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 |
| 2022 | | | 2021 | | | 2022 | | 2021 | |
Product Line and Services | | | | | | |
Refined petroleum products | $ | 39,410 | | | 21,876 | | | 68,792 | | 38,219 | |
Crude oil resales | 5,793 | | | 3,204 | | | 9,548 | | 6,393 | |
Natural gas liquids (NGL) | 3,255 | | | 1,943 | | | 6,485 | | 3,717 | |
Services and other* | 119 | | | (21) | | | (69) | | 300 | |
Consolidated sales and other operating revenues | $ | 48,577 | | | 27,002 | | | 84,756 | | 48,629 | |
| | | | | | |
Geographic Location** | | | | | | |
United States | $ | 38,899 | | | 21,297 | | | 67,784 | | 37,909 | |
United Kingdom | 5,043 | | | 2,835 | | | 8,683 | | 5,122 | |
Germany | 1,793 | | | 1,038 | | | 3,175 | | 1,855 | |
Other foreign countries | 2,842 | | | 1,832 | | | 5,114 | | 3,743 | |
Consolidated sales and other operating revenues | $ | 48,577 | | | 27,002 | | | 84,756 | | 48,629 | |
* Includes derivatives-related activities. See Note 11—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. |
Contract-Related Assets and Liabilities
At June 30, 2022, and December 31, 2021, receivables from contracts with customers were $11,043 million and $6,140 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, 2022, and December 31, 2021, our asset balances related to such payments were $480 million and $466 million, respectively.
Our contract liabilities represent advances from our customers prior to product or service delivery. At June 30, 2022, and December 31, 2021, contract liabilities were not material.
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 an unsatisfied performance obligation. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing. At June 30, 2022, 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. In addition, when events and circumstances arise that may affect certain counterparties’ abilities to fulfill their obligations, such as Coronavirus Disease 2019 (COVID-19), we enhance our credit monitoring, and we may seek collateral to support some transactions or require prepayments from higher-risk counterparties.
At June 30, 2022, and December 31, 2021, we reported $13,393 million and $7,470 million of accounts and notes receivable, respectively, net of allowances of $62 million and $44 million, respectively. Based on an aging analysis at June 30, 2022, 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 9—Guarantees, and Note 10—Contingencies and Commitments, for more information on these off-balance sheet exposures.
Note 4—Inventories
Inventories consisted of the following:
| | | | | | | | | | | |
| Millions of Dollars |
| June 30 2022 | | December 31 2021 |
| | | |
Crude oil and petroleum products | $ | 4,223 | | | 3,024 | |
Materials and supplies | 357 | | | 370 | |
| $ | 4,580 | | | 3,394 | |
Inventories valued on the last-in, first-out (LIFO) basis totaled $4,005 million and $2,792 million at June 30, 2022, and December 31, 2021, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $10.5 billion and $5.7 billion at June 30, 2022, and December 31, 2021, 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 increased our net income by $3 million and $43 million in the three and six months ended June 30, 2022, respectively. 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.
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 brought by the Standing Rock Sioux Tribe ordered the U.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) addressing an easement under Lake Oahe in North Dakota. The court later vacated the easement. Although the easement is vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS. In May 2021, the Standing Rock Sioux Tribe’s request for an injunction to force a shutdown of the pipeline while the EIS is being prepared was denied. In June 2021, the trial court dismissed the litigation entirely. Once the EIS is completed, new litigation or challenges to the EIS could be filed.
In September 2021, Dakota Access filed a writ of certiorari, requesting the U.S. Supreme Court to review the lower court’s decision to order the EIS and vacate the easement. In February 2022, the writ was denied, and the requirement to prepare the EIS stands. Completion of the EIS was expected in the fall of 2022, but now may be delayed as the USACE engages with the Standing Rock Sioux Tribe on their reasons for withdrawing as a cooperating agency with respect to preparation of the EIS.
