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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedMarch 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission file number:001-35349

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

2331 CityWest Blvd., Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
832-765-3010
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par ValuePSXNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filer
Smaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  
The registrant had 481,100,026 shares of common stock, $0.01 par value, outstanding as of March 31, 2022.


PHILLIPS 66

TABLE OF CONTENTS
 



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

 Millions of Dollars
 Three Months Ended
March 31
 2022 2021 
Revenues and Other Income
Sales and other operating revenues$36,179 21,627 
Equity in earnings of affiliates685 285 
Net gain on dispositions1  
Other income (loss)(143)15 
Total Revenues and Other Income36,722 21,927 
Costs and Expenses
Purchased crude oil and products33,495 20,065 
Operating expenses1,340 1,380 
Selling, general and administrative expenses433 408 
Depreciation and amortization338 356 
Impairments 198 
Taxes other than income taxes149 139 
Accretion on discounted liabilities6 6 
Interest and debt expense135 146 
Foreign currency transaction gains(2) 
Total Costs and Expenses35,894 22,698 
Income (loss) before income taxes828 (771)
Income tax expense (benefit)171 (132)
Net Income (Loss)657 (639)
Less: net income attributable to noncontrolling interests75 15 
Net Income (Loss) Attributable to Phillips 66$582 (654)
Net Income (Loss) Attributable to Phillips 66 Per Share of Common Stock (dollars)
Basic$1.29 (1.49)
Diluted1.29 (1.49)
Weighted-Average Common Shares Outstanding (thousands)
Basic449,298 439,504 
Diluted450,011 439,504 
See Notes to Consolidated Financial Statements.
1

Consolidated Statement of Comprehensive Income (Loss)Phillips 66
 
 Millions of Dollars
 Three Months Ended
March 31
 2022 2021 
Net Income (Loss)$657 (639)
Other comprehensive income (loss)
Defined benefit plans
Amortization of net actuarial loss, prior service credit and settlements11 22 
Plans sponsored by equity affiliates5 6 
Income taxes on defined benefit plans(3)(6)
Defined benefit plans, net of income taxes13 22 
Foreign currency translation adjustments(82)(15)
Income taxes on foreign currency translation adjustments  
Foreign currency translation adjustments, net of income taxes(82)(15)
Cash flow hedges 2 
Income taxes on hedging activities  
Hedging activities, net of income taxes 2 
Other Comprehensive Income (Loss), Net of Income Taxes(69)9 
Comprehensive Income (Loss)588 (630)
Less: comprehensive income attributable to noncontrolling interests75 15 
Comprehensive Income (Loss) Attributable to Phillips 66$513 (645)
See Notes to Consolidated Financial Statements.
2

Consolidated Balance SheetPhillips 66
 
 Millions of Dollars
 March 31
2022
December 31
2021
Assets
Cash and cash equivalents$3,335 3,147 
Accounts and notes receivable (net of allowances of $44 million in 2022 and 2021)
8,749 6,138 
Accounts and notes receivable—related parties1,706 1,332 
Inventories4,530 3,394 
Prepaid expenses and other current assets1,534 686 
Total Current Assets19,854 14,697 
Investments and long-term receivables14,465 14,471 
Net properties, plants and equipment22,333 22,435 
Goodwill1,484 1,484 
Intangibles819 813 
Other assets1,683 1,694 
Total Assets$60,638 55,594 
Liabilities
Accounts payable$12,047 7,629 
Accounts payable—related parties1,137 832 
Short-term debt 1,474 1,489 
Accrued income and other taxes1,363 1,254 
Employee benefit obligations375 638 
Other accruals1,207 959 
Total Current Liabilities17,603 12,801 
Long-term debt12,960 12,959 
Asset retirement obligations and accrued environmental costs716 727 
Deferred income taxes5,264 5,475 
Employee benefit obligations1,049 1,055 
Other liabilities and deferred credits925 940 
Total Liabilities38,517 33,957 
Equity
Common stock (2,500,000,000 shares authorized at $0.01 par value)
     Issued (2022—651,046,617 shares; 2021—650,026,318 shares)
Par value7 7 
Capital in excess of par19,667 20,504 
Treasury stock (at cost: 2022—169,946,591 shares; 2021—211,771,827 shares)
(13,736)(17,116)
Retained earnings16,391 16,216 
Accumulated other comprehensive loss(514)(445)
Total Stockholders’ Equity21,815 19,166 
Noncontrolling interests306 2,471 
Total Equity22,121 21,637 
Total Liabilities and Equity$60,638 55,594 
See Notes to Consolidated Financial Statements.
3

