PHILLIPS 66 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 toPhillips 66 . The terms "results," "before-tax income" or "before-tax loss" as used in Management's Discussion and Analysis refer to income (loss) before income taxes.
EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT
Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. AtDecember 31, 2021 , we had total assets of$55.6 billion . Executive Overview We reported earnings of$1.3 billion and generated$6.0 billion in cash from operating activities for the full year of 2021. During 2021, we used available cash to fund capital expenditures and investments of$1.9 billion , pay dividends on our common stock of$1.6 billion , and pay down$1.5 billion in debt. We ended 2021 with$3.1 billion of cash and cash equivalents and approximately$5.7 billion of total committed capacity available under our credit facilities. Our reported earnings for 2021 continued to reflect the ongoing impacts of the disruption to global economic activities caused by the Coronavirus Disease 2019 (COVID-19) pandemic, primarily on our Refining segment. However, through 2021 global refined petroleum product demand steadily recovered due to the easing of pandemic restrictions and the administration of COVID-19 vaccines. Consequently, margins and utilization for our Refining segment, margins and sales volumes for our Marketing and Specialities (M&S) segment, and throughput volumes for our Transportation business improved. In addition, equity earnings from our Chemicals segment increased significantly due to higher margins driven by strong demand and tight product supply. However, as uncertainty remains regarding the ongoing impact of the pandemic on the global economy, we will continue to be disciplined in our allocation of capital and monitor the performance of our portfolio. In 2021, we progressed strategic initiatives to positionPhillips 66 for a lower-carbon future as a part of our commitment to play an important role in addressing climate change. InSeptember 2021 , we announced a set of company-wide greenhouse gas (GHG) emission intensity reduction targets that we consider to be impactful, attainable and measurable. By 2030, we expect to reduce GHG emission intensity by 30% for Scope 1 and 2 emissions from our operations and by 15% for Scope 3 emissions from our energy products, below 2019 levels. Also inSeptember 2021 , we acquired a 16% interest in NOVONIX Limited (NOVONIX), a company that develops technology and supplies materials for lithium-ion batteries. InOctober 2021 , we entered into a definitive merger agreement withPhillips 66 Partners to acquire all of the limited partner interests inPhillips 66 Partners not already owned by us on the closing date of the transaction. The agreement provides for an all-stock transaction in which each outstandingPhillips 66 Partners common unitholder would receive 0.50 shares ofPhillips 66 common stock for eachPhillips 66 Partners common unit.Phillips 66 Partners' perpetual convertible preferred units would be converted into common units at a premium to the original issuance price prior to exchange forPhillips 66 common stock. This merger is expected to close inMarch 2022 , subject to customary closing conditions. Upon closing,Phillips 66 Partners will become a wholly owned subsidiary ofPhillips 66 and will no longer be a publicly traded partnership. See Note 27-Phillips 66 Partners LP , in the Notes to Consolidated Financial Statements, for additional information on the pending merger transaction. 38
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Index to Financial Statements 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 2021, we achieved a 0.12 total recordable rate. 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. Senior management actively monitors these costs and assesses opportunities for permanent cost reductions. 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 2021, our worldwide refining crude oil capacity utilization rate was 84% and our worldwide refining clean product yield was 83%. •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 returns-focused growth opportunities in the Midstream and Chemicals segments, as well as our investments in renewable fuels projects to advance a lower-carbon future. In 2022, we have budgeted$426 million in growth capital for our Midstream segment, which includes construction completion of Frac 4 at the Sweeny Hub. In Chemicals, our share of expected self-funded growth capital spending byChevron Phillips Chemical Company LLC (CPChem) is$502 million . CPChem plans to use its growth capital to fund expansion of its normal alpha olefins production, optimization and debottleneck opportunities in the olefins and polyolefins chains, as well as continuing development of petrochemicals projects in theU.S. Gulf Coast andQatar . In Refining, we have budgeted$408 million of growth capital, primarily for the reconfiguration of theSan Francisco Refinery inRodeo, California , to a renewable fuels production facility, as part of the Rodeo Renewed project. •Returns. We plan to enhance Refining returns by increasing throughput of advantaged feedstocks, improving yields, optimizing our portfolio, and remaining committed to operating excellence. For 2022, 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 the fourth quarter of 2021, we increased our quarterly dividend by 2% to$0.92 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. We suspended our share repurchase program inMarch 2020 to preserve liquidity. As operating cash flows improve further, we will prioritize shareholder returns and debt repayment. •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. 39
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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 contains both fee-based operations and operations directly impacted by NGL prices. The Midstream segment also includes our 50% equity investment in DCP Midstream. During 2021, NGL prices increased significantly, compared with 2020, due to strong demand as economic activities gradually recovered following the administration of COVID-19 vaccines and the easing of pandemic restrictions. The Chemicals segment consists of our 50% equity investment in 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 2020, the benchmark high-density polyethylene chain margin increased significantly in 2021, due to continued strong demand and tight supply. 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 ofU.S. benchmark crude oil, West Texas Intermediate (WTI) atCushing, Oklahoma , increased to an average of$67.96 per barrel during 2021, compared with an average of$39.31 per barrel in 2020. Market crack spreads are used as indicators of refining margins and measure the difference between market prices for refined petroleum products and crude oil. Worldwide market crack spreads increased to an average of$17.09 per barrel during 2021, compared with an average of$8.33 per barrel in 2020. The increases in crude oil prices and market crack spreads were primarily driven by a significant increase in demand for refined petroleum products, as economic activities gradually recovered following the administration of COVID-19 vaccines and the easing of pandemic restrictions, as well as tightening supply. In 2021, renewable identification number (RIN) prices increased significantly, compared with 2020. Results for our M&S segment depend largely on marketing fuel and lubricant margins, and sales volumes of our refined petroleum and other specialty 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. In general, a downward trend of spot prices has a favorable impact on marketing fuel margins, while an upward trend of spot prices has an unfavorable impact on marketing fuel margins. The global disruption caused by the COVID-19 pandemic resulted in reduced demand for refined petroleum and specialty products sinceMarch 2020 . Following the administration of COVID-19 vaccines in 2021 and the easing of pandemic restrictions, demand for refined petroleum and specialty products improved in 2021, compared with 2020. 40
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Table of Contents Index to Financial Statements RESULTS OF OPERATIONS Consolidated Results
A summary of income (loss) before income taxes by business segment with a
reconciliation to net income (loss) attributable to
Millions of Dollars
Year Ended December 31
2021 2020 2019
Midstream $ 1,610 (9) 684
Chemicals 1,844 635 879
Refining (2,549) (6,155) 1,986
Marketing and Specialties 1,809 1,446 1,433
Corporate and Other (974) (881) (804)
Income (loss) before income taxes 1,740 (4,964) 4,178
Income tax expense (benefit) 146 (1,250) 801
Net income (loss) 1,594 (3,714) 3,377
Less: net income attributable to noncontrolling interests 277 261 301
Net income (loss) attributable to Phillips 66 $ 1,317 (3,975) 3,076
2021 vs. 2020
Net income attributable to Phillips 66 for the year ended December 31, 2021 , was
$1,317 million , compared with a 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.
