Quarterly Report (10-q)

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Table of Contents

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 ended			September 30, 2021

or

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from						to

Commission file number:			001-36011

Phillips 66 Partners LP

(Exact name of registrant as specified in its charter)

 

Delaware						38-3899432
(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)

[phone]

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Units, Representing Limited Partner Interests

PSXP

New 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 filer			☒			Accelerated filer			☐
Non-accelerated filer			☐			Smaller reporting company			☐
Emerging 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 228,340,146 common units outstanding as of September 30, 2021.

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Table of Contents

PHILLIPS 66 PARTNERS LP

TABLE OF CONTENTS

 

			Page
Part I – Financial Information			1
Item 1. Financial Statements			1
Consolidated Statement of Income			1
Consolidated Statement of Comprehensive Income			2
Consolidated Balance Sheet			3
Consolidated Statement of Cash Flows			4
Consolidated Statement of Changes in Equity			5
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and    Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			35
Part II – Other Information			36
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 6. Exhibits			37
Signatures			38

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

Consolidated Statement of Income			Phillips 66 Partners LP

			Millions of Dollars
			Three Months Ended September 30									Nine Months Ended September 30
			2021			2020						2021			2020
Revenues and Other Income
Operating revenues—related parties			$	275		256						794			750
Operating revenues—third parties			8			9						21			23
Equity in earnings of affiliates			163			129						429			369
Gain from equity interest transfer			—			—						—			84
Other income			6			—						7			2
Total revenues and other income			452			394						1,251			1,228
Costs and Expenses
Operating and maintenance expenses			89			85						277			257
Depreciation			38			35						106			96
Impairments			10			—						208			—
General and administrative expenses			17			16						52			50
Taxes other than income taxes			10			9						31			30
Interest and debt expense			32			32						97			89
Other expenses			1			—						1			7
Total costs and expenses			197			177						772			529
Income before income taxes			255			217						479			699
Income tax expense			—			1						1			2
Net Income			255			216						478			697
Less: Net income attributable to noncontrolling interest			13			10						29			10
Net Income Attributable to the Partnership			242			206						449			687
Less: Preferred unitholders’ interest in net income attributable to the Partnership			12			10						36			29
Limited Partners’ Interest in Net Income Attributable to the Partnership			$	230		196						413			658
Net Income Attributable to the Partnership Per Limited Partner Unit (dollars)
Common units—basic			$	1.00		0.86						1.79			2.88
Common units—diluted			1.00			0.85						1.79			2.84
Weighted-Average Limited Partner Units Outstanding (thousands)
Common units—basic			228,340			228,340						228,340			228,331
Common units—diluted			228,340			242,160						228,340			242,151
See Notes to Consolidated Financial Statements.

1

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Table of Contents

Consolidated Statement of Comprehensive Income			Phillips 66 Partners LP

			Millions of Dollars
			Three Months Ended September 30									Nine Months Ended September 30
			2021			2020						2021			2020
Net Income			$	255		216						478			697
Defined benefit plans
Plan sponsored by equity affiliates, net of income taxes			—			—						(1)			—
Other comprehensive loss			—			—						(1)			—
Comprehensive Income			255			216						477			697
Less: Comprehensive income attributable to noncontrolling interest			13			10						29			10
Comprehensive Income Attributable to the Partnership			$	242		206						448			687
See Notes to Consolidated Financial Statements.

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Consolidated Balance Sheet			Phillips 66 Partners LP

 

			Millions of Dollars
			September 30 2021						December 31 2020
Assets
Cash and cash equivalents			$	71					7
Accounts receivable—related parties			99						103
Accounts receivable—third parties			3						3
Materials and supplies			29						16
Prepaid expenses and other current assets			7						11
Total current assets			209						140
Equity investments			2,941						3,244
Net properties, plants and equipment			3,693						3,639
Goodwill			185						185
Other assets			49						50
Total Assets			$	7,077					7,258
Liabilities
Accounts payable—related parties			$	22					19
Accounts payable—third parties			97						73
Accrued interest			39						35
Deferred revenues			36						27
Short-term debt			450						465
Accrued property and other taxes			30						11
Other current liabilities			6						3
Total current liabilities			680						633
Long-term debt			3,446						3,444
Other liabilities			87						90
Total Liabilities			4,213						4,167
Equity
Preferred unitholders (2021—13,451,263 units issued and outstanding; 2020—13,819,791 units issued and outstanding)			729						749
Common unitholders—public (2021 and 2020—58,580,009 units issued and outstanding)			2,657						2,706
Common unitholder—Phillips 66 (2021 and 2020—169,760,137 units issued and outstanding)			(798)						(656)
Accumulated other comprehensive loss			(2)						(1)
Total unitholders’ equity			2,586						2,798
Noncontrolling interest			278						293
Total Equity			2,864						3,091
Total Liabilities and Equity			$	7,077					7,258
See Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows			Phillips 66 Partners LP

			Millions of Dollars
			Nine Months Ended September 30
			2021						2020
Cash Flows From Operating Activities
Net income			$	478					697
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation			106						96
Impairments			208						—
Undistributed equity earnings			—						9
Gain from equity interest transfer			—						(84)
Other			1						7
Working capital adjustments
Accounts receivable			4						17
Materials and supplies			8						(1)
Prepaid expenses and other current assets			4						3
Accounts payable			8						20
Accrued interest			4						(3)
Deferred revenues			9						6
Other accruals			21						18
Net Cash Provided by Operating Activities			851						785
Cash Flows From Investing Activities
Cash capital expenditures and investments			(204)						(796)
Return of investment from equity affiliates			115						124
Proceeds from sale of equity interest			22						—
Liberty acquisition			—						(75)
Net Cash Used in Investing Activities			(67)						(747)
Cash Flows From Financing Activities
Issuance of debt			450						290
Repayment of debt			(465)						(25)
Issuance of common units			—						2
Debt issuance costs			(1)						—
Repurchase of preferred units			(24)						—
Quarterly distributions to preferred unitholders			(36)						(28)
Quarterly distributions to common unitholders—public			(154)						(153)
Quarterly distributions to common unitholder—Phillips 66			(445)						(446)
Net proceeds from equity interest transfer			—						40
Proceeds from noncontrolling interest			—						3
Distributions to noncontrolling interest			(44)						(13)
Other distributions from (to) Phillips 66			(1)						8
Net Cash Used in Financing Activities			(720)						(322)
Net Change in Cash and Cash Equivalents			64						(284)
Cash and cash equivalents at beginning of period			7						286
Cash and Cash Equivalents at End of Period			$	71					2
See Notes to Consolidated Financial Statements.

