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OFFON

PHILLIPS 66 PARTNERS LP

(PSXP)
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PHILLIPS 66 PARTNERS LP : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/03/2021 | 05:06pm EDT
Unless otherwise stated or the context otherwise indicates, all references to
"Phillips 66 Partners," "the Partnership," "us," "our," "we," or similar
expressions refer to Phillips 66 Partners LP, including its consolidated
subsidiaries. References to Phillips 66 may refer to Phillips 66 and/or its
subsidiaries, depending on the context. References to our "General Partner"
refer to Phillips 66 Partners GP LLC, and references to "Phillips 66 PDI" refer
to Phillips 66 Project Development Inc., the Phillips 66 subsidiary that holds a
limited partner interest in us and wholly owns our General Partner.

Management's Discussion and Analysis is the Partnership's analysis of its
financial performance, 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
report. It contains forward-looking statements including, without limitation,
statements relating to the Partnership's plans, strategies, objectives,
expectations and intentions. The words "anticipate," "estimate," "believe,"
"budget," "continue," "could," "intend," "may," "plan," "potential," "predict,"
"seek," "should," "will," "would," "expect," "objective," "projection,"
"forecast," "goal," "guidance," "outlook," "effort," "target" and similar
expressions normally identify forward-looking statements, but the absence of
these words does not mean that a statement is not forward-looking. The
Partnership does not undertake to update, revise or correct any of the
forward-looking information unless required to do so under the federal
securities laws. Readers are cautioned that such forward-looking statements
should be read in conjunction with the Partnership's disclosures under the
heading: "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS."


EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT


Partnership Overview
We are a master limited partnership formed to own, operate, develop and acquire
primarily fee-based midstream assets. Our operations consist of crude oil,
refined petroleum products and natural gas liquids (NGL) transportation,
terminaling, processing and storage assets. We conduct our operations through
both wholly owned and joint venture operations. The majority of our wholly owned
assets are associated with, and are integral to the operation of, nine of
Phillips 66's owned or joint venture refineries.

We primarily generate revenue by providing fee-based transportation, terminaling, processing, storage and fractionation services to Phillips 66 and other customers. Our equity affiliates primarily generate revenue from transporting and terminaling crude oil, refined petroleum products and NGL.

Our common units trade on the New York Stock Exchange under the symbol PSXP.


How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our
performance, including: (1) volumes handled; (2) operating and maintenance
expenses; (3) net income before net interest expense, income taxes, depreciation
and amortization (EBITDA); (4) adjusted EBITDA; and (5) distributable cash flow.

Volumes Handled
The amount of revenue we generate primarily depends on the volumes of crude oil,
refined petroleum products and NGL that we handle in our pipeline, terminal,
rail rack, processing, storage and fractionator systems. In addition, our equity
affiliates generate revenue from transporting and terminaling crude oil, refined
petroleum products and NGL. These volumes are primarily affected by the supply
of, and demand for, crude oil, refined petroleum products and NGL in the markets
served directly or indirectly by our assets, as well as the operational status
of the refineries served by our assets. Phillips 66 has committed to minimum
throughput volumes under many of our commercial agreements.

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Operating and Maintenance Expenses
Our management seeks to maximize the profitability of our operations by
effectively managing operating and maintenance expenses. These expenses
primarily consist of labor expenses (including contractor services), utility
costs, and repair and maintenance expenses. Operating and maintenance expenses
generally remain relatively stable across broad ranges of throughput volumes but
can fluctuate from period to period depending on the mix of activities,
particularly maintenance activities, performed during the period. Our processing
assets are periodically subject to major maintenance, or turnaround activities,
which can significantly increase operating and maintenance expenses in a given
year. Although we seek to manage our maintenance expenditures on our facilities
to avoid significant variability in our quarterly cash flows, we balance this
approach with our high standards of safety and environmental stewardship, such
that critical maintenance is regularly performed.