2020 vs. 2019
Net loss attributable toPhillips 66 for the year endedDecember 31, 2020 , was$3,975 million , compared with net income attributable toPhillips 66 of$3,076 million for the year endedDecember 31, 2019 . The decrease was mainly attributable to:
•Lower realized refining margins and decreased refinery production.
•A goodwill impairment in our Refining segment.
•A long-lived asset impairment associated with our plan to reconfigure theSan Francisco Refinery into a renewable fuels production facility, which impacted our Refining and Midstream segments.
•Higher impairments of equity investments in our Midstream segment.
These decreases were partially offset by an income tax benefit recognized in 2020, compared with income tax expense recognized in 2019.
See Note 9-Impairments, and Note 16-Fair Value Measurements, in the Notes to Consolidated Financial Statements, for information on impairments recorded in 2021, 2020 and 2019.
See the "Segment Results" section for additional information on our segment results.
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Index to Financial Statements Statement of Operations Analysis
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, andExcel Paralubes LLC (Excel) 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 owns an interest inGray Oak Pipeline, LLC . See Note 27-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. 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 ourAlliance Refinery in connection with plans to convert it to a terminal. See Note 7-Properties, Plants and Equipment, in the Notes to Consolidated Financial Statements, for additional information regarding asset retirements related to ourAlliance Refinery .
Impairments decreased 65% in 2021. See Note 9-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 ourSan 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 21-Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes. 42
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Index to Financial Statements 2020 vs. 2019 Sales and other operating revenues and purchased crude oil and products both decreased 40% in 2020. The decreases were mainly due to lower prices and volumes for refined petroleum products and crude oil, reflecting the impact of the COVID-19 pandemic. Equity in earnings of affiliates decreased 44% in 2020. The decrease was primarily due to lower realized refining margins and decreased refinery production at WRB, and lower margins, partially offset by higher sales volumes, at CPChem. See Chemicals segment analysis in the "Segment Results" section for additional information on CPChem. Net gain on dispositions increased$88 million in 2020. The increase was mainly due to a gain of$84 million associated with a co-venturer's prior-year acquisition of a 35% interest inPhillips 66 Partners' consolidated holding company that owns an interest inGray Oak Pipeline, LLC . See Note 27-Phillips 66 Partners LP , in the Notes to Consolidated Financial Statements, for additional information. Operating expenses decreased 10% in 2020, primarily driven by our company-wide cost reduction initiatives in response to the COVID-19 pandemic, lower utility costs, and decreased refinery turnaround activities. Impairments increased$3,391 million in 2020. See Note 9-Impairments, and Note 16-Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information associated with impairments. We had an income tax benefit of$1,250 million in 2020, compared with income tax expense of$801 million in 2019, primarily due to a before-tax loss in 2020 versus before-tax income in 2019. See Note 21-Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes. 43
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Index to Financial Statements
Segment Results
Midstream
Year Ended December 31
2021 2020 2019
Millions of Dollars
Income (Loss) Before Income Taxes
Transportation $ 678 508 946
NGL and Other 747 441 522
DCP Midstream 185 (958) (784)
Total Midstream $ 1,610 (9) 684
Thousands of Barrels Daily
Transportation Volumes
Pipelines* 3,271 3,005 3,396
Terminals 2,790 2,971 3,315
Operating Statistics
NGL fractionated** 410 249 224
NGL extracted*** 394 399 417
* Pipelines represent the sum of volumes transported through each separately
tariffed consolidated pipeline segment.
** Excludes DCP Midstream.
*** Includes 100% of DCP Midstream's volumes.
Dollars Per Gallon
Market Indicator
Weighted-Average NGL Price* $ 0.83 0.41 0.51
* Based on index prices from the
The Midstream segment provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, fractionation, processing and marketing services, mainly inthe United States . This segment includes our MLP,Phillips 66 Partners , our 50% equity investment in DCP Midstream, which includes the operations of its MLP,DCP Partners , and our 16% investment in NOVONIX.
2021 vs. 2020
Results from our Midstream segment increased
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 owns an interest inGray Oak Pipeline, LLC , and increased depreciation and amortization expense from asset retirements related to the shutdown of theAlliance Refinery in the fourth quarter of 2021. Results from our NGL and Other business increased$306 million in 2021, compared with 2020. The increase in 2021 was primarily driven by a$370 million increase in the value of our investment in NOVONIX, which we acquired in the third quarter of 2021, partially offset by higher utility costs due to increased natural gas prices. 44
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Index to Financial Statements Results from our investment in DCP Midstream increased$1,143 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.
See Note 9-Impairments, and Note 27-
See the "Executive Overview and Business Environment" section for information on market factors impacting 2021 results.
2020 vs. 2019
Midstream's results decreased
Results from our Transportation business decreased$438 million in 2020, compared with 2019. The decrease was primarily attributable to before-tax impairments of$300 million , decreased equity earnings, lower pipeline and terminal throughput volumes, and higher operating costs, partially offset by an$84 million before-tax gain recognized in the second quarter of 2020 associated with the Gray Oak Pipeline joint venture. The$300 million before-tax impairments consisted of a$120 million impairment of the pipeline and terminal assets associated with the planned reconfiguration of ourSan Francisco Refinery into a renewable fuels production facility, a$96 million impairment ofPhillips 66 Partners' equity investments in two crude oil logistics joint ventures, and an$84 million impairment of our equity investment in the canceled Red Oak Pipeline project.
See Note 9-Impairments, and Note 27-
Results from our NGL and Other business decreased$81 million in 2020, compared with 2019. The decrease was mainly due to lower results from our trading activities and decreased margins, partially offset by higher export cargos and increased fractionation volumes from the startup of Frac 2 and Frac 3 in late 2020, as well as the startup of a new isomerization unit at ourLake Charles Refinery in the second half of 2019. Results from our investment in DCP Midstream decreased$174 million in 2020, compared with 2019. The decrease was primarily due to higher impairment charges, partially offset by the recognition of a larger benefit to our equity earnings from the amortization of the basis difference associated with the impairments and DCP Midstream's cost reduction initiatives in response to the challenging business environment. See Note 6-Investments, Loans and Long-Term Receivables, and Note 9-Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding the impairments and the associated basis difference amortization related to our investment in DCP Midstream. 45
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Index to Financial Statements
Chemicals
Year Ended December 31
2021 2020 2019
Millions of Dollars
Income Before Income Taxes $ 1,844 635 879
Millions of Pounds
CPChem Externally Marketed Sales Volumes*
Olefins and Polyolefins 19,332 20,993 20,237
Specialties, Aromatics and Styrenics 4,735 4,367 4,281
24,067 25,360 24,518
* Represents 100% of CPChem's outside sales of produced petrochemical products, as well as commission sales from equity affiliates.
Olefins and Polyolefins Capacity Utilization (percent) 95 % 99 97 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. We structure our reporting of CPChem's operations around two primary business lines: Olefins and Polyolefins (O&P) and Specialties, Aromatics and Styrenics (SA&S). The O&P business line 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. The SA&S business line manufactures and markets aromatics and styrenics products, such as benzene, cyclohexane, styrene and polystyrene. SA&S also manufactures and/or markets a variety of specialty chemical products. Unless otherwise noted, amounts referenced below reflect our net 50% interest in CPChem. 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.
See the "Executive Overview and Business Environment" section for information on market factors impacting CPChem's 2021 results.