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 June 30, 2022, the aggregate principal amount outstanding of Dakota Access’ senior unsecured notes was $1.85 billion.
In conjunction with the notes offering, Phillips 66 Partners, now a wholly owned subsidiary of Phillips 66, and its co-venturers in Dakota Access also provided a Contingent Equity Contribution Undertaking (CECU). Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the above-mentioned ongoing litigation. At June 30, 2022, our 25% share of the maximum potential equity contributions under the CECU was approximately $467 million.
If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we could be required to support our 25% share of the ongoing expenses, including scheduled interest payments on the notes of approximately $20 million annually, in addition to the potential obligations under the CECU at June 30, 2022.
At June 30, 2022, the aggregate book value of our investments in Dakota Access and ETCO was $704 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, 2022, our maximum exposure to loss was comprised of our $280 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, 2022, our maximum exposure to loss was $201 million, which represented the book value of our investment in OnCue of $129 million and guaranteed debt obligations of $72 million.
Liberty Pipeline LLC (Liberty)
In the first quarter of 2021, Phillips 66 Partners decided to exit the Liberty Pipeline project, which resulted in a $198 million before-tax impairment in our Midstream segment. 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 12—Fair Value Measurements, for additional information regarding this impairment and the techniques used to determine the fair value of this investment. 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.
Other Investments
In September 2021, we acquired 78 million ordinary shares, representing a 16% ownership interest, in NOVONIX Limited (NOVONIX), which are traded on the Australian Securities Exchange. NOVONIX is a Brisbane, Australia-based company that develops technology and supplies materials for lithium-ion batteries. Since we do not have significant influence over the operating and financial policies of NOVONIX and the shares we own have a readily determinable fair value, our investment is recorded at fair value at the end of each reporting period. The fair value of our investment is recorded in the “Investments and long-term receivables” line item on our consolidated balance sheet. The change in the fair value of our investment due to fluctuations in NOVONIX’s stock price, or unrealized investment losses, is recorded in the “Other income (loss)” line item of our consolidated statement of operations, while changes due to foreign currency fluctuations are recorded in the “Foreign currency transaction (gains) losses” line item on our consolidated statement of operations. The fair value of our investment in NOVONIX was $122 million at June 30, 2022. The fair value of our investment in NOVONIX declined by $240 million and $398 million during the three and six months ended June 30, 2022, respectively, reflecting unrealized investment losses of $221 million and $390 million and unrealized foreign currency losses of $19 million and $8 million, respectively. See Note 12—Fair Value Measurements, for additional information regarding the recurring fair value measurement of our investment in NOVONIX.
Related Party Loans
We and our co-venturer have provided member loans to WRB Refining LP (WRB). In April 2022, we and our co-venturer provided additional member loans to WRB; our 50% share was $75 million. In June 2022, WRB repaid a portion of the outstanding member loan balance; our 50% share was $100 million. At June 30, 2022, our 50% share of the outstanding member loan balance, including accrued interest, was $570 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, 2022 | | December 31, 2021 |