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Consolidated Statement of Changes in Equity			Phillips 66 Partners LP

			Millions of Dollars
			Three Months Ended September 30
			Partnership
			Preferred Unitholders Public			Common Unitholders Public			Common Unitholder Phillips 66			Accum. Other Comprehensive Loss			Noncontrolling Interest			Total
June 30, 2021			$	729		2,649			(820)			(2)			283			2,839
Net income			12			59			171			—			13			255
Quarterly cash distributions to unitholders ($0.875 per common unit)			(12)			(51)			(148)			—			—			(211)
Distributions to noncontrolling interest			—			—			—			—			(18)			(18)
Other distributions to Phillips 66			—			—			(1)			—			—			(1)
September 30, 2021			$	729		2,657			(798)			(2)			278			2,864
June 30, 2020			$	746		2,735			(572)			(1)			305			3,213
Net income			10			50			146			—			10			216
Quarterly cash distributions to unitholders ($0.875 per common unit)			(9)			(51)			(149)			—			—			(209)
Proceeds from noncontrolling interest			—			—			—			—			3			3
Distributions to noncontrolling interest			—			—			—			—			(13)			(13)
Other distributions to Phillips 66			—			—			(3)			—			—			(3)
September 30, 2020			$	747		2,734			(578)			(1)			305			3,207

			Units
			Three Months Ended September 30
			Preferred Units Public			Common Units Public			Common Units Phillips 66			Total Units
June 30, 2021			13,451,263			58,580,009			169,760,137			241,791,409
Units issued in public equity offerings			—			—			—			—
September 30, 2021			13,451,263			58,580,009			169,760,137			241,791,409
June 30, 2020			13,819,791			58,580,009			169,760,137			242,159,937
Units issued in public equity offerings			—			—			—			—
September 30, 2020			13,819,791			58,580,009			169,760,137			242,159,937
See Notes to Consolidated Financial Statements.

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			Millions of Dollars
			Nine Months Ended September 30
			Partnership
			Preferred Unitholders Public			Common Unitholders Public			Common Unitholder Phillips 66			Accum. Other Comprehensive Loss			Noncontrolling Interest			Total
December 31, 2020			$	749		2,706			(656)			(1)			293			3,091
Net income			36			106			307			—			29			478
Other comprehensive loss			—			—			—			(1)			—			(1)
Quarterly cash distributions to unitholders ($2.625 per common unit)			(36)			(154)			(445)			—			—			(635)
Repurchase of preferred units			(20)			(1)			(3)			—			—			(24)
Distributions to noncontrolling interest			—			—			—			—			(44)			(44)
Other distributions to Phillips 66			—			—			(1)			—			—			(1)
September 30, 2021			$	729		2,657			(798)			(2)			278			2,864
December 31, 2019			$	746		2,717			(628)			(1)			—			2,834
Issuance of common units			—			2			—			—			—			2
Net income			29			168			490			—			10			697
Quarterly cash distributions to unitholders ($2.625 per common unit)			(28)			(153)			(446)			—			—			(627)
Transfer of equity interest			—			—			—			—			305			305
Proceeds from noncontrolling interest			—			—			—			—			3			3
Distributions to noncontrolling interest			—			—			—			—			(13)			(13)
Other contributions from Phillips 66			—			—			6			—			—			6
September 30, 2020			$	747		2,734			(578)			(1)			305			3,207

			Units
			Nine Months Ended September 30
			Preferred Units Public			Common Units Public			Common Units Phillips 66			Total Units
December 31, 2020			13,819,791			58,580,009			169,760,137			242,159,937
Units issued in public equity offerings			—			—			—			—
Repurchase of preferred units			(368,528)			—			—			(368,528)
September 30, 2021			13,451,263			58,580,009			169,760,137			241,791,409
December 31, 2019			13,819,791			58,539,439			169,760,137			242,119,367
Units issued in public equity offerings			—			40,570			—			40,570
September 30, 2020			13,819,791			58,580,009			169,760,137			242,159,937
See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements			Phillips 66 Partners LP

 

Note 1—Description of the Business

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” or “GP” 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.

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. Our operations consist of one reportable segment.

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. Since 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, we 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.

Pending Merger with Phillips 66

On October 26, 2021, we entered into a definitive merger agreement with Phillips 66 and its wholly owned subsidiaries, Phillips 66 Company, Phillips 66 PDI, and Phoenix Sub LLC, and our General Partner pursuant to which Phillips 66 would acquire all of the publicly held common units representing limited partner interests in the Partnership not already owned by Phillips 66 and its subsidiaries on the closing date of the transaction. The agreement provides for an all-stock transaction in which each outstanding common unitholder would receive 0.50 shares of Phillips 66 common stock for each common unit. Pursuant to our partnership agreement, the Partnership’s perpetual convertible preferred units would be converted into common units at a premium to the original issuance price prior to exchange for Phillips 66 common stock. The merger is expected to close in early 2022, subject to customary closing conditions.

In connection with the merger transaction, our partnership agreement was amended, effective October 26, 2021, to provide for automatic conversion of the preferred units upon the acquisition by Phillips 66 of our common units at a conversion ratio determined by dividing i) the product of the original issuance price multiplied by a premium of 147.5%, less distributions paid after June 30, 2021, and before the closing date of the transaction, by ii) the closing unit price of the Partnership on the last trading day prior to completion of the merger.

