# Phillips 66 (PSX) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Phillips 66's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1534701/000153470123000053/psx-20221231.htm Accession: 0001534701-23-000053 Filing date: 2023-02-22 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/PSX/ All MD&A years: /company/PSX/mda/ Previous year: /company/PSX/mda/fy2021/ (FY 2021) Next year: /company/PSX/mda/fy2023/ (FY 2023) Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis is the company’s analysis of its financial performance and financial condition, and of significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The terms “earnings” and “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 a diversified energy company with Midstream, Chemicals, Refining, and Marketing and Specialties (M&S) operating segments. At December 31, 2022, we had total assets of $76.4 billion. Executive Overview We reported earnings of $11 billion and generated $10.8 billion in cash from operating activities for the full year of 2022. During 2022, we used available cash to pay down $2.4 billion in debt, fund capital expenditures and investments of $2.2 billion, pay dividends on our common stock of $1.8 billion and repurchase $1.5 billion of our common stock. We ended 2022 with $6.1 billion of cash and cash equivalents and approximately $6.7 billion of total committed capacity available under our credit facilities. DCP Midstream, LLC (DCP Midstream) and Gray Oak Holdings LLC (Gray Oak Holdings) Merger On August 17, 2022, we announced a realignment of our economic and governance interests in DCP Midstream, LP (DCP LP) and Gray Oak Pipeline, LLC (Gray Oak Pipeline) resulting from the merger of DCP Midstream and Gray Oak Holdings. In connection with the merger, we were delegated DCP Midstream’s governance rights over DCP LP and its general partner entities, referred to as DCP Midstream Class A Segment. Additionally, Enbridge Inc., our co-venturer, was delegated governance rights over Gray Oak Pipeline, referred to as DCP Midstream Class B Segment. In connection with the merger of DCP Midstream and Gray Oak Holdings, our NGL and Other business includes DCP Midstream Class A Segment, DCP Sand Hills Pipeline, LLC (DCP Sand Hills) and DCP Southern Hills Pipeline, LLC (DCP Southern Hills). Prior to August 18, 2022, our investments in DCP Midstream, DCP Sand Hills and DCP Southern Hills were accounted for using the equity method. We account for our remaining investment in Gray Oak Pipeline, now held through DCP Midstream Class B Segment, using the equity method. See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings. 40 Table of Contents Index to Financial Statements DCP LP Public Common Unit Acquisition Agreement On January 5, 2023, we entered into a definitive agreement with DCP LP, its subsidiaries and its general partner entities, pursuant to which one of our wholly owned subsidiaries will merge with and into DCP LP, with DCP LP surviving as a Delaware limited partnership. Under the terms of the agreement, at the effective time of the merger, each publicly held common unit representing a limited partner interest in DCP LP (other than the common units owned by DCP LP and DCP Midstream GP, LP) issued and outstanding as of immediately prior to the effective time will be converted into the right to receive $41.75 per common unit in cash, without interest. The merger will increase our economic interest in DCP LP from 43.3% to 86.8%. The transaction is expected to close in the second quarter of 2023, subject to customary closing conditions. The transaction was unanimously approved by the board of the general partner of DCP LP, based on the unanimous approval and recommendation of its special committee comprised entirely of independent directors after evaluation of the transaction by the special committee in consultation with independent financial and legal advisors. Concurrently with the execution of the agreement, affiliates of Phillips 66, which together own greater than a majority of the outstanding DCP LP common units, delivered their consent to approve the transaction. As a result, DCP LP has not solicited and is not soliciting approval of the transaction by any other holders of DCP LP common units. See Note 29—DCP Midstream Class A Segment, in the Notes to Consolidated Financial Statements, for additional information on the common unit acquisition agreement. Phillips 66 Partners Merger On March 9, 2022, we completed the merger between us and Phillips 66 Partners LP (Phillips 66 Partners). The merger resulted in the acquisition of all limited partnership interests in Phillips 66 Partners not already owned by us. Upon closing, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66 and its common units are no longer publicly traded. See Note 30—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on this merger transaction. CEO Transition On April 12, 2022, Greg C. Garland, announced his intention to retire from his position as Chief Executive Officer of Phillips 66, effective July 1, 2022. Mr. Garland continues to serve as Executive Chairman of the Board with an expected retirement date from this position in 2024. Mark E. Lashier was promoted to the position of President and Chief Executive Officer effective July 1, 2022. We continue to focus on the following strategic priorities: •Operating Excellence. Our commitment to operating excellence guides everything we do. We are committed to protecting the health and safety of everyone who has a role in our operations and the communities in which we operate. Continuous improvement in safety, environmental stewardship, reliability and cost efficiency is a fundamental requirement for our company and employees. We employ rigorous training and audit programs to drive ongoing improvement in both personal and process safety as we strive for zero incidents. In 2022, we achieved a combined workforce total recordable rate of 0.11. Since we cannot control commodity prices, controlling operating expenses and overhead costs, within the context of our commitment to safety and environmental stewardship, is a high priority. We continue to progress our multi-year business transformation initiative focused on identifying and implementing opportunities to improve our cost structure enterprise wide. We are executing on our initiatives to achieve a sustainable run-rate cost reduction of at least $800 million and a sustaining capital reduction of at least $200 million per year by the end of 2023. We are committed to protecting the environment and strive to reduce our environmental footprint throughout our operations. Optimizing utilization rates and product yield at our refineries through reliable and safe operations enables us to capture the value available in the market in terms of prices and margins. During 2022, our worldwide refining crude oil capacity utilization rate was 90% and our worldwide refining clean product yield was 84%. 41 Table of Contents Index to Financial Statements •Growth. A disciplined capital allocation process ensures we invest in projects that are expected to generate competitive returns. Our strategy primarily focuses on investing in high-return growth opportunities in the Midstream and Chemicals segments, as well as our investments in renewable fuels projects to advance a lower-carbon future. In 2023, we have budgeted $2 billion in capital expenditures and investments, which includes $1.1 billion of growth capital. Approximately 50% of growth capital is expected to support lower-carbon opportunities. In Midstream, we have budgeted $639 million for capital expenditures and investments, of which $310 million is for growth capital projects directed towards enhancing our integrated natural gas liquids (NGL) value chain from wellhead to market. In Refining, we have budgeted $1.1 billion for capital expenditures and investments, of which $448 million is for the continued conversion of the San Francisco Refinery in Rodeo, California into a renewable fuels facility. In Chemicals, our share of expected self-funded capital spending by Chevron Phillips Chemical Company LLC (CPChem) is $925 million, of which $702 million is for growth capital projects. CPChem plans to use its growth capital to fund development of its petrochemical projects in the U.S. Gulf Coast and Qatar, as well as expand its propylene splitting capacity and normal alpha olefins production. As part of our strategy to grow our Midstream NGL business, on January 5, 2023, we entered into a definitive agreement to acquire all of the publicly held common units of DCP LP, which will increase our economic interest in DCP LP from 43.3% to 86.8% at closing. This transaction will be accounted for as an equity transaction and is expected to close in the second quarter of 2023, subject to customary closing conditions. We expect to fund this transaction with a combination of cash and debt. •Returns. We plan to enhance Refining returns by focusing on low-capital, higher-return projects that increase asset reliability, improve market capture and reduce costs. Our M&S segment will continue to develop and enhance our retail network, including energy transition opportunities. •Distributions. We believe shareholder value is enhanced through, among other things, a secure, competitive and growing dividend, complemented by share repurchases. In 2022, we paid $1.8 billion of dividends on our common stock. In the second quarter of 2022, we increased our quarterly dividend by 5% to $0.97 per common share. In the first quarter of 2023, we increased our quarterly dividend by 8% to $1.05 per common share. Regular dividends demonstrate the confidence our Board of Directors and management have in our capital structure and operations’ capability to generate free cash flow throughout the business cycle. In the second quarter of 2022, we resumed repurchasing shares under our share repurchase program. In 2022, we repurchased $1.5 billion, or 16.6 million shares, of our common stock. On November 7, 2022, our Board of Directors approved a $5 billion increase to our share repurchase program, bringing the total amount of share repurchases authorized by our Board of Directors since July 2012 to an aggregate of $20 billion. At the discretion of our Board of Directors, we are targeting to return $10 billion to $12 billion to our shareholders through a combination of dividends and share repurchases in the period from July 1, 2022 through December 31, 2024. The amount and timing of future dividend payments and the level and timing of future share repurchases will depend on various factors including our share price, results of operations, financial condition and cash required for future business plans. •High-Performing Organization. We strive to attract, develop and retain individuals with the knowledge and skills to implement our business strategy and who support our values and culture. Throughout the company, we focus on promoting an inclusive workplace that enables our diverse workforce to innovate, create value and deliver extraordinary performance. We also focus on getting results in the right way and embracing our values as a common bond, and we believe success is both what we do and how we do it. We encourage collaboration throughout our company, while valuing differences, respecting diversity, and creating a great place to work. We foster an environment of learning and development through structured programs focused on enhancing functional and technical skills where employees are engaged in our business and committed to their own, as well as the company’s, success. 42 Table of Contents Index to Financial Statements Business Environment The Midstream segment includes our Transportation and NGL businesses. Our Transportation business contains fee-based operations not directly exposed to commodity price risk. Our NGL business, including DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022, forward, contains both fee-based operations and operations directly impacted by NGL, natural gas and condensate prices. During 2022, NGL and natural gas prices increased, compared with 2021, supported by increasing liquified natural gas exports and higher crude oil prices. The Chemicals segment consists of our 50% equity investment in 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. Compared with 2021, the benchmark high-density polyethylene chain margin decreased significantly in 2022, due to soft demand and increasing capacity, resulting in lower plant operating rates. Our Refining segment results are driven by several factors, including market crack spreads, refinery throughput, feedstock costs, product yields, turnaround activity, and other operating costs. The price of U.S. benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $94.44 per barrel during 2022, compared with an average of $67.96 per barrel in 2021. Market crack spreads are used as indicators of refining margins and measure the difference between market prices for refined petroleum products and crude oil. Worldwide market crack spreads increased to an average of $34.26 per barrel during 2022, compared with an average of $17.09 per barrel in 2021. The increases in crude oil prices and market crack spreads were primarily driven by improving demand for refined petroleum products, as economic activities gradually recovered as the impacts from the COVID-19 pandemic moderated, as well as tightening supply due to the Russia-Ukraine war and refinery closures that occurred during the pandemic. Results for our M&S segment depend largely on marketing fuel and lubricant margins and sales volumes of our refined petroleum products. While marketing fuel and lubricant margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are influenced by trends in spot prices, and where applicable, retail prices for refined petroleum products in the regions and countries where we operate. 