| Gross PP&E | | Accum. D&A | | Net PP&E | | Gross PP&E | | Accum. D&A | | Net PP&E |
| | | | | | | | | | | |
Midstream | $ | 13,367 | | | 3,861 | | | 9,506 | | | 12,524 | | | 3,064 | | | 9,460 | |
Chemicals | — | | | — | | | — | | | — | | | — | | | — | |
Refining | 23,223 | | | 12,043 | | | 11,180 | | | 23,878 | | | 12,517 | | | 11,361 | |
Marketing and Specialties | 1,736 | | | 1,012 | | | 724 | | | 1,819 | | | 1,035 | | | 784 | |
Corporate and Other | 1,600 | | | 781 | | | 819 | | | 1,576 | | | 746 | | | 830 | |
| $ | 39,926 | | | 17,697 | | | 22,229 | | | 39,797 | | | 17,362 | | | 22,435 | |
Note 7—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 |
| 2022 | | 2021 | | 2022 | 2021 |
| Basic | Diluted | | Basic | Diluted | | Basic | Diluted | Basic | Diluted |
Amounts Attributed to Phillips 66 Common Stockholders (millions): | | | | | | | | | | |
Net income (loss) attributable to Phillips 66 | $ | 3,167 | | 3,167 | | | 296 | | 296 | | | 3,749 | | 3,749 | | (358) | | (358) | |
Income allocated to participating securities | (3) | | — | | | (3) | | (3) | | | (5) | | — | | (6) | | (6) | |
Premium paid for the repurchase of noncontrolling interests | — | | — | | | (2) | | (2) | | | — | | — | | (2) | | (2) | |
Net income (loss) available to common stockholders | $ | 3,164 | | 3,167 | | | 291 | | 291 | | | 3,744 | | 3,749 | | (366) | | (366) | |
| | | | | | | | | | |
Weighted-average common shares outstanding (thousands): | 481,105 | | 483,088 | | | 437,909 | | 439,940 | | | 464,249 | | 466,286 | | 437,639 | | 439,722 | |
Effect of share-based compensation | 1,983 | | 1,947 | | | 2,031 | | 456 | | | 2,037 | | 2,052 | | 2,083 | | — | |
Weighted-average common shares outstanding—EPS | 483,088 | | 485,035 | | | 439,940 | | 440,396 | | | 466,286 | | 468,338 | | 439,722 | | 439,722 | |
| | | | | | | | | | |
Earnings (Loss) Per Share of Common Stock (dollars) | $ | 6.55 | | 6.53 | | | 0.66 | | 0.66 | | | 8.03 | | 8.00 | | (0.83) | | (0.83) | |
On March 9, 2022, we completed the merger between us and Phillips 66 Partners. The merger resulted in the acquisition of all limited partnership interests in Phillips 66 Partners not already owned by us in exchange for approximately 42 million shares of Phillips 66 common stock issued from treasury stock. See Note 18—Phillips 66 Partners LP, for additional information on the merger transaction.
Note 8—Debt
Short-term and long-term debt consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| June 30, 2022 | | December 31, 2021 |
| Phillips 66 | Phillips 66 Company | Phillips 66 Partners | Total | | Phillips 66 | | Phillips 66 Partners | Total |
| | | | | | | | | |
4.300% Senior Notes due April 2022 | $ | — | | — | | — | | — | | | 1,000 | | | — | | 1,000 | |
3.700% Senior Notes due April 2023 | 500 | | — | | — | | 500 | | | 500 | | | — | | 500 | |
0.900% Senior Notes due February 2024 | 800 | | — | | — | | 800 | | | 800 | | | — | | 800 | |
2.450% Senior Notes due December 2024 | — | | 277 | | 23 | | 300 | | | — | | | 300 | | 300 | |
3.605% Senior Notes due February 2025 | — | | 441 | | 59 | | 500 | | | — | | | 500 | | 500 | |
3.850% Senior Notes due April 2025 | 650 | | — | | — | | 650 | | | 650 | | | — | | 650 | |
1.300% Senior Notes due February 2026 | 500 | | — | | — | | 500 | | | 500 | | | — | | 500 | |
3.550% Senior Notes due October 2026 | — | | 458 | | 42 | | 500 | | | — | | | 500 | | 500 | |
3.750% Senior Notes due March 2028 | — | | 427 | | 73 | | 500 | | | — | | | 500 | | 500 | |
3.900% Senior Notes due March 2028 | 800 | | — | | — | | 800 | | | 800 | | | — | | 800 | |
3.150% Senior Notes due December 2029 | — | | 570 | | 30 | | 600 | | | — | | | 600 | | 600 | |
2.150% Senior Notes due December 2030 | 850 | | — | | — | | 850 | | | 850 | | | — | | 850 | |
