joint and several liabilities, we could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites for which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit, although some of the indemnifications are subject to dollar and time limits.

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At June 30, 2021, our total environmental accruals were $455 million, compared with $427 million at December 31, 2020. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

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Legal Proceedings
Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required.

Other Contingencies
We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized.

At June 30, 2021, we had performance obligations secured by letters of credit and bank guarantees of $883 million related to various purchase and other commitments incident to the ordinary conduct of business.


Note 12—Derivatives and Financial Instruments

Derivative Instruments
We use financial and commodity-based derivative contracts to manage exposures to fluctuations in commodity prices, interest rates and foreign currency exchange rates, or to capture market opportunities. Because we do not apply hedge accounting for commodity derivative contracts, all realized and unrealized gains and losses from commodity derivative contracts are recognized in our consolidated statement of operations. Gains and losses from derivative contracts held for trading not directly related to our physical business are reported net in the “Other income” line item on our consolidated statement of operations. Cash flows from all our derivative activity for the periods presented appear in the operating section on our consolidated statement of cash flows.

Purchase and sales contracts with firm minimum notional volumes for commodities that are readily convertible to cash are recorded on our consolidated balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception, whereby the contracts are recorded on an accrual basis. We generally apply the normal purchases and normal sales exception to eligible crude oil, refined petroleum product, NGL, natural gas, renewable feedstock, and power commodity contracts to purchase or sell quantities we expect to use or sell in the normal course of business. All other derivative instruments are recorded at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 13—Fair Value Measurements.

Commodity Derivative Contracts—We sell into or receive supply from the worldwide crude oil, refined petroleum product, NGL, natural gas, renewable feedstock, and electric power markets, exposing our revenues, purchases, cost of operating activities and cash flows to fluctuations in the prices for these commodities. Generally, our policy is to remain exposed to the market prices of commodities; however, we use futures, forwards, swaps and options in various markets to balance physical systems, meet customer needs, manage price exposures on specific transactions, and do a limited amount of trading not directly related to our physical business, all of which may reduce our exposure to fluctuations in market prices. We also use the market knowledge gained from these activities to capture market opportunities such as moving physical commodities to more profitable locations, storing commodities to capture seasonal or time premiums, and blending commodities to capture quality upgrades.

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The following table indicates the consolidated balance sheet line items that include the fair values of commodity derivative assets and liabilities. The balances in the following table are presented on a gross basis, before the effects of counterparty and collateral netting. However, we have elected to present our commodity derivative assets and liabilities with the same counterparty on a net basis on our consolidated balance sheet when the legal right of offset exists.

  Millions of Dollars
  June 30, 2021 December 31, 2020
Commodity Derivatives Effect of Collateral Netting Net Carrying Value Presented on the Balance Sheet Commodity Derivatives Effect of Collateral Netting Net Carrying Value Presented on the Balance Sheet
  Assets Liabilities Assets Liabilities
Assets
Prepaid expenses and other current assets $ 18      18  13  —  —  13 
Other assets 6  (1)   5  (4) — 
Liabilities
Other accruals 1,703  (1,886) 152  (31) 665  (721) 46  (10)
Other liabilities and deferred credits   (1)   (1) —  —  —  — 
Total $ 1,727  (1,888) 152  (9) 683  (725) 46 

At June 30, 2021, and December 31, 2020, there was no material cash collateral received or paid that was not offset on our consolidated balance sheet.

The realized and unrealized gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of operations, were:
 
  Millions of Dollars
  Three Months Ended
June 30
Six Months Ended
June 30
  2021  2020  2021  2020 
Sales and other operating revenues $ (193) (180) (316) 499 
Other income 18  19 
Purchased crude oil and products (213) (124) (348) 317 
Net gain (loss) from commodity derivative activity $ (388) (298) (645) 825 


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The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from nonderivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward purchase and sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was more than 95% at June 30, 2021, and December 31, 2020.