43 Table of Contents Index to Financial Statements RESULTS OF OPERATIONS Basis of Presentation Effective August 18, 2022, forward, in connection with the merger of DCP Midstream and Gray Oak Holdings we began consolidating the results of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills. As a result of this transaction, we began presenting the results of DCP Midstream Class A Segment within the results of our NGL and Other business. Prior periods also have been updated to reflect the results of our equity investment in DCP Midstream prior to August 18, 2022, within the results of our NGL and Other business. See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger, Note 4—Business Combination, and Note 18—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings. Effective October 1, 2022, we changed the organizational structure of the internal financial information reviewed by our President and Chief Executive Officer, and determined this resulted in a change in the composition of our operating segments. As part of the realignment, we moved the results and net assets of our Merey Sweeny vacuum distillation and delayed coker units at our Sweeny Refinery and the isomerization unit at our Lake Charles Refinery from our Midstream segment to our Refining segment. Additionally, commissions charged to the Refining segment by the M&S segment related to sales of specialty products were eliminated and the costs of the sales organization were reclassified from the M&S segment to the Refining segment. Further, we are no longer presenting disaggregated business line results for our Chemicals and M&S segments to align with changes in our internal financial reporting. Effective January 1, 2022, we began reporting our investment in NOVONIX Limited (NOVONIX) as a separate business line within our Midstream segment. Previously it was included in our NGL and Other business line. The segment realignment and business line reporting changes are presented for the year ended December 31, 2022, with the prior periods recast for comparability. 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: [[GREPCENT_TABLE]] [["","Millions of Dollars"],["","Year Ended December 31"],["","2022","","2021","","2020"],["Midstream","$","4,734","","","1,500","","","(116)"],["Chemicals","856","","","1,844","","","635"],["Refining","7,816","","","(2,353)","","","(6,023)"],["Marketing and Specialties","2,402","","","1,723","","","1,421"],["Corporate and Other","(1,169)","","","(974)","","","(881)"],["Income (loss) before income taxes","14,639","","","1,740","","","(4,964)"],["Income tax expense (benefit)","3,248","","","146","","","(1,250)"],["Net income (loss)","11,391","","","1,594","","","(3,714)"],["Less: net income attributable to noncontrolling interests","367","","","277","","","261"],["Net income (loss) attributable to Phillips 66","$","11,024","","","1,317","","","(3,975)"]] [[/GREPCENT_TABLE]] 44 Table of Contents Index to Financial Statements 2022 vs. 2021 Net income attributable to Phillips 66 for the year ended December 31, 2022, was $11,024 million, compared with $1,317 million for the year ended December 31, 2021. The improvement was primarily due to higher realized refining margins, an aggregate before-tax gain of $3,013 million recognized in our Midstream segment in connection with the merger of DCP Midstream and Gray Oak Holdings, lower impairments in the Refining segment, and improved international marketing fuel margins. These improvements were partially offset by an increase in income tax expense, lower equity earnings from CPChem, and an unrealized decrease in the fair value of our investment in NOVONIX. 2021 vs. 2020 Net income attributable to Phillips 66 for the year ended December 31, 2021, was $1,317 million, compared with net loss attributable to Phillips 66 of $3,975 million for the year ended December 31, 2020. The improvement was primarily due to lower impairments, improved realized refining margins and higher equity earnings from CPChem, partially offset by income tax impacts from improved results. See Note 4—Business Combination, and Note 18—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information on the gain recognized in connection with the merger of DCP Midstream and Gray Oak Holdings. See Note 11—Impairments, and Note 18—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for information on impairments recorded in 2021 and 2020. See Note 23—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information on income taxes. See the “Segment Results” section for additional information on our segment results. 45 Table of Contents Index to Financial Statements Statement of Operations Analysis 2022 vs. 2021 Sales and other operating revenues and purchased crude oil and products increased 52% and 47%, respectively, in 2022. These increases were mainly due to higher prices for refined petroleum products, crude oil and NGL. Other income increased $2,283 million in 2022, primarily due to an aggregate gain of $3,013 million recognized in our Midstream segment in connection with the merger of DCP Midstream and Gray Oak Holdings. The impact of this gain was partially offset by an unrealized investment loss on our investment in NOVONIX, compared with an unrealized gain in 2021. See Note 4—Business Combination, and Note 18—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information on the aggregate gain. See Note 8—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information regarding our investment in NOVONIX. Operating expenses increased 19% in 2022, mainly attributable to higher utility costs driven by increased natural gas and power prices and higher turnaround and other maintenance expenses. Selling, general and administrative expenses increased 24% in 2022, primarily driven by higher employee-related expenses, restructuring costs due to our business transformation and increased selling expenses driven by rising refined petroleum product prices. Impairments decreased 96% in 2022 primarily due to a before-tax impairment of $1,298 million recorded in the third quarter of 2021 associated with our Alliance Refinery. See Note 11—Impairments, in the Notes to Consolidated Financial Statements, for additional information. Taxes other than income taxes increased 29% in 2022, primarily due to tax credits received from renewable diesel blending activity at our San Francisco Refinery in the third quarter of 2021, as well as higher property and other taxes. Income tax expense increased $3,102 million in 2022 primarily due to improved results. See Note 23—Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes. Net income attributable to noncontrolling interests increased 32% in 2022. The increase was primarily driven by the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills, which resulted in us reflecting the additional noncontrolling interest owned by the public common and preferred unitholders of DCP LP, as well as Enbridge’s noncontrolling interest in DCP Midstream Class A Segment, on our consolidated statement of operations. The increase was partially offset by a decrease due to the merger between us and Phillips 66 Partners that occurred in the first quarter of 2022 and resulted in Phillips 66 Partners becoming a wholly owned subsidiary of Phillips 66. See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger, and Note 30—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings and the Phillips 66 Partners merger, respectively. 46 Table of Contents Index to Financial Statements 2021 vs. 2020 Sales and other operating revenues and purchased crude oil and products increased 74% and 77%, respectively, in 2021. These increases were mainly due to higher prices for refined petroleum products, crude oil and NGL, as well as increased volumes for refined petroleum products and crude oil. Equity in earnings of affiliates increased $1,713 million in 2021. The increase was primarily due to higher equity earnings from CPChem mainly driven by increased margins, WRB Refining LP (WRB) resulting from improved realized refining margins and higher refinery production, and Excel Paralubes LLC (Excel Paralubes) attributable to higher base oil margins. See Chemicals segment analysis in the “Segment Results” section for additional information on CPChem. Net gain on dispositions decreased 83% in 2021, mainly reflecting a before-tax gain of $84 million recognized in the second quarter of 2020 associated with a co-venturer’s acquisition of an ownership interest in the consolidated holding company that owned an interest in Gray Oak Pipeline. See Note 30—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information. Other income increased $388 million in 2021, primarily driven by an unrealized gain of $365 million related to the change in fair value of our investment in NOVONIX, which we acquired in the third quarter of 2021. See Note 8—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information on our investment in NOVONIX. Operating expenses increased 13% in 2021, mainly attributable to higher utility costs driven by increased commodity prices, higher employee-related expenses, and increased maintenance and repair costs. Selling, general and administrative expenses increased 13% in 2021, primarily driven by higher selling expenses due to rising refined petroleum product prices and demand, increased employee-related expenses, and a benefit received from a legal settlement in the first quarter of 2020. Depreciation and amortization increased 15% in 2021, mainly due to asset retirements related to the shutdown of our Alliance Refinery. See Note 9—Properties, Plants and Equipment, in the Notes to Consolidated Financial Statements, for additional information regarding asset retirements related to the Alliance Refinery. Impairments decreased 65% in 2021. See Note 11—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments. Taxes other than income taxes decreased 12% in 2021, primarily driven by tax credits received from renewable diesel blending activity at our San Francisco Refinery in 2021, and lower property and franchise taxes. Interest and debt expense increased 16% in 2021, primarily driven by lower capitalized interest due to the completion of capital projects and the placement of assets into service, as well as higher average debt principal balances resulting from new debt issuances in the second and fourth quarters of 2020. We had income tax expense of $146 million in 2021, compared with an income tax benefit of $1,250 million in 2020, primarily due to before-tax income in 2021 versus a before-tax loss in 2020. See Note 23—Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes. 47 Table of Contents Index to Financial Statements Segment Results Midstream [[GREPCENT_TABLE]] [["","Year Ended December 31"],["","2022","","2021","","2020"],["","Millions of Dollars"],["Income (Loss) Before Income Taxes"],["Transportation","$","1,176","","","678","","","508"],["NGL and Other","4,000","","","452","","","(624)"],["NOVONIX","(442)","","","370","","","\u2014"],["Total Midstream","$","4,734","","","1,500","","","(116)"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","Thousands of Barrels Daily"],["Transportation Volumes"],["Pipelines*","3,089","","","3,271","","","3,005"],["Terminals","2,981","","","2,790","","","2,971"],["Operating Statistics"],["NGL fractionated**","529","","","410","","","249"],["NGL production***","423","","","394","","","399"]] [[/GREPCENT_TABLE]] * Pipelines represent the sum of volumes transported through each separately tariffed consolidated pipeline segment, excluding NGL pipelines. ** Includes 100% of DCP Midstream Class A Segment’s volumes from August 18, 2022, forward. *** Includes 100% of DCP Midstream Class A Segment’s volumes. [[GREPCENT_TABLE]] [["","Dollars Per Gallon"],["Market Indicator"],["Weighted-Average NGL Price*","$","1.00","","","0.83","","","0.41"]] [[/GREPCENT_TABLE]] * Based on index prices from the Mont Belvieu market hub, which are weighted by NGL component mix. The Midstream segment provides crude oil and refined petroleum product transportation, terminaling and processing services; NGL production, transportation, storage, fractionation, processing and marketing services; natural gas gathering, compressing, treating, processing, storage, transportation and marketing services; and condensate recovery. These activities are mainly in the United States. This segment also includes our investment in NOVONIX. In connection with the merger of DCP Midstream and Gray Oak Holdings, the results of our Transportation business reflect a decrease in our indirect economic interest in Gray Oak Pipeline to 6.5% from August 18, 2022, forward. Prior to August 18, 2022, the Transportation results presented in the table above reflect Gray Oak Holdings’ 65% economic interest in Gray Oak Pipeline. In addition, the results of our NGL and Other business include the consolidated results of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022, forward. Prior to August 18, 2022, our investments in DCP Midstream, DCP Sand Hills and DCP Southern Hills were accounted for using the equity method. As a result of the merger and consolidation, equity earnings from our investment in DCP Midstream prior to the merger have been included with the results of our NGL and Other business. 