4.650% Senior Notes due November 2034 | 1,000 | | — | | — | | 1,000 | | | 1,000 | | | — | | 1,000 | |
5.875% Senior Notes due May 2042 | 1,500 | | — | | — | | 1,500 | | | 1,500 | | | — | | 1,500 | |
4.875% Senior Notes due November 2044 | 1,700 | | — | | — | | 1,700 | | | 1,700 | | | — | | 1,700 | |
4.680% Senior Notes due February 2045 | — | | 442 | | 8 | | 450 | | | — | | | 450 | | 450 | |
4.900% Senior Notes due October 2046 | — | | 605 | | 20 | | 625 | | | — | | | 625 | | 625 | |
3.300% Senior Notes due March 2052 | 1,000 | | — | | — | | 1,000 | | | 1,000 | | | — | | 1,000 | |
Floating Rate Term Loan due April 2022 at 0.978% at year-end 2021 | — | | — | | — | | — | | | — | | | 450 | | 450 | |
Floating Rate Advance Term Loan due December 2034 at 0.831% and 0.699% at June 30, 2022 and year-end 2021, respectively—related party | 25 | | — | | — | | 25 | | | 25 | | | — | | 25 | |
Other | 1 | | — | | — | | 1 | | | 1 | | | — | | 1 | |
Debt at face value | 9,326 | | 3,220 | | 255 | | 12,801 | | | 10,326 | | | 3,925 | | 14,251 | |
Finance leases | | | | 256 | | | | | | 290 | |
Software obligations | | | | 19 | | | | | | 16 | |
Net unamortized discounts and debt issuance costs | | | | (107) | | | | | | (109) | |
Total debt | | | | 12,969 | | | | | | 14,448 | |
Short-term debt | | | | (526) | | | | | | (1,489) | |
Long-term debt | | | | $ | 12,443 | | | | | | 12,959 | |
2022 Activities
Revolving Credit Facilities
On June 23, 2022, we entered into a new $5 billion revolving credit facility (the Facility) with Phillips 66 Company as the borrower and Phillips 66 as the guarantor and a scheduled maturity date of June 22, 2027. The Facility replaced our previous $5 billion revolving credit facility with Phillips 66 as the borrower and Phillips 66 Company as the guarantor. The Facility contains usual and customary covenants that are similar to the previous revolving credit facility, including a maximum consolidated net debt-to-capitalization ratio of 65% as of the last day of each fiscal quarter. We have the option to increase the overall capacity to $6 billion, subject to certain conditions. We also have the option to extend the scheduled maturity of the Facility for up to two additional one-year terms, subject to, among other things, the consent of the lenders holding the majority of the commitments and of each lender extending its commitment. Outstanding borrowings under the Facility bear interest at either (a) the Adjusted Term Secured Overnight Financing Rate (as described in the Facility) in effect from time to time plus the applicable margin; or (b) the reference rate (as described in the Facility) plus the applicable margin. The Facility also provides for customary fees, including commitment fees. The pricing levels for the commitment fees and interest-rate margins are determined based on the ratings in effect for our senior unsecured long-term debt from time to time. We may at any time prepay outstanding borrowings, in whole or in part, without premium or penalty. At June 30, 2022, no amount has been drawn under the Facility.
In connection with entering into the Facility, we terminated Phillips 66 Partners’ $750 million revolving credit facility.
Debt Exchange
On May 5, 2022, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, completed offers to exchange (the Exchange Offers) all validly tendered notes of seven different series of notes issued by Phillips 66 Partners (collectively, the Old Notes), with an aggregate principal amount of approximately $3.5 billion, for notes issued by Phillips 66 Company (collectively, the New Notes). The New Notes are fully and unconditionally guaranteed by Phillips 66 and rank equally with Phillips 66 Company’s other unsecured and unsubordinated indebtedness, and the guarantees rank equally with Phillips 66’s other unsecured and unsubordinated indebtedness.