2020 vs. 2019
Before-tax income from the Chemicals segment decreased$244 million in 2020, compared with 2019. The decrease was mainly due to lower margins and decreased earnings from CPChem's equity affiliates, partially offset by higher sales volumes and a favorable impact from lower-of-cost-or-market adjustments of inventories valued on the last-in-first-out (LIFO) basis attributable to petrochemical product price recovery in 2020. 46
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Index to Financial Statements
Refining
Year Ended December 31
2021 2020 2019
Millions of Dollars
Income (Loss) Before Income Taxes
Atlantic Basin/Europe $ (36) (1,224) 608
Gulf Coast (1,889) (2,077) 364
Central Corridor 70 (641) 1,338
West Coast (694) (2,213) (324)
Worldwide $ (2,549) (6,155) 1,986
Dollars Per Barrel
Income (Loss) Before Income Taxes
Atlantic Basin/Europe $ (0.19) (7.18) 3.11
Gulf Coast (7.84) (9.71) 1.24
Central Corridor 0.73 (6.96) 12.95
West Coast (6.14) (20.01) (2.49)
Worldwide (3.99) (10.48) 2.75
Realized Refining Margins*
Atlantic Basin/Europe $ 7.48 2.17 9.33
Gulf Coast 4.92 1.85 7.42
Central Corridor 9.65 7.17 14.91
West Coast 7.49 3.43 9.18
Worldwide 7.15 3.51 9.91
* 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
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Index to Financial Statements
Thousands of Barrels Daily
Year Ended December 31
2021 2020 2019
Operating Statistics
Refining operations*
Atlantic Basin /Europe
Crude oil capacity 537 537 537
Crude oil processed 479 434 497
Capacity utilization (percent) 89 % 81 92
Refinery production 522 470 541
Gulf Coast**
Crude oil capacity 720 769 764
Crude oil processed 592 533 725
Capacity utilization (percent) 82 % 69 95
Refinery production 662 586 804
Central Corridor
Crude oil capacity 531 530 515
Crude oil processed 461 431 498
Capacity utilization (percent) 87 % 81 97
Refinery production 476 446 518
West Coast
Crude oil capacity 364 364 364
Crude oil processed 284 279 323
Capacity utilization (percent) 78 % 77 89
Refinery production 308 301 354
Worldwide
Crude oil capacity 2,152 2,200 2,180
Crude oil processed 1,816 1,677 2,043
Capacity utilization (percent) 84 % 76 94
Refinery production 1,968 1,803 2,217
* Includes our share of equity affiliates.
** Excludes operating statistics of the
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 inthe United States andEurope . OurAlliance Refinery sustained significant impacts from Hurricane Ida inAugust 2021 , and in the fourth quarter of 2021, we announced the shutdown of the refinery in connection with plans to convert it to a terminal.
2021 vs. 2020
Results from the Refining segment increased$3,606 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 ourAlliance 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.
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.
See Note 9-Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments recorded in our Refining segment during 2021 and 2020.
See the "Executive Overview and Business Environment" section for information on industry crack spreads and other market factors impacting this year's results.
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Index to Financial Statements 2020 vs. 2019
Results from the Refining segment decreased
•Lower realized refining margins and decreased refinery production. A sharp decline in demand for refined petroleum products resulting from global economic disruption caused by the COVID-19 pandemic led to lower market crack spreads and reduced refinery production in 2020. In addition, hurricane impacts contributed to the lower refinery production in theGulf Coast region in 2020. •A before-tax long-lived asset impairment of$910 million in the third quarter of 2020 associated with our plan to reconfigure theSan Francisco Refinery into a renewable fuels production facility.
•A before-tax goodwill impairment of
Our worldwide refining crude oil capacity utilization rate was 76% and 94% in 2020 and 2019, respectively. The lower utilization rate in 2020 was primarily due to reduced refining runs driven by lower demand for refined petroleum products as a result of the COVID-19 pandemic, as well as hurricane impacts in theGulf Coast region. See Note 9-Impairments, in the Notes to Consolidated Financial Statements, for additional information regarding impairments recorded in our Refining segment during 2020. 49
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Index to Financial Statements
Marketing and Specialties
Year Ended December 31
2021 2020 2019
Millions of Dollars
Income Before Income Taxes
Marketing and Other $ 1,453 1,271 1,199
Specialties 356 175 234
Total Marketing and Specialties $ 1,809 1,446 1,433
Dollars Per Barrel
Income Before Income Taxes
U.S. $ 1.74 1.42 1.22
International 4.13 4.84 3.58
Realized Marketing Fuel Margins*
U.S. $ 2.19 1.87 1.57
International 5.96 6.34 4.90
* See the "Non-GAAP Reconciliations" 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 $ 2.46 1.56 2.12
Distillates 2.36 1.47 2.12
* On third-party branded refined petroleum product sales, excluding excise taxes.
Thousands of Barrels Daily
Marketing Refined Petroleum Product Sales
Gasoline 1,154 1,021 1,230
Distillates 959 895 1,104
Other 17 17 18
2,130 1,933 2,352
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 specialty products, such as base oils and
lubricants.
2021 vs. 2020
Before-tax income from the M&S segment increased$363 million in 2021, compared with 2020. The increase in 2021 was primarily driven by higher realizedU.S. marketing fuel margins and increased equity earnings from Excel due to improved base oil margins, partially offset by lower realized international marketing fuel margins.
See the "Executive Overview and Business Environment" section for information on marketing fuel margins and other market factors impacting 2021 results.
2020 vs. 2019
Before-tax income from the M&S segment increased$13 million in 2020, compared with 2019. The increase was primarily attributable to higher realized marketing fuel margins, partially offset by lower sales volumes for refined petroleum and specialty products driven by decreased demand. 50
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Index to Financial Statements
Corporate and Other
Millions of Dollars
Year Ended December 31
2021 2020 2019
Loss Before Income Taxes
Net interest expense $ (583) (485) (415)
Corporate overhead and other (391) (396) (389)
Total Corporate and Other $ (974) (881) (804)
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, foreign currency transaction gains and
losses, and other costs not directly associated with an operating segment.
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 12-Debt, in the Notes to Consolidated Financial Statements, for additional information on the debt issuances in 2020 and debt repayment in 2021.
Corporate overhead and other decreased
2020 vs. 2019
Net interest expense increased$70 million in 2020, compared with 2019, primarily due to higher average debt principal balances, reflecting new debt issuances during 2020, along with decreased interest income driven by lower interest rates in 2020. See Note 12-Debt, in the Notes to Consolidated Financial Statements, for additional information on the debt issuances in 2020.
Corporate overhead and other increased
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Index to Financial Statements CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars, Except as Indicated
2021 2020 2019
Cash and cash equivalents $ 3,147 2,514 1,614
Net cash provided by operating activities 6,017 2,111 4,808
Short-term debt 1,489 987 547
Total debt 14,448 15,893 11,763
Total equity 21,637 21,523 27,169
Percent of total debt to capital* 40 % 42 30
Percent of floating-rate debt to total debt 3 % 12 9
* Capital includes total debt and total equity.
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 2021, we generated$6.0 billion in cash from operations. We used available cash to fund capital expenditures and investments of$1.9 billion , pay dividends on our common stock of$1.6 billion , pay down$1.5 billion in debt, and fund an additional member loan to an equity affiliate of$310 million . During 2021, cash and cash equivalents increased$633 million to$3.1 billion .