  Open Position
Long / (Short)
  June 30
2021
December 31
2020
Commodity
Crude oil, refined petroleum products, NGL and renewable feedstocks (millions of barrels)
(35) (13)

Interest Rate Derivative Contracts—In 2016, we entered into interest rate swaps to hedge the variability of lease payments on our headquarters facility. These monthly lease payments vary based on monthly changes in the one-month London Interbank Offered Rate (LIBOR) and changes, if any, in our credit rating. The pay-fixed, receive-floating interest rate swaps have an aggregate notional value of $650 million and ended in April 2021. These swaps were designated as cash flow hedges. We reported the mark-to-market gains or losses on our interest rate swaps designated as highly effective cash flow hedges as a component of other comprehensive income (loss), and reclassified such gains and losses into earnings (loss) in the same period during which the hedged transaction affected earnings (loss). Net realized gains and losses from settlements of the swaps were immaterial for the three and six months ended June 30, 2021 and 2020.

Credit Risk from Derivative Instruments
The credit risk from our derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements, typically on a daily basis, until settled.

Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if our credit ratings fall below investment grade. Cash is the primary collateral in all contracts; however, many contracts also permit us to post letters of credit as collateral.

The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were immaterial at June 30, 2021, and December 31, 2020.


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Note 13—Fair Value Measurements

Recurring Fair Value Measurements
We carry certain assets and liabilities at fair value, which we measure at the reporting date using the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price), and disclose the quality of these fair values based on the valuation inputs used in these measurements under the following hierarchy:

Level 1: Fair value measured with unadjusted quoted prices from an active market for identical assets or liabilities.
Level 2: Fair value measured either with: (1) adjusted quoted prices from an active market for similar assets or liabilities; or (2) other valuation inputs that are directly or indirectly observable.
Level 3: Fair value measured with unobservable inputs that are significant to the measurement.

We classify the fair value of an asset or liability based on the significance of its observable or unobservable inputs to the measurement. However, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable.

We used the following methods and assumptions to estimate the fair value of financial instruments:

Cash and cash equivalents—The carrying amount reported on our consolidated balance sheet approximates fair value.
Accounts and notes receivable—The carrying amount reported on our consolidated balance sheet approximates fair value.
Derivative instruments—We fair value our exchange-traded contracts based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange or other exchanges, and classify them as Level 1 in the fair value hierarchy. When exchange-cleared contracts lack sufficient liquidity, or are valued using either adjusted exchange-provided prices or nonexchange quotes, we classify those contracts as Level 2.
Physical commodity forward purchase and sales contracts and over-the-counter (OTC) financial swaps are generally valued using forward quotes provided by brokers and price index developers, such as Platts and Oil Price Information Service. We corroborate these quotes with market data and classify the resulting fair values as Level 2. When forward market prices are not available, we estimate fair value using the forward price of a similar commodity, adjusted for the difference in quality or location. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, physical commodity purchase and sales contracts and OTC swaps are valued using internally developed methodologies that consider historical relationships among various commodities that result in management’s best estimate of fair value. We classify these contracts as Level 3. Physical and OTC commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines whether the options are classified as Level 2 or 3. We use a midmarket pricing convention (the midpoint between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
We determine the fair value of our interest rate swaps based on observable market valuations for interest rate swaps that have notional amounts, terms and pay and reset frequencies similar to ours.
Rabbi trust assets—These deferred compensation investments are measured at fair value using unadjusted quoted prices available from national securities exchanges and are therefore categorized as Level 1 in the fair value hierarchy.
Debt—The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on observable market prices.

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The following tables display the fair value hierarchy for our financial assets and liabilities either accounted for or disclosed at fair value on a recurring basis. These values are determined by treating each contract as the fundamental unit of account; therefore, derivative assets and liabilities with the same counterparty are shown on a gross basis in the hierarchy sections of these tables, before the effects of counterparty and collateral netting. The following tables also reflect the effect of netting derivative assets and liabilities with the same counterparty for which we have the legal right of offset and collateral netting.