Our operating and maintenance expenses are also affected by volumetric
gains/losses resulting from variances in meter readings and other measurement
methods, as well as volume fluctuations due to pressure and temperature changes.
Under certain commercial agreements with Phillips 66, the value of any crude
oil, refined petroleum product and NGL volumetric gains and losses are
determined by reference to the monthly average reference price for the
applicable commodity. Any gains/losses under these provisions decrease or
increase, respectively, our operating and maintenance expenses in the period in
which they are realized. These contractual volumetric gain/loss provisions could
increase variability in our operating and maintenance expenses.

EBITDA, Adjusted EBITDA and Distributable Cash Flow We define EBITDA as net income plus net interest expense, income taxes, depreciation and amortization.

Adjusted EBITDA is EBITDA attributable to the Partnership after deducting the adjusted EBITDA attributable to noncontrolling interest, further adjusted for:

•The proportional share of equity affiliates' net interest expense, income taxes, depreciation and amortization, and impairments.

•Transaction costs associated with acquisitions.

•Certain other noncash items, including gains and losses on asset sales and asset impairments.


Distributable cash flow is defined as adjusted EBITDA less (i) equity affiliate
distributions less than proportional adjusted EBITDA, (ii) maintenance capital
expenditures, (iii) net interest expense, (iv) income taxes paid and (v)
preferred unit distributions, plus adjustments for deferred revenue impacts.

EBITDA, adjusted EBITDA, and distributable cash flow are not presentations made
in accordance with generally accepted accounting principles in the United States
(GAAP). EBITDA, adjusted EBITDA and distributable cash flow are non-GAAP
supplemental financial measures that management believes external users of our
consolidated financial statements, such as industry analysts, investors, lenders
and rating agencies, may find useful to assess:

•Our operating performance as compared to other publicly traded partnerships in
the midstream energy industry, without regard to historical cost basis or, in
the case of EBITDA and adjusted EBITDA, financing methods.

•The ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders.

•Our ability to incur and service debt and fund capital expenditures.

•The viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

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The GAAP performance measure most directly comparable to EBITDA and adjusted
EBITDA is net income. The GAAP liquidity measure most directly comparable to
EBITDA and distributable cash flow is net cash provided by operating activities.
These non-GAAP financial measures should not be considered alternatives to GAAP
net income or net cash provided by operating activities. They have important
limitations as analytical tools because they exclude some items that affect net
income and net cash provided by operating activities. Additionally, because
EBITDA, adjusted EBITDA, and distributable cash flow may be defined differently
by other companies in our industry, our definition of these non-GAAP financial
measures may not be comparable to similarly titled measures of other companies,
thereby diminishing their utility.


Business Environment
We do not own any of the crude oil, refined petroleum products and NGL we handle
and do not engage in the trading of those commodities, and therefore have
limited direct exposure to risks associated with fluctuating commodity prices,
although these risks indirectly influence our activities and results of
operations over the long term.

Our throughput volumes primarily depend on the volume of crude oil processed and
refined petroleum products produced at Phillips 66's owned or operated
refineries with which our assets are integrated. These volumes are primarily
dependent on Phillips 66's refining margins and maintenance schedules. Refining
margins depend on the price of crude oil or other feedstocks and the price of
refined petroleum products. These prices are affected by numerous factors beyond
our or Phillips 66's control, including the domestic and global supply of and
demand for crude oil and refined petroleum products. Throughput volumes of our
equity affiliates primarily depend on upstream drilling activities, refinery
performance and product supply and demand.

The Coronavirus Disease 2019 (COVID-19) pandemic continues to impact global
economic activity. Our results in the second quarter of 2021 reflect the gradual
recovery of demand for refined petroleum products following the administration
of COVID-19 vaccines and the easing of pandemic restrictions since the beginning
of 2021. However, the adverse impacts of the COVID-19 pandemic may continue in
the near term, and the depth and duration of the resulting economic consequences
remain uncertain. We continuously monitor our asset and investment portfolio for
impairments in this challenging business environment.