Significant Sources of Capital
Operating Activities During 2021, cash generated by operating activities was$6.0 billion , a$3.9 billion increase compared with 2020. The increase was primarily due to improved realized refining margins, aU.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.
During 2020, cash generated by operating activities was
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 84%, 76% and 94% in 2021, 2020 and 2019, respectively. Our worldwide refining clean product yield was 83%, 84% and 84% in 2021, 2020 and 2019, 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 endedDecember 31, 2021 , our operating cash flows included aggregate distributions from our equity affiliates of$6,285 million , including$3,101 million from CPChem. We cannot control the amount or timing of future distributions from equity affiliates; therefore, future distributions are not assured. 52
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Index to Financial Statements Tax Refunds We received aU.S. federal income tax refund of$1.1 billion in the second quarter of 2021. Revolving Credit Facilities and Commercial PaperPhillips 66 has a$5 billion revolving credit facility which may be used for direct bank borrowings, as support for issuances of letters of credit, and as support for our commercial paper program. We have an 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 after itsJuly 30, 2024 , maturity date, subject to, among other things, the consent of the lenders holding the majority of the commitments and of each lender extending its commitment. The facility is with a broad syndicate of financial institutions and contains covenants that are usual and customary for an agreement of this type, including a maximum consolidated net debt-to-capitalization ratio of 65% as of the last day of each fiscal quarter. The facility has customary events of default, such as nonpayment of principal when due; nonpayment of interest, fees or other amounts; and violation of covenants. Outstanding borrowings under the facility bear interest, at our option, at either: (a) the Eurodollar rate 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 forPhillips 66's senior unsecured long-term debt from time to time.Phillips 66 may at any time prepay outstanding borrowings under the facility, in whole or in part, without premium or penalty. AtDecember 31, 2021 and 2020, no amount had been drawn under the facility.
Phillips 66 Partners has a$750 million revolving credit facility which may be used for direct bank borrowings and as support for issuances of letters of credit.Phillips 66 Partners has an option to increase the overall capacity to$1 billion , subject to certain conditions.Phillips 66 Partners also has the option to extend the facility for two additional one-year terms after itsJuly 30, 2024 , maturity date, subject to, among other things, the consent of the lenders holding the majority of the commitments and of each lender extending its commitment. The facility is with a broad syndicate of financial institutions and contains covenants that are usual and customary for an agreement of this type. The facility has customary events of default, such as nonpayment of principal when due; nonpayment of interest, fees or other amounts; and violation of covenants. Outstanding revolving borrowings under the facility bear interest, atPhillips 66 Partners' option, at either: (a) the Eurodollar rate 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 onPhillips 66 Partners' credit ratings in effect from time to time. Borrowings under this facility may be short-term or long-term in duration, andPhillips 66 Partners may at any time prepay outstanding borrowings under the facility, in whole or in part, without premium or penalty. AtDecember 31, 2021 , no borrowings were outstanding under this facility, compared with borrowings of$415 million atDecember 31, 2020 . At bothDecember 31, 2021 and 2020,$1 million in letters of credit had been issued that were supported by this facility. We had approximately$5.7 billion and$5.3 billion of total committed capacity available under our revolving credit facilities atDecember 31, 2021 and 2020, respectively. 53
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Index to Financial Statements Other Debt Issuances and Financings Senior Unsecured Notes InNovember 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 onMarch 15 andSeptember 15 of each year, commencing onMarch 15, 2022 . Proceeds received from the public offering were$982 million , net of underwriters' discounts and commissions, as well as debt issuance costs. InDecember 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 dueApril 2022 .
In
•$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. InDecember 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 onFebruary 15 andAugust 15 of each year, commencing onFebruary 15, 2021 . Proceeds received from the public offering of senior unsecured notes inNovember 2020 were$1.74 billion , net of underwriters' discounts and commissions, as well as debt issuance costs.
In
•$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
•$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 onApril 6 andOctober 6 of each year, commencing onOctober 6, 2020 . The Senior Notes due 2025 issued inJune 2020 constitute a further issuance of the Senior Notes due 2025 originally issued inApril 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 onApril 9 andOctober 9 of each year, commencing onOctober 9, 2020 . Interest on the Senior Notes due 2030 is payable semiannually onJune 15 andDecember 15 of each year, commencing onDecember 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. Term Loan Facility InMarch 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. InNovember 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 toNovember 20, 2023 . InSeptember 2021 , we repaid the outstanding borrowings of$500 million . 54
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Index to Financial Statements Availability of Debt Financing We have an A3 credit rating, with a stable outlook, fromMoody's Investors Service and a BBB+ credit rating, with a stable outlook, fromStandard & Poor's . In the fourth quarter of 2021, both rating agencies updated their outlooks on our credit ratings from negative to stable. 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.Phillips 66 Partners' Debt and Equity Financings In 2013, we formedPhillips 66 Partners , a publicly traded MLP, which owns and operates primarily fee-based midstream assets. AtDecember 31, 2021 , we owned 170 millionPhillips 66 Partners common units, representing a 74% limited partner interest, while the public owned a 26% limited partner interest and 13.5 million perpetual convertible preferred units. We consolidatePhillips 66 Partners as a variable interest entity for financial reporting purposes. As a result of this consolidation, the public common and preferred unitholders' interests inPhillips 66 Partners are reflected as noncontrolling interests of$2,169 million in our consolidated balance sheet atDecember 31, 2021 .
During the three years ended
•In
•InSeptember 2019 ,Phillips 66 Partners received net proceeds of$892 million from the issuance of$300 million of 2.450% Senior Notes dueDecember 2024 and$600 million of 3.150% Senior Notes dueDecember 2029 . •InMarch 2019 ,Phillips 66 Partners entered into a senior unsecured term loan facility with a borrowing capacity of$400 million dueMarch 20, 2020 .Phillips 66 Partners borrowed an aggregate amount of$400 million under the facility during the first half of 2019, which was repaid in full inSeptember 2019 . •Phillips 66 Partners has authorized an aggregate of$750 million under three$250 million continuous offerings of common units, or at-the-market (ATM) programs.Phillips 66 Partners completed the first two programs inJune 2018 andDecember 2019 , respectively. For the three years endedDecember 31, 2021 , net proceeds of$175 million have been received under these programs.
See Note 27-
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Index to Financial Statements Off-Balance Sheet Arrangements Lease Residual Value Guarantees Under the operating lease agreement for our headquarters facility inHouston, Texas , we have the option, at the end of the lease term inSeptember 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 atDecember 31, 2021 . We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling$221 million . These leases have remaining terms of up to ten years.Dakota Access, LLC (Dakota Access) andEnergy Transfer Crude Oil Company, LLC (ETCO) In 2020, the trial court presiding over litigation regarding the Dakota Access Pipeline ordered theU.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) relating to an easement underLake Oahe inNorth Dakota and later vacated the easement. Although the easement has been vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS, which is expected to be completed in the second half of 2022. InMay 2021 , the court denied a request for an injunction to shut down the pipeline while the EIS is being prepared and, inJune 2021 , dismissed the litigation. It is possible that the litigation could be reopened or new litigation challenging the EIS, once completed, could be filed. InSeptember 2021 , Dakota Access filed a writ of certiorari, requesting theU.S. Supreme Court to review the lower court's judgment that ordered the EIS and vacated the easement.