The carrying values and fair values by hierarchy of our financial assets and liabilities, either carried or disclosed at fair value, including any effects of counterparty and collateral netting, were:

  Millions of Dollars
  June 30, 2021
Fair Value Hierarchy Total Fair Value of Gross Assets & Liabilities Effect of Counterparty Netting Effect of Collateral Netting Difference in Carrying Value and Fair Value Net Carrying Value Presented on the Balance Sheet
  Level 1 Level 2 Level 3
Commodity Derivative Assets
Exchange-cleared instruments $ 878  832    1,710  (1,704)     6 
Physical forward contracts   17    17        17 
Rabbi trust assets 155      155  N/A N/A   155 
$ 1,033  849    1,882  (1,704)     178 
Commodity Derivative Liabilities
Exchange-cleared instruments $ 1,040  816    1,856  (1,704) (152)    
Physical forward contracts   32    32        32 
Floating-rate debt   1,440    1,440  N/A N/A   1,440 
Fixed-rate debt, excluding finance leases
  15,546    15,546  N/A N/A (1,870) 13,676 
$ 1,040  17,834    18,874  (1,704) (152) (1,870) 15,148 


  Millions of Dollars
  December 31, 2020
Fair Value Hierarchy Total Fair Value of Gross Assets & Liabilities Effect of Counterparty Netting Effect of Collateral Netting Difference in Carrying Value and Fair Value Net Carrying Value Presented on the Balance Sheet
  Level 1 Level 2 Level 3
Commodity Derivative Assets
Exchange-cleared instruments $ 314  356  —  670  (669) —  — 
Physical forward contracts —  13  —  13  —  —  —  13 
Rabbi trust assets 143  —  —  143  N/A N/A —  143 
$ 457  369  —  826  (669) —  —  157 
Commodity Derivative Liabilities
Exchange-cleared instruments $ 351  364  —  715  (669) (46) —  — 
Physical forward contracts —  10  —  10  —  —  —  10 
Interest-rate derivatives —  —  —  —  — 
Floating-rate debt —  1,940  —  1,940  N/A N/A —  1,940 
Fixed-rate debt, excluding finance leases
—  15,597  —  15,597  N/A N/A (1,927) 13,670 
$ 351  17,914  —  18,265  (669) (46) (1,927) 15,623 


The rabbi trust assets are recorded in the “Investments and long-term receivables” line item, and floating-rate and fixed-rate debt are recorded in the “Short-term debt” and “Long-term debt” line items on our consolidated balance sheet. See Note 12—Derivatives and Financial Instruments, for information regarding where the assets and liabilities related to our commodity derivatives are recorded on our consolidated balance sheet.

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Nonrecurring Fair Value Measurements
Equity Investments
In the first quarter of 2021, Phillips 66 Partners wrote down the book value of its investment in Liberty to estimated fair value using a Level 3 nonrecurring fair value measurement. This nonrecurring measurement was based on the estimated fair value of Phillip 66 Partners’ share of the joint venture’s pipeline assets and net working capital. See Note 5—Investments, Loans and Long-Term Receivables, for more information regarding Phillips 66 Partners’ transfer of its ownership in Liberty to its co-venturer in April 2021.

In the first quarter of 2020, the nonrecurring fair value measurement used to record an impairment of our DCP Midstream investment was the fair value of our share of DCP Midstream’s limited partner interest in DCP Partners, which was estimated based on average market prices of DCP Partners common units for a multi-day trading period encompassing March 31, 2020. This valuation resulted in a Level 2 nonrecurring fair value measurement.

Goodwill
The carrying value of the Refining reporting unit’s goodwill was remeasured to fair value on a nonrecurring basis in the first quarter of 2020.  The fair value of the Refining reporting unit was calculated by weighting the results from the income approach and the market approach.  The income approach used a discounted cash flow model that included various observable and nonobservable inputs, such as prices, volumes, expenses, capital expenditures, discount rates and projected long-term growth rates and terminal values. The market approach used peer company enterprise values relative to current and future net income (loss) before net interest expense, income taxes, depreciation and amortization (EBITDA) projections to arrive at an average multiple.  This multiple was applied to the reporting unit’s current and projected EBITDA, with consideration for an estimated market participant acquisition premium.  The resulting Level 3 fair value estimate was less than the Refining reporting unit’s carrying value by an amount that exceeded the existing goodwill balance of the reporting unit.  As a result, the Refining reporting unit’s goodwill was impaired to zero. As part of our impairment analysis, the fair value of all reporting units was reconciled to the company’s market capitalization.

See Note 7—Impairments, for additional information on the above impairments.