Phillips 66 PDI, a wholly owned subsidiary of Phillips 66 that owns a majority of our common units, has delivered a written consent approving the transaction. This written consent constitutes the requisite vote of our common units to approve the transaction.

The terms of the transaction were unanimously approved by the Board of Directors of our General Partner based on the unanimous approval and recommendation of its conflicts committee, comprised entirely of independent directors.

Upon closing, we will become an indirect wholly owned subsidiary of Phillips 66, and our common units will cease to be listed on the NYSE and will be subsequently deregistered under the Exchange Act.

See Note 5—Net Income Per Limited Partner Unit, for additional information regarding the merger agreement.

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Note 2—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 our financial position, 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 audited consolidated financial statements and notes included in our 2020 Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2021, are not necessarily indicative of the results to be expected for the full year.

Note 3—Operating Revenues

Operating revenues are primarily generated from long-term pipeline transportation, terminaling, storage, processing and fractionation lease and service agreements, mainly with Phillips 66. These agreements typically include escalation clauses to adjust transportation tariffs and terminaling and storage fees to reflect changes in price indices. In addition, most of these agreements contain renewal options, which typically require the mutual consent of both our customers and us.

Total operating revenues disaggregated by asset type were as follows:

			Millions of Dollars
			Three Months Ended September 30									Nine Months Ended September 30
			2021			2020						2021			2020
Pipelines			$	121		117						346			325
Terminals			40			36						122			112
Storage, processing and other revenues			122			112						347			336
Total operating revenues			$	283		265						815			773

The majority of our agreements with Phillips 66 are considered operating leases under GAAP. The classification of a lease as either an operating or a financing lease requires judgment in assessing the contract’s lease and service components and in determining the asset’s fair value. We have elected to account for lease and service elements of contracts classified as leases on a combined basis, except for leases of processing-type assets, which contain non-ratable fees related to turnaround activity. For these types of leases, we continue to separate the lease and service elements based on relative standalone prices and apply the lease standard to the lease element and the revenue standard to the service element.

Total operating revenues disaggregated by lease and service revenues were as follows:

			Millions of Dollars
			Three Months Ended September 30									Nine Months Ended September 30
			2021			2020						2021			2020
Lease revenues			$	234		209						674			622
Service revenues			49			56						141			151
Total operating revenues			$	283		265						815			773

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Accounts Receivable

We bill our customers, mainly Phillips 66, under our lease and service contracts generally on a monthly basis.

Total accounts receivable by revenue type was as follows:

			Millions of Dollars
			September 30 2021						December 31 2020
Lease receivables			$	87					87
Service receivables			15						19
Total accounts receivable			$	102					106

Deferred Revenues

Our deferred revenues represent payments received from our customers, mainly Phillips 66, in advance of the period in which lease and service contract performance obligations have been fulfilled. The majority of our deferred revenues relate to a tolling agreement and a storage agreement that are classified as leases. The remainder of our deferred revenues relate to lease and service agreements that contain minimum volume commitments with recovery provisions. Our deferred revenues are recorded in the “Deferred revenues” and “Other liabilities” line items on our consolidated balance sheet.

Total deferred revenues under our lease and service agreements were as follows:

			Millions of Dollars
			September 30 2021						December 31 2020
Deferred lease revenues			$	53					45
Deferred service revenues			2						4
Total deferred revenues			$	55					49

Future Minimum Lease Payments from Customers

At September 30, 2021, future minimum payments to be received under our lease agreements with customers, mainly Phillips 66, were estimated to be:

			Millions of Dollars
Remainder of 2021			$	193
2022			753
2023			707
2024			589
2025			530
Remaining years			1,297
Total future minimum lease payments from customers			$	4,069

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Remaining Performance Obligations

We typically have long-term service contracts with our customers, mainly Phillips 66, of which the original durations range from 5 to 15 years. The weighted-average remaining duration of these contracts is 9 years. These contracts include both fixed and variable transaction price components. At September 30, 2021, future service revenues expected to be recognized for the fixed component of the transaction price of our remaining performance obligations from service contracts with our customers that have an original expected duration of greater than one year were:

			Millions of Dollars
Remainder of 2021			$	32
2022			124
2023			123
2024			99
2025			95
Remaining years			381
Total future service revenues			$	854

For the remaining service performance obligations, we applied the exemption for variable prices allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer distinct services as part of a performance obligation.

Note 4—Equity Investments

The following table summarizes the carrying value of our equity investments:

									Millions of Dollars
			Percentage Ownership						September 30 2021						December 31 2020
Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (Bakken Pipeline)			25.00		%				$	579					577
Bayou Bridge Pipeline, LLC (Bayou Bridge)			40.00						278						288
DCP Sand Hills Pipeline, LLC (Sand Hills)			33.34						576						582
DCP Southern Hills Pipeline, LLC (Southern Hills)			33.34						213						217
Explorer Pipeline Company (Explorer)			21.94						86						92
Gray Oak Pipeline, LLC			65.00						818						860
Liberty Pipeline LLC (Liberty)*			—						—						241
Paradigm Pipeline LLC (Paradigm)			50.00						137						141
Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal)			70.00						15						15
South Texas Gateway Terminal LLC (South Texas Gateway Terminal)			25.00						176						167
STACK Pipeline LLC (STACK)			50.00						63						64
Total equity investments									$	2,941					3,244

*In April 2021, we transferred our 50% ownership interest in Liberty to our co-venturer.

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Earnings (losses) from our equity investments were as follows:

			Millions of Dollars
			Three Months Ended September 30									Nine Months Ended September 30
			2021			2020						2021			2020
Bakken Pipeline			$	51		37						133			124
Bayou Bridge			12			6						29			23
Sand Hills			29			33						89			111
Southern Hills			12			11						36			32
Explorer			11			6						25			17
Gray Oak Pipeline, LLC			35			30						82			49
Paradigm			6			4						17			10
Phillips 66 Partners Terminal			—			(1)						1			(2)
South Texas Gateway Terminal			6			2						15			2
STACK			1			1						2			3
Total equity in earnings of affiliates			$	163		129						429			369

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 the second half of 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. In September 2021, Dakota Access filed a writ of certiorari, requesting the U.S. Supreme Court to review the lower court’s judgment that ordered the EIS and vacated the easement.