While we believe we and the majority of our joint ventures have substantially
mitigated our indirect exposure to commodity price fluctuations through the
minimum volume commitments included in our commercial agreements, our ability to
execute our strategy will depend, in part, on the availability of attractively
priced crude oil in the areas served by our crude oil pipelines and rail racks,
demand for refined petroleum products in the markets served by our refined
petroleum product pipelines and terminals, and the general demand for midstream
services, including NGL transportation and fractionation.


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RESULTS OF OPERATIONS

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

                                                                         Millions of Dollars
                                                    Three Months Ended                      Six Months Ended
                                                         June 30                                June 30
                                                            2021              2020                       2021             2020
Revenues and Other Income
Operating revenues-related parties                  $        274               236                        519              494
Operating revenues-third parties                               6                 5                         13               14
Equity in earnings of affiliates                             142               104                        266              240
Gain from equity interest transfer                             -                84                          -               84
Other income                                                   1                 1                          1                2
Total revenues and other income                              423               430                        799              834

Costs and Expenses
Operating and maintenance expenses                            93                84                        188              172
Depreciation                                                  34                31                         68               61
Impairments                                                    -                 -                        198                -
General and administrative expenses                           18                17                         35               34
Taxes other than income taxes                                 11                10                         21               21
Interest and debt expense                                     32                28                         65               57
Other expenses                                                 -                 5                          -                7
Total costs and expenses                                     188               175                        575              352
Income before income taxes                                   235               255                        224              482
Income tax expense                                             1                 -                          1                1
Net Income                                                   234               255                        223              481
Less: Net income attributable to noncontrolling
interest                                                       9                 -                         16                -
Net Income Attributable to the Partnership                   225               255                        207              481

Less: Preferred unitholders' interest in net income attributable to the Partnership

                               12                 9                         24               19
Limited Partners' Interest in Net Income
Attributable to the Partnership                     $        213               246                        183              462

Net Cash Provided by Operating Activities           $        286               215                        513              489

Adjusted EBITDA                                     $        337               269                        626              590

Distributable Cash Flow                             $        267               218                        500              487


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                                                  Three Months
                                                      Ended                            Six Months Ended
                                                     June 30                               June 30
                                                       2021              2020                       2021             2020
Wholly Owned Operating Data
Pipelines
Pipeline revenues (millions of dollars)         $       121                97                        225              208
Pipeline volumes(1) (thousands of barrels
daily)
Crude oil                                               957               806                        877              873
Refined petroleum products and NGL                    1,029               825                        920              846
Total                                                 1,986             1,631                      1,797            1,719

Average pipeline revenue per barrel (dollars)   $      0.66              0.65                       0.68             0.66

Terminals

Terminal revenues (millions of dollars)         $        43                33                         82               76
Terminal throughput (thousands of barrels
daily)
Crude oil(2)                                            397               380                        386              420
Refined petroleum products                              827               690                        743              719
Total                                                 1,224             1,070                      1,129            1,139

Average terminaling revenue per barrel
(dollars)                                       $      0.38              0.33                       0.39             0.36

Storage, processing and other revenues
(millions of
  dollars)                                      $       116               111                        225              224
Total Operating Revenues (millions of dollars)  $       280               241                        532              508

Joint Venture Operating Data(3)
Crude oil, refined petroleum products and NGL
(thousands
  of barrels daily)                                   1,327               942                      1,190              890


(1) Represents the sum of volumes transported through each separately tariffed
pipeline segment.
(2) Bayway and Ferndale rail rack volumes included in crude oil terminals.
(3) Proportional share of total pipeline and terminal volumes of joint ventures
consistent with recognized equity in earnings of affiliates.


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The following tables present reconciliations of EBITDA and adjusted EBITDA to
net income, and EBITDA and distributable cash flow to net cash provided by
operating activities, the most directly comparable GAAP financial measures, for
each of the periods indicated.