Old Notes with an aggregate principal amount of approximately $3.2 billion were tendered in the Exchange Offers. The New Notes have the same interest rates, interest payment dates and maturity dates as the Old Notes. Holders that validly tendered before the end of the early participation period on April 19, 2022 (the Early Participation Date), received New Notes with an aggregate principal amount equivalent to the Old Notes, while holders that validly tendered after the Early Participation Date, but before the Expiration Date, received New Notes with an aggregate principal amount 3% less than the Old Notes. Substantially all of the Old Notes exchanged were tendered during the Early Participation Period.
Debt Repayments
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.
2021 Activities
In April 2021, Phillips 66 Partners entered into a $450 million term loan agreement with a one-year term and borrowed the full amount. The term loan agreement was repaid upon maturity in April 2022 without premium or penalty.
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 upon maturity.
Note 9—Guarantees
At June 30, 2022, 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, 2022. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling $221 million. These leases have remaining terms of up to ten years.
Guarantees of Joint Venture 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, 2022, we also had other guarantees outstanding primarily for our portion of certain joint venture debt, which have remaining terms of up to three years. The maximum potential future exposures under these guarantees were approximately $86 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, 2022, and December 31, 2021, the carrying amount of recorded indemnifications was $142 million and $144 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, 2022, and December 31, 2021, environmental accruals for known contamination of $105 million and $106 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 10—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.
Note 10—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, 2022, our total environmental accruals were $430 million, compared with $436 million at December 31, 2021. 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.
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, 2022, we had performance obligations secured by letters of credit and bank guarantees of $2,374 million related to various purchase and other commitments incident to the ordinary conduct of business.
Note 11—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 12—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.
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, 2022 | | December 31, 2021 |
| 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 | $ | 2,371 | | (2,115) | | — | | 256 | | | | 99 | | (20) | | — | | 79 | |
Other assets | 37 | | (4) | | — | | 33 | | | | 3 | | (1) | | — | | 2 | |
Liabilities | | | | | | | | | | |
Other accruals | 1,767 | | (1,958) | | 102 | | (89) | | | | 758 | | (855) | | 49 | | (48) | |
Other liabilities and deferred credits | — | | (5) | | 4 | | (1) | | | | — | | (1) | | — | | (1) | |
Total | $ | 4,175 | | (4,082) | | 106 | | 199 | | | | 860 | | (877) | | 49 | | 32 | |
At June 30, 2022, and December 31, 2021, 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 |
| 2022 | | | 2021 | | | 2022 | | 2021 | |
| | | | | | |
Sales and other operating revenues | $ | (135) | | | (193) | | | (555) | | (316) | |
Other income | 37 | | | 18 | | | 62 | | 19 | |
Purchased crude oil and products | (253) | | | (213) | | | (481) | | (348) | |
Net loss from commodity derivative activity | $ | (351) | | | (388) | | | (974) | | (645) | |
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, 2022, and December 31, 2021.
| | | | | | | | | | | |
| Open Position Long / (Short) |
| June 30 2022 | | December 31 2021 |
Commodity | | | |
Crude oil, refined petroleum products, NGL and renewable feedstocks (millions of barrels) | (16) | | | (18) | |
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, 2022, and December 31, 2021.
Note 12—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—The fair value of our exchange-traded contracts is based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange or other exchanges, and is reported 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 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.
•Investment in NOVONIX—Our investment in NOVONIX is measured at fair value using unadjusted quoted prices available from the Australian Securities Exchange and is 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.