Consolidated Statement of Cash FlowsPhillips 66
 Millions of Dollars
 Three Months Ended
March 31
 2022 2021 
Cash Flows From Operating Activities
Net income (loss)$657 (639)
Adjustments to reconcile net income (loss) to net cash provided by operating
   activities
Depreciation and amortization338 356 
Impairments 198 
Accretion on discounted liabilities6 6 
Deferred income taxes142 (103)
Undistributed equity earnings(100)217 
Net gain on dispositions(1) 
Unrealized investment loss169  
Other40 138 
Working capital adjustments
Accounts and notes receivable(3,042)(1,740)
Inventories(1,152)(377)
Prepaid expenses and other current assets(849)(283)
Accounts payable4,809 2,779 
Taxes and other accruals119 (281)
Net Cash Provided by Operating Activities1,136 271 
Cash Flows From Investing Activities
Capital expenditures and investments(370)(331)
Return of investments in equity affiliates 15 58 
Proceeds from asset dispositions1  
Advances/loans—related parties (155)
Other(74)(39)
Net Cash Used in Investing Activities(428)(467)
Cash Flows From Financing Activities
Issuance of debt 450 
Repayment of debt(24)(925)
Issuance of common stock23 20 
Dividends paid on common stock(404)(394)
Distributions to noncontrolling interests(77)(76)
Other(30)(20)
Net Cash Used in Financing Activities(512)(945)
Effect of Exchange Rate Changes on Cash and Cash Equivalents(8)(22)
Net Change in Cash and Cash Equivalents188 (1,163)
Cash and cash equivalents at beginning of period3,147 2,514 
Cash and Cash Equivalents at End of Period$3,335 1,351 
See Notes to Consolidated Financial Statements.
4

Consolidated Statement of Changes in EquityPhillips 66

Millions of Dollars
Three Months Ended March 31
 Attributable to Phillips 66 
 Common Stock   
 Par ValueCapital in Excess of ParTreasury StockRetained EarningsAccum. Other Comprehensive LossNoncontrolling InterestsTotal
December 31, 2021$7 20,504 (17,116)16,216 (445)2,471 21,637 
Net income   582  75 657 
Other comprehensive loss    (69) (69)
Dividends paid on common stock ($0.92 per share)
   (404)  (404)
Benefit plan activity 32  (3)  29 
Distributions to noncontrolling interests     (77)(77)
Acquisition of noncontrolling interest in Phillips 66 Partners LP (869)3,380   (2,163)348 
March 31, 2022$7 19,667 (13,736)16,391 (514)306 22,121 
December 31, 2020$6 20,383 (17,116)16,500 (789)2,539 21,523 
Net income (loss)— — — (654)— 15 (639)
Other comprehensive income— — — — 9 — 9 
Dividends paid on common stock ($0.90 per share)
— — — (394)— — (394)
Benefit plan activity— 37 — (3)— — 34 
Distributions to noncontrolling interests— — — — — (76)(76)
March 31, 2021$6 20,420 (17,116)15,449 (780)2,478 20,457 


Shares
Three Months Ended March 31
 Common Stock IssuedTreasury Stock
December 31, 2021650,026,318 211,771,827 
Shares issued—share-based compensation1,020,299  
Shares issued—acquisition of noncontrolling interest in Phillips 66 Partners LP (41,825,236)
March 31, 2022651,046,617 169,946,591 
December 31, 2020648,643,223 211,771,827 
Shares issued—share-based compensation995,658 — 
March 31, 2021649,638,881 211,771,827 
See Notes to Consolidated Financial Statements.
5

Notes to Consolidated Financial StatementsPhillips 66

Note 1—Interim Financial Information

The unaudited interim financial information presented in the financial statements included in this report is prepared in accordance with generally accepted accounting principles in the United States (GAAP) and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2021 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2022, are not necessarily indicative of the results expected for the full year.

On March 9, 2022, we completed the previously announced merger between us and Phillips 66 Partners LP (Phillips 66 Partners). See Note 18—Phillips 66 Partners LP, for additional information on the merger transaction.