                                                                       Millions of Dollars
                                                     Three Months
                                                         Ended                          Six Months Ended
                                                        June 30                              June 30
                                                          2021             2020                      2021            2020

Reconciliation to Net Income Attributable to the

Partnership

Net Income Attributable to the Partnership         $       225              255                       207             481

Plus:

Net income attributable to noncontrolling interest           9                -                        16               -
Net Income                                                 234              255                       223             481
Plus:
Depreciation                                                34               31                        68              61
Net interest expense                                        32               29                        65              57
Income tax expense                                           1                -                         1               1
EBITDA                                                     301              315                       357             600
Plus:
Proportional share of equity affiliates' net
interest, taxes, depreciation and amortization,
and impairments                                             51               38                       100              73
Expenses indemnified or prefunded by Phillips 66             1                -                         1               -
Transaction costs associated with acquisitions               -                -                         -               1
Impairments                                                  -                -                       198               -

Less:

Gain from equity interest transfer                           -               84                         -              84
Adjusted EBITDA attributable to noncontrolling
interest                                                    16                -                        30               -
Adjusted EBITDA                                            337              269                       626             590
Plus:
Deferred revenue impacts*†                                  (4)               5                         5               7

Less:

Equity affiliate distributions less than (more
than) proportional adjusted EBITDA                           3              (10)                       17              (9)
Maintenance capital expenditures†                           17               28                        23              43
Net interest expense                                        32               29                        65              57
Preferred unit distributions                                12                9                        24              19
Income taxes paid                                            2                -                         2               -
Distributable Cash Flow                            $       267              218                       500             487

*Difference between cash receipts and revenue recognition. †Excludes Merey Sweeny capital reimbursements and turnaround impacts.

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                                                                       Millions of Dollars
                                                     Three Months
                                                         Ended                          Six Months Ended
                                                        June 30                              June 30
                                                          2021             2020                      2021            2020

Reconciliation to Net Cash Provided by Operating

Activities

Net Cash Provided by Operating Activities          $       286                 215                    513                489
Plus:
Net interest expense                                        32               29                        65              57
Income tax expense                                           1                -                         1               1
Changes in working capital                                 (11)              (3)                      (22)            (15)
Undistributed equity earnings                               (7)              (5)                       (2)             (9)
Impairments                                                  -                -                      (198)              -
Gain from equity interest transfer                           -               84                         -              84
Deferred revenues and other liabilities                      2                2                         2               2
Other                                                       (2)              (7)                       (2)             (9)
EBITDA                                                     301              315                       357             600
Plus:
Proportional share of equity affiliates' net
interest, taxes, depreciation and amortization,
and impairments                                             51               38                       100              73
Expenses indemnified or prefunded by Phillips 66             1                -                         1               -
Transaction costs associated with acquisitions               -                -                         -               1
Impairments                                                  -                -                       198               -

Less:

Gain from equity interest transfer                           -               84                         -              84
Adjusted EBITDA attributable to noncontrolling
interest                                                    16                -                        30               -

Adjusted EBITDA                                            337              269                       626             590
Plus:
Deferred revenue impacts*†                                  (4)               5                         5               7

Less:

Equity affiliate distributions less than (more
than) proportional adjusted EBITDA                           3              (10)                       17              (9)
Maintenance capital expenditures†                           17               28                        23              43
Net interest expense                                        32               29                        65              57
Preferred unit distributions                                12                9                        24              19
Income taxes paid                                            2                -                         2               -
Distributable Cash Flow                            $       267              218                       500             487

*Difference between cash receipts and revenue recognition. †Excludes Merey Sweeny capital reimbursements and turnaround impacts.

Statement of Income Analysis


Operating revenues increased $39 million, or 16%, and increased $24 million, or
5%, in the second quarter and six-month period of 2021, respectively. The
increases in both periods were primarily attributable to increased volumes
resulting from market demand. Additionally, the increase in the six-month period
was partially offset by the effects of winter storms impacting the Central and
Gulf Coast regions in the first quarter of 2021.