48 Table of Contents Index to Financial Statements 2022 vs. 2021 Results from our Midstream segment increased $3,234 million in 2022, compared with 2021. Results from our Transportation business increased $498 million in 2022, compared with 2021. The increase was primarily due to a before-tax impairment of $198 million recorded in the first quarter of 2021 related to Phillips 66 Partners’ decision to exit the Liberty Pipeline project, a before-tax gain of $182 million from the transfer of a 35.75% indirect economic interest in Gray Oak Pipeline to our co-venturer as part of the merger of DCP Midstream and Gray Oak Holdings, and lower depreciation and amortization expense from logistic assets that were retired in the fourth quarter of 2021 as part of the planned conversion of the Alliance Refinery to a terminal. Results from our NGL and Other business increased $3,548 million in 2022, compared with 2021. The increase was primarily due to before-tax gains totaling $2,831 million recognized from remeasuring our previously held equity investments in DCP Midstream, DCP Sand Hills and DCP Southern Hills to their fair values in connection with the merger of DCP Midstream and Gray Oak Holdings. Additionally, the increased results reflect the consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills from August 18, 2022, forward, as well as improved Sweeny Hub results. In 2022, the fair value of our investment in NOVONIX decreased by $442 million compared with an increase of $370 million in 2021. We acquired this investment in September 2021. See Note 11—Impairments, and Note 8—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information on impairments and our investment in NOVONIX, respectively. See Note 4—Business Combination, and Note 18—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information regarding the before-tax gains. See the “Executive Overview and Business Environment” section for information on market factors impacting 2022 results. 2021 vs. 2020 Midstream’s results increased $1,616 million in 2021, compared with 2020. Results from our Transportation business increased $170 million in 2021, compared with 2020. The increase was primarily due to improved earnings from our equity affiliates, lower asset impairments, and increased pipeline volumes and tariffs. These increases were partially offset by a before-tax gain of $84 million recognized in the second quarter of 2020 associated with a co-venturer’s acquisition of an ownership interest in the consolidated holding company that owned an interest in Gray Oak Pipeline, and increased depreciation and amortization expense from logistic assets that were retired in the fourth quarter of 2021 as part of the planned conversion of the Alliance Refinery to a terminal. Results from our NGL and Other business increased $1,076 million in 2021, compared with 2020. The increase in 2021 reflects a $1,161 million before-tax impairment of our investment in DCP Midstream recorded in the first quarter of 2020, partially offset by higher utility costs due to increased natural gas prices. The fair value of our investment in NOVONIX increased $370 million in 2021, compared with 2020. We acquired this investment in September 2021. See Note 11—Impairments, Note 30—Phillips 66 Partners LP and Note 8—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for additional information on impairments, the before-tax gain and our investment in NOVONIX, respectively. 49 Table of Contents Index to Financial Statements Chemicals [[GREPCENT_TABLE]] [["","Year Ended December 31"],["","2022","","2021","","2020"],["","Millions of Dollars"],["Income Before Income Taxes","$","856","","","1,844","","","635"],["","Millions of Pounds"],["CPChem Externally Marketed Sales Volumes*","23,749","","","24,067","","","25,360"],["* Represents 100% of CPChem\u2019s outside sales of produced petrochemical products, as well as commission sales from equity affiliates."],["Olefins and Polyolefins Capacity Utilization (percent)","91","%","","95","","","99"]] [[/GREPCENT_TABLE]] The Chemicals segment consists of our 50% interest in CPChem, which we account for under the equity method. CPChem uses NGL and other feedstocks to produce petrochemicals. These products are then marketed and sold or used as feedstocks to produce plastics and other chemicals. CPChem produces and markets ethylene and other olefin products. Ethylene produced is primarily consumed within CPChem for the production of polyethylene, normal alpha olefins and polyethylene pipe. CPChem manufactures and markets aromatics and styrenics products, such as benzene, cyclohexane, styrene and polystyrene, as well as manufactures and/or markets a variety of specialty chemical products. Unless otherwise noted, amounts referenced below reflect our net 50% interest in CPChem. 2022 vs. 2021 Before-tax income from the Chemicals segment decreased $988 million in 2022, compared with 2021. The decrease was primarily due to lower margins driven by decreased sale prices, higher feedstock and utility costs, as well as decreased results from CPChem’s equity affiliates. See the “Executive Overview and Business Environment” section for information on market factors impacting CPChem’s 2022 results. 2021 vs. 2020 Before-tax income from the Chemicals segment increased $1,209 million in 2021, compared with 2020. The increase was primarily due to improved margins driven by increased sale prices reflecting strong demand and tight supply, partially offset by higher utility, turnaround, maintenance and repair costs. 50 Table of Contents Index to Financial Statements Refining [[GREPCENT_TABLE]] [["","Year Ended December 31"],["","2022","","2021","","2020"],["","Millions of Dollars"],["Income (Loss) Before Income Taxes"],["Atlantic Basin/Europe","$","2,402","","","1","","","(1,207)"],["Gulf Coast","2,091","","","(1,759)","","","(1,964)"],["Central Corridor","2,415","","","72","","","(642)"],["West Coast","908","","","(667)","","","(2,210)"],["Worldwide","$","7,816","","","(2,353)","","","(6,023)"],["","Dollars Per Barrel"],["Income (Loss) Before Income Taxes"],["Atlantic Basin/Europe","$","12.05","","","0.01","","","(7.08)"],["Gulf Coast","10.29","","","(7.30)","","","(9.18)"],["Central Corridor","24.64","","","0.75","","","(6.97)"],["West Coast","7.86","","","(5.90)","","","(19.98)"],["Worldwide","12.69","","","(3.69)","","","(10.26)"],["Realized Refining Margins*"],["Atlantic Basin/Europe","$","20.30","","","7.48","","","2.17"],["Gulf Coast","18.25","","","5.65","","","2.64"],["Central Corridor","24.96","","","9.65","","","7.17"],["West Coast","24.31","","","7.70","","","3.43"],["Worldwide","21.55","","","7.42","","","3.77"]] [[/GREPCENT_TABLE]] * See the “Non-GAAP Reconciliations” section for a reconciliation of this non-GAAP measure to the most directly comparable measure under generally accepted accounting principles in the United States (GAAP), income (loss) before income taxes per barrel. 51 Table of Contents Index to Financial Statements [[GREPCENT_TABLE]] [["","Thousands of Barrels Daily"],["","Year Ended December 31"],["","2022","","2021","","2020"],["Operating Statistics"],["Refining operations*"],["Atlantic Basin/Europe"],["Crude oil capacity","537","","","537","","","537"],["Crude oil processed","524","","","479","","","434"],["Capacity utilization (percent)","98","%","","89","","","81"],["Refinery production","549","","","522","","","470"],["Gulf Coast**"],["Crude oil capacity","529","","","720","","","769"],["Crude oil processed","488","","","592","","","533"],["Capacity utilization (percent)","92","%","","82","","","69"],["Refinery production","565","","","662","","","586"],["Central Corridor"],["Crude oil capacity","531","","","531","","","530"],["Crude oil processed","469","","","461","","","431"],["Capacity utilization (percent)","88","%","","87","","","81"],["Refinery production","487","","","476","","","446"],["West Coast"],["Crude oil capacity","364","","","364","","","364"],["Crude oil processed","290","","","284","","","279"],["Capacity utilization (percent)","80","%","","78","","","77"],["Refinery production","315","","","308","","","301"],["Worldwide"],["Crude oil capacity","1,961","","","2,152","","","2,200"],["Crude oil processed","1,771","","","1,816","","","1,677"],["Capacity utilization (percent)","90","%","","84","","","76"],["Refinery production","1,916","","","1,968","","","1,803"],["* Includes our share of equity affiliates."],["** Excludes operating statistics of the Alliance Refinery beginning on October 1, 2021."]] [[/GREPCENT_TABLE]] The Refining segment refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates and aviation fuels, as well as renewable fuels, at 12 refineries in the United States and Europe.  In the fourth quarter of 2021, we shut down our Alliance Refinery. 2022 vs. 2021 Results from the Refining segment increased $10,169 million in 2022, compared with 2021. The improved results were primarily due to higher realized refining margins driven by improved market crack spreads, partially offset by higher operating costs. In addition, 2021 included a before-tax impairment of $1,288 million associated with our Alliance Refinery. See Note 11—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding this impairment. Our worldwide refining crude oil capacity utilization rate was 90% and 84% in 2022 and 2021, respectively. The increase in 2022 was primarily driven by improved demand for refined petroleum products due to supply constraints caused by the conflict between Russia and Ukraine and easing of restrictions from the COVID-19 pandemic. See the “Executive Overview and Business Environment” section for information on industry crack spreads and other market factors impacting this year’s results. 52 Table of Contents Index to Financial Statements 2021 vs. 2020 Results from the Refining segment increased $3,670 million in 2021, compared with 2020. The improved results in 2021 were primarily due to higher realized refining margins and lower asset impairments, partially offset by increased utility expenses and higher costs related to the shutdown of our Alliance Refinery. The improved realized refining margins in 2021 were mainly attributable to increased market crack spreads, partially offset by higher RIN costs, lower clean product differentials and decreased secondary products margins. See Note 11—Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments recorded in our Refining segment during 2021 and 2020. Our worldwide refining crude oil capacity utilization rate was 84% and 76% in 2021 and 2020, respectively. The increase in 2021 was primarily driven by improved market demand for refined petroleum products following the administration of COVID-19 vaccines and the easing of pandemic restrictions. 53 Table of Contents Index to Financial Statements Marketing and Specialties [[GREPCENT_TABLE]] [["","Year Ended December 31"],["","2022","","2021","","2020"],["","Millions of Dollars"],["Income Before Income Taxes","$","2,402","","","1,723","","","1,421"],["","Dollars Per Barrel"],["Income Before Income Taxes"],["U.S.","$","1.95","","","1.74","","","1.42"],["International","7.44","","","4.13","","","4.84"],["Realized Marketing Fuel Margins*"],["U.S.","$","2.34","","","2.19","","","1.87"],["International","8.29","","","5.96","","","6.34"],["* See the \u201cNon-GAAP Reconciliations\u201d section for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure, income before income taxes per barrel."],["","Dollars Per Gallon"],["U.S. Average Wholesale Prices*"],["Gasoline","$","3.30","","","2.46","","","1.56"],["Distillates","3.86","","","2.36","","","1.47"],["* On third-party branded refined petroleum product sales, excluding excise taxes."],["","Thousands of Barrels Daily"],["Marketing Refined Petroleum Product Sales"],["Gasoline","1,167","","","1,154","","","1,021"],["Distillates","962","","","959","","","895"],["Other","18","","","17","","","17"],["","2,147","","","2,130","","","1,933"]] [[/GREPCENT_TABLE]] The M&S segment purchases for resale and markets refined petroleum products, such as gasoline, distillates and aviation fuels, as well as renewable fuels, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of base oils and lubricants. 2022 vs. 2021 Before-tax income from the M&S segment increased $679 million in 2022, compared with 2021. The increase in 2022 was primarily driven by improved realized international marketing fuel margins and higher results from our specialty lubricants and other businesses. See the “Executive Overview and Business Environment” section for information on marketing fuel margins and other market factors impacting 2022 results. 2021 vs. 2020 Before-tax income from the M&S segment increased $302 million in 2021, compared with 2020. The increase in 2021 was primarily driven by higher realized U.S. marketing fuel margins and increased equity earnings from Excel Paralubes due to improved base oil margins, partially offset by lower realized international marketing fuel margins. 54 Table of Contents Index to Financial Statements Corporate and Other [[GREPCENT_TABLE]] [["","Millions of Dollars"],["","Year Ended December 31"],["","2022","","2021","","2020"],["Loss Before Income Taxes"],["Net interest expense","$","(537)","","","(583)","","","(485)"],["Corporate overhead and other","(632)","","","(391)","","","(396)"],["Total Corporate and Other","$","(1,169)","","","(974)","","","(881)"]] [[/GREPCENT_TABLE]] Net interest expense consists of interest and financing expense, net of interest income and capitalized interest. Corporate overhead and other includes general and administrative expenses, technology costs, environmental costs associated with sites no longer in operation, restructuring costs related to our business transformation, foreign currency transaction gains and losses, and other costs not directly associated with an operating segment. 2022 vs. 2021 Net interest expense decreased $46 million in 2022, compared with 2021, primarily driven by increased interest income, partially offset by increased interest expense as a result of consolidating DCP Midstream Class A Segment from August 18, 2022, forward. See Note 14—Debt, in the Notes to Consolidated Financial Statements, for additional information regarding debt. Corporate overhead and other increased $241 million in 2022, compared with 2021. The increase was primarily due to restructuring costs associated with our business transformation for consulting fees, severance and an impairment related to assets held for sale, as well as higher employee related expenses. See Note 28—Segment Disclosures and Related Information, and Note 31—Restructuring, in the Notes to Consolidated Financial Statements, for additional information regarding restructuring costs. 