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Note 14—Pension and Postretirement Plans

The components of net periodic benefit cost for the three and six months ended June 30, 2021 and 2020, were as follows:
  Millions of Dollars
  Pension Benefits Other Benefits
  2021 2020 2021  2020 
U.S. Int’l. U.S. Int’l.
Components of Net Periodic Benefit Cost
Three Months Ended June 30
Service cost $ 37  8  34  2 
Interest cost 20  4  24  1 
Expected return on plan assets (41) (14) (42) (12)   — 
Recognized net actuarial loss (gain) 14  6  15  (1) — 
Settlements 29    39  —    — 
Net periodic benefit cost* $ 59  4  70  2 
Six Months Ended June 30
Service cost $ 74  17  67  14  3 
Interest cost 40  9  49  11  2 
Expected return on plan assets (82) (29) (83) (25)   — 
Amortization of prior service credit     —  —  (1) (1)
Recognized net actuarial loss (gain) 29  12  29  (1) — 
Settlements 29    39  —    — 
Net periodic benefit cost* $ 90  9  101  3 
* Included in the “Operating expenses” and “Selling, general and administrative expenses” line items on our consolidated statement of operations.


During the six months ended June 30, 2021, we contributed $10 million to our U.S. pension and other postretirement benefit plans and $13 million to our international pension plans. We currently expect to make additional contributions of approximately $35 million to our U.S. pension and other postretirement benefit plans and $15 million to our international pension plans during the remainder of 2021.

During the six months ended June 30, 2021, our lump-sum benefit payments exceeded the sum of service and interest costs for the plan year for our U.S. qualified and non-qualified pension plans. As a result, we recognized a portion of prior actuarial losses, or pension settlement expense, of $27 million related to our U.S. qualified pension plan and $2 million related to our U.S. non-qualified pension plan. In conjunction with the recognition of pension settlement expense, the plan assets and projected benefit obligation of our U.S. qualified pension plan were remeasured as of June 30, 2021. At the remeasurement date, the net pension liability decreased by $210 million resulting in a corresponding increase to other comprehensive income for the second quarter of 2021. The decrease in the net pension liability was primarily due to an increase in the discount rate used to value the projected benefit obligation from 2.5% to 2.9% and an increase in the fair value of plan assets from December 31, 2020, to June 30, 2021.


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Note 15—Accumulated Other Comprehensive Loss

Changes in the balances of each component of accumulated other comprehensive loss were as follows:

  Millions of Dollars
  Defined Benefit Plans Foreign Currency Translation Hedging Accumulated Other Comprehensive Loss
December 31, 2020 $ (809) 25  (5) (789)
Other comprehensive income before reclassifications 181  4  1  186 
Amounts reclassified from accumulated other comprehensive loss
Defined benefit plans*
Amortization of net actuarial loss, prior service credit and settlements 53      53 
Foreign currency translation        
Hedging     1  1 
Net current period other comprehensive income 234  4  2  240 
June 30, 2021 $ (575) 29  (3) (549)
December 31, 2019 $ (656) (131) (1) (788)
Other comprehensive loss before reclassifications (223) (195) (8) (426)
Amounts reclassified from accumulated other comprehensive loss
Defined benefit plans*
Amortization of net actuarial loss, prior service credit and settlements 60  —  —  60 
Foreign currency translation —  —  —  — 
Hedging —  — 
Net current period other comprehensive loss (163) (195) (7) (365)
Other —  — 
June 30, 2020 $ (819) (321) (8) (1,148)
* Included in the computation of net periodic benefit cost. See Note 14—Pension and Postretirement Plans, for additional information.

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Note 16—Related Party Transactions

Significant transactions with related parties were:

  Millions of Dollars
  Three Months Ended
June 30
Six Months Ended
June 30
  2021  2020  2021  2020 
Operating revenues and other income (a) $ 959  353  1,729  887 
Purchases (b) 3,452  1,130  5,809  3,256 
Operating expenses and selling, general and administrative expenses (c)
67  55  135  106 

(a)We sold NGL, other petrochemical feedstocks and solvents to Chevron Phillips Chemical Company LLC (CPChem), NGL and certain feedstocks to DCP Midstream, gas oil and hydrogen feedstocks to Excel Paralubes (Excel), and refined petroleum products to several of our equity affiliates in the Marketing and Specialties segment, including OnCue and CF United. We also sold certain feedstocks and intermediate products to WRB and acted as an agent for WRB in supplying crude oil and other feedstocks for a fee. In addition, we charged several of our equity affiliates, including CPChem, for the use of common facilities, such as steam generators, waste and water treaters and warehouse facilities.