Note 2—Sales and Other Operating Revenues

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

 Millions of Dollars
 Three Months Ended
March 31
 2022 2021 
Product Line and Services
Refined petroleum products$29,382 16,343 
Crude oil resales3,755 3,189 
Natural gas liquids (NGL)3,230 1,774 
Services and other*
(188)321 
Consolidated sales and other operating revenues
$36,179 21,627 
Geographic Location**
United States$28,885 16,612 
United Kingdom3,640 2,287 
Germany1,382 817 
Other foreign countries2,272 1,911 
Consolidated sales and other operating revenues
$36,179 21,627 
* Includes derivatives-related activities. See Note 11—Derivatives and Financial Instruments, for additional information.
** Sales and other operating revenues are attributable to countries based on the location of the operations generating the revenues.



6

Contract-Related Assets and Liabilities
At March 31, 2022, and December 31, 2021, receivables from contracts with customers were $8,604 million and $6,140 million, respectively. Significant noncustomer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.

Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At March 31, 2022, and December 31, 2021, our asset balances related to such payments were $471 million and $466 million, respectively.

Our contract liabilities represent advances from our customers prior to product or service delivery. At March 31, 2022, and December 31, 2021, contract liabilities were not material.

Remaining Performance Obligations
Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We do not disclose remaining performance obligations for these contracts as the expected duration is one year or less or because the variable consideration has been allocated entirely to an unsatisfied performance obligation. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing. At March 31, 2022, the remaining performance obligations related to these minimum volume commitment contracts were immaterial.


Note 3—Credit Losses

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

We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliations, dispute resolution and payment confirmations. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables. In addition, when events and circumstances arise that may affect certain counterparties’ abilities to fulfill their obligations, such as Coronavirus Disease 2019 (COVID-19), we enhance our credit monitoring, and we may seek collateral to support some transactions or require prepayments from higher-risk counterparties.

At March 31, 2022, and December 31, 2021, we reported $10,455 million and $7,470 million of accounts and notes receivable, respectively, net of allowances of $44 million for both periods. Based on an aging analysis at March 31, 2022, more than 95% of our accounts receivable were outstanding less than 60 days.

We are also exposed to credit losses from off-balance sheet exposures, such as guarantees of joint venture debt and standby letters of credit. See Note 9—Guarantees, and Note 10—Contingencies and Commitments, for more information on these off-balance sheet exposures.


7

Note 4—Inventories

Inventories consisted of the following:

 Millions of Dollars
 March 31
2022
December 31
2021
Crude oil and petroleum products$4,152 3,024 
Materials and supplies378 370 
$4,530 3,394 


Inventories valued on the last-in, first-out (LIFO) basis totaled $3,923 million and $2,792 million at March 31, 2022, and December 31, 2021, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $9.4 billion and $5.7 billion at March 31, 2022, and December 31, 2021, respectively.

Certain planned reductions in inventory that are not expected to be replaced by the end of the year cause liquidations of LIFO inventory values. LIFO inventory liquidations increased our net income by $40 million in the three months ended March 31, 2022 and increased our net loss by $28 million in the three months ended March 31, 2021.
8

Note 5—Investments, Loans and Long-Term Receivables

Equity Investments

Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In 2020, the trial court presiding over litigation brought by the Standing Rock Sioux Tribe ordered the U.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) addressing an easement under Lake Oahe in North Dakota. The court later vacated the easement. Although the easement is vacated, the USACE has indicated that it will not take action to stop pipeline operations while it proceeds with the EIS. In May 2021, the Standing Rock Sioux Tribe’s request for an injunction to force a shutdown of the pipeline while the EIS is being prepared was denied. In June 2021, the trial court dismissed the litigation entirely. Once the EIS is completed, new litigation or challenges to the EIS could be filed.

In September 2021, Dakota Access filed a writ of certiorari, requesting the U.S. Supreme Court to review the lower court’s decision to order the EIS and vacate the easement. In February 2022, the writ was denied, and the requirement to prepare the EIS stands. Completion of the EIS was expected in the fall of 2022, but now may be delayed as the USACE engages with the Standing Rock Sioux Tribe on their reasons for withdrawing as a cooperating agency with respect to preparation of the EIS.