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 September 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.

Summarized financial information for 100% of Dakota Access is as follows:

			Millions of Dollars
			Three Months Ended September 30									Nine Months Ended September 30
			2021						2020						2021			2020
Revenues			$	241					196						654			623
Income before income taxes			162						121						429			401
Net income			162						121						429			401

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Gray Oak Pipeline, LLC

Gray Oak Pipeline, LLC was formed to develop and construct the Gray Oak Pipeline, which transports crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi and the Sweeny area, including the Phillips 66 Sweeny Refinery, as well as access to the Houston market. We have a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. In December 2018, a third party exercised its option to acquire a 35% interest in the holding company. Because the holding company’s sole asset was its ownership interest in Gray Oak Pipeline, LLC, which was considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in the holding company during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP at that time. The Gray Oak Pipeline commenced full operations in the second quarter of 2020 and the restrictions placed on the co-venturer were lifted on June 30, 2020, resulting in the recognition of the sale under GAAP. Accordingly, at June 30, 2020, the co-venturer’s 35% interest in the holding company was recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet. In addition, the premium of $84 million previously paid by the co-venturer in 2019 was recharacterized from a long-term obligation to a gain in our consolidated statement of income. For the nine months ended September 30, 2020, the co-venturer contributed an aggregate of $64 million to the holding company to fund its portion of Gray Oak Pipeline, LLC’s cash calls. We have an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC, after considering our co-venturer’s 35% interest in the consolidated holding company.

Liberty

Liberty was a joint venture formed to develop and construct the Liberty Pipeline system. In the first quarter of 2021, we decided to exit the Liberty Pipeline project, which had previously been deferred due to the challenging business environment created by the COVID-19 pandemic. As a result, we recorded a $198 million impairment to reduce the book value of our investment in Liberty at March 31, 2021, to our share of the estimated fair value of the joint venture’s pipeline assets and net working capital. The impairment is included in the “Impairments” line item on our consolidated statement of income. This valuation resulted in a Level 3 nonrecurring fair value measurement.

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.

Note 5—Net Income Per Limited Partner Unit

We calculate net income attributable to the Partnership per limited partner unit by dividing the limited partners’ interest in net income by the weighted-average number of common units outstanding for the period. After considering the period’s cash distributions declared, the remaining undistributed earnings or excess distributions declared over earnings, if any, are allocated to participating securities in accordance with the contractual terms of our partnership agreement and as prescribed under the two-class method for those periods in which we have participating securities. The earnings amount allocated to the limited partner common unitholders is then adjusted for any premiums paid to repurchase preferred units. Our preferred units became participating securities effective October 1, 2020. See Note 9—Equity for additional information on our preferred units.

For the diluted net income per limited partner unit calculation, the preferred units are assumed to be converted at the beginning of the period into limited partner common units on a one-for-one basis, and the distribution formula for available cash in our partnership agreement is recalculated, using the original available cash amount increased only for the preferred distributions declared which would not have been paid after conversion. Any potentially dilutive securities are excluded from the diluted earnings per unit computation if the effect of including such securities would be anti-dilutive.

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			Millions of Dollars
			Three Months Ended September 30									Nine Months Ended September 30
			2021						2020						2021			2020
Net income attributable to the Partnership			$	242					206						449			687
Less:
Limited partners’ distributions declared on preferred units*			12						10						36			29
Limited partners’ distributions declared on common units*			200						200						599			599
Distributions less than (more than) net income attributable to the Partnership			$	30					(4)						(186)			59

*Distributions declared are attributable to the indicated periods.

			Limited Partners’ Common Units						Limited Partners’ Preferred Units			Total
Three Months Ended September 30, 2021
Net income attributable to the Partnership (millions):
Distributions declared			$	200					12			212
Distributions less than net income attributable to the Partnership			28						2			30
Net income attributable to the Partnership—basic			228						14			242
Dilutive effect of preferred units			—
Net income attributable to the Partnership—diluted			$	228
Weighted-average units outstanding—basic			228,340,146
Dilutive effect of preferred units			—
Weighted-average units outstanding—diluted			228,340,146
Net income attributable to the Partnership per limited partner unit—basic (dollars)			$	1.00
Net income attributable to the Partnership per limited partner unit—diluted (dollars)			1.00

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			Limited Partners’ Common Units			Limited Partners’ Preferred Units			Total
Three Months Ended September 30, 2020
Net income attributable to the Partnership (millions):
Distributions declared			$	200		10			210
Distributions more than net income attributable to the Partnership			(4)			—			(4)
Net income attributable to the Partnership—basic			196			10			206
Dilutive effect of preferred units			10
Net income attributable to the Partnership—diluted			$	206
Weighted-average units outstanding—basic			228,340,146
Dilutive effect of preferred units			13,819,791
Weighted-average units outstanding—diluted			242,159,937
Net income attributable to the Partnership per limited partner unit—basic (dollars)			$	0.86
Net income attributable to the Partnership per limited partner unit—diluted (dollars)			0.85

			Limited Partners’ Common Units						Limited Partners’ Preferred Units			Total
Nine Months Ended September 30, 2021
Net income attributable to the Partnership (millions):
Distributions declared			$	599					36			635
Distributions more than net income attributable to the Partnership			(186)						—			(186)
Net income attributable to the Partnership			413						36			449
Premium paid for the repurchase of preferred units			(4)
Net income attributable to the Partnership—basic			409
Dilutive effect of preferred units			—
Net income attributable to the Partnership—diluted			$	409
Weighted-average units outstanding—basic			228,340,146
Dilutive effect of preferred units			—
Weighted-average units outstanding—diluted			228,340,146
Net income attributable to the Partnership per limited partner unit—basic (dollars)			$	1.79
Net income attributable to the Partnership per limited partner unit—diluted (dollars)			1.79