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Equity in earnings of affiliates increased $38 million, or 37%, and increased
$26 million, or 11%, in the second quarter and six-month period of 2021,
respectively. The increases in both periods were primarily due to higher
volumes, including volumes from Gray Oak Pipeline, LLC, which commenced full
operations during the second quarter of 2020, and South Texas Gateway Terminal
LLC (South Texas Gateway), which commenced full operations in the first quarter
of 2021. The increases in both periods were partially offset by a decrease in
earnings from DCP Sand Hills Pipeline, LLC. See Note 4-Equity Investments, in
the Notes to Consolidated Financial Statements, for additional information.

Gain on equity interest transfer reflects the second-quarter 2020 gain recognition related to a co-venturer's acquisition of a 35% interest in the consolidated holding company that owns an interest in Gray Oak Pipeline, LLC. See Note 4-Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.


Operating and maintenance expenses increased $9 million, or 11%, and increased
$16 million, or 9%, in the second quarter and six-month period of 2021,
respectively. The increases in both periods were primarily due to higher utility
costs.

Interest and debt expense increased $4 million, or 14%, and increased $8 million, or 14%, in the second quarter and six-month period of 2021, respectively. The increases in both periods were due to lower capitalized interest and increased debt.

Impairments reflects the first-quarter 2021 impairment of our investment in Liberty Pipeline LLC (Liberty). See Note 4-Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.


CAPITAL RESOURCES AND LIQUIDITY
Significant Sources of Capital
Our sources of liquidity include cash generated from operations, distributions
from our equity affiliates, borrowings from related parties and under our
revolving credit facility, issuances of additional debt and equity securities,
and funding from joint venture partners. We believe that cash generated from
these sources will be sufficient to meet our short-term working capital
requirements, long-term capital expenditure requirements and our quarterly cash
distributions.

Operating Activities
We generated $513 million in cash from operations during the first six months of
2021, an increase of $24 million compared with the corresponding period of 2020.
The increase was primarily driven by higher operating revenues and higher
operating distributions from equity affiliates.

Equity Affiliate Distributions
Our operating and investing cash flows are impacted by distribution decisions
made by our equity affiliates. During the first six months of 2021, we received
aggregate distributions from our equity affiliates of $345 million, compared
with $335 million during the same period of 2020. We cannot control the amount
or timing of future distributions from equity affiliates; therefore, future
distributions are not assured.

Revolving Credit Facility
At June 30, 2021, and December 31, 2020, borrowings of $15 million and
$415 million, respectively, were outstanding under our $750 million revolving
credit facility. At both June 30, 2021, and December 31, 2020, $1 million in
letters of credit had been issued that were supported by this facility.

Term Loan Agreement
On April 6, 2021, we entered into a $450 million term loan agreement and
borrowed the full amount. The term loan agreement has a maturity date of April
5, 2022, and the outstanding borrowings can be repaid at any time and from time
to time, in whole or in part, without premium or penalty. Borrowings bear
interest at a floating rate based on either a Eurodollar rate or a reference
rate, plus a margin of 0.875%. Proceeds were primarily used to repay amounts
borrowed under our $750 million revolving credit facility.



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Transfer of Equity Interest
In April 2021, we transferred our 50% ownership interest in Liberty to our
co-venturer for cash and certain pipeline assets with a value that approximated
our book value of $46 million at March 31, 2021. See Note 4-Equity Investments,
in the Notes to Consolidated Financial Statements, for additional information.

ATM Program
At June 30, 2021, we have $248 million of available capacity under our $250
million continuous offering of common units, or at-the-market (ATM) program. We
suspended issuances under the ATM program in the first quarter of 2020 due to
low common unit prices. We did not issue any common units under the ATM program
during the three and six months ended June 30, 2021.


Off-Balance Sheet Arrangements


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

Dakota Access and ETCO have guaranteed repayment of $2.5 billion aggregate
principal amount of senior unsecured notes issued by a wholly owned subsidiary
of Dakota Access. In addition, we and our co-venturers in Dakota Access provided
a Contingent Equity Contribution Undertaking (CECU) in conjunction with the
notes offering. Under the CECU, the co-venturers may be severally required to
make proportionate equity contributions to Dakota Access in certain
circumstances relating to the litigation described above. At June 30, 2021, our
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, we also could be required to support our 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. If we are required to perform under the CECU, we would expect to fund such performance with cash, capacity available under our revolving credit facility, third-party debt financing, and/or sponsor loans from Phillips 66.