(b)We purchased crude oil, refined petroleum products, NGL and solvents from WRB. We also purchased natural gas and NGL from DCP Midstream and CPChem, as well as other feedstocks from various equity affiliates, for use in our refinery and fractionation processes. In addition, we purchased base oils and fuel products from Excel for use in our specialty and refining businesses. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline equity affiliates for transporting crude oil, refined petroleum products and NGL.

(c)We paid consignment fees to CF United, and utility and processing fees to various equity affiliates.


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Note 17—Segment Disclosures and Related Information

Our operating segments are:

1)Midstream—Provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, fractionation, processing, and marketing services, mainly in the United States. The Midstream segment includes our master limited partnership (MLP), Phillips 66 Partners, as well as our 50% equity investment in DCP Midstream.

2)Chemicals—Consists of our 50% equity investment in CPChem, which manufactures and markets petrochemicals and plastics on a worldwide basis.

3)Refining—Refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates and aviation fuels, at 13 refineries in the United States and Europe.

4)Marketing and Specialties—Purchases for resale and markets refined petroleum products, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products.

Corporate and Other includes general corporate overhead, interest expense, our investment in new technologies, and various other corporate activities. Corporate assets include all cash, cash equivalents and income tax-related assets.

Intersegment sales are at prices that we believe approximate market.

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Analysis of Results by Operating Segment

  Millions of Dollars
  Three Months Ended
June 30
Six Months Ended
June 30
  2021  2020  2021  2020 
Sales and Other Operating Revenues*
Midstream
Total sales $ 2,598  1,100  4,982  2,638 
Intersegment eliminations (709) (382) (1,336) (877)
Total Midstream 1,889  718  3,646  1,761 
Chemicals 1  2 
Refining
Total sales 18,680  7,352  33,733  21,133 
Intersegment eliminations (11,517) (4,437) (19,973) (12,070)
Total Refining 7,163  2,915  13,760  9,063 
Marketing and Specialties
Total sales 18,504  7,493  32,102  21,742 
Intersegment eliminations (560) (220) (893) (790)
Total Marketing and Specialties 17,944  7,273  31,209  20,952 
Corporate and Other 5  12  13 
Consolidated sales and other operating revenues $ 27,002  10,913  48,629  31,791 
* See Note 2—Sales and Other Operating Revenues, for further details on our disaggregated sales and other operating revenues.
Income (Loss) Before Income Taxes
Midstream $ 312  324  388  (378)
Chemicals 623  42  777  211 
Refining (729) (878) (1,769) (3,139)
Marketing and Specialties 476  286  766  799 
Corporate and Other (246) (219) (497) (416)
Consolidated income (loss) before income taxes $ 436  (445) (335) (2,923)


  Millions of Dollars
  June 30
2021
December 31
2020
Total Assets
Midstream $ 15,190  15,596 
Chemicals 6,454  6,183 
Refining 22,437  20,404 
Marketing and Specialties 8,672  7,180 
Corporate and Other 4,224  5,358 
Consolidated total assets $ 56,977  54,721 

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Note 18—Income Taxes

Our effective income tax rate for the three and six months ended June 30, 2021, was 14% and 21%, respectively, compared with 85% and 15%, respectively, for the corresponding periods of 2020. The decrease in our effective tax rate for the three months ended June 30, 2021, was primarily attributable to an adjustment required in the second quarter of 2020 related to a change in methodology used to calculate the provision for income taxes based on actual results and the ability provided under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to carry back a 2020 net operating loss to a year with a 35% income tax rate. Also contributing to the decrease were enacted income tax rate changes and income attributable to noncontrolling interests, partially offset by state income taxes. The increase in our effective tax rate for the six months ended June 30, 2021, was primarily due to the impact of a prior-year nondeductible goodwill impairment and enacted income tax rate changes, partially offset by the ability provided under the CARES Act to carry back a 2020 net operating loss to a year with a 35% income tax rate, income attributable to noncontrolling interests and foreign operations.