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			Limited Partners’ Common Units			Limited Partners’ Preferred Units			Total
Nine Months Ended September 30, 2020
Net income attributable to the Partnership (millions):
Distributions declared			$	599		29			628
Distributions less than net income attributable to the Partnership			59			—			59
Net income attributable to the Partnership—basic			658			29			687
Dilutive effect of preferred units			29
Net income attributable to the Partnership—diluted			$	687
Weighted-average units outstanding—basic			228,330,885
Dilutive effect of preferred units			13,819,791
Weighted-average units outstanding—diluted			242,150,676
Net income attributable to the Partnership per limited partner unit—basic (dollars)			$	2.88
Net income attributable to the Partnership per limited partner unit—diluted (dollars)			2.84

On October 19, 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 $200 million attributable to the third quarter of 2021. This distribution is payable on November 12, 2021, to common unitholders of record as of October 29, 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 third quarter of 2021. This distribution is payable November 12, 2021, to preferred unitholders of record as of October 29, 2021.

On October 26, 2021, we entered into a definitive merger agreement with Phillips 66. This agreement provides that, unless prohibited by the partnership agreement or applicable law, our General Partner shall cause the Partnership to declare, authorize and pay regular quarterly cash distributions on our common units in an amount not less than $0.875 per unit for the quarterly period ending December 31, 2021, and for each full quarterly period thereafter, unless the merger closes prior to the applicable record date. See Note 1—Description of the Business, for additional information regarding the merger agreement.

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Note 6—Properties, Plants and Equipment

Our investment in properties, plants and equipment (PP&E), with the associated accumulated depreciation, was:

			Millions of Dollars
			September 30 2021						December 31 2020
Land			$	19					19
Buildings and improvements			117						115
Pipelines and related assets*			1,538						1,518
Terminals and related assets*			851						847
Rail racks and related assets*			137						137
Processing and related assets*			1,065						1,063
Caverns and related assets*			733						732
Construction-in-progress			521						394
Gross PP&E			4,981						4,825
Accumulated depreciation			(1,288)						(1,186)
Net PP&E			$	3,693					3,639
*Assets for which we are the lessor.

In the third quarter of 2021, we decided not to pursue the ACE Pipeline project. Accordingly, we wrote-off the capitalized costs associated with this project of $10 million. This charge is included in the “Impairments” line item on our consolidated statement of income.

Note 7—Debt

			Millions of Dollars
			September 30 2021						December 31 2020
2.450% Senior Notes due December 2024			$	300					300
3.605% Senior Notes due February 2025			500						500
3.550% Senior Notes due October 2026			500						500
3.750% Senior Notes due March 2028			500						500
3.150% Senior Notes due December 2029			600						600
4.680% Senior Notes due February 2045			450						450
4.900% Senior Notes due October 2046			625						625
Term loan due April 2022 at rate of 0.958%			450						—
Tax-exempt bonds due April 2021 at weighted-average rate of 0.360%			—						50
Revolving credit facility borrowings due January 2021 at weighted-average rate of 1.397%			—						415
Debt at face value			3,925						3,940
Net unamortized discounts and debt issuance costs			(29)						(31)
Total debt			3,896						3,909
Short-term debt			(450)						(465)
Long-term debt			$	3,446					3,444

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The fair value of our fixed-rate and floating-rate debt is estimated based on observable market prices and is classified as Level 2 of the fair value hierarchy. The fair value of our fixed-rate debt was $3,793 million and $3,752 million at September 30, 2021, and December 31, 2020, respectively. The fair value of our floating-rate debt approximated carrying value of $450 million at September 30, 2021 and December 31, 2020.

At September 30, 2021, no borrowings were outstanding and $1 million in letters of credit had been drawn under our $750 million revolving credit facility, compared with outstanding borrowings of $415 million and $1 million in letters of credit drawn under the facility at December 31, 2020.

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.

Debt Repayment

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

Note 8—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.

Environmental

We are subject to federal, state and local environmental laws and regulations. We record accruals for contingent environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency 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. At September 30, 2021, and December 31, 2020, our total environmental accruals were not material.

In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

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Legal Proceedings

Under our amended omnibus agreement, Phillips 66 provides certain services for our benefit, including legal support services, and we pay an operational and administrative support fee for these services. Phillips 66’s 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. 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 determines if adjustment of existing accruals, or establishment of new accruals, is required. As of September 30, 2021, and December 31, 2020, we did not have any material accrued contingent liabilities associated with litigation matters.

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 noncash expenses and associated noncash capital contributions from our General Partner, as these are considered liabilities paid for by a principal unitholder.

Note 9—Equity

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.

On October 26, 2021, we entered into a definitive merger agreement with Phillips 66. See Note 1—Description of the Business, and Note 5—Net Income Per Limited Partner Unit, for additional information regarding the merger agreement.

Note 10—Related Party Transactions

Commercial Agreements

We have entered into long-term, fee-based commercial agreements with Phillips 66 to provide transportation, terminaling, storage, stevedoring, fractionation, processing, and rail terminal services. Under these agreements, Phillips 66 commits to provide us with minimum transportation, throughput or storage volumes, or minimum monthly service fees. If Phillips 66 does not meet its minimum volume commitments under an agreement, Phillips 66 pays us a deficiency payment based on the calculation described in the agreement.

Amended and Restated Operational Services Agreement

Under our amended and restated operational services agreement, we reimburse Phillips 66 for certain operational services provided in support of our pipelines, terminaling, processing, and storage facilities. These services include routine and emergency maintenance and repair services, routine operational activities, routine administrative services, construction and related services and such other services as we and Phillips 66 may mutually agree upon from time to time.

Amended Omnibus Agreement

The amended omnibus agreement addresses our payment of an operating and administrative support fee and our obligation to reimburse Phillips 66 for all other direct or allocated costs and expenses incurred by Phillips 66 in providing general and administrative services. Additionally, the omnibus agreement addresses Phillips 66’s indemnification to us and our indemnification to Phillips 66 for certain environmental and other liabilities. Further, it addresses the granting of a license from Phillips 66 to us with respect to the use of certain Phillips 66 trademarks.