2021 vs. 2020 Net interest expense increased $98 million in 2021, compared with 2020, primarily driven by lower capitalized interest due to the completion of capital projects and the placement of assets into service, and higher average debt principal balances reflecting debt issuances in the second and fourth quarters of 2020, as well as costs associated with early debt retirement in 2021. See Note 14—Debt, in the Notes to Consolidated Financial Statements, for additional information on the debt repayment in 2021. Corporate overhead and other decreased $5 million in 2021, compared with 2020. 55 Table of Contents Index to Financial Statements CAPITAL RESOURCES AND LIQUIDITY Financial Indicators [[GREPCENT_TABLE]] [["","Millions of Dollars, Except as Indicated"],["","2022","","2021","","2020"],["Cash and cash equivalents","$","6,133","","","3,147","","","2,514"],["Net cash provided by operating activities","10,813","","","6,017","","","2,111"],["Short-term debt","529","","","1,489","","","987"],["Total debt","17,190","","","14,448","","","15,893"],["Total equity","34,106","","","21,637","","","21,523"],["Percent of total debt to capital*","34","%","","40","","","42"],["Percent of floating-rate debt to total debt","\u2014","%","","3","","","12"],["* Capital includes total debt and total equity."]] [[/GREPCENT_TABLE]] To meet our short- and long-term liquidity requirements, we use a variety of funding sources but rely primarily on cash generated from operating activities and debt financing. During 2022, we generated $10.8 billion in cash from operations. We used available cash to pay down $2.4 billion in debt, fund capital expenditures and investments of $2.2 billion, pay dividends on our common stock of $1.8 billion and repurchase $1.5 billion of our common stock. During 2022, cash and cash equivalents increased $3 billion to $6.1 billion. Significant Sources of Capital Operating Activities During 2022, cash generated by operating activities was $10.8 billion, a $4.8 billion increase compared with 2021. The increase was primarily due to higher earnings resulting from improved realized refining margins, partially offset by working capital impacts and lower distributions from equity affiliates. During 2021, cash generated by operating activities was $6 billion, a $3.9 billion increase compared with 2020. The increase was primarily due to improved realized refining margins, a U.S. federal income tax refund of $1.1 billion received in the second quarter of 2021, and higher cash distributions from our equity affiliates, partially offset by higher operating expenses. Our short- and long-term operating cash flows are highly dependent upon refining and marketing margins, NGL prices and chemicals margins. Prices and margins in our industry are typically volatile, and are driven by market conditions over which we have little or no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows. The level and quality of output from our refineries also impact our cash flows. Factors such as operating efficiency, maintenance turnarounds, market conditions, feedstock availability, and weather conditions can affect output. We actively manage the operations of our refineries, and any variability in their operations typically has not been as significant to cash flows as that caused by margins and prices. Our worldwide refining crude oil capacity utilization was 90%, 84% and 76% in 2022, 2021 and 2020, respectively. Our worldwide refining clean product yield was 84%, 83% and 84% in 2022, 2021 and 2020, respectively. Equity Affiliate Operating Distributions Our operating cash flows are also impacted by distribution decisions made by our equity affiliates, including CPChem. Over the three years ended December 31, 2022, our operating cash flows included aggregate distributions from our equity affiliates of $6 billion, including $2.8 billion from CPChem. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these equity affiliates are not assured. 56 Table of Contents Index to Financial Statements Tax Refunds We received a U.S. federal income tax refund of $1.1 billion in the second quarter of 2021. Credit Facilities and Commercial Paper Phillips 66 and Phillips 66 Company On June 23, 2022, we entered into a new $5 billion revolving credit facility (the Facility) with Phillips 66 Company as the borrower and Phillips 66 as the guarantor and a scheduled maturity date of June 22, 2027. The Facility replaced our previous $5 billion revolving credit facility with Phillips 66 as the borrower and Phillips 66 Company as the guarantor. The Facility contains usual and customary covenants that are similar to the previous revolving credit facility, including a maximum consolidated net debt-to-capitalization ratio of 65% as of the last day of each fiscal quarter. We have the option to increase the overall capacity to $6 billion, subject to certain conditions. We also have the option to extend the scheduled maturity of the Facility for up to two additional one-year terms, subject to, among other things, the consent of the lenders holding the majority of the commitments and of each lender extending its commitment. Outstanding borrowings under the Facility bear interest at either (a) the Adjusted Term Secured Overnight Financing Rate (SOFR) (as described in the Facility) in effect from time to time plus the applicable margin; or (b) the reference rate (as described in the Facility) plus the applicable margin. The Facility also provides for customary fees, including commitment fees. The pricing levels for the commitment fees and interest-rate margins are determined based on the ratings in effect for our senior unsecured long-term debt from time to time. We may at any time prepay outstanding borrowings, in whole or in part, without premium or penalty. At December 31, 2022 and 2021, no amount had been drawn under our revolving credit facilities. Phillips 66 also has a $5 billion uncommitted commercial paper program for short-term working capital needs that is supported by the Facility. Commercial paper maturities are contractually limited to 365 days. At December 31, 2022 and 2021, no borrowings were outstanding under the program. Phillips 66 Partners In connection with entering into the Facility, we terminated Phillips 66 Partners’ $750 million revolving credit facility. DCP Midstream Class A Segment DCP LP has a credit facility under its amended credit agreement (the Credit Agreement), with a borrowing capacity of up to $1.4 billion that matures on March 18, 2027. The Credit Agreement grants DCP LP the option to increase the revolving loan commitment by an aggregate principal amount of up to $500 million and to extend the term for up to two additional one-year periods, subject to requisite lender approval. Indebtedness under the Credit Agreement bears interest at either: (a) an adjusted SOFR (as described in the Credit Agreement) plus the applicable margin; or (b) the base rate (as described in the Credit Agreement) plus the applicable margin. The Credit Agreement also provides for customary fees, including commitment fees. The cost of borrowing under the Credit Agreement is determined by a ratings-based pricing grid based on DCP LP’s credit rating. At December 31, 2022, DCP LP had no borrowings outstanding under the Credit Agreement. At December 31, 2022, $10 million in letters of credit had been issued that are supported by the Credit Agreement. DCP LP has an accounts receivable securitization facility (the Securitization Facility) that provides for up to $350 million of borrowing capacity through August 2024 at an adjusted SOFR and includes an uncommitted option to increase the total commitments under the Securitization Facility by up to an additional $400 million. Under the Securitization Facility, certain of DCP LP’s wholly owned subsidiaries sell or contribute receivables to another of DCP LP’s consolidated subsidiaries, DCP Receivables LLC (DCP Receivables), a bankruptcy-remote special purpose entity created for the sole purpose of the Securitization Facility. At December 31, 2022, $40 million of borrowings were outstanding under the Securitization Facility, which are secured by its accounts receivable at DCP Receivables. 57 Table of Contents Index to Financial Statements Total Committed Capacity Available At December 31, 2022, we had approximately $6.7 billion of total committed capacity available under the credit facilities described above. At December 31, 2021, we had approximately $5.7 billion of total committed capacity available under our revolving credit facilities. Other Debt Issuances and Financings Senior Unsecured Notes In November 2021, Phillips 66 closed its public offering of $1 billion aggregate principal amount of 3.300% senior unsecured notes due 2052. Interest on the Senior Notes due 2052 is payable semiannually on March 15 and September 15 of each year, commencing on March 15, 2022. Proceeds received from the public offering were $982 million, net of underwriters’ discounts and commissions, as well as debt issuance costs. In December 2021, Phillips 66 used the proceeds from this offering, together with cash on hand, to repay $1 billion in aggregate principal amount of its $2 billion 4.300% Senior Notes due April 2022. In November 2020, Phillips 66 closed its public offering of $1.75 billion aggregate principal amount of senior unsecured notes consisting of: •$450 million aggregate principal amount of Floating Rate Senior Notes due 2024. •$800 million aggregate principal amount of 0.900% Senior Notes due 2024. •$500 million aggregate principal amount of 1.300% Senior Notes due 2026. The Floating Rate Senior Notes bear interest at a floating rate, reset quarterly, equal to the three-month London Interbank Offered Rate plus 0.62% per year, subject to adjustment. In December 2021, we used cash on hand to repay the $450 million Floating Rate Senior Notes due 2024. Interest on the Senior Notes due 2024 and 2026 is payable semiannually on February 15 and August 15 of each year, commencing on February 15, 2021. Proceeds received from the public offering of senior unsecured notes in November 2020 were $1.74 billion, net of underwriters’ discounts and commissions, as well as debt issuance costs. In June 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. In April 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 in June 2020 constitute a further issuance of the Senior Notes due 2025 originally issued in April 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 in June and April of 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. 58 Table of Contents Index to Financial Statements Term Loan Facility 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 March 2020, we entered into a $1 billion 364-day delayed draw term loan agreement (the Facility) and borrowed $1 billion under the Facility shortly thereafter. 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 to November 20, 2023. In September 2021, we repaid the outstanding borrowings of $500 million. Phillips 66 Availability of Debt Financing We have an A3 credit rating, with a stable outlook, from Moody’s Investors Service and a BBB+ credit rating, with a stable outlook, from Standard & Poor’s. These investment grade ratings have served to lower our borrowing costs and facilitate access to a variety of lenders. We do not have any ratings triggers on any of our corporate debt that would cause an automatic default, and thereby impact our access to liquidity, in the event of a rating downgrade by one or both rating agencies. Failure to maintain investment grade ratings could prohibit us from accessing the commercial paper market, although we would expect to be able to access funds under our liquidity facilities mentioned above. DCP LP Availability of Debt Financing DCP LP has a BBB+ credit rating, with a stable outlook, from Standard and Poor’s; a BBB- credit rating, with a stable outlook, from Fitch Ratings; and a Ba1 credit rating, with a positive outlook, from Moody’s Investors Service. These ratings facilitate DCP LP access to a variety of lenders. DCP LP does not have any ratings triggers on any of its corporate debt that would cause an automatic default, and thereby impact access to liquidity, in the event of a rating downgrade by one or more rating agencies. 59 Table of Contents Index to Financial Statements Off-Balance Sheet Arrangements 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 December 31, 2022. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling $156 million. These leases have remaining terms of five to nine years. 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 (the 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 no plans to stop pipeline operations while it proceeds with the EIS, and the Tribe’s request for a shutdown was denied in May 2021. In June 2021, the trial court dismissed the litigation entirely. Once the EIS is completed, new litigation or challenges may be filed. In February 2022, the U.S. Supreme Court (the Court) denied Dakota Access’ writ of certiorari requesting the Court to review the lower court’s decision to order the EIS and vacate the easement. Therefore, the requirement to prepare the EIS stands. Also in February 2022, the Tribe withdrew as a cooperating agency, causing the USACE to halt the EIS process while the USACE engaged with the Tribe on their reasons for withdrawing. The draft EIS process resumed in August 2022, and release is expected in Spring 2023. 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 December 31, 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 December 31, 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 December 31, 2022. See Note 15—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees. 60 Table of Contents Index to Financial Statements Capital Requirements Capital Expenditures and Investments For information about our capital expenditures and investments, see the “Capital Spending” section below. Debt Financing Our debt balance at December 31, 2022, was $17.2 billion and our total debt-to-capital ratio was 34%. In December 2022, Phillips 66 repaid its 3.700% senior notes due April 2023 with an aggregate principal amount of $500 million. After our consolidation of DCP Midstream Class A Segment on August 17, 2022, DCP LP repaid $470 million of borrowings under its accounts receivable securitization and revolving credit facilities that were outstanding on the acquisition date. 