The effective income tax rate for the three months ended June 30, 2021, varied from the U.S. federal statutory income tax rate of 21%, primarily due to income attributable to noncontrolling interests, foreign operations and enacted income tax rate changes.

We received a U.S. federal income tax refund of $1.1 billion in the second quarter of 2021. An income tax receivable of $657 million is included in the “Accounts and notes receivable” line item on our consolidated balance sheet as of June 30, 2021.


Note 19—Phillips 66 Partners LP

Phillips 66 Partners, headquartered in Houston, Texas, is a publicly traded MLP formed in 2013 to own, operate, develop and acquire primarily fee-based midstream assets. Phillips 66 Partners’ operations currently consist of crude oil, refined petroleum product and NGL transportation, fractionation, processing, terminaling, and storage assets.

We consolidate Phillips 66 Partners because we determined it is a VIE of which we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as well as the ability to direct the activities that most significantly impact its economic performance. As a result of this consolidation, the public common and perpetual convertible preferred unitholders’ ownership interests in Phillips 66 Partners are reflected as noncontrolling interests in our financial statements. In June 2021, Phillips 66 Partners repurchased 368,528 of its outstanding perpetual convertible preferred units for $24 million in cash. Upon the repurchase, these preferred units were canceled and are no longer outstanding. At June 30, 2021, we owned 170 million Phillips 66 Partners common units, representing a 74% limited partner interest in Phillips 66 Partners, while the public owned a 26% limited partner interest and 13.5 million perpetual convertible preferred units.

The most significant assets of Phillips 66 Partners that are available to settle only its obligations, along with its most significant liabilities for which its creditors do not have recourse to Phillips 66’s general credit, were:

  Millions of Dollars
  June 30
2021
December 31
2020
Equity investments* $ 2,962  3,244 
Net properties, plants and equipment 3,653  3,639 
Short-term debt 465  465 
Long-term debt 3,445  3,444 
* Included in the “Investments and long-term receivables” line item on the Phillips 66 consolidated balance sheet.



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Gray Oak Pipeline, LLC was formed to develop and construct the Gray Oak Pipeline, which transports crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi, Texas, and the Sweeny area, including our Sweeny Refinery. Phillips 66 Partners has a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. In December 2018, a third party acquired a 35% interest in the holding company. Because the holding company’s sole asset was its ownership interest in Gray Oak Pipeline, LLC, which was considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in the holding company during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP at that time. The Gray Oak Pipeline commenced full operations in the second quarter of 2020, and the restrictions placed on the co-venturer were lifted on June 30, 2020, resulting in the recognition of the sale under GAAP. Accordingly, at June 30, 2020, the co-venturer’s 35% interest in the holding company was recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet, and the premium of $84 million previously paid by the co-venturer in 2019 was recharacterized from a long-term obligation to a gain in our consolidated statement of operations. For the six months ended June 30, 2020, the co-venturer contributed an aggregate of $61 million to the holding company to fund its portion of Gray Oak Pipeline, LLC’s cash calls. Phillips 66 Partners’ effective ownership interest in Gray Oak Pipeline, LLC is 42.25% , after considering the co-venturer’s 35% interest in the consolidated holding company.

See Note 5—Investments, Loans and Long-Term Receivables, for further discussion regarding Phillips 66 Partners’ investments in Dakota Access and ETCO, and Liberty.

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Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated, “the company,” “we,” “our,” “us” and “Phillips 66” are used in this report to refer to the businesses of Phillips 66 and its consolidated subsidiaries.

Management’s Discussion and Analysis is the company’s analysis of its financial performance, financial condition, and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. 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 often identify forward-looking statements, but the absence of these words does not mean a statement is not forward-looking. The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”

The terms “earnings” or “loss” as used in Management’s Discussion and Analysis refer to net income (loss) attributable to Phillips 66. The terms “results,” “before-tax income” or “before-tax loss” as used in Management’s Discussion and Analysis refer to income (loss) before income taxes.


EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT

Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. At June 30, 2021, we had total assets of $57 billion. Our common stock trades on the New York Stock Exchange under the symbol PSX.