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The operational and administrative support fee is for the provision of certain services, including: logistical services; asset oversight, such as operational management and supervision; corporate engineering services, including asset integrity and regulatory services; business development services; executive services; financial and administrative services (including treasury and accounting); information technology; legal services; corporate health, safety and environmental services; facility services; human resources services; procurement services; investor relations; tax matters; and public company reporting services. We pay Phillips 66 an operational and administrative support fee under the terms of our amended omnibus agreement in the amount of $8 million per month.

We also reimburse Phillips 66 for all other direct or allocated costs incurred on behalf of us, pursuant to the terms of our amended omnibus agreement. The classification of these charges between operating and maintenance expenses and general and administrative expenses is based on the functional nature of the services performed for our operations. Under our amended and restated operational services agreement, we reimburse Phillips 66 for the provision of certain operational services in support of our operating assets. Additionally, we pay Phillips 66 for insurance services provided to us, and recoveries under these policies are recorded as an offset to our expenses. Operating and maintenance expenses also include volumetric gains and losses associated with volumes transported by Phillips 66.

Tax Sharing Agreement

Under our tax sharing agreement, we reimburse Phillips 66 for our share of state and local income and other taxes incurred by Phillips 66 due to our results of operations being included in a combined or consolidated tax return filed by Phillips 66. Any reimbursement is limited to the tax that we (and our subsidiaries) would have paid had we not been included in a combined group with Phillips 66. Phillips 66 may use its tax attributes to cause its combined or consolidated group to owe no tax; however, we would nevertheless reimburse Phillips 66 for the tax we would have owed, even though Phillips 66 had no cash expense for that period.

Related Party Transactions

Significant related party transactions included in our costs and expenses were:

			Millions of Dollars
			Three Months Ended September 30									Nine Months Ended September 30
			2021						2020						2021			2020
Operating and maintenance expenses			$	49					46						154			136
General and administrative expenses			15						15						46			46

Other related party balances were included in the following line items on our consolidated balance sheet, all of which were related to commercial agreements with Phillips 66:

			Millions of Dollars
			September 30 2021						December 31 2020
Prepaid expenses and other current assets			$	4					7
Other assets			46						47
Deferred revenues			36						27
Other current liabilities			1						1
Other liabilities			61						64

Equity Affiliate Arrangements

In March 2019, we and our co-venturers in Dakota Access provided a CECU in conjunction with a senior unsecured notes offering. See Note 4—Equity Investments, for additional information.

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Note 11—Cash Flow Information

Capital Expenditures and Investments

Our capital expenditures and investments consisted of:

			Millions of Dollars
			Nine Months Ended September 30
			2021						2020
Cash capital expenditures and investments			$	204					796
Change in capital expenditure accruals			18						(1)
Total capital expenditures and investments			$	222					795

Distributions from Equity Affiliates

Distributions received from our equity affiliates are classified on our consolidated statement of cash flows pursuant to the cumulative earnings approach. Under this approach, a distribution received from an equity affiliate is considered a return on investment and is classified as an operating cash inflow unless cumulative distributions received from the equity affiliate exceed cumulative equity in earnings. If cumulative distributions from an equity affiliate exceed cumulative equity in earnings, the excess is considered a return of investment and is classified as an investing cash inflow on our consolidated statement of cash flows.

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Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Pending Merger with Phillips 66

On October 26, 2021, we entered into a definitive merger agreement with Phillips 66 and its wholly owned subsidiaries, Phillips 66 Company, Phillips 66 PDI, and Phoenix Sub LLC, and our General Partner pursuant to which Phillips 66 would acquire all of the publicly held common units representing limited partner interests in the Partnership not already owned by Phillips 66 and its subsidiaries on the closing date of the transaction. The agreement provides for an all-stock transaction in which each outstanding common unitholder would receive 0.50 shares of Phillips 66 common stock for each common unit. Pursuant to our partnership agreement, the Partnership’s perpetual convertible preferred units would be converted into common units at a premium to the original issuance price prior to exchange for Phillips 66 common stock. The merger is expected to close in early 2022, subject to customary closing conditions.

Upon closing, we will become an indirect wholly owned subsidiary of Phillips 66, and our common units will cease to be listed on the NYSE and will be subsequently deregistered under the Exchange Act. See Note 1—Description of the Business, in the Notes to Consolidated Financial Statements, for additional information regarding the merger agreement.

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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.

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.

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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.

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 third 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.

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 nine months ended September 30, 2021, is based on a comparison with the corresponding period of 2020.

			Millions of Dollars
			Three Months Ended September 30									Nine Months Ended September 30
			2021						2020						2021			2020
Revenues and Other Income
Operating revenues—related parties			$	275					256						794			750
Operating revenues—third parties			8						9						21			23
Equity in earnings of affiliates			163						129						429			369
Gain from equity interest transfer			—						—						—			84
Other income			6						—						7			2
Total revenues and other income			452						394						1,251			1,228
Costs and Expenses
Operating and maintenance expenses			89						85						277			257
Depreciation			38						35						106			96
Impairments			10						—						208			—
General and administrative expenses			17						16						52			50
Taxes other than income taxes			10						9						31			30
Interest and debt expense			32						32						97			89
Other expenses			1						—						1			7
Total costs and expenses			197						177						772			529
Income before income taxes			255						217						479			699
Income tax expense			—						1						1			2
Net Income			255						216						478			697
Less: Net income attributable to noncontrolling interest			13						10						29			10
Net Income Attributable to the Partnership			242						206						449			687
Less: Preferred unitholders’ interest in net income attributable to the Partnership			12						10						36			29
Limited Partners’ Interest in Net Income Attributable to the Partnership			$	230					196						413			658
Net Cash Provided by Operating Activities			$	338					296						851			785
Adjusted EBITDA			$	367					313						993			903
Distributable Cash Flow			$	268					243						768			730