In
•$650 million aggregate principal amount of 3.625% Senior Notes due 2022.
•$1.0 billion aggregate principal amount of 3.900% Senior Notes due 2024.
•$850 million aggregate principal amount of 4.625% Senior Notes due 2029.
Dakota Access and ETCO have guaranteed repayment of the notes. In addition,Phillips 66 Partners and its co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the above mentioned ongoing litigation. Contributions may be required if Dakota Access determines that the issues included in any such final judgment cannot be remediated and Dakota Access has or is projected to have insufficient funds to satisfy repayment of the notes. If Dakota Access undertakes remediation to cure issues raised in a final judgment, contributions may be required if any series of the notes become due, whether by acceleration or at maturity, during such time, to the extent Dakota Access has or is projected to have insufficient funds to pay such amounts. AtDecember 31, 2021 ,Phillips 66 Partners' share of the maximum potential equity contributions under the CECU was approximately$631 million . If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses,Phillips 66 Partners also could be required to support its share of the ongoing expenses, including scheduled interest payments on the notes of approximately$25 million annually, in addition to the potential obligations under the CECU.
See Note 13-Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.
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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 atDecember 31, 2021 , was$14.4 billion and our total debt-to-capital ratio was 40%. In 2021, we paid down$1.5 billion in debt and will continue to prioritize debt reduction in 2022. As our operating cash flows improve further, we expect to reduce our debt to pre-COVID-19 pandemic levels over the next couple of years. See Note 12-Debt, in the Notes to Consolidated Financial Statements, for our annual debt maturities over the next five years and more information on debt repayments. Joint Venture Loans During 2020 and 2021, we and our co-venturer provided member loans to WRB. AtDecember 31, 2021 , our share of the outstanding member loan balance, including accrued interest, was$595 million . The need for additional loans to WRB in 2022, as well as WRB's repayment schedule, will depend on market conditions.
Dividends
OnFebruary 9, 2022 , our Board of Directors declared a quarterly cash dividend of$0.92 per common share, payableMarch 1, 2022 , to holders of record at the close of business onFebruary 22, 2022 . We expect that our Board of Directors will continue to declare a competitive and growing dividend in 2022. Share Repurchases SinceJuly 2012 , our board of directors has authorized an aggregate of$15 billion of repurchases of our outstanding common stock. The authorizations do not have expiration dates. The 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. Since the inception of our share repurchase program in 2012, we have repurchased 159 million shares at an aggregate cost of$12.5 billion . Shares of stock repurchased are held as treasury shares. We suspended our share repurchase program inMarch 2020 to preserve liquidity. As operating cash flows improve further, we will prioritize shareholder returns and debt repayment. Pending Merger withPhillips 66 Partners OnOctober 26, 2021 , we entered into a definitive merger agreement withPhillips 66 Partners to acquire all of the limited partner interests inPhillips 66 Partners not already owned by us on the closing date of the transaction. The agreement provides for an all-stock transaction in which each outstandingPhillips 66 Partners common unitholder would receive 0.50 shares ofPhillips 66 common stock for eachPhillips 66 Partners common unit.Phillips 66 Partners' perpetual convertible preferred units would be converted into common units at a premium to the original issuance price prior to exchange forPhillips 66 common stock. This merger is expected to close inMarch 2022 , subject to customary closing conditions. Based on the closing market prices ofPhillips 66 common stock andPhillips 66 Partners common units onDecember 31, 2021 , we would issue approximately 44 million shares of our common stock with a value of approximately$3.2 billion on the closing date of this transaction. The number of shares of common stock we will issue and the value of those shares are subject to change until the merger is closed.
See Note 27-
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Index to Financial Statements 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 ofDecember 31, 2021 , our purchase obligations totaled$113.9 billion , with$43.0 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. AtDecember 31, 2021 , product purchase commitments with third parties and related parties were$44.8 billion and$51.3 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 ofDecember 31, 2021 , our aggregate principal amount of outstanding debt was$14.3 billion , with$1.5 billion due within one year. Our obligations for interest on the debt totaled$7.5 billion , with$513 million due within one year. See Note 12-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 18-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 10-Asset Retirement Obligations and Accrued Environmental Costs, in the Notes to Consolidated Financial Statements, for information regarding asset retirement and environmental obligations. 58
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Index to Financial Statements
Capital Spending
Our capital expenditures and investments represent consolidated capital
spending. Our adjusted capital spending is a non-GAAP financial measure that
demonstrates our net share of capital spending, and reflects an adjustment for
the portion of our consolidated capital spending funded by certain joint venture
partners.
Millions of Dollars
2022
Budget 2021 2020 2019
Capital Expenditures and Investments
Midstream $ 703 738 1,747 2,292
Chemicals - - - -
Refining 896 779 816 1,001
Marketing and Specialties 144 202 173 374
Corporate and Other 165 141 184 206
Total Capital Expenditures and Investments 1,908 1,860 2,920 3,873
Less: capital spending funded by certain joint
venture partners* 2 - 61 423
Adjusted Capital Spending $ 1,906 1,860 2,859 3,450
Selected Equity Affiliates**
DCP Midstream $ 128 55 119 472
CPChem 717 367 284 382
WRB 220 229 175 175
$ 1,065 651 578 1,029
* Included in the Midstream segment.
** Our share of joint venture's capital spending.
Midstream
Capital spending in our Midstream segment was
•Continued development and expansion ofGulf Coast fractionation capacity at our Sweeny Hub. We completed two NGL fractionators (Sweeny Fracs 2 and 3) which commenced operations in 2020. In 2021, we resumed the construction ofSweeny Frac 4.
•Contributions by
•Completion of construction activities onPhillips 66 Partners' C2G Pipeline, a new 16 inch ethane pipeline that connectsPhillips 66 Partners' Clemens Caverns storage facility to petrochemical facilities inGregory, Texas , nearCorpus Christi .
•Investments in NOVONIX and a renewable feedstock processing plant.
•Construction of
•Construction activities to increase storage and export capacity at our
•Contributions to Dakota Access by
•Construction of
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Index to Financial Statements •Contributions toBayou Bridge Pipeline, LLC , aPhillips 66 Partners' 40 percent-owned joint venture, for the construction of a pipeline fromNederland, Texas , toLake Charles, Louisiana , and a pipeline segment fromLake Charles toSt. James, Louisiana .
•Spending associated with other return, reliability, and maintenance projects in our Transportation and NGL businesses.
During the three-year period endedDecember 31, 2021 , DCP Midstream's self-funded capital expenditures and investments were$1.3 billion on a 100% basis. Capital spending during this period was primarily for expansion projects and maintenance capital expenditures for existing assets. Expansion projects included construction of the Latham II offload facilities, theCheyenne Connector, and the O'Connor 2 plant, as well as investments in theSand Hills ,Southern Hills and Gulf Coast Express pipeline joint ventures.
Chemicals
During the three-year period endedDecember 31, 2021 , CPChem had a self-funded capital program that totaled$2.1 billion on a 100% basis. Capital spending was primarily for the development of petrochemical projects on theU.S. Gulf Coast and in theMiddle East , as well as sustaining, debottlenecking and optimization projects on existing assets.
