Phillips 66 (PSX)

FORM 10-K | Annual Report
Feb. 22, 2019 1:29 PM
|
About: Phillips 66 (PSX)View as PDF
Phillips 66 (Form: 10-K, Received: 02/22/2019 13:34:01)

2018
 
UNITED STATES
 
 
SECURITIES AND EXCHANGE COMMISSION
 
 
Washington, D.C. 20549
 
 
FORM 10-K
 
(Mark One)
 
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended
December 31, 2018
 
 
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: 001-35349
 
 
Phillips 66
 
 
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
45-3779385
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
2331 CityWest Blvd., Houston, Texas 77042
 
 
(Address of principal executive offices) (Zip Code)
 
 
Registrant’s telephone number, including area code: 281-293-6600
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
Name of each exchange on which registered
 
 
Common Stock, $0.01 Par Value
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[X] Yes [ ] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [X] No
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.
[X] 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).
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
             [ ]
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 [X]
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 Act).
[ ] Yes [X] No
The aggregate market value of common stock held by non-affiliates of the registrant on June 29, 2018 , the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $112.31 , was $52.1 billion . The registrant, solely for the purpose of this required presentation, had deemed its Board of Directors and executive officers to be affiliates, and deducted their stockholdings in determining the aggregate market value.
The registrant had 454,913,087 shares of common stock outstanding at January 31, 2019 .
Documents incorporated by reference:
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 8, 2019 (Part III).



TABLE OF CONTENTS
Item
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 



Unless otherwise indicated, “the company,” “we,” “our,” “us” and “Phillips 66” are used in this report to refer to the businesses of Phillips 66 and its consolidated subsidiaries.

This Annual Report on Form 10-K contains forward-looking statements including, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. 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 identify forward-looking statements. The company does not undertake to update, revise or correct any 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 company’s disclosures under the heading “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”


PART I

Items 1 and 2. BUSINESS AND PROPERTIES


CORPORATE STRUCTURE

Phillips 66, headquartered in Houston, Texas, was incorporated in Delaware in 2011 in connection with, and in anticipation of, a restructuring of ConocoPhillips that separated its downstream businesses into an independent, publicly traded company named Phillips 66. The two companies were separated by ConocoPhillips distributing to its stockholders all the shares of common stock of Phillips 66 after the market closed on April 30, 2012 (the Separation). Phillips 66 stock trades on the New York Stock Exchange under the “PSX” stock symbol.

Our business is organized into four operating segments:

1)
Midstream— Provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and natural gas liquids (NGL) transportation, storage, processing and marketing services, mainly in the United States. This segment includes our master limited partnership (MLP), Phillips 66 Partners LP (Phillips 66 Partners), as well as our 50 percent equity investment in DCP Midstream, LLC (DCP Midstream).

2)
Chemicals— Consists of our 50 percent equity investment in Chevron Phillips Chemical Company LLC (CPChem), which manufactures and markets petrochemicals and plastics on a worldwide basis.

3)
Refining— Refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 13 refineries in the United States and Europe.

4)
Marketing and Specialties (M&S)— Purchases for resale and markets refined petroleum products, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products (such as base oils and lubricants), as well as power generation operations.

Corporate and Other includes general corporate overhead, interest expense, our investment in new technologies and various other corporate activities. Corporate assets include all cash, cash equivalents and income tax-related assets.

At December 31, 2018 , Phillips 66 had approximately 14,200 employees.


1


SEGMENT AND GEOGRAPHIC INFORMATION


MIDSTREAM

The Midstream segment consists of three business lines:

Transportation —Transports crude oil and other feedstocks to our refineries and other locations, delivers refined petroleum products to market, and provides terminaling and storage services for crude oil and refined petroleum products.

NGL and Other —Transports, stores, fractionates, exports and markets NGL and provides other fee-based processing services.

DCP Midstream —Gathers, processes, transports and markets natural gas and transports, fractionates and markets NGL.

Phillips 66 Partners
Phillips 66 Partners, headquartered in Houston, Texas, is an MLP we formed in 2013 to own, operate, develop and acquire primarily fee-based midstream assets. At December 31, 2018 , we owned a 54 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, while the public owned a 44 percent limited partner interest and 13.8 million perpetual convertible preferred units.