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, 2022 |
| 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 | $ | 2,623 | | | 1,457 | | | — | | | 4,080 | | (3,886) | | — | | — | | 194 | | |
| | | | | | | | | | | | |
Physical forward contracts | — | | | 95 | | | — | | | 95 | | — | | — | | — | | 95 | | |
| | | | | | | | | | | | |
Rabbi trust assets | 129 | | | — | | | — | | | 129 | | N/A | N/A | — | | 129 | | |
Investment in NOVONIX | 122 | | | — | | | — | | | 122 | | N/A | N/A | — | | 122 | | |
| $ | 2,874 | | | 1,552 | | | — | | | 4,426 | | (3,886) | | — | | — | | 540 | | |
| | | | | | | | | | | | |
Commodity Derivative Liabilities | | | | | | | | | | | | |
Exchange-cleared instruments | $ | 2,432 | | | 1,561 | | | — | | | 3,993 | | (3,886) | | (106) | | — | | 1 | | |
| | | | | | | | | | | | |
Physical forward contracts | — | | | 89 | | | — | | | 89 | | — | | — | | — | | 89 | | |
| | | | | | | | | | | | |
Floating-rate debt | — | | | 25 | | | — | | | 25 | | N/A | N/A | — | | 25 | | |
Fixed-rate debt, excluding finance leases and software obligations | — | | | 12,055 | | | — | | | 12,055 | | N/A | N/A | 614 | | 12,669 | | |
| $ | 2,432 | | | 13,730 | | | — | | | 16,162 | | (3,886) | | (106) | | 614 | | 12,784 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| December 31, 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 | $ | 419 | | | 368 | | | — | | | 787 | | (779) | | — | | — | | 8 | | |
| | | | | | | | | | | | |
Physical forward contracts | — | | | 73 | | | — | | | 73 | | — | | — | | — | | 73 | | |
| | | | | | | | | | | | |
Rabbi trust assets | 158 | | | — | | | — | | | 158 | | N/A | N/A | — | | 158 | | |
Investment in NOVONIX | 520 | | | — | | | — | | | 520 | | N/A | N/A | — | | 520 | | |
| $ | 1,097 | | | 441 | | | — | | | 1,538 | | (779) | | — | | — | | 759 | | |
| | | | | | | | | | | | |
Commodity Derivative Liabilities | | | | | | | | | | | | |
Exchange-cleared instruments | $ | 463 | | | 362 | | | — | | | 825 | | (779) | | (49) | | — | | (3) | | |
OTC instruments | — | | | 1 | | | — | | | 1 | | — | | — | | — | | 1 | | |
Physical forward contracts | — | | | 51 | | | — | | | 51 | | — | | — | | — | | 51 | | |
| | | | | | | | | | | | |
Floating-rate debt | — | | | 475 | | | — | | | 475 | | N/A | N/A | — | | 475 | | |
Fixed-rate debt, excluding finance leases and software obligations | — | | | 15,353 | | | — | | | 15,353 | | N/A | N/A | (1,686) | | 13,667 | | |
| $ | 463 | | | 16,242 | | | — | | | 16,705 | | (779) | | (49) | | (1,686) | | 14,191 | | |
The rabbi trust assets and investment in NOVONIX 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 11—Derivatives and Financial Instruments, for information regarding where the assets and liabilities related to our commodity derivatives are recorded on our consolidated balance sheet.
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 Phillips 66 Partners’ share of the joint venture’s pipeline assets and net working capital at March 31, 2021. 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.