Dakota Access and ETCO have guaranteed repayment of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access with an aggregate principal outstanding of $2.5 billion at March 31, 2022. In addition, Phillips 66 Partners, now a wholly owned subsidiary of Phillips 66, 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. At March 31, 2022, 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 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 at March 31, 2022.

At March 31, 2022, the aggregate book value of our investments in Dakota Access and ETCO was $725 million.

On April 1, 2022, Dakota Access’ wholly owned subsidiary repaid $650 million aggregate principal amount of its outstanding senior notes upon maturity. We funded our 25% share, or $163 million, with a capital contribution of $89 million in March 2022 and $74 million of distributions we elected not to receive from Dakota Access in the first quarter of 2022. As a result of the debt repayment, on April 1, 2022, our share of the maximum potential equity contributions under the CECU decreased to approximately $467 million, and our share of scheduled interest payments on the notes that we could be required to support decreased to approximately $20 million annually.

CF United LLC (CF United)
We hold a 50% voting interest and a 48% economic interest in CF United, a retail marketing joint venture with operations primarily on the U.S. West Coast. CF United is considered a variable interest entity (VIE) because our co-venturer has an option to require us to purchase its interest based on a fixed multiple. The put option becomes effective July 1, 2023, and expires on March 31, 2024. The put option is viewed as a variable interest as the purchase price on the exercise date may not represent the then-current fair value of CF United. We have determined that we are not the primary beneficiary because we and our co-venturer jointly direct the activities of CF United that most significantly impact economic performance. At March 31, 2022, our maximum exposure to loss was comprised of our $278 million investment in CF United, and any potential future loss resulting from the put option should the purchase price based on a fixed multiple exceed the then-current fair value of CF United.


9

OnCue Holdings, LLC (OnCue)
We hold a 50% interest in OnCue, a joint venture that owns and operates retail convenience stores. We fully guaranteed various debt agreements of OnCue and our co-venturer did not participate in the guarantees. This entity is considered a VIE because our debt guarantees resulted in OnCue not being exposed to all potential losses. We have determined we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact economic performance. At March 31, 2022, our maximum exposure to loss was $188 million, which represented the book value of our investment in OnCue of $120 million and guaranteed debt obligations of $68 million.

Liberty Pipeline LLC (Liberty)
In the first quarter of 2021, Phillips 66 Partners decided to exit the Liberty Pipeline project, which resulted in a $198 million before-tax impairment in our Midstream segment. The impairment is included in the “Impairments” line item on our consolidated statement of operations for the three months ended March 31, 2021. See Note 12—Fair Value Measurements, for additional information regarding this impairment and the techniques used to determine the fair value of this investment. In April 2021, Phillips 66 Partners transferred its ownership interest in Liberty to its co-venturer for cash and certain pipeline assets with a value that approximated its book value of $46 million at March 31, 2021.

Other Investments
In September 2021, we acquired 78 million ordinary shares, representing a 16% ownership interest, in NOVONIX Limited (NOVONIX), which are traded on the Australian Securities Exchange. NOVONIX is a Brisbane, Australia-based company that develops technology and supplies materials for lithium-ion batteries. Since we do not have significant influence over the operating and financial policies of NOVONIX and the shares we own have a readily determinable fair value, our investment is recorded at fair value at the end of each reporting period. The fair value of our investment is recorded in the “Investments and long-term receivables” line item on our consolidated balance sheet. The change in the fair value of our investment due to fluctuations in NOVONIX’s stock price, or unrealized investment gains (losses), is recorded in the “Other income (loss)” line item of our consolidated statement of operations, while changes due to foreign currency fluctuations are recorded in the “Foreign currency transaction gains” line item on our consolidated statement of operations. The fair value of our investment in NOVONIX was $362 million at March 31, 2022. The fair value of our investment in NOVONIX declined by $158 million during the three months ended March 31, 2022, reflecting an unrealized investment loss of $169 million, partially offset by an unrealized foreign currency gain of $11 million. See Note 12—Fair Value Measurements, for additional information regarding the recurring fair value measurement of our investment in NOVONIX.

Related Party Loans
We and our co-venturer provided member loans to WRB Refining LP (WRB). At March 31, 2022, our 50% share of the outstanding member loan balance, including accrued interest, was $597 million.