Phillips 66 Partners’ operations currently consist of crude oil, refined petroleum product and NGL transportation, processing, terminaling and storage assets that are geographically dispersed throughout the United States. The majority of Phillips 66 Partners’ assets are integral to Phillips 66-operated refineries.

The results of operations of Phillips 66 Partners are included in Midstream’s Transportation and NGL and Other business lines, based on the nature of the activity within the partnership.

Transportation

We own or lease various assets to provide transportation, terminaling and storage services. These assets include crude oil, refined petroleum product, NGL, and natural gas pipeline systems; crude oil, refined petroleum product and NGL terminals; a petroleum coke handling facility; marine vessels; railcars and trucks.

Pipelines and Terminals
At December 31, 2018 , our Transportation business was comprised of over 21,000 miles of crude oil, refined petroleum product, NGL and natural gas pipeline systems in the United States, including those partially owned or operated by our affiliates. We owned or operated 39 refined petroleum product terminals, 20 crude oil terminals, 4 NGL terminals, a petroleum coke exporting facility and various other storage and loading locations.

The Beaumont Terminal in Nederland, Texas, is the largest terminal in the Phillips 66 portfolio. During 2018, we continued to invest in the terminal by adding 3.5 million barrels of crude oil storage capacity. At December 31, 2018 , the terminal storage capacity was 14.6 million barrels, which included 10.9 million barrels of storage capacity for crude oil and 3.7 million barrels of storage capacity for refined petroleum products. A further expansion of 2.2 million barrels of crude oil capacity is planned for completion in the first quarter of 2020.

The Bayou Bridge Pipeline joint venture delivers crude oil from Nederland, Texas, to Lake Charles, Louisiana. Phillips 66 Partners has a 40 percent interest in the joint venture, and our co-venturer serves as the operator. An extension of the pipeline from Lake Charles to St. James, Louisiana, is expected to be in service in March 2019. The pipeline has a capacity of approximately 480,000 barrels per day (BPD).

2


The Gray Oak Pipeline system will provide crude oil transportation from the Permian Basin and Eagle Ford to destinations in the Corpus Christi and Freeport markets on the Texas Gulf Coast, including the Sweeny Refinery. The planned capacity of the pipeline is 900,000 BPD. At December 31, 2018, Phillips 66 Partners had an effective ownership interest in the pipeline system of 48.75 percent. In February 2019, another party exercised its option to acquire an interest in the pipeline system that reduced Phillips 66 Partners’ effective ownership interest to 42.25 percent. The pipeline system is expected to be in service by the end of 2019.

Phillips 66 Partners owns a 25 percent interest in the South Texas Gateway Terminal, which will connect to the Gray Oak Pipeline in Corpus Christi, Texas. The marine terminal, under development by a co-venturer, will have two deepwater docks and an initial storage capacity of 6.5 to 7 million barrels. The terminal is expected to start-up by mid-2020.

An open season commenced for the Red Oak Pipeline system on November 12, 2018. As proposed, this pipeline system would provide shippers the opportunity to transport crude oil from Cushing, Oklahoma, to Corpus Christi, Houston, and Beaumont, Texas. The initial throughput capacity on the pipeline is expected to be 400,000 BPD, with potential for further expansion. The pipeline system is anticipated to be placed in service in the fourth quarter of 2020.

An open season also commenced on the Liberty Pipeline system on November 12, 2018. As proposed, this pipeline system would provide shippers the opportunity to transport crude oil from the Rockies and Bakken production areas to Corpus Christi, Texas. The initial throughput capacity on the pipeline is expected to be 350,000 BPD, with potential for further expansion. The pipeline system is anticipated to be placed in service in the fourth quarter of 2020.