Note 13—Pension and Postretirement Plans
The components of net periodic benefit cost for the three and six months ended June 30, 2022 and 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Pension Benefits | | Other Benefits |
| 2022 | | 2021 | | 2022 | | | 2021 | |
| U.S. | | Int’l. | | U.S. | | Int’l. | | | | |
Components of Net Periodic Benefit Cost | | | | | | | | | | | |
Three Months Ended June 30 | | | | | | | | | | | |
Service cost | $ | 35 | | | 7 | | | 37 | | | 8 | | | 1 | | | 2 | |
Interest cost | 21 | | | 5 | | | 20 | | | 4 | | | 2 | | | 1 | |
Expected return on plan assets | (39) | | | (15) | | | (41) | | | (14) | | | — | | | — | |
Amortization of prior service credit | — | | | — | | | — | | | — | | | (1) | | | — | |
Amortization of net actuarial loss (gain) | 6 | | | 3 | | | 14 | | | 6 | | | — | | | (1) | |
Settlements | 24 | | | — | | | 29 | | | — | | | — | | | — | |
Net periodic benefit cost* | $ | 47 | | | — | | | 59 | | | 4 | | | 2 | | | 2 | |
| | | | | | | | | | | |
Six Months Ended June 30 | | | | | | | | | | | |
Service cost | $ | 70 | | | 15 | | | 74 | | | 17 | | | 2 | | | 3 | |
Interest cost | 42 | | | 11 | | | 40 | | | 9 | | | 3 | | | 2 | |
Expected return on plan assets | (78) | | | (31) | | | (82) | | | (29) | | | — | | | — | |
Amortization of prior service credit | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Recognized net actuarial loss (gain) | 12 | | | 6 | | | 29 | | | 12 | | | (1) | | | (1) | |
Settlements | 25 | | | — | | | 29 | | | — | | | — | | | — | |
Net periodic benefit cost* | $ | 71 | | | 1 | | | 90 | | | 9 | | | 3 | | | 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, 2022, we contributed $91 million to our U.S. pension and other postretirement benefit plans and $12 million to our international pension plans. We currently expect to make additional contributions of approximately $45 million to our U.S. pension and other postretirement benefit plans and approximately $12 million to our international pension plans during the remainder of 2022.
Note 14—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, 2021 | $ | (398) | | | (45) | | | (2) | | | (445) | |
Other comprehensive loss before reclassifications | (5) | | | (324) | | | — | | | (329) | |
Amounts reclassified from accumulated other comprehensive loss | | | | | | | |
Defined benefit plans* | | | | | | | |
Amortization of net actuarial loss, prior service credit and settlements | 41 | | | — | | | — | | | 41 | |
Foreign currency translation | — | | | — | | | — | | | — | |
Hedging | — | | | — | | | — | | | — | |
Net current period other comprehensive income (loss) | 36 | | | (324) | | | — | | | (288) | |
June 30, 2022 | $ | (362) | | | (369) | | | (2) | | | (733) | |
| | | | | | | |
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) | |
* Included in the computation of net periodic benefit cost. See Note 13—Pension and Postretirement Plans, for additional information. |
Note 15—Related Party Transactions
Significant transactions with related parties were:
| | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2022 | | | 2021 | | | 2022 | | 2021 | |
| | | | | | |
Operating revenues and other income (a) | $ | 1,975 | | | 959 | | | 3,315 | | 1,729 | |
Purchases (b) | 6,203 | | | 3,452 | | | 10,884 | | 5,809 | |
Operating expenses and selling, general and administrative expenses (c) | 70 | | | 67 | | | 140 | | 135 | |
| | | | | | |
(a)We sold NGL, other petrochemical feedstocks and solvents to Chevron Phillips Chemical Company LLC (CPChem), NGL and certain feedstocks to DCP Midstream, LLC (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.
Note 16—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 50% equity investment in DCP Midstream and our 16% investment in NOVONIX. On March 9, 2022, we completed the merger between us and Phillips 66 Partners. See Note 18—Phillips 66 Partners LP, for additional information on the merger transaction.
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, as well as renewable fuels, at 12 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.