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			Three Months Ended September 30									Nine Months Ended September 30
			2021						2020						2021			2020
Wholly Owned Operating Data
Pipelines
Pipeline revenues (millions of dollars)			$	121					117						346			325
Pipeline volumes(1) (thousands of barrels daily)
Crude oil			954						867						903			871
Refined petroleum products and NGL			994						907						945			866
Total			1,948						1,774						1,848			1,737
Average pipeline revenue per barrel (dollars)			$	0.67					0.71						0.68			0.68
Terminals
Terminal revenues (millions of dollars)			$	40					36						122			112
Terminal throughput (thousands of barrels daily)
Crude oil(2)			446						296						406			378
Refined petroleum products			780						700						756			713
Total			1,226						996						1,162			1,091
Average terminaling revenue per barrel (dollars)			$	0.36					0.39						0.38			0.37
Storage, processing and other revenues (millions of    dollars)			$	122					112						347			336
Total Operating Revenues (millions of dollars)			$	283					265						815			773
Joint Venture Operating Data(3)
Crude oil, refined petroleum products and NGL (thousands    of barrels daily)			1,294						1,142						1,225			975

(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 September 30									Nine Months Ended September 30
			2021						2020						2021			2020
Reconciliation to Net Income Attributable to the    Partnership
Net Income Attributable to the Partnership			$	242					206						449			687
Plus:
Net income attributable to noncontrolling interest			13						10						29			10
Net Income			255						216						478			697
Plus:
Depreciation			38						35						106			96
Net interest expense			31						31						96			88
Income tax expense			—						1						1			2
EBITDA			324						283						681			883
Plus:
Proportional share of equity affiliates’ net interest, taxes, depreciation and amortization, and impairments			51						45						151			118
Expenses indemnified or prefunded by Phillips 66			—						1						1			1
Transaction costs associated with acquisitions			—						—						—			1
Impairments			10						—						208			—
Less:
Gain from equity interest transfer			—						—						—			84
Adjusted EBITDA attributable to noncontrolling interest			18						16						48			16
Adjusted EBITDA			367						313						993			903
Plus:
Deferred revenue impacts*†			2						(3)						7			4
Less:
Equity affiliate distributions less than (more than) proportional adjusted EBITDA			14						4						31			(5)
Maintenance capital expenditures†			44						21						67			64
Net interest expense			31						31						96			88
Preferred unit distributions			12						10						36			29
Income taxes paid			—						1						2			1
Distributable Cash Flow			$	268					243						768			730

*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 September 30									Nine Months Ended September 30
			2021						2020						2021			2020
Reconciliation to Net Cash Provided by Operating    Activities
Net Cash Provided by Operating Activities			$	338					296						851			785
Plus:
Net interest expense			31						31						96			88
Income tax expense			—						1						1			2
Changes in working capital			(36)						(45)						(58)			(60)
Undistributed equity earnings			2						—						—			(9)
Impairments			(10)						—						(208)			—
Gain from equity interest transfer			—						—						—			84
Deferred revenues and other liabilities			—						1						2			3
Other			(1)						(1)						(3)			(10)
EBITDA			324						283						681			883
Plus:
Proportional share of equity affiliates’ net interest, taxes, depreciation and amortization, and impairments			51						45						151			118
Expenses indemnified or prefunded by Phillips 66			—						1						1			1
Transaction costs associated with acquisitions			—						—						—			1
Impairments			10						—						208			—
Less:
Gain from equity interest transfer			—						—						—			84
Adjusted EBITDA attributable to noncontrolling interest			18						16						48			16
Adjusted EBITDA			367						313						993			903
Plus:
Deferred revenue impacts*†			2						(3)						7			4
Less:
Equity affiliate distributions less than (more than) proportional adjusted EBITDA			14						4						31			(5)
Maintenance capital expenditures†			44						21						67			64
Net interest expense			31						31						96			88
Preferred unit distributions			12						10						36			29
Income taxes paid			—						1						2			1
Distributable Cash Flow			$	268					243						768			730

*Difference between cash receipts and revenue recognition.

†Excludes Merey Sweeny capital reimbursements and turnaround impacts.

Statement of Income Analysis

Operating revenues increased $18 million, or 7%, and increased $42 million, or 5%, in the third quarter and nine-month period of 2021, respectively. The increases in both periods were primarily attributable to higher volumes resulting from improved market demand. Additionally, the increase in the nine-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 $34 million, or 26%, and increased $60 million, or 16%, in the third quarter and nine-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 $4 million, or 5%, and increased $20 million, or 8%, in the third quarter and nine-month period of 2021, respectively. The increases in both periods were primarily due to higher utility costs.

Depreciation increased $3 million, or 9%, and increased $10 million, or 10%, in the third quarter and nine-month period of 2021, respectively. The increases in both periods were primarily attributable to additional assets placed in operation, including additional storage capacity at the Clemens Caverns in mid-2020 and the Sweeny to Pasadena Pipeline expansion project in the third quarter of 2020.

Impairments reflects the impairment resulting from the cancellation of the ACE Pipeline Project in the third quarter and nine-month period of 2021. See Note 6—Properties, Plants and Equipment, in the Notes to Consolidated Financial Statements, for additional information. Additionally, the nine-month period 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 $851 million in cash from operations during the first nine months of 2021, an increase of $66 million compared with the corresponding period of 2020. The increase was primarily driven by higher operating distributions from equity affiliates and higher operating revenues.

Equity Affiliate Distributions

Our operating and investing cash flows are impacted by distribution decisions made by our equity affiliates. During the first nine months of 2021, we received aggregate distributions from our equity affiliates of $544 million, compared with $502 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 September 30, 2021, no borrowings were outstanding and $1 million in letters of credit had been drawn under our $750 million revolving credit facility, compared with outstanding borrowings of $415 million and $1 million in letters of credit drawn under the facility at December 31, 2020.

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 September 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 nine months ended September 30, 2021.

On October 26, 2021, we entered into a definitive merger agreement with Phillips 66. If this merger is consummated, our common units will no longer be publicly traded and, as a result, we would not expect any issuances of common units under our ATM Program before or after the closing date of this transaction. See Note 1—Description of the Business, for additional information regarding the merger agreement.