3


The following table depicts our ownership interest in major pipeline systems at December 31, 2018 :
Name
 
State of
Origination/Terminus
 
Interest
 
Length
(Miles)
 
Gross Capacity
(MBD)
Crude Oil
 
 
 
 
 
 
 
 
Bakken Pipeline †
 
North Dakota/Texas
 
25
%
 
1,915

 
525

Bayou Bridge †
 
Texas/Louisiana
 
40

 
49

 
480

Clifton Ridge †
 
Louisiana
 
100

 
10

 
260

CushPo †
 
Oklahoma
 
100

 
62

 
130

Eagle Ford Gathering †
 
Texas
 
100

 
28

 
54

Glacier †
 
Montana
 
79

 
865

 
126

Line 100
 
California
 
100

 
79

 
54

Line 200
 
California
 
100

 
228

 
93

Line 300
 
California
 
100

 
61

 
48

Line 400
 
California
 
100

 
153

 
40

Line O †
 
Oklahoma/Texas
 
100

 
276

 
37

Louisiana Crude Gathering
 
Louisiana
 
100

 
80

 
25

New Mexico Crude †
 
New Mexico/Texas
 
100

 
227

 
106

North Texas Crude †
 
Texas
 
100

 
224

 
28

Oklahoma Crude †
 
Texas/Oklahoma
 
100

 
217

 
100

Sacagawea †
 
North Dakota
 
50

 
95

 
175

STACK PL †
 
Oklahoma
 
50

 
149

 
250

Sweeny Crude
 
Texas
 
100

 
56

 
265

West Texas Crude †
 
Texas
 
100

 
1,064

 
156

Refined Petroleum Products
 
 
 
 
 
 
 
 
ATA Line †
 
Texas/New Mexico
 
50

 
293

 
34

Borger to Amarillo †
 
Texas
 
100

 
93

 
76

Borger-Denver
 
Texas/Colorado
 
70

 
397

 
38

Cherokee East †
 
Oklahoma/Missouri
 
100

 
287

 
55

Cherokee North †
 
Oklahoma/Kansas
 
100

 
29

 
57

Cherokee South †
 
Oklahoma
 
100

 
98

 
46

Cross Channel Connector †
 
Texas
 
100

 
5

 
180

Explorer †
 
Texas/Indiana
 
22

 
1,830

 
660

Gold Line †
 
Texas/Illinois
 
100

 
686

 
120

Harbor
 
New Jersey
 
33

 
80

 
171

Heartland*
 
Kansas/Iowa
 
50

 
49

 
30

LAX Jet Line
 
California
 
50

 
19

 
50

Los Angeles Products
 
California
 
100

 
22

 
112

Paola Products †
 
Kansas
 
100

 
106

 
96

Pioneer
 
Wyoming/Utah
 
50

 
562

 
63

Richmond
 
California
 
100

 
14

 
26

SAAL †
 
Texas
 
33

 
102

 
33

SAAL †
 
Texas
 
54

 
19

 
30

Seminoe †
 
Montana/Wyoming
 
100

 
342

 
33

Standish †
 
Oklahoma/Kansas
 
100

 
92

 
72

Sweeny to Pasadena †
 
Texas
 
100

 
120

 
294

Torrance Products
 
California
 
100

 
8

 
161

Watson Products
 
California
 
100

 
9

 
238

Yellowstone
 
Montana/Washington
 
46

 
710

 
66


4


Name
 
State of
Origination/Terminus
 
Interest
 
Length
(Miles)
 
Gross Capacity
(MBD)
NGL
 
 
 
 
 
 
 
 
Blue Line
 
Texas/Illinois
 
100
%
 
688

 
29

Brown Line †
 
Oklahoma/Kansas
 
100

 
76

 
26

Chisholm
 
Oklahoma/Kansas
 
50

 
202

 
42

Conway to Wichita
 
Kansas
 
100

 
55

 
38

Medford †
 
Oklahoma
 
100

 
42

 
10

Powder River
 
Wyoming/Texas
 
100

 
705

 
14

River Parish NGL†
 
Louisiana
 
100

 
510

 
133

Sand Hills †
 
Texas
 
33

 
1,466

 
485

Skelly-Belvieu
 
Texas
 
50

 
571

 
45

Southern Hills †
 
Kansas/Texas
 
33

 
941

 
192

Sweeny LPG
 
Texas
 
100

 
232

 
942

Sweeny NGL
 
Texas
 
100

 
18

 
204

TX Panhandle Y1/Y2
 
Texas
 
100

 
289

 
61

Natural Gas
 
 
 
 
 
 
 
 
Rockies Express**
 
 
 
 
 
 
 
 
East to West
 
Ohio/Illinois
 
25

 