Executive Overview
The Coronavirus Disease 2019 (COVID-19) pandemic continues to disrupt economic activities globally. Reduced demand for refined petroleum products resulted in low refining margins and decreased volumes through refineries and logistics infrastructure in 2020. Since the beginning of 2021, demand for refined petroleum products has started to recover following the administration of COVID-19 vaccines and the easing of pandemic restrictions. Consequently, refining margins have improved, as has volume throughput. However, refining profitability remains challenged. The depth and duration of the economic consequences of the COVID-19 pandemic remain uncertain and we continue to monitor our asset and investment portfolio. The consequences of the sustained disruption of economic activities by the pandemic may include additional asset impairments and portfolio rationalization in the future.

In the second quarter of 2021, we reported earnings of $296 million and generated cash from operating activities of $1.7 billion, including a U.S. federal income tax refund of $1.1 billion. We used available cash for capital expenditures and investments of $380 million, dividend payments on our common stock of $394 million, and an additional member loan to an equity affiliate of $90 million. We ended the second quarter of 2021 with $2.2 billion of cash and cash equivalents and approximately $5.7 billion of total committed capacity available under our revolving credit facilities.



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Business Environment
The Midstream segment includes our Transportation and NGL businesses. Our Transportation business contains fee-based operations that are not directly exposed to commodity price risk. Our NGL business contains both fee-based operations and operations that are directly impacted by NGL prices. The Midstream segment also includes our 50% equity investment in DCP Midstream, LLC (DCP Midstream). During the second quarter of 2021, NGL prices increased significantly, compared with the second quarter of 2020, due to strong demand as economic activities gradually recovered following the administration of COVID-19 vaccines and the easing of pandemic restrictions.

The Chemicals segment consists of our 50% equity investment in Chevron Phillips Chemical Company LLC (CPChem). The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on supply and demand, as well as cost factors. During the second quarter of 2021, the benchmark high-density polyethylene chain margin increased significantly, compared with the second quarter of 2020. This significant increase was due to continued strong demand and tight supplies driven by the operational impacts caused by the winter storms that occurred in the Central and Gulf Coast regions in the first quarter of 2021.

Our Refining segment results are driven by several factors, including refining margins, refinery throughput, feedstock costs, product yields, turnaround activity, and other operating costs. The price of U.S. benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $66.09 per barrel during the second quarter of 2021, compared with an average of $27.80 per barrel in the second quarter of 2020. Market crack spreads are used as indicators of refining margins and measure the difference between market prices for refined petroleum products and crude oil. During the second quarter of 2021, worldwide market crack spreads were higher than the second quarter of 2020. The increases in crude oil prices and market crack spreads were mainly driven by a significant increase in demand for refined petroleum products, as economic activities gradually recovered following the administration of COVID-19 vaccines and the easing of pandemic restrictions, as well as a tightening supply. In addition, in the second quarter of 2021, renewable identification number (RIN) costs increased significantly, compared with the corresponding period of 2020.

Results for our Marketing and Specialties (M&S) segment depend largely on marketing fuel and lubricant margins, and sales volumes of our refined petroleum and other specialty products. While M&S margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are influenced by the trend in spot prices for refined petroleum products. Generally speaking, a downward trend of spot prices has a favorable impact on marketing fuel margins, while an upward trend of spot prices has an unfavorable impact on marketing fuel margins. The global disruption caused by the COVID-19 pandemic resulted in reduced demand for refined petroleum and specialty products since March 2020. Following the administration of COVID-19 vaccines in 2021 and the easing of pandemic restrictions, the global economy has begun to recover, and demand for refined petroleum and specialty products has significantly improved, compared with the second quarter of 2020.
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RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three and six months ended June 30, 2021, is based on a comparison with the corresponding periods of 2020.


Consolidated Results

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

  Millions of Dollars
  Three Months Ended
June 30
Six Months Ended
June 30
  2021  2020  2021  2020 
Midstream $ 312  324  388  (378)
Chemicals 623  42  777  211 
Refining (729) (878) (1,769) (3,139)
Marketing and Specialties 476  286  766  799 
Corporate and Other (246) (219) (497) (416)
Income (loss) before income taxes 436  (445) (335)