Analysis of Results by Operating Segment
| | | | | | | | | | | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2022 | | | 2021 | | | 2022 | | | 2021 | |
Sales and Other Operating Revenues* | | | | | | | |
Midstream | | | | | | | |
Total sales | $ | 3,821 | | | 2,598 | | | 7,903 | | | 4,982 | |
Intersegment eliminations | (716) | | | (709) | | | (1,602) | | | (1,336) | |
Total Midstream | 3,105 | | | 1,889 | | | 6,301 | | | 3,646 | |
Chemicals | — | | | 1 | | | — | | | 2 | |
Refining | | | | | | | |
Total sales | 32,908 | | | 18,680 | | | 57,001 | | | 33,733 | |
Intersegment eliminations | (20,898) | | | (11,517) | | | (36,489) | | | (19,973) | |
Total Refining | 12,010 | | | 7,163 | | | 20,512 | | | 13,760 | |
Marketing and Specialties | | | | | | | |
Total sales | 34,434 | | | 18,504 | | | 59,729 | | | 32,102 | |
Intersegment eliminations | (979) | | | (560) | | | (1,798) | | | (893) | |
Total Marketing and Specialties | 33,455 | | | 17,944 | | | 57,931 | | | 31,209 | |
Corporate and Other | 7 | | | 5 | | | 12 | | | 12 | |
Consolidated sales and other operating revenues | $ | 48,577 | | | 27,002 | | | 84,756 | | | 48,629 | |
* 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 | $ | 292 | | | 312 | | | 534 | | | 388 | |
Chemicals | 273 | | | 623 | | | 669 | | | 777 | |
Refining | 3,036 | | | (729) | | | 3,159 | | | (1,769) | |
Marketing and Specialties | 765 | | | 476 | | | 1,081 | | | 766 | |
Corporate and Other | (260) | | | (246) | | | (509) | | | (497) | |
Consolidated income (loss) before income taxes | $ | 4,106 | | | 436 | | | 4,934 | | | (335) | |
| | | | | | | | | | | |
| Millions of Dollars |
| June 30 2022 | | December 31 2021 |
Total Assets | | | |
Midstream | $ | 16,239 | | | 15,932 | |
Chemicals | 6,597 | | | 6,453 | |
Refining | 23,441 | | | 19,952 | |
Marketing and Specialties | 12,146 | | | 8,505 | |
Corporate and Other | 4,389 | | | 4,752 | |
Consolidated total assets | $ | 62,812 | | | 55,594 | |
Note 17—Income Taxes
Our effective income tax rate for the three and six months ended June 30, 2022, was 23% and 22%, compared with 14% and 21%, respectively, for the corresponding periods of 2021. The increase in our effective tax rate for the three and six months ended June 30, 2022, was primarily attributable to the impact of foreign operations, the elimination of the favorable noncontrolling interest impact as a result of completing the merger between us and Phillips 66 Partners on March 9, 2022, and the net benefit to the 2021 income tax rate from enacted income tax rate changes.
The effective tax rate for the three and six months ended June 30, 2022, varied from the U.S. federal statutory income tax rate primarily due to state income taxes, partially offset by the impact of foreign operations.
Note 18—Phillips 66 Partners LP
On March 9, 2022, we completed the merger between us and Phillips 66 Partners. The merger resulted in the acquisition of all limited partnership interests in Phillips 66 Partners not already owned by us in exchange for approximately 42 million shares of Phillips 66 common stock issued from treasury stock. Phillips 66 Partners common unitholders received 0.50 shares of Phillips 66 common stock for each outstanding Phillips 66 Partners common unit. Phillips 66 Partners’ perpetual convertible preferred units were converted into common units at a premium to the original issuance price prior to being exchanged for Phillips 66 common stock. Upon closing, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66 and its common units are no longer publicly traded.
The merger was accounted for as an equity transaction and resulted in decreases to “Treasury stock” of $3,380 million, “Noncontrolling interests” of $2,163 million, “Capital in excess of par” of $901 million, “Deferred income taxes” of $323 million, and “Cash and cash equivalents” of $2 million, and an increase to “Other accruals” of $5 million on our consolidated balance sheet.
Note 19—Restructuring
In April 2022, we announced that we are progressing a multi-year business transformation focused on enterprise-wide opportunities to improve our cost structure. For the three months ended June 30, 2022, we recorded restructuring costs totaling $25 million associated with our business transformation. These costs are recorded in the “Selling, general and administrative expenses” line item on our consolidated statement of operations and are reported in our Corporate segment.