Refining
Capital spending for the Refining segment during the three-year period endedDecember 31, 2021 , was$2.6 billion , primarily for refinery upgrade projects to enhance the yield of high-value products, renewable diesel projects, improvements to the operating integrity of key processing units, and safety-related projects.
Key projects completed during the three-year period included:
•Installation of facilities to improve product value at ourPonca City Refinery and facilities to provide flexibility to produce renewable diesel at ourSan Francisco Refinery .
•Installation of facilities to improve clean product yield at the
•Installation of facilities to improve product value at the
•Installation of facilities to improve processing of advantaged crude at the
•Installation of facilities to comply with the
Marketing and Specialties Capital spending for the M&S segment during the three-year period endedDecember 31, 2021 , was primarily for investment in retail marketing joint ventures in theU.S. West Coast and Central regions; the continued acquisition, development and enhancement of retail sites inEurope ; and acquisition of a commercial fleet fueling business inCalifornia , which will provide further placement opportunities for renewable diesel production to end-use customers.
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Index to Financial Statements 2022 Budget Our 2022 capital budget is$1.9 billion , including$992 million for sustaining capital and$916 million for growth capital. Approximately 45% of growth capital supports lower-carbon opportunities. Our projected$1.9 billion capital budget excludes our portion of planned capital spending by our major joint ventures CPChem, WRB and DCP Midstream totaling$1.1 billion . The Midstream capital budget of$703 million includes a growth capital budget of$426 million which will be directed toward completing construction ofSweeny Frac 4, repayment ofPhillips 66 Partners' 25% share of Dakota Access' debt due in 2022, and investment opportunities to advance our lower-carbon efforts. The Midstream capital budget also includes$277 million for sustaining projects. In Refining, the total capital budget of$896 million consists of$488 million for reliability, safety and environmental projects and$408 million of growth capital primarily for the reconfiguration of ourSan Francisco Refinery as part of the Rodeo Renewed project. The M&S capital budget of$144 million reflects the continued development and enhancement of our retail network, including energy transition opportunities. The Corporate and Other capital budget is$165 million primarily for digital transformation projects.
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 21-Income Taxes, in the
Notes to Consolidated Financial Statements, for additional information about
income tax-related contingencies.
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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 water bodies.
•European Union Regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), which governs production, marketing and use of chemicals. •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 ofthe 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 theUnited Kingdom Emissions Trading Scheme (UK ETS), which replaced the EU ETS in theUnited Kingdom onJanuary 1, 2021 , but theUnited Kingdom had the obligation and retained the ability to enforce the EU ETS obligations untilApril 30, 2021 . 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, inCalifornia theSouth Coast Air Quality Management District (SCAQMD) approved amendments to the RegionalClean Air Incentives Market (RECLAIM) that became effective in 2016, which require a phased reduction of nitrogen oxide emissions through 2022, affecting refineries in theLos Angeles metropolitan area. In 2017, SCAQMD required additional nitrogen dioxide emissions reductions through 2025 and, onNovember 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 inthe United States and in other countries in which we operate. Notable areas of potential impacts include air emissions compliance and remediation obligations inthe United States . 62
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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 theEPA 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. OnDecember 7, 2021 , theEPA proposed RVO for the 2021 and 2022 compliance years, which essentially holds the 2021 RVO to actual volumes of biofuel consumption, while increasing the volumes in 2022. TheEPA also re-proposed the compliance year 2020 RVO, also holding them to actual volumes. It is uncertain how various future RVO requirements contained in EISA, and the regulations promulgated thereunder, may be implemented and what their full impact may be on our operations. Additionally, we may experience a decrease in demand for refined petroleum products due to the regulatory program as currently promulgated. This program continues to be the subject of possible Congressional review and re-promulgation in revised form, and theEPA 's final regulations establishing RVO requirements have been and continue to be subject to legal challenge, further creating uncertainty regarding RVO requirements. Compliance with the regulation has been further complicated as the market for RINs has been the subject of fraudulent third-party activity, and it is possible that some RINs that we have purchased may be determined to be invalid. Should that occur, we could incur costs to replace those fraudulent RINs. Although the cost for replacing any fraudulently marketed RINs is not reasonably estimable at this time, we would not expect such costs to have a material impact on our results of operations or financial condition. 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 endedDecember 31, 2021 , 2020 and 2019, we incurred expenses of$441 million ,$342 million and$111 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$351 million ,$133 million and$74 million for the years endedDecember 31, 2021 , 2020 and 2019, 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 throughoutthe 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 theEPA 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 theEPA 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 ofDecember 31, 2020 , we reported that we had been notified of potential liability under CERCLA and comparable state laws at 25 sites withinthe United States . During 2021, there were no new sites for which we received notice of potential liability nor were any existing sites deemed resolved and closed, leaving 25 unresolved sites with potential liability atDecember 31, 2021 . 63
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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 theEPA 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 theEPA 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$726 million in 2021 and are expected to be approximately$725 million and$775 million in 2022 and 2023, respectively. Capitalized environmental costs were$96 million in 2021 and are expected to be approximately$115 million and$165 million , in 2022 and 2023, 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 theEPA . 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 theEuropean 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 theUnited Kingdom's exit from theEuropean Union (BREXIT), those types of entities in theUnited Kingdom became subject to theUK ETS, rather than the EU ETS, after the EU ETS 2020 scheme year ended onApril 30, 2021 . 64
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Index to Financial Statements •California's Senate Bill No. 32, which requires reduction ofCalifornia'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 westernU.S. states have been enacted or are under consideration or development, including amendments toCalifornia's Low Carbon Fuel Standard,Oregon's Low Carbon Fuel Standard and Climate Protection Plan, andWashington's carbon reduction programs. •TheU.S. Supreme Court decision inMassachusetts v.EPA ,549 U.S. 497 , 127 S. Ct. 1438 (2007), confirming that theEPA has the authority to regulate carbon dioxide as an "air pollutant" under the Federal Clean Air Act. •TheEPA 's announcement onMarch 29, 2010 (published as "Interpretation of Regulations that Determine Pollutants Covered byClean Air Act Permitting Programs ," 75 Fed. Reg. 17004 (April 2, 2010 )), and theEPA 'sand U.S. Department of Transportation's joint promulgation of a Final Rule onApril 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. •TheEPA '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. TheEPA commenced rulemaking in 2017 to rescind the Clean Power Plan and, inAugust 2018 , theEPA proposed the Affordable Clean Energy (ACE) rule as its replacement. OnJanuary 19, 2021 , theU.S. Court of Appeals for the District of Columbia invalidated the ACE rule and remanded the matter to theEPA , 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 fromJanuary 1, 2021 through 2030 and sectors covered under the ETS must reduce their GHG emissions by 43% compared to 2005 levels. SinceJanuary 1, 2021 , theUnited Kingdom is no longer part of the EU ETS and, instead, has been under theUK ETS. However, theUnited Kingdom had the obligation and retained the ability to enforce the EU ETS obligations untilApril 30, 2021 .Phillips 66 has assets that are subject to the EU ETS and assets that are subject to theUK ETS. FromNovember 30 to December 12, 2015 , more than 190 countries, includingthe United States , participated in theUnited Nations Climate Change Conference inParis, France . The conference culminated in what is known as the "Paris Agreement," which, upon certain conditions being met, entered into force onNovember 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 withdrawthe United States from the Paris Agreement and that withdrawal became effective onNovember 4, 2020 . OnJanuary 20, 2021 ,President Biden signed the "Acceptance on Behalf ofthe United States of America ," which allowsthe United States to rejoin the Paris Agreement.The United States officially rejoined the Paris Agreement inFebruary 2021 , which could lead to additional GHG emission reduction requirements for sources inthe United States . Inthe 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. 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. 65
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Index to Financial Statements An example of one such program isCalifornia'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 inCalifornia , but beginning inJanuary 2015 was expanded to include emissions from transportation fuels distributed inCalifornia . Inclusion of transportation fuels inCalifornia'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. InSeptember 2021 , we announced a set of company-wide GHG emission intensity reduction targets that we consider to be impactful, attainable and measurable. By 2030, we expect to reduce GHG emission intensity by 30% for Scope 1 and 2 emissions from our operations and by 15% for Scope 3 emissions from our energy products, below 2019 levels. In addition to the disclosures above, we have issued our 2021 Sustainability Report that is accessible on our website and provides more detailed information on our Environmental, Social and Corporate Governance (ESG) initiatives, including detailed information on environmental metrics. 66
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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, along with the discussion of contingencies in this report, addresses all important 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. 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. 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 9-Impairments, in the Notes to Consolidated Financial Statements, for information about significant impairments recorded in 2021, 2020 and 2019.