Capital Requirements


Capital Expenditures and Investments
Our operations are capital intensive and require investments to expand, upgrade,
maintain or enhance existing operations and to meet environmental and
operational requirements of our wholly owned and joint venture entities. Our
capital requirements consist of maintenance and expansion capital expenditures,
as well as contributions to our joint ventures. Maintenance capital expenditures
are those made to replace partially or fully depreciated assets, to maintain the
existing operating capacity of our assets and to extend their useful lives, or
to maintain existing system volumes and related cash flows. In contrast,
expansion capital expenditures are those made to expand and upgrade our systems
and facilities and to construct or acquire new systems or facilities to grow our
business, including contributions to joint ventures that are using the
contributed funds for such purposes.

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Our capital expenditures and investments represent the total spending for our
capital requirements. 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 consolidated capital spending funded by certain
joint venture partners. Additionally, the disaggregation of adjusted capital
spending between expansion and maintenance is not a distinction recognized under
GAAP. We disaggregate adjusted capital spending because our partnership
agreement requires that we treat expansion and maintenance capital differently
for operating and capital surplus determinations. Further, we generally fund
expansion capital spending with both operating and financing cash flows and fund
maintenance capital spending with operating cash flows.

Our capital expenditures and investments were:

                                                                          Millions of Dollars
                                                                            Six Months Ended
                                                                                June 30
                                                                          2021                  2020
Capital Expenditures and Investments
Capital expenditures and investments                             $         119                   611
Capital expenditures and investments funded by certain joint
venture partners                                                             -                   (61)
Adjusted Capital Spending                                        $         119                   550

Expansion                                                        $          96                   507
Maintenance                                                                 23                    43



Our capital expenditures and investments for the first six months of 2021 were primarily associated with the following activities:


•Construction activities related to the C2G Pipeline, a new 16-inch ethane
pipeline that connects our Clemens Caverns storage facility to petrochemical
facilities in Gregory, Texas, near Corpus Christi, Texas.

•Contributions to Dakota Access for a pipeline optimization project.

•Contributions to complete the South Texas Gateway Terminal development activities.

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



Cash Distributions
On July 20, 2021, the Board of Directors of our General Partner declared a
quarterly cash distribution of $0.875 per common unit, which will result in a
total distribution of $199 million attributable to the second quarter of 2021.
This distribution is payable on August 13, 2021, to common unitholders of record
as of July 30, 2021.

Beginning with the distribution to preferred unitholders attributable to the
fourth quarter of 2020, the preferred unitholders at the record date are
entitled to receive cumulative quarterly distributions equal to the greater of
$0.678375 per unit, or the per-unit distribution amount paid to the common
unitholders. Preferred unitholders will receive $12 million of distributions
attributable to the second quarter of 2021. This distribution is payable
August 13, 2021, to preferred unitholders of record as of July 30, 2021.

Repurchase of Preferred Units
On June 29, 2021, we repurchased 368,528 of the outstanding Series A Perpetual
Convertible Preferred Units with an aggregate carrying value of $20 million for
$24 million in cash, or $65.124 per unit. Upon the repurchase, these preferred
units were canceled and are no longer outstanding. At June 30, 2021, there were
13,451,263 preferred units outstanding.

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Debt Repayment
On April 1, 2021, we repaid the two remaining $25 million tranches of tax-exempt
bonds due April 2021, totaling $50 million.


Contingencies

From time to time, lawsuits involving a variety of claims that arise in the
ordinary course of business are filed against 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 sites. We regularly assess the need for accounting 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 any 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.