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 the second half of 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. In September 2021, Dakota Access filed a writ of certiorari, requesting the U.S. Supreme Court to review the lower court’s judgment that ordered the EIS and vacated the easement.

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 September 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
			Nine Months Ended September 30
			2021						2020
Capital Expenditures and Investments
Capital expenditures and investments			$	222					795
Capital expenditures and investments funded by certain joint venture partners			—						(64)
Adjusted Capital Spending			$	222					731
Expansion			$	155					667
Maintenance			67						64

Our capital expenditures and investments for the first nine 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.

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.

Debt Repayment

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

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Cash Distributions

On October 19, 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 $200 million attributable to the third quarter of 2021. This distribution is payable on November 12, 2021, to common unitholders of record as of October 29, 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 third quarter of 2021. This distribution is payable November 12, 2021, to preferred unitholders of record as of October 29, 2021.

On October 26, 2021, we entered into a definitive merger agreement with Phillips 66. This agreement provides that, unless prohibited by the partnership agreement or applicable law, our General Partner shall cause the Partnership to declare, authorize and pay regular quarterly cash distributions on our common units in an amount not less than $0.875 per unit for the quarterly period ending December 31, 2021, and for each full quarterly period thereafter, unless the merger closes prior to the applicable record date. See Note 1—Description of the Business, in the Notes to Consolidated Financial Statements, for additional information regarding the merger agreement.

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.

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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 September 30, 2021, and December 31, 2020, we did not have any material accrued contingent liabilities associated with litigation matters.

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 timing and completion of the pending merger with Phillips 66.

•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.

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•Costs associated with compliance with safety regulations, including pipeline integrity management program testing and related repairs.

•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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Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our commodity price risk and interest rate risk at September 30, 2021, did not differ materially from that disclosed under Item 7A of our 2020 Annual Report on Form 10-K.

Item 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our General Partner’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2021, our General Partner’s Chairman and Chief Executive Officer and its Vice President and Chief Financial Officer, with the participation of the General Partner’s management, carried out an evaluation, pursuant to Rule 13a-15(b) of the Act, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our General Partner’s Chairman and Chief Executive Officer and its Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of September 30, 2021.

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the quarterly period ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not a party to any reportable litigation or governmental or other proceeding, including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment, that we reasonably believe will be in excess of $300,000 or have a material adverse impact on our consolidated financial position.

Under our amended omnibus agreement, and pursuant to the terms of various agreements under which we acquired assets from Phillips 66, Phillips 66 indemnifies us, or assumes responsibility, for certain liabilities relating to litigation and environmental matters attributable to the ownership or operation of our assets prior to their contribution to us from Phillips 66.

See Note 8—Contingencies, in the Notes to Consolidated Financial Statements, for additional information.

Item 1A.  RISK FACTORS

Except as set forth below, there have been no material changes from the risk factors disclosed in Item 1A of our 2020 Annual Report on Form 10-K.

Because the exchange ratio is fixed and because the market price of Phillips 66 common stock will fluctuate prior to the completion of our merger with Phillips 66, our unitholders cannot be certain of the market value of the Phillips 66 common stock they will receive as merger consideration relative to the value of our common units they exchange.

The market value of the consideration that our unitholders will receive in our merger will depend on the trading price of Phillips 66 common stock on the closing date of the transaction. The exchange ratio that determines the number of shares of Phillips 66 common stock that our unitholders will receive in this transaction is fixed at 0.50 shares of Phillips 66 common stock for each common unit. This means that there is no mechanism contained in the definitive merger agreement that would adjust the number of shares of Phillips 66 common stock that our unitholders will receive based on any decreases or increases in the trading price of Phillips 66 common stock. Stock or unit price changes may result from a variety of factors (many of which are beyond Phillips 66’s and our control), including:

•changes in Phillips 66’s or our business, operations and prospects;

•changes in market assessments of Phillips 66’s or our business, operations and prospects;

•interest rates, commodity prices, general market, industry and economic conditions and other factors generally affecting the price of Phillips 66’s common stock or our common units; and

•federal, state and local legislation, governmental regulation and legal developments in the businesses in which Phillips 66 and we operate.

If the price of Phillips 66 common stock on the closing date of the merger is less than the price of Phillips 66 common stock on the date the merger agreement was executed, then the market value of the merger consideration will be less than contemplated at the time the merger agreement was executed.

The timing of the completion of our merger with Phillips 66 is not certain, which affects when our common unitholders will receive the merger consideration. If the merger is not consummated, the market price of our common units may decline.

Completion of our merger with Phillips 66 is subject to several conditions, not all of which are controllable by us. Accordingly, the date on which our unitholders will receive the merger consideration depends on the completion date of the merger, which is uncertain. If any of the conditions to completing the merger are not satisfied or waived, the merger may not occur, even though Phillips 66 PDI has already delivered a written consent approving the merger. If the merger does not occur, the market price of our common units may decline.

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Item 6. EXHIBITS

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

Exhibit Number

Filing Date

SEC File No.

2.1

Agreement and Plan of Merger, dated as of October 26, 2021, by and among Phillips 66, Phillips 66 Company, Phillips 66 Project Development Inc., Phoenix Sub LLC, Phillips 66 Partners LP, and Phillips 66 Partners GP LLC

8-K

2.1

10/27/2021

001-36011

3.1

Amendment No. 1 to the Third Amended and Restated Agreement of Limited Partnership of Phillips 66 Partners LP, dated as of October 26, 2021

8-K

3.1

10/27/2021

001-36011

31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2*

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32*

Certifications pursuant to 18 U.S.C. Section 1350.

101.INS*

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*

Inline XBRL Taxonomy Extension Schema Document.

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

Inline XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104*

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

			PHILLIPS 66 PARTNERS LP
			By: Phillips 66 Partners GP LLC, its general partner
			/s/ J. Scott Pruitt
			J. Scott Pruitt Vice President and Controller (Chief Accounting and Duly Authorized Officer)

Date: October 29, 2021

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