10

Note 6—Properties, Plants and Equipment

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

 Millions of Dollars
 March 31, 2022December 31, 2021
 Gross
PP&E
Accum.
D&A
  Net
PP&E
Gross
PP&E
Accum.
D&A
Net
PP&E
Midstream$12,597 3,156 9,441 12,524 3,064 9,460 
Chemicals      
Refining23,991 12,683 11,308 23,878 12,517 11,361 
Marketing and Specialties1,800 1,037 763 1,819 1,035 784 
Corporate and Other1,586 765 821 1,576 746 830 
$39,974 17,641 22,333 39,797 17,362 22,435 


11

Note 7—Earnings (Loss) Per Share

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

 Three Months Ended
March 31
 20222021
BasicDilutedBasicDiluted
Amounts Attributed to Phillips 66 Common Stockholders (millions):
Net income (loss) attributable to Phillips 66$582 582 (654)(654)
Income allocated to participating securities(2)(2)(2)(2)
Net income (loss) available to common stockholders$580 580 (656)(656)
Weighted-average common shares outstanding (thousands):
447,206 449,298 437,369 439,504 
Effect of share-based compensation2,092 713 2,135  
Weighted-average common shares outstanding—EPS449,298 450,011 439,504 439,504 
Earnings (Loss) Per Share of Common Stock (dollars)
$1.29 1.29 (1.49)(1.49)

On March 9, 2022, we completed the previously announced merger between us and Phillips 66 Partners. The merger resulted in the acquisition of all limited partnership interests in Phillips 66 Partners not already owned by us in exchange for approximately 42 million shares of Phillips 66 common stock issued from treasury stock. See Note 18—Phillips 66 Partners LP, for additional information on the merger transaction.
12

Note 8—Debt

2022 Activities
Debt Repayments
In early April 2022, upon maturity, Phillips 66 repaid its 4.300% senior notes with an aggregate principal amount of $1.0 billion and Phillips 66 Partners repaid its $450 million term loan.

Debt Exchange
On April 6, 2022, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, announced offers to exchange (the Exchange Offers) all validly tendered notes of seven different series of notes issued by Phillips 66 Partners (collectively, the Old Notes), with an aggregate principal amount of approximately $3.5 billion, for notes to be issued by Phillips 66 Company (collectively, the New Notes). The New Notes will be fully and unconditionally guaranteed by Phillips 66 and will rank equally with Phillips 66 Company’s other unsecured and unsubordinated indebtedness, and the guarantees will rank equally with Phillips 66’s other unsecured and unsubordinated indebtedness. The Exchange Offers will expire on May 3, 2022, unless such date is extended (the Expiration Date). Phillips 66 Company currently expects the settlement of the Exchange Offers to occur on May 5, 2022, unless the Expiration Date is extended.

The New Notes will have the same interest rates, interest payment dates and maturity dates as the Old Notes. In addition, holders that validly tender before the end of the early participation period on April 19, 2022 (the Early Participation Date), will receive New Notes with an aggregate principal amount equivalent to the Old Notes, while holders that validly tender after the Early Participation Date, but before the Expiration Date, will receive New Notes with an aggregate principal amount that is 3% less than the Old Notes.

Through the end of the early participation period on April 19, 2022, Old Notes with an aggregate principal amount of approximately $3.2 billion had been validly tendered for exchange.

2021 Activities
In February 2021, Phillips 66 repaid $500 million outstanding principal balance of its floating-rate senior notes upon maturity.
13

Note 9—Guarantees

At March 31, 2022, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantees and expect future performance to be either immaterial or have only a remote chance of occurrence.

Lease Residual Value Guarantees
Under the operating lease agreement for our headquarters facility in Houston, Texas, we have the option, at the end of the lease term in September 2025, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at March 31, 2022. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future exposures totaling $221 million. These leases have remaining terms of up to ten years.

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

At March 31, 2022, we also had other guarantees outstanding primarily for our portion of certain joint venture debt, which have remaining terms of up to four years. The maximum potential future exposures under these guarantees were approximately $133 million. Payment would be required if a joint venture defaults on its obligations.

Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnification. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses, employee claims, and real estate tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. At March 31, 2022, and December 31, 2021, the carrying amount of recorded indemnifications was $146 million and $144 million, respectively.

We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information to support the reversal. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. At March 31, 2022, and December 31, 2021, environmental accruals for known contamination of $109 million and $106 million, respectively, were included in the carrying amount of the recorded indemnifications noted above. These environmental accruals were primarily included in the “Asset retirement obligations and accrued environmental costs” line item on our consolidated balance sheet. For additional information about environmental liabilities, see Note 10—Contingencies and Commitments.