Regulatory Matters
Our interstate common carrier crude oil and refined petroleum products pipeline
operations are subject to rate regulation by the Federal Energy Regulatory
Commission under the Interstate Commerce Act and Energy Policy Act of 1992, and
certain of our pipeline systems providing intrastate service are subject to rate
regulation by applicable state authorities under their respective laws and
regulations. Our pipeline, rail rack and terminal operations are also subject to
safety regulations adopted by the Department of Transportation, as well as to
state regulations.

Legal and Tax Matters
Under our amended omnibus agreement, Phillips 66 provides certain services for
our benefit, including legal and tax support services, and we pay an operational
and administrative support fee for these services. Phillips 66's legal and tax
organizations apply their knowledge, experience and professional judgment to the
specific characteristics of our cases and uncertain tax positions. Phillips 66's
legal organization employs a litigation management process to manage and monitor
the legal proceedings against us. The process facilitates the early evaluation
and quantification of potential exposures in individual cases and enables
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, Phillips 66's legal organization regularly assesses the adequacy of
current accruals and recommends if adjustment of existing accruals, or
establishment of new accruals, is required. As of June 30, 2021, and
December 31, 2020, we did not have any material accrued contingent liabilities
associated with litigation matters.

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Environmental
We are subject to extensive federal, state and local environmental laws and
regulations. These requirements, which frequently change, regulate the discharge
of materials into the environment or otherwise relate to protection of the
environment. Compliance with these laws and regulations may require us to
remediate environmental damage from any discharge of petroleum or chemical
substances from our facilities or require us to install additional pollution
control equipment at or on our facilities. Our failure to comply with these or
any other environmental or safety-related regulations could result in the
assessment of administrative, civil, or criminal penalties, the imposition of
investigatory and remedial liabilities, and the issuance of governmental orders
that may subject us to additional operational constraints. Future expenditures
may be required to comply with the Federal Clean Air Act and other federal,
state and local requirements in respect of our various sites, including our
pipelines and storage assets. The impact of legislative and regulatory
developments, if enacted or adopted, could result in increased compliance costs
and additional operating restrictions on our business, each of which could have
an adverse impact on our financial position, results of operations and
liquidity.

As with all costs, if these expenditures are not ultimately recovered in the
tariffs and other fees we receive for our services, our operating results will
be adversely affected. We believe that substantially all similarly situated
parties and holders of comparable assets must comply with similar environmental
laws and regulations. However, the specific impact on each may vary depending on
a number of factors, including, but not limited to, the age and location of its
operating facilities.

We accrue for environmental remediation activities when the responsibility to
remediate is probable and the amount of associated costs can be reasonably
estimated. As environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise, charges in excess of
those previously accrued may be required. New or expanded environmental
requirements, which could increase our environmental costs, may arise in the
future. We believe we are in substantial compliance with all legal obligations
regarding the environment and have established the environmental accruals that
are currently required; however, it is not possible to predict all of the
ultimate costs of compliance, including remediation costs that may be incurred
and penalties that may be imposed, because not all of the costs are fixed or
presently determinable (even under existing legislation) and the costs may be
affected by future legislation or regulations.

Indemnification and Excluded Liabilities
Under our amended omnibus agreement and pursuant to the terms of various
agreements under which we acquired assets from Phillips 66, Phillips 66 will
indemnify us, or assume responsibility, for certain environmental liabilities,
tax liabilities, litigation and any other liabilities attributable to the
ownership or operation of the assets contributed to us and that arose prior to
the effective date of each acquisition. These indemnifications and exclusions
from liability have, in some cases, time limits and deductibles. When Phillips
66 performs under any of these indemnifications or exclusions from liability, we
recognize non-cash expenses and associated non-cash capital contributions from
our General Partner, as these are considered liabilities paid for by a principal
unitholder.


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           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements. You can normally identify our
forward-looking statements by the words "anticipate," "estimate," "believe,"
"budget," "continue," "could," "intend," "may," "plan," "potential," "predict,"
"seek," "should," "will," "would," "expect," "objective," "projection,"
"forecast," "goal," "guidance," "outlook," "effort," "target" and similar
expressions, although the absence of these words does not mean that statement is
not forward-looking.