Asset Retirement Obligations
Under various contracts, permits and regulations, we have legal obligations to
remove tangible long-lived assets and restore the land at the end of operations
at certain operational sites. Estimating the timing and cost of future asset
removals is difficult. Our recognized asset retirement obligations primarily
involve asbestos abatement at our refineries; decommissioning, removal or
dismantlement of certain assets at refineries that have or will be shut down;
and dismantlement or removal of assets at certain leased international marketing
sites. Many of these removal obligations are many years, or decades, in the
future, and the contracts and regulations often have vague descriptions of what
removal practices and criteria must be met when the removal event actually
occurs. Asset removal technologies and costs, regulatory and other compliance
considerations, expenditure timing, and other inputs into valuation of the
obligation, including discount and inflation rates, are also subject to change.
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Index to Financial Statements Environmental Costs In addition to asset retirement obligations discussed above, we have certain obligations to complete environmental-related projects. These projects are primarily related to cleanup at domestic refineries, underground storage sites and nonoperated sites. Future environmental remediation costs are difficult to estimate because they are subject to change due to such factors as the uncertain magnitude of cleanup costs, timing and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. Intangible Assets andGoodwill AtDecember 31, 2021 , we had$715 million of intangible assets that we have determined to have indefinite useful lives, and therefore do not amortize. The judgmental determination that an intangible asset has an indefinite useful life is continuously evaluated. If, due to changes in facts and circumstances, management determines these intangible assets have finite useful lives, amortization will commence at that time on a prospective basis. As long as these intangible assets are determined to have indefinite lives, they will be subject to at least annual impairment tests that require management's judgment of their estimated fair value. AtDecember 31, 2021 , we had$1.5 billion of goodwill primarily related to past business combinations.Goodwill is not amortized. Instead, goodwill is subject to at least annual tests for impairment at a reporting unit level. A reporting unit is an operating segment or a component that is one level below an operating segment, and it is determined primarily based on the manner in which the business is managed. We perform our annual goodwill impairment test using a qualitative assessment and a quantitative assessment, if one is deemed necessary. As part of our qualitative assessment, we evaluate relevant events and circumstances that could affect the fair value of our reporting units, including macroeconomic conditions, overall industry and market considerations and regulatory changes, as well as company-specific market metrics, performance and events. The evaluation of company-specific events and circumstances includes evaluating changes in our stock price and cost of capital, actual and forecasted financial performance, as well as the effect of significant asset dispositions. If our qualitative assessment indicates it is likely the fair value of a reporting unit has declined below its carrying value (including goodwill), a quantitative assessment is performed. When a quantitative assessment is performed, management applies judgment in determining the estimated fair values of the reporting units because quoted market prices for our reporting units are not available. Management uses available information to make this fair value determination, including estimated future cash flows, cost of capital, observed market earnings multiples of comparable companies, our common stock price and associated total company market capitalization. We completed our annual qualitative assessment of goodwill as ofOctober 1, 2021 , and concluded that the fair values of our reporting units exceeded their respective carrying values (including goodwill). A decline in the estimated fair value of one or more of our reporting units in the future could result in an impairment. As such, we continue to monitor for indicators of impairment until our next annual impairment assessment is performed.
See Note 9-Impairments, and Note 16-Fair Value Measurements, in the Notes to Consolidated Financial Statements, for additional information regarding the goodwill impairment we recorded in the first quarter of 2020.
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Index to Financial Statements Tax Assets and Liabilities Our operations are subject to various taxes, including federal, state and foreign income taxes, property taxes, and transactional taxes such as excise, sales and use, value-added and payroll taxes. We record tax liabilities based on our assessment of existing tax laws and regulations. The recording of tax liabilities requires significant judgment and estimates. We recognize the financial statement effects of an income tax position when it is more likely than not that the position will be sustained upon examination by a taxing authority. A contingent liability related to a transactional tax claim is recorded if the loss is both probable and reasonably estimable. Actual incurred tax liabilities can vary from our estimates for a variety of reasons, including different interpretations of tax laws and regulations and different assessments of the amount of tax due. In determining our income tax expense (benefit), we assess the likelihood our deferred tax assets will be recovered through future taxable income. Valuation allowances reduce deferred tax assets to an amount that will, more likely than not, be realized. Judgment is required in estimating the amount of valuation allowance, if any, that should be recorded against our deferred tax assets. Based on our historical taxable income, our expectations for the future, and available tax-planning strategies, we expect our net deferred tax assets will more likely than not be realized as offsets to reversing deferred tax liabilities and as reductions to future taxable income. If our actual results of operations differ from such estimates or our estimates of future taxable income change, the valuation allowance may need to be revised. New tax laws and regulations, as well as changes to existing tax laws and regulations, are continuously being proposed or promulgated. The implementation of future legislative and regulatory tax initiatives could result in increased income tax liabilities that cannot be predicted at this time. Projected Benefit Obligations Calculation of the projected benefit obligations for our defined benefit pension and postretirement plans impacts the obligations on the balance sheet and the amount of benefit expense in the statement of operations. The actuarial calculation of projected benefit obligations and company contribution requirements involves judgment about uncertain future events, including estimated retirement dates, salary levels at retirement, mortality rates, lump-sum election rates, rates of return on plan assets, future interest rates, future health care cost-trend rates, and rates of utilization of health care services by retirees. We engage outside actuarial firms to assist in the calculation of these projected benefit obligations and company contribution requirements due to the specialized nature of these calculations. As financial accounting rules and the pension plan funding regulations promulgated by governmental agencies have different objectives and requirements, the actuarial methods and assumptions for the two purposes differ in certain important respects. Ultimately, we will be required to fund all promised benefits under pension and postretirement benefit plans not funded by plan assets or investment returns, but the judgmental assumptions used in the actuarial calculations significantly affect periodic financial statements and funding patterns over time. Benefit expense is particularly sensitive to the discount rate and return on plan assets assumptions. A one percentage-point decrease in the discount rate assumption used for the plan obligation would increase annual benefit expense by an estimated$60 million , while a one percentage-point decrease in the return on plan assets assumption would increase annual benefit expense by an estimated$40 million . In determining the discount rate, we use yields on high-quality fixed income investments with payments matched to the estimated distributions of benefits from our plans. The expected weighted-average long-term rate of return for worldwide pension plan assets was approximately 6% for both 2021 and 2020, while the actual weighted-average rate of return was 10% in 2021 and 12% in 2020. For the past ten years, our actual weighted-average rate of return for worldwide pension plan assets was 10%. 69