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. See Note 14—Debt, in the Notes to Consolidated Financial Statements, for our annual debt maturities over the next five years and more information on debt repayments. Debt Exchange On May 5, 2022, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, completed offers to exchange (the Exchange Offers) all validly tendered notes of seven different series of notes issued by Phillips 66 Partners (collectively, the Old Notes), with an aggregate principal amount of approximately $3.5 billion, for notes issued by Phillips 66 Company (collectively, the New Notes). The New Notes are fully and unconditionally guaranteed by Phillips 66 and rank equally with Phillips 66 Company’s other unsecured and unsubordinated indebtedness, and the guarantees rank equally with Phillips 66’s other unsecured and unsubordinated indebtedness. Old Notes with an aggregate principal amount of approximately $3.2 billion were tendered in the Exchange Offers. The New Notes have the same interest rates, interest payment dates and maturity dates as the Old Notes. Holders that validly tendered before the end of the early participation period on April 19, 2022 (the Early Participation Date), received New Notes with an aggregate principal amount equivalent to the Old Notes, while holders that validly tendered after the Early Participation Date, but before the Expiration Date, received New Notes with an aggregate principal amount 3% less than the Old Notes. Substantially all of the Old Notes exchanged were tendered during the Early Participation Period. Joint Venture Loans Starting in 2020 and extending through the second quarter of 2022, we and our co-venturer provided member loans to WRB. By December 31, 2022, WRB had repaid all outstanding member loans. At December 31, 2021, our share of the outstanding member loan balance, including accrued interest, was $595 million. The need for additional loans to WRB in 2023 will depend on market conditions. DCP Midstream and Gray Oak Holdings Merger On August 17, 2022, we and our co-venturer, Enbridge, agreed to merge DCP Midstream and Gray Oak Holdings with DCP Midstream as the surviving entity. As part of the merger, we made a net cash payment of $306 million. DCP LP Public Common Unit Acquisition Agreement On January 5, 2023, we entered into a definitive agreement with DCP LP, its subsidiaries and its general partner entities, pursuant to which one of our wholly owned subsidiaries will merge with and into DCP LP, with DCP LP surviving as a Delaware limited partnership. Under the terms of the agreement, at the effective time of the merger, each publicly held common unit representing a limited partner interest in DCP LP (other than the common units owned by DCP LP and DCP Midstream GP, LP) issued and outstanding as of immediately prior to the effective time will be converted into the right to receive $41.75 per common unit in cash, without interest. The merger will increase our economic interest in DCP LP from 43.3% to 86.8%. The transaction is expected to close in the second quarter of 2023, subject to customary closing conditions. 61 Table of Contents Index to Financial Statements If the merger is successfully completed, we will pay approximately $3.8 billion in cash consideration, which we expect to fund through a combination of cash generated from operating activities and debt. The transaction was unanimously approved by the board of the general partner of DCP LP, based on the unanimous approval and recommendation of its special committee comprised entirely of independent directors after evaluation of the transaction by the special committee in consultation with independent financial and legal advisors. Concurrently with the execution of the agreement, affiliates of Phillips 66, which together own greater than a majority of the outstanding DCP LP common units, delivered their consent to approve the transaction. As a result, DCP LP has not solicited and is not soliciting approval of the transaction by any other holders of DCP LP common units. See Note 3—DCP Midstream, LLC and Gray Oak Holdings LLC Merger and Note 29—DCP Midstream Class A Segment, in the Notes to the Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings. DCP LP Cash Distributions to Unitholders DCP LP’s partnership agreement requires that, within 45 days after the end of each quarter, DCP LP distributes all available cash. Since the merger on August 18, 2022, DCP LP made cash distributions of $51 million to common unitholders other than Phillips 66, $19 million to Series A preferred unitholders, $6 million to Series B preferred unitholders and $2 million to Series C preferred unitholders. See Note 29—DCP Midstream Class A Segment, in the Notes to the Consolidated Financial Statements, for additional information. On January 24, 2023, the board of directors of DCP Midstream GP, LLC, declared a quarterly distribution on DCP LP’s common units of $0.43 per common unit and a quarterly distribution on DCP LP’s Series B and Series C Preferred Units of $0.4922 and $0.4969 per unit, respectively. The distribution on the common units was paid on February 14, 2023, to unitholders of record on February 3, 2023. The Series B distribution will be paid on March 15, 2023, to unitholders of record on March 1, 2023. The Series C distribution will be paid on April 17, 2023, to unitholders of record on April 3, 2023. DCP LP Preferred Units DCP LP redeemed its Series A preferred units with an aggregate liquidation preference of $500 million in December 2022. DCP LP funded this redemption from available cash and borrowings under its accounts receivable securitization facility. Merger with Phillips 66 Partners On March 9, 2022, we completed a 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 41.8 million shares of Phillips 66 common stock issued from treasury stock. Phillips 66 Partners common unitholders received 0.50 shares of Phillips 66 common stock for each outstanding Phillips 66 Partners common unit. Phillips 66 Partners’ perpetual convertible preferred units were converted into common units at a premium to the original issuance price prior to being exchanged for Phillips 66 common stock. Upon closing, Phillips 66 Partners became a wholly owned subsidiary of Phillips 66 and its common units are no longer publicly traded. See Note 30—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on the merger transaction. Dividends On February 8, 2023, our Board of Directors declared a quarterly cash dividend of $1.05 per common share, representing an 8% increase. The dividend is payable March 1, 2023, to holders of record at the close of business on February 21, 2023. 62 Table of Contents Index to Financial Statements Share Repurchases In March 2020, we announced that we had temporarily suspended our share repurchases to preserve liquidity in response to the global economic disruption caused by the COVID-19 pandemic. We resumed purchasing shares under our share repurchase program in the second quarter of 2022. On November 7, 2022, our Board of Directors approved a $5 billion increase to our share repurchase program. Since July 2012, our Board of Directors has authorized an aggregate of $20 billion of repurchases of our outstanding common stock. The authorizations do not have expiration dates. Future share repurchases are expected to be funded primarily through available cash. We are not obligated to repurchase any shares of common stock pursuant to these authorizations and may commence, suspend or terminate repurchases at any time. In 2022, we repurchased 16.6 million shares at an aggregate cost of $1.5 billion. Since the inception of our share repurchase program in 2012, we have repurchased 175.9 million shares at an aggregate cost of $14 billion. Shares of stock repurchased are held as treasury shares. Employee Benefit Plan Contributions During the year ended December 31, 2022, we contributed $125 million to our U.S. pension and other postretirement benefit plans and $23 million to our international pension plans. Contractual Obligations Our contractual obligations primarily consist of purchase obligations, outstanding debt principal and interest obligations, operating and finance lease obligations, and asset retirement and environmental obligations. Purchase Obligations Our purchase obligations represent agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms. We expect these purchase obligations will be fulfilled with operating cash flows in the period when due. As of December 31, 2022, our purchase obligations totaled $106.5 billion, with $44.4 billion due within one year. The majority of our purchase obligations are market-based contracts, including exchanges and futures, for the purchase of products such as crude oil and raw NGL. The products are used to supply our refineries and fractionators and optimize our supply chain. At December 31, 2022, product purchase commitments with third parties and related parties were $54.6 billion and $26.1 billion, respectively. The remaining purchase obligations mainly represent agreements to access and utilize the capacity of third-party equipment and facilities, including pipelines and product terminals, to transport, process, treat, and store products, and our net share of purchase commitments for materials and services for jointly owned facilities where we are the operator. Debt Principal and Interest Obligations As of December 31, 2022, our aggregate principal amount of outstanding debt was $17.2 billion, with $529 million due within one year. Our obligations for interest on the debt totaled $10.2 billion, with $776 million due within one year. See Note 14—Debt, in the Notes to Consolidated Financial Statements, for additional information regarding our outstanding debt principal and interest obligations. Finance and Operating Lease Obligations See Note 20—Leases, in the Notes to Consolidated Financial Statements, for information regarding our lease obligations and timing of our expected lease payments. Asset Retirement and Environmental Obligations See Note 12—Asset Retirement Obligations and Accrued Environmental Costs, in the Notes to Consolidated Financial Statements, for information regarding asset retirement and environmental obligations. 63 Table of Contents Index to Financial Statements Capital Spending Our capital expenditures and investments represent consolidated capital spending. [[GREPCENT_TABLE]] [["","Millions of Dollars"],["","2023 Budget","","2022","","2021","","2020"],["Capital Expenditures and Investments"],["Midstream*","$","639","","","1,043","","","733","","","1,735"],["Chemicals","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Refining","1,118","","","928","","","784","","","828"],["Marketing and Specialties","134","","","89","","","202","","","173"],["Corporate and Other","108","","","134","","","141","","","184"],["Total Capital Expenditures and Investments","1,999","","","2,194","","","1,860","","","2,920"],["Selected Equity Affiliates**"],["CPChem","925","","","701","","","367","","","284"],["WRB","216","","","177","","","229","","","175"],["","$","1,141","","","878","","","596","","","459"]] [[/GREPCENT_TABLE]] * Includes 100% of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills capital expenditures and investments from August 18, 2022, forward, net of acquired cash. ** Our share of joint ventures’ capital spending. Midstream Capital spending in our Midstream segment was $3.5 billion for the three-year period ended December 31, 2022, including: •Continued development and expansion of fractionation capacity at our Sweeny Hub. We completed two NGL fractionators (Sweeny Fracs 2 and 3) which commenced operations in 2020. We completed and started operations of Sweeny Frac 4 in the third quarter of 2022. •Completion of construction on our C2G Pipeline, a new 16-inch ethane pipeline that connects our Clemens Caverns storage facility to petrochemical facilities in Gregory, Texas, near Corpus Christi. •Net cash payment in connection with the merger of DCP Midstream and Gray Oak Holdings. •Contributions to fund the Gray Oak Pipeline project and South Texas Gateway Terminal development activities. •Investments in NOVONIX and a renewable feedstock processing plant. •Contributions to Dakota Access for a pipeline optimization project, including a contribution to fund our 25% share of Dakota Access’ debt repayment. •Spending associated with other return, reliability, and maintenance projects in our Transportation and NGL businesses. Chemicals During the three-year period ended December 31, 2022, CPChem had a self-funded capital program that totaled $2.7 billion on a 100% basis. Capital spending was primarily for the development of petrochemical projects on the U.S. Gulf Coast and in the Middle East, as well as sustaining, debottlenecking and optimization projects on existing assets. 64 Table of Contents Index to Financial Statements Refining Capital spending for the Refining segment during the three-year period ended December 31, 2022, was $2.5 billion, primarily for refinery upgrade projects to enhance the yield of high-value products, renewable fuels projects, improvements to the operating integrity of key processing units, and safety-related projects. Key projects funded during the three-year period included: •Installation of facilities to improve clean product yield at the Ponca City and Sweeny refineries, as well as the jointly owned Wood River Refinery. •Installation of facilities to improve product value at the Lake Charles Refinery. •Installation of facilities to produce renewable fuels at our San Francisco and Humber refineries. Marketing and Specialties Capital spending for the M&S segment during the three-year period ended December 31, 2022, was primarily for investment in retail marketing joint ventures in the U.S. West Coast and Central regions; the continued acquisition, development and enhancement of retail sites in Europe; and acquisition of a commercial fleet fueling business in California, which will provide further placement opportunities for renewable diesel production to end-use customers. Corporate and Other Capital spending for Corporate and Other during the three-year period ended December 31, 2022, was primarily for information technology and facilities. 