We based the forward-looking statements on our current expectations, estimates
and projections about us, our operations, the operations of our joint ventures
and the entities in which we own equity interests, as well as the industries in
which we and they operate in general. We caution you these statements are not
guarantees of future performance as they involve assumptions that, while made in
good faith, may prove to be incorrect, and involve risks and uncertainties we
cannot predict. In addition, we based many of these forward-looking statements
on assumptions about future events that may prove to be inaccurate. Accordingly,
our actual outcomes and results may differ materially from what we have
expressed or forecast in the forward-looking statements. Any differences could
result from a variety of factors, including the following:

•The continuing effects of the COVID-19 pandemic and its negative impact on the
demand for crude oil and refined petroleum products, as well as the extent and
duration of recovery of economies and the demand for crude oil and refined
petroleum products after the pandemic subsides.
•Reductions in the volume of crude oil, refined petroleum products and NGL we or
our equity affiliates transport, fractionate, process, terminal and store.
•The continued ability of Phillips 66 to satisfy its obligations under our
commercial and other agreements.
•Fluctuations in the prices and demand for crude oil, refined petroleum products
and NGL, including as a result of actions taken by OPEC and other countries
impacting supply and demand and, correspondingly, commodity prices.
•Changes in governmental policies relating to crude oil, refined petroleum
products or NGL pricing, regulation, taxation, or exports.
•Potential liabilities associated with the risks and operational hazards
inherent in transporting, fractionating, processing, terminaling and storing
crude oil, refined petroleum products and NGL.
•Curtailment of operations due to severe weather (including as a result of
climate change) disruption or natural disasters; riots, strikes, lockouts or
other industrial disturbances.
•Accidents or other unscheduled shutdowns affecting our pipelines, processing,
fractionating, terminaling, and storage facilities or equipment, or those of our
equity affiliates, suppliers or customers.
•Our, and our equity affiliates', inability to obtain or maintain permits, in a
timely manner, or at all, and the possibility of the revocation or modification
of such permits.
•The operation, financing and distribution decisions of our joint ventures,
which we may not control.
•The inability to comply with government regulations or make capital
expenditures required to maintain compliance.
•The failure to complete construction of announced and future capital projects
in a timely manner, cost overruns associated with such projects, and the ability
to obtain or maintain permits necessary for such projects.
•Costs or liabilities associated with federal, state, and local laws and
regulations relating to environmental protection and safety, including spills,
releases and pipeline integrity.
•Failure of information technology systems due to various causes, including
unauthorized access or attack.
•Changes to the tariff rates with respect to volumes transported through
regulated assets, which rates are subject to review and possible adjustment by
federal and state regulators.
•Changes in revenues we realize under the loss allowance provisions of our
regulated tariffs resulting from changes in underlying commodity prices.
•Costs associated with compliance with evolving environmental laws and
regulations on climate change.
•Costs associated with compliance with safety regulations, including pipeline
integrity management program testing and related repairs.
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•Changes in the cost or availability of third-party vessels, pipelines, railcars
and other means of delivering and transporting crude oil, refined petroleum
products and NGL.
•General domestic and international economic and political developments
including armed hostilities, expropriation of assets, social unrest,
insurrections, and other political, economic or diplomatic developments,
including those caused by public health issues and outbreaks of diseases and
pandemics.
•Direct or indirect effects on our business resulting from actual or threatened
terrorist incidents or acts of war.
•Our ability to comply with the terms of our credit facility, indebtedness and
other financing arrangements, which, if accelerated, we may not be able to
repay.
•Our ability to incur additional indebtedness or our ability to obtain financing
on terms that we deem acceptable, including the refinancing of our current
obligations; higher interest rates and costs of financing would increase our
expenses.
•Changes in tax, environmental and other laws and regulations.
•The factors generally described in Item 1A. Risk Factors in our 2020 Annual
Report on Form 10-K.
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