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Index to Financial Statements GUARANTOR FINANCIAL INFORMATION AtDecember 31, 2021 ,Phillips 66 had$10.3 billion of senior unsecured notes outstanding guaranteed byPhillips 66 Company , a direct, wholly owned operating subsidiary ofPhillips 66 .Phillips 66 conducts substantially all of its operations through subsidiaries, includingPhillips 66 Company , and those subsidiaries generate substantially all of its operating income and cash flows. The guarantees (1) are unsecured obligations ofPhillips 66 Company , (2) rank equally with all ofPhillips 66 Company's other unsecured and unsubordinated indebtedness, and (3) are full and unconditional. Summarized financial information ofPhillips 66 andPhillips 66 Company (theObligor Group ) is presented on a combined basis. Intercompany transactions among the members of theObligor 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 theObligor Group and non-guarantor subsidiaries are presented separately in the summarized financial information. The summarized results of operations for the year endedDecember 31, 2021 , and the summarized financial position atDecember 31, 2021 , of theObligor Group on a combined basis were: Summarized Combined Statement of Operations Millions of Dollars Sales and other operating revenues $ 86,935 Revenues and other income-non-guarantor subsidiaries 4,421 Purchased crude oil and products-third parties 52,921 Purchased crude oil and products-related parties 14,476 Purchased crude oil and products-non-guarantor subsidiaries 17,457 Impairments 1,290 Income before income taxes 397 Net income 428 Summarized Combined Balance Sheet Millions of
Dollars
Accounts and notes receivable-third parties $
3,772
Accounts and notes receivable-related parties
1,289
Due from non-guarantor subsidiaries, current
456
Total current assets
10,080
Investments and long-term receivables
10,324
Net properties, plants and equipment
11,541
Goodwill
1,047
Due from non-guarantor subsidiaries, noncurrent
5,699
Other assets associated with non-guarantor subsidiaries 2,565
Total noncurrent assets 32,935
Total assets 43,015
Due to non-guarantor subsidiaries, current $ 2,227
Total current liabilities 10,551
Long-term debt 9,364
Due to non-guarantor subsidiaries, noncurrent 9,341
Total noncurrent liabilities 24,094
Total liabilities 34,645
Total equity 8,370
Total liabilities and equity 43,015
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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:
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Index to Financial Statements
Millions of Dollars, Except as Indicated
Atlantic
Realized Refining Margins Basin/Europe Gulf Coast Central Corridor West Coast Worldwide
Year Ended December 31, 2021
Income (loss) before income taxes $ (36) (1,889) 70 (694) (2,549)
Plus:
Taxes other than income taxes 69 73 51 49 242 Depreciation, amortization and impairments 210 1,665 139 240 2,254 Selling, general and administrative expenses 70 50 32 41 193 Operating expenses 981 1,309 647 1,220 4,157 Equity in losses of affiliates 9 11 164 - 184 Other segment (income) expense, net 9 (7) (11) 4 (5) Proportional share of refining gross margins contributed by equity affiliates 123 - 609 - 732 Special items: Certain tax impacts (4) - - - (4) Regulatory compliance costs (20) (28) (27) (13) (88) Realized refining margins$ 1,411 1,184 1,674 847 5,116
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)** $ (0.19) (7.84) 0.73 (6.14) (3.99)
Realized refining margins (dollars per
barrel)*** 7.48 4.92 9.65 7.49 7.15
Year Ended December 31, 2020
Loss before income taxes $ (1,224) (2,077) (641) (2,213) (6,155)
Plus:
Taxes other than income taxes 61 107 51 89 308 Depreciation, amortization and impairments 643 968 571 1,460 3,642 Selling, general and administrative expenses 44 39 28 38 149 Operating expenses 774 1,354 498 1,000 3,626 Equity in losses of affiliates 10 3 363 - 376 Other segment (income) expense, net 1 1 (2) 5 5 Proportional share of refining gross margins contributed by equity affiliates 67 - 298 - 365 Special items: Certain tax impacts (6) - - - (6) Realized refining margins $ 370 395 1,166 379 2,310
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)** $ (7.18) (9.71) (6.96) (20.01) (10.48)
Realized refining margins (dollars per
barrel)*** 2.17 1.85 7.17 3.43 3.51
* 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.
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Index to Financial Statements
Millions of Dollars, Except as Indicated
Atlantic
Realized Refining Margins Basin/Europe Gulf Coast Central Corridor West Coast Worldwide
Year Ended December 31, 2019
Income (loss) before income taxes $ 608 364 1,338 (324) 1,986
Plus:
Taxes other than income taxes 52 73 40 85 250 Depreciation, amortization and impairments 198 271 135 253 857 Selling, general and administrative expenses 39 23 22 31 115 Operating expenses 863 1,449 550 1,143 4,005 Equity in (earnings) losses of affiliates 11 2 (331) - (318) Other segment (income) expense, net (16) (3) - 5 (14) Proportional share of refining gross margins contributed by equity affiliates 69 - 1,073 - 1,142 Special items: Pending claims and settlements - - (21) - (21) Realized refining margins$ 1,824 2,179 2,806 1,193 8,002
Total processed inputs (thousands of barrels) 195,506 293,666
103,294 130,014 722,480
Adjusted total processed inputs (thousands of
barrels)* 195,506 293,666 188,045 130,014 807,231
Income (loss) before income taxes per barrel
(dollars per barrel)** $ 3.11 1.24 12.95 (2.49) 2.75
Realized refining margins (dollars per
barrel)*** 9.33 7.42 14.91 9.18 9.91
* 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.
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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:
Millions of Dollars, Except as Indicated
U.S. International
2021 2020 2019 2021 2020 2019
Realized Marketing Fuel Margins
Income before income taxes$ 1,180 870 916 403 454 380
Plus:
Taxes other than income taxes 9 1 5 6 5 6 Depreciation, amortization and impairment 14 12 10 76 70 65 Selling, general and administrative expenses 758 623 743 253 246 249 Equity in earnings of affiliates (48) (31) (27) (113) (108) (99) Other operating (revenues) expenses* (424) (327) (379) 8 (27) (37) Other segment expense, net - - - 1 1 1 Special items: Certain tax impacts - - (90) - - - Marketing margins 1,489 1,148 1,178 634 641 565 Less: margin for nonfuel related sales - - - 53 46 44 Realized marketing fuel margins$ 1,489 1,148 1,178 581 595 521 Total fuel sales volumes (thousands of barrels) 680,102 613,869 752,064 97,529 93,773 106,263 Income before income taxes per barrel (dollars per barrel)$ 1.74 1.42 1.22 4.13 4.84 3.58 Realized marketing fuel margins (dollars per barrel)** 2.19 1.87 1.57 5.96 6.34 4.90
* 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.
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