2023 Budget Our 2023 capital budget is $2 billion, including $865 million for sustaining capital and $1.1 billion for growth capital. Approximately 50% of growth capital is expected to support lower-carbon opportunities. Our projected $2 billion capital budget excludes our portion of planned capital spending by our major joint ventures CPChem and WRB totaling $1.1 billion. The Midstream capital budget of $639 million includes a growth capital budget of $310 million which will be directed toward enhancing our integrated NGL value chain from wellhead to market. The Midstream capital budget also includes $329 million for sustaining projects. The Midstream expected spend includes 100% of DCP LP’s sustaining capital of $150 million and $125 million of growth capital. In Refining, the total capital budget of $1.1 billion consists of $389 million for reliability, safety and environmental projects and $729 million for growth capital. Refining’s growth capital includes the continued conversion of the San Francisco Refinery into a renewable fuels facility. The M&S capital budget of $134 million reflects the continued development and enhancement of our retail network, including energy transition opportunities. The Corporate and Other capital budget is $108 million primarily for digital transformation and information technology projects. 65 Table of Contents Index to Financial Statements Contingencies 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. Legal and Tax Matters Our legal and tax matters are handled by our legal and tax organizations. These organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions. We employ a litigation management process to manage and monitor the legal proceedings. 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. In the case of income tax-related contingencies, we monitor tax legislation and court decisions, the status of tax audits and the statute of limitations within which a taxing authority can assert a liability. See Note 23—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information about income tax-related contingencies. 66 Table of Contents Index to Financial Statements Environmental We are subject to numerous international, federal, state and local environmental laws and regulations. Among the most significant of these international and federal environmental laws and regulations are the: •U.S. Federal Clean Air Act, which governs air emissions. •U.S. Federal Clean Water Act, which governs discharges into bodies of water. •European Union Regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (EU REACH), which governs production, marketing and use of chemicals and the United Kingdom’s legislation for the Registration, Evaluation, Authorization and Restriction of Chemicals (UK REACH), which replaced EU REACH in the United Kingdom in 2021 following the United Kingdom’s exit from the European Union (BREXIT). •U.S. Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which imposes liability on generators, transporters and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur. •U.S. Federal Resource Conservation and Recovery Act (RCRA), which governs the treatment, storage and disposal of solid waste. •U.S. Federal Emergency Planning and Community Right-to-Know Act (EPCRA), which requires facilities to report toxic chemical inventories to local emergency planning committees and response departments. •U.S. Federal Oil Pollution Act of 1990 (OPA90), under which owners and operators of onshore facilities and pipelines as well as owners and operators of vessels are liable for removal costs and damages that result from a discharge of crude oil into navigable waters of the United States. •European Union Trading Directive resulting in the European Union Emissions Trading Scheme (EU ETS), which uses a market-based mechanism to incentivize the reduction of greenhouse gas (GHG) emissions, as well as the United Kingdom Emissions Trading Scheme (UK ETS), which replaced the EU ETS in the United Kingdom in 2021, following BREXIT. These laws and their implementing regulations set limits on emissions and, in the case of discharges to water, establish water quality limits. They also, in most cases, require permits in association with new or modified operations. These permits can require an applicant to collect substantial information in connection with the application process, which can be expensive and time consuming. In addition, there can be delays associated with notice and comment periods and the agency’s processing of the application. Many of the delays associated with the permitting process are beyond the control of the applicant. Other foreign countries and many states where we operate also have, or are developing, similar environmental laws and regulations governing these same types of activities. While similar, in some cases these regulations may impose additional, or more stringent, requirements that can add to the cost and difficulty of developing infrastructure and marketing and transporting products across state and international borders. For example, in California the South Coast Air Quality Management District (SCAQMD) approved amendments to the Regional Clean Air Incentives Market (RECLAIM) that became effective in 2016, which require a phased reduction of nitrogen oxide emissions through 2022, affecting refineries in the Los Angeles metropolitan area. In 2017, SCAQMD required additional nitrogen oxide emissions reductions through 2025 and, on November 5, 2021, promulgated new regulations to replace the RECLAIM program with a traditional command and control regulatory regime. The ultimate financial impact arising from environmental laws and regulations is neither clearly known nor easily determinable as new standards, such as air emission standards, water quality standards and stricter fuel regulations, continue to evolve. However, environmental laws and regulations, including those that may arise to address concerns about global climate change, are expected to continue to have an increasing impact on our operations in the United States and in other countries in which we operate. Notable areas of potential impacts include air emissions compliance and remediation obligations in the United States. 67 Table of Contents Index to Financial Statements An example of this in the fuels area is the Energy Independence and Security Act of 2007 (EISA). It requires fuel producers and importers to provide additional renewable fuels for transportation motor fuels and stipulates a mix of various types. RINs form the mechanism used by the EPA to record compliance with the Renewable Fuel Standard (RFS). If an obligated party has more RINs than it needs to meet its obligation, it may sell or trade the extra RINs, or instead choose to “bank” them for use the following year. We have met the requirements to date while establishing implementation, operating and capital strategies, along with advanced technology development, to address projected future renewable volume obligation (RVO) requirements. On December 1, 2022, the EPA proposed RVO for the 2023, 2024 and 2025 compliance years, as well as RIN generation from renewable electricity utilized as a transportation fuel (eRINs). These standards increase cellulosic volumes, which reflect the EPA’s forecast for increasing eRIN volumes beginning in 2024. They also increase total advanced biofuel volumes, which reflect the EPA’s forecast for increasing eRIN volumes beginning in 2024. In addition, they increase total advanced biofuel volumes from the 5.63 billion gallons established for the 2022 compliance year to 7.43 billion gallons in 2025. If adopted, we may experience a decrease in demand for refined petroleum products and increased program costs if not fully recovered in the market. This program continues to be the subject of possible Congressional review and re-promulgation in revised form, and the EPA’s final regulations establishing RVO requirements have been and continue to be subject to legal challenge, further creating uncertainty regarding RVO requirements. We are required to purchase RINs in the open market to satisfy the portion of our obligation under the RFS that is not fulfilled by blending renewable fuels into the motor fuels we produce. For the years ended December 31, 2022, 2021 and 2020, we incurred expenses of $478 million, $441 million and $342 million, respectively, associated with our obligation to purchase RINs in the open market to comply with the RFS for our wholly owned refineries. These expenses are included in the “Purchased crude oil and products” line item on our consolidated statement of operations. Our jointly owned refineries also incurred expenses associated with the purchase of RINs in the open market, of which our share was $437 million, $351 million and $133 million for the years ended December 31, 2022, 2021 and 2020, respectively. These expenses are included in the “Equity in earnings of affiliates” line item on our consolidated statement of operations. The amount of these expenses and fluctuations between periods is primarily driven by the market price of RINs, refinery production, blending activities, and RVO requirements. We also are subject to certain laws and regulations relating to environmental remediation obligations associated with current and past operations. Such laws and regulations include CERCLA and RCRA and their state equivalents. Remediation obligations include cleanup responsibility arising from petroleum releases from underground storage tanks located at numerous previously and currently owned and/or operated petroleum-marketing outlets throughout the United States. Federal and state laws require contamination caused by such underground storage tank releases be assessed and remediated to meet applicable standards. In addition to other cleanup standards, many states have adopted cleanup criteria for methyl tertiary-butyl ether (MTBE) for both soil and groundwater and both the EPA and many states may adopt cleanup standards for per- and polyfluoroalkyl substances (PFAS), which may have been a constituent in certain firefighting foams used or stored at or near some of our facilities. At RCRA-permitted facilities, we are required to assess environmental conditions. If conditions warrant, we may be required to remediate contamination caused by prior operations. In contrast to CERCLA, which is often referred to as “Superfund,” the cost of corrective action activities under RCRA corrective action programs typically is borne solely by us. We anticipate increased expenditures for RCRA remediation activities may be required, but such annual expenditures for the near term are not expected to vary significantly from the range of such expenditures we have experienced over the past few years. Longer-term expenditures are subject to considerable uncertainty and may fluctuate significantly. We occasionally receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging that we are a potentially responsible party under CERCLA or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. As of December 31, 2021, we reported that we had been notified of potential liability under CERCLA and comparable state laws at 25 sites within the United States. In 2022, we were notified of one potentially new site through a CERCLA Section 104(e) information request issued by the EPA, and four sites that were deemed resolved and closed, accordingly, leaving 22 unresolved sites with potential liability at December 31, 2022. 68 Table of Contents Index to Financial Statements For the majority of Superfund sites, our potential liability will be less than the total site remediation costs because the percentage of waste attributable to us, versus that attributable to all other potentially responsible parties, is relatively low. Although liability of those potentially responsible is generally joint and several for federal sites and frequently so for state sites, other potentially responsible parties at sites where we are a party typically have had the financial strength to meet their obligations, and where they have not, or where potentially responsible parties could not be located, our share of liability has not increased materially. 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 site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or attain a settlement of liability. Actual cleanup costs generally occur after the parties obtain the EPA or equivalent state agency approval of a remediation plan. There are relatively few sites where we are a major participant, and given the timing and amounts of anticipated expenditures, neither the cost of remediation at those sites nor such costs at all CERCLA sites, in the aggregate, is expected to have a material adverse effect on our competitive or financial condition. We incur costs related to the prevention, control, abatement or elimination of environmental pollution. Expensed environmental costs were $728 million in 2022 and are expected to be approximately $800 million in 2023 and 2024. Capitalized environmental costs were $88 million in 2022 and are expected to be approximately $140 million and $250 million, in 2023 and 2024, respectively. These amounts do not include capital expenditures made for other purposes that have an indirect benefit on environmental compliance. Accrued liabilities for remediation activities are not reduced for potential recoveries from insurers or other third parties and are not discounted (except those assumed in a business combination, which we record on a discounted basis). Many of these liabilities result from CERCLA, RCRA and similar state laws that require us to undertake certain investigative and remedial activities at sites where we conduct, or once conducted, operations or at sites where our generated waste was disposed. We also have accrued for a number of sites we identified that may require environmental remediation, but which are not currently the subject of CERCLA, RCRA or state enforcement activities. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the future, we may incur significant costs under both CERCLA and RCRA. Remediation activities vary substantially in duration and cost from site to site, depending on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, and the presence or absence of potentially liable third parties. Therefore, it is difficult to develop reasonable estimates of future site remediation costs. Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in certain of our operations and products, and there can be no assurance that those costs and liabilities will not be material. However, we currently do not expect any material adverse effect on our results of operations or financial position as a result of compliance with current environmental laws and regulations. Climate Change There has been a broad range of proposed or promulgated state, national and international laws focusing on GHG emissions reduction, including various regulations proposed or issued by the EPA. These proposed or promulgated laws apply or could apply in states and/or countries where we have interests or may have interests in the future. Laws regulating GHG emissions continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws potentially could have a material impact on our results of operations and financial condition as a result of increasing costs of compliance, lengthening project implementation and agency reviews, or reducing demand for certain hydrocarbon products. Examples of legislation or precursors for possible regulation that do or could affect our operations include: •EU ETS, which is part of the European Union’s policy to combat climate change and is a key tool for reducing industrial GHG emissions. EU ETS impacts factories, power stations and other installations across all EU member states. As a result of the United Kingdom’s exit from the EU (BREXIT), those types of entities in the United Kingdom are now subject to the UK ETS, rather than the EU ETS. •EU Renewable Energy Directive II, which increases the EU’s energy consumption from renewable sources in the electricity, heat, and transportation sectors to 32% by 2030. 69 Table of Contents Index to Financial Statements •United Kingdom’s Renewable Fuel Obligation, which is intended to reduce the GHG emissions from fuel used in the United Kingdom transportation sector by encouraging the supply of renewable fuels. •California’s Senate Bill No. 32, which requires reduction of California's GHG emissions to 40% below the 1990 emission level by 2030, and Assembly Bill 398, which extends the California GHG emission cap and trade program through 2030. Other GHG emissions programs in the western U.S. states have been enacted or are under consideration or development, including amendments to California's Low Carbon Fuel Standard, California’s Advanced Clean Cars and Trucks Programs, California’s Carbon Neutrality by 2045 Scoping Plan, Oregon's Low Carbon Fuel Standard and Climate Protection Plan, and Washington's carbon reduction programs. •United States’ Inflation Reduction Act, which contains tax inducements and other provisions that incentivize investment, development, and deployment of alternative energy sources and technologies, which is intended to accelerate the energy transition. •The U.S. Supreme Court decision in Massachusetts v. EPA, 549 U.S. 497, 127 S. Ct. 1438 (2007), confirming that the EPA has the authority to regulate carbon dioxide as an “air pollutant” under the Federal Clean Air Act. •The EPA’s announcement on March 29, 2010 (published as “Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs,” 75 Fed. Reg. 17004 (April 2, 2010)), and the EPA’s and U.S. Department of Transportation’s joint promulgation of a Final Rule on April 1, 2010, that triggers regulation of GHGs under the Clean Air Act. These collectively may lead to more climate-based claims for damages, and may result in longer agency review time for development projects to determine the extent of potential climate change. •The EPA's 2015 Final Rule regulating GHG emissions from existing fossil fuel-fired electrical generating units under the Federal Clean Air Act, commonly referred to as the Clean Power Plan. The EPA commenced rulemaking in 2017 to rescind the Clean Power Plan and, in August 2018, the EPA proposed the Affordable Clean Energy (ACE) rule as its replacement. On January 19, 2021, the U.S. Court of Appeals for the District of Columbia invalidated the ACE rule and remanded the matter to the EPA, essentially restarting this rulemaking process. •Carbon taxes in certain jurisdictions. •GHG emission cap and trade programs in certain jurisdictions. In the EU, the first phase of the EU ETS completed at the end of 2007. Phase II was undertaken from 2008 through 2012, and Phase III ran from 2013 through to 2020. Phase IV runs from January 1, 2021 through 2030 and sectors covered under the ETS must reduce their GHG emissions by 43% compared to 2005 levels and there is agreement between the EU Member States, the European Parliament, and the EU Commission (which is pending ratification by the EU Council and European Parliament) to increase the Phase IV GHG emissions reduction to 63% by 2030 compared to 2005 levels. The United Kingdom is no longer part of the EU ETS and, instead, has been under the UK ETS since 2021. Phillips 66 has assets that are subject to the EU ETS and assets that are subject to the UK ETS. From November 30 to December 12, 2015, more than 190 countries, including the United States, participated in the United Nations Climate Change Conference in Paris, France. The conference culminated in what is known as the “Paris Agreement,” which, upon certain conditions being met, entered into force on November 4, 2016. The Paris Agreement establishes a commitment by signatory parties to pursue domestic GHG emission reductions. In 2017, President Trump announced his intention to withdraw the United States from the Paris Agreement and that withdrawal became effective on November 4, 2020. On January 20, 2021, President Biden signed the “Acceptance on Behalf of the United States of America,” which allows the United States to rejoin the Paris Agreement. The United States officially rejoined the Paris Agreement in February 2021, which could lead to additional GHG emission reduction requirements for sources in the United States. In the United States, some additional form of regulation is likely to be forthcoming at the state or federal levels with respect to GHG emissions. Such regulation could take any of several forms that may result in additional financial burden in the form of taxes, the restriction of output, investments of capital to maintain compliance with laws and regulations, or required acquisition or trading of emission allowances. 70 Table of Contents Index to Financial Statements Compliance with changes in laws and regulations that create a GHG emission trading program, GHG reduction requirements or carbon taxes could significantly increase our costs, reduce demand for fossil energy derived products, impact the cost and availability of capital and increase our exposure to litigation. Such laws and regulations could also increase demand for less carbon intensive energy sources. An example of one such program is California’s cap and trade program, which was promulgated pursuant to the State’s Global Warming Solutions Act. The program had been limited to certain stationary sources, which include our refineries in California, but beginning in January 2015 was expanded to include emissions from transportation fuels distributed in California. Inclusion of transportation fuels in California’s cap and trade program as currently promulgated has increased our cap and trade program compliance costs. The ultimate impact on our financial performance, either positive or negative, from this and similar programs, will depend on a number of factors, including, but not limited to: •Whether and to what extent legislation or regulation is enacted. •The nature of the legislation or regulation, such as a cap and trade system or a tax on emissions. •The GHG reductions required. •The price and availability of offsets. •The demand for, and amount and allocation of allowances. •Technological and scientific developments leading to new products or services. •Any potential significant physical effects of climate change, such as increased severe weather events, changes in sea levels and changes in temperature. •Whether, and the extent to which, increased compliance costs are ultimately reflected in the prices of our products and services. We consider and take into account anticipated future GHG emissions in designing and developing major facilities and projects, and implement energy efficiency initiatives to reduce GHG emissions. Data on our GHG emissions, legal requirements regulating such emissions, and the possible physical effects of climate change on our coastal assets are incorporated into our planning, investment, and risk management decision-making. We are working to continuously improve operational and energy efficiency through resource and energy conservation throughout our operations. In February 2022, we announced our intention to reduce our Scope 1 and Scope 2 GHG emissions intensity related to our operations by 50% of 2019 levels by the year 2050. This new target builds upon our previously announced 2030 GHG emissions intensity targets to reduce Scope 1 and Scope 2 emissions from our operations by 30% and Scope 3 emissions from our energy products by 15% compared to 2019 levels. In addition to the disclosures above, we have issued our 2022 Sustainability Report that is accessible on our website and provides more detailed information on our Environmental, Social and Corporate Governance initiatives, including detailed information on environmental metrics. 71 Table of Contents Index to Financial Statements CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with GAAP requires management to select appropriate accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. See Note 1—Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, for descriptions of our major accounting policies. Some of these accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts would have been reported under different conditions, or if different assumptions had been used. The following discussion of critical accounting estimates addresses accounting areas where the nature of accounting estimates or assumptions could be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change. Business Combination In accounting for a business combination, assets acquired, liabilities assumed and noncontrolling interests are recorded based on estimated fair values as of the date of acquisition. The excess or shortfall of the purchase price when compared to the fair value of the net tangible and identifiable intangible assets acquired, if any, is recorded as goodwill or a bargain purchase gain, respectively. A significant amount of judgment is made in estimating the individual fair value of property, plant and equipment, intangible assets, noncontrolling interests and other assets and liabilities. We use available information to make these fair value determinations and engage third-party specialists in the valuation process as necessary. The fair values of assets acquired, liabilities assumed and noncontrolling interests as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity specific differences. The estimates used in determining fair values are based on assumptions believed to be reasonable, but which are inherently uncertain. Accordingly, actual results may differ materially from the estimated results used to determine fair value. See Note 4—Business Combination, and Note 18—Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information on the merger of DCP Midstream and Gray Oak Holdings and fair value measurements. Impairment of Long-Lived Assets and Equity Method Investments Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in future expected cash flows. If the sum of the undiscounted expected future before-tax cash flows of an asset group is less than the carrying value, including applicable liabilities, the carrying value is written down to estimated fair value. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined using one or more of the following methods: the present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants; a market multiple for similar assets; historical market transactions including similar assets, adjusted using principal market participant assumptions when necessary; or replacement cost adjusted for physical deterioration and economic obsolescence. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments, including future volumes, commodity prices, operating costs, margins, discount rates and capital project decisions, considering all available information at the date of review. 72 Table of Contents Index to Financial Statements Investments in nonconsolidated entities accounted for under the equity method are assessed for impairment when there are indicators of a loss in value, such as a lack of sustained earnings capacity or a current fair value less than the investment’s carrying amount. When it is determined that an indicated impairment is other than temporary, a charge is recognized for the difference between the investment’s carrying value and its estimated fair value. When determining whether a decline in value is other than temporary, management considers factors such as the duration and extent of the decline, the investee’s financial condition and near-term prospects, and our ability and intention to retain our investment for a period that allows for recovery. When quoted market prices are not available, the fair value is usually based on the present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants and observed market earnings multiples of comparable companies, if appropriate. Different assumptions could affect the timing and the amount of an impairment of an investment in any period. See Note 11—Impairments, in the Notes to Consolidated Financial Statements, for information about impairments recorded in 2022, 2021 and 2020. 