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



14

Note 10—Contingencies and Commitments

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

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

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

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

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At March 31, 2022, and December 31, 2021, our total environmental accruals were $436 million. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.


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

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

At March 31, 2022, we had performance obligations secured by letters of credit and bank guarantees of $1,546 million related to various purchase and other commitments incident to the ordinary conduct of business.


Note 11—Derivatives and Financial Instruments

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

Purchase and sales contracts with firm minimum notional volumes for commodities that are readily convertible to cash are recorded on our consolidated balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception, whereby the contracts are recorded on an accrual basis. We generally apply the normal purchases and normal sales exception to eligible crude oil, refined petroleum product, NGL, natural gas, renewable feedstock, and power commodity contracts to purchase or sell quantities we expect to use or sell in the normal course of business. All other derivative instruments are recorded at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 12—Fair Value Measurements.

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


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

 Millions of Dollars
 March 31, 2022December 31, 2021
Commodity DerivativesEffect of Collateral NettingNet Carrying Value Presented on the Balance SheetCommodity DerivativesEffect of Collateral NettingNet Carrying Value Presented on the Balance Sheet
 AssetsLiabilitiesAssetsLiabilities
Assets
Prepaid expenses and other current assets$202 (11)(8)183 99 (20) 79 
Other assets37 (15) 22 3 (1) 2 
Liabilities
Other accruals5,403 (5,649)142 (104)758 (855)49 (48)
Other liabilities and deferred credits (2) (2) (1) (1)
Total$5,642 (5,677)134 99 860 (877)49 32 

At March 31, 2022, and December 31, 2021, there was no material cash collateral received or paid that was not offset on our consolidated balance sheet.

The realized and unrealized gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of operations, were:
 
 Millions of Dollars
 Three Months Ended
March 31
 2022 2021 
Sales and other operating revenues$(420)(123)
Other income25 1 
Purchased crude oil and products(228)(135)
Net loss from commodity derivative activity$(623)(257)



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The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from nonderivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward purchase and sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was more than 95% at March 31, 2022, and December 31, 2021.

 Open Position
Long / (Short)
 March 31
2022
December 31
2021
Commodity
Crude oil, refined petroleum products, NGL and renewable feedstocks (millions of barrels)
(27)(18)


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

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

The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were immaterial at March 31, 2022, and December 31, 2021.


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Note 12—Fair Value Measurements

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

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

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

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

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

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Rabbi trust assets—These deferred compensation investments are measured at fair value using unadjusted quoted prices available from national securities exchanges and are therefore categorized as Level 1 in the fair value hierarchy.
Investment in NOVONIX—Our investment in NOVONIX is measured at fair value using unadjusted quoted prices available from the Australian Securities Exchange and is therefore categorized as Level 1 in the fair value hierarchy.
Debt—The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on observable market prices.

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

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

 Millions of Dollars
 March 31, 2022
Fair Value HierarchyTotal Fair Value of Gross Assets & LiabilitiesEffect of Counterparty NettingEffect of Collateral NettingDifference in Carrying Value and Fair ValueNet Carrying Value Presented on the Balance Sheet
 Level 1Level 2Level 3
Commodity Derivative Assets
Exchange-cleared instruments$3,677 1,800  5,477 (5,429)(8) 40 
OTC instruments 1  1    1 
Physical forward contracts 163 1 164    164 
Rabbi trust assets150   150 N/AN/A 150 
Investment in NOVONIX362   362 N/AN/A 362 
$4,189 1,964 1 6,154 (5,429)(8) 717 
Commodity Derivative Liabilities
Exchange-cleared instruments$3,737 1,835  5,572 (5,429)(142) 1 
Physical forward contracts 104 1 105    105 
Floating-rate debt 475  475 N/AN/A 475 
Fixed-rate debt, excluding finance leases and software obligations 14,104  14,104 N/AN/A(434)13,670 
$3,737 16,518 1 20,256 (5,429)(142)(434)14,251 

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 Millions of Dollars
 December 31, 2021
Fair Value HierarchyTotal Fair Value of Gross Assets & LiabilitiesEffect of Counterparty NettingEffect of Collateral NettingDifference in Carrying Value and Fair Value