73 Table of Contents Index to Financial Statements GUARANTOR FINANCIAL INFORMATION We have various cross guarantees between Phillips 66 and its wholly owned subsidiary Phillips 66 Company (together, the Obligor Group) with respect to publicly held debt securities. Phillips 66 conducts substantially all of its operations through subsidiaries, including Phillips 66 Company, and those subsidiaries generate substantially all of its operating income and cash flow. Phillips 66 has fully and unconditionally guaranteed the payment obligations of Phillips 66 Company with respect to its publicly held debt securities. In addition, Phillips 66 Company has fully and unconditionally guaranteed the payment obligations of Phillips 66 with respect to its publicly held debt securities. All guarantees are full and unconditional. At December 31, 2022, $12 billion of senior unsecured notes outstanding has been guaranteed by the Obligor Group. See the “Significant Sources of Capital” section for additional information regarding the Exchange Offers by Phillips 66 Company for existing senior notes of Phillips 66 Partners that settled in May 2022. Summarized financial information of the Obligor Group is presented on a combined basis. Intercompany transactions among the members of the Obligor Group have been eliminated. The financial information of non-guarantor subsidiaries has been excluded from the summarized financial information. Significant intercompany transactions and receivable/payable balances between the Obligor Group and non-guarantor subsidiaries are presented separately in the summarized financial information. 74 Table of Contents Index to Financial Statements The summarized results of operations for the year ended December 31, 2022, and the summarized financial position at December 31, 2022, of the Obligor Group on a combined basis were: [[GREPCENT_TABLE]] [["Summarized Combined Statement of Operations","Millions of Dollars"],["Sales and other operating revenues","$","131,315"],["Revenues and other income\u2014non-guarantor subsidiaries","3,643"],["Purchased crude oil and products\u2014third parties","74,787"],["Purchased crude oil and products\u2014related parties","21,125"],["Purchased crude oil and products\u2014non-guarantor subsidiaries","25,240"],["Income before income taxes","7,244"],["Net income","5,240"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Summarized Combined Balance Sheet","Millions of Dollars"],["Accounts and notes receivable\u2014third parties","$","5,485"],["Accounts and notes receivable\u2014related parties","1,376"],["Due from non-guarantor subsidiaries, current","741"],["Total current assets","15,566"],["Investments and long-term receivables","10,433"],["Net properties, plants and equipment","11,652"],["Goodwill","1,047"],["Due from non-guarantor subsidiaries, noncurrent","2,163"],["Other assets associated with non-guarantor subsidiaries","2,144"],["Total noncurrent assets","29,209"],["Total assets","44,775"],["Due to non-guarantor subsidiaries, current","$","2,297"],["Total current liabilities","11,148"],["Long-term debt","12,060"],["Due to non-guarantor subsidiaries, noncurrent","7,088"],["Total noncurrent liabilities","25,223"],["Total liabilities","36,371"],["Total equity","8,404"],["Total liabilities and equity","44,775"]] [[/GREPCENT_TABLE]] 75 Table of Contents Index to Financial Statements NON-GAAP RECONCILIATIONS Refining Our realized refining margins measure the difference between (a) sales and other operating revenues derived from the sale of petroleum products manufactured at our refineries and (b) costs of feedstocks, primarily crude oil, used to produce the petroleum products. The realized refining margins are adjusted to include our proportional share of our joint venture refineries’ realized margins, as well as to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized refining margins are converted to a per-barrel basis by dividing them by total refinery processed inputs (primarily crude oil) measured on a barrel basis, including our share of inputs processed by our joint venture refineries. Our realized refining margin per barrel is intended to be comparable with industry refining margins, which are known as “crack spreads.” As discussed in “Executive Overview and Business Environment—Business Environment,” industry crack spreads measure the difference between market prices for refined petroleum products and crude oil. We believe realized refining margin per barrel calculated on a similar basis as industry crack spreads provides a useful measure of how well we performed relative to benchmark industry refining margins. The GAAP performance measure most directly comparable to realized refining margin per barrel is the Refining segment’s “income (loss) before income taxes per barrel.” Realized refining margin per barrel excludes items that are typically included in a manufacturer’s gross margin, such as depreciation and operating expenses, and other items used to determine income (loss) before income taxes, such as general and administrative expenses. It also includes our proportional share of joint venture refineries’ realized refining margins and excludes special items. Because realized refining margin per barrel is calculated in this manner, and because realized refining margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. Following are reconciliations of income (loss) before income taxes to realized refining margins: 76 Table of Contents Index to Financial Statements [[GREPCENT_TABLE]] [["","Millions of Dollars, Except as Indicated"],["Realized Refining Margins","Atlantic Basin/Europe","Gulf Coast","Central Corridor","West Coast","Worldwide"],["Year Ended December 31, 2022"],["Income before income taxes","$","2,402","","2,091","","2,415","","908","","7,816"],["Plus:"],["Taxes other than income taxes","53","","87","","57","","91","","288"],["Depreciation, amortization and impairments","203","","250","","147","","279","","879"],["Selling, general and administrative expenses","41","","19","","62","","31","","153"],["Operating expenses","1,242","","1,230","","809","","1,486","","4,767"],["Equity in (earnings) losses of affiliates","9","","7","","(763)","","\u2014","","(747)"],["Other segment (income) expense, net","(6)","","1","","2","","(1)","","(4)"],["Proportional share of refining gross margins contributed by equity affiliates","93","","\u2014","","1,668","","\u2014","","1,761"],["Special items:"],["Regulatory compliance costs","9","","26","","22","","13","","70"],["Realized refining margins","$","4,046","","3,711","","4,419","","2,807","","14,983"],["Total processed inputs (thousands of barrels)","199,319","","203,269","","97,997","","115,457","","616,042"],["Adjusted total processed inputs (thousands of barrels)*","199,319","","203,269","","177,112","","115,457","","695,157"],["Income before income taxes per barrel (dollars per barrel)**","$","12.05","","10.29","","24.64","","7.86","","12.69"],["Realized refining margins (dollars per barrel)***","20.30","","18.25","","24.96","","24.31","","21.55"],["Year Ended December 31, 2021"],["Income (loss) before income taxes","$","1","","(1,759)","","72","","(667)","","(2,353)"],["Plus:"],["Taxes other than income taxes","69","","74","","51","","49","","243"],["Depreciation, amortization and impairments","210","","1,683","","139","","240","","2,272"],["Selling, general and administrative expenses","32","","34","","30","","37","","133"],["Operating expenses","981","","1,352","","648","","1,220","","4,201"],["Equity in losses of affiliates","9","","11","","164","","\u2014","","184"],["Other segment (income) expense, net","9","","(7)","","(11)","","4","","(5)"],["Proportional share of refining gross margins contributed by equity affiliates","123","","\u2014","","609","","\u2014","","732"],["Special items:"],["Certain tax impacts","(4)","","\u2014","","\u2014","","\u2014","","(4)"],["Regulatory compliance costs","(20)","","(28)","","(27)","","(13)","","(88)"],["Realized refining margins","$","1,410","","1,360","","1,675","","870","","5,315"],["Total processed inputs (thousands of barrels)","188,697","","240,859","","95,595","","112,994","","638,145"],["Adjusted total processed inputs (thousands of barrels)*","188,697","","240,859","","173,230","","112,994","","715,780"],["Income (loss) before income taxes per barrel (dollars per barrel)**","$","0.01","","(7.30)","","0.75","","(5.90)","","(3.69)"],["Realized refining margins (dollars per barrel)***","7.48","","5.65","","9.65","","7.70","","7.42"],["* Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate."],["** Income (loss) before income taxes divided by total processed inputs."],["*** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts."]] [[/GREPCENT_TABLE]] 77 Table of Contents Index to Financial Statements [[GREPCENT_TABLE]] [["","Millions of Dollars, Except as Indicated"],["Realized Refining Margins","Atlantic Basin/Europe","Gulf Coast","Central Corridor","West Coast","Worldwide"],["Year Ended December 31, 2020"],["Loss before income taxes","$","(1,207)","","(1,964)","","(642)","","(2,210)","","(6,023)"],["Plus:"],["Taxes other than income taxes","61","","110","","51","","89","","311"],["Depreciation, amortization and impairments","643","","985","","571","","1,460","","3,659"],["Selling, general and administrative expenses","27","","37","","28","","35","","127"],["Operating expenses","775","","1,394","","497","","1,000","","3,666"],["Equity in losses of affiliates","10","","3","","363","","\u2014","","376"],["Other segment (income) expense, net","1","","1","","(2)","","5","","5"],["Proportional share of refining gross margins contributed by equity affiliates","67","","\u2014","","298","","\u2014","","365"],["Special items:"],["Certain tax impacts","(6)","","\u2014","","\u2014","","\u2014","","(6)"],["Realized refining margins","$","371","","566","","1,164","","379","","2,480"],["Total processed inputs (thousands of barrels)","170,536","","213,871","","92,050","","110,602","","587,059"],["Adjusted total processed inputs (thousands of barrels)*","170,536","","213,871","","162,693","","110,602","","657,702"],["Loss before income taxes per barrel (dollars per barrel)**","$","(7.08)","","(9.18)","","(6.97)","","(19.98)","","(10.26)"],["Realized refining margins (dollars per barrel)***","2.17","","2.64","","7.17","","3.43","","3.77"],["* Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate."],["** Loss before income taxes divided by total processed inputs."],["*** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts."]] [[/GREPCENT_TABLE]] 78 Table of Contents Index to Financial Statements Marketing Our realized marketing fuel margins measure the difference between (a) sales and other operating revenues derived from the sale of fuels in our M&S segment and (b) costs of those fuels. The realized marketing fuel margins are adjusted to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized marketing fuel margins are converted to a per-barrel basis by dividing them by sales volumes measured on a barrel basis. We believe realized marketing fuel margin per barrel demonstrates the value uplift our marketing operations provide by optimizing the placement and ultimate sale of our refineries’ fuel production. Within the M&S segment, the GAAP performance measure most directly comparable to realized marketing fuel margin per barrel is the marketing business’ “income before income taxes per barrel.” Realized marketing fuel margin per barrel excludes items that are typically included in gross margin, such as depreciation and operating expenses, and other items used to determine income before income taxes, such as general and administrative expenses. Because realized marketing fuel margin per barrel excludes these items, and because realized marketing fuel margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. Following are reconciliations of income before income taxes to realized marketing fuel margins: [[GREPCENT_TABLE]] [["","Millions of Dollars, Except as Indicated"],["","U.S.","","International"],["","2022","2021","2020","","2022","2021","2020"],["Realized Marketing Fuel Margins"],["Income before income taxes","$","1,329","","1,180","","870","","","765","","403","","454"],["Plus:"],["Depreciation and amortization","14","","14","","12","","","72","","76","","70"],["Selling, general and administrative expenses","808","","758","","623","","","251","","253","","246"],["Equity in earnings of affiliates","(71)","","(48)","","(31)","","","(115)","","(113)","","(108)"],["Other operating (revenues) expenses*","(508)","","(424)","","(327)","","","(62)","","8","","(27)"],["Other (income) expense, net","24","","9","","1","","","(7)","","7","","6"],["Marketing margins","1,596","","1,489","","1,148","","","904","","634","","641"],["Less: margin for nonfuel related sales","\u2014","","\u2014","","\u2014","","","51","","53","","46"],["Realized marketing fuel margins","$","1,596","","1,489","","1,148","","","853","","581","","595"],["Total fuel sales volumes (thousands of barrels)","680,930","","680,102","","613,869","","","102,862","","97,529","","93,773"],["Income before income taxes per barrel (dollars per barrel)","$","1.95","1.74","1.42","","7.44","4.13","4.84"],["Realized marketing fuel margins (dollars per barrel)**","2.34","","2.19","","1.87","","","8.29","","5.96","","6.34"],["* Includes other nonfuel revenues and expenses."],["** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts."]] [[/GREPCENT_TABLE]] 79 Table of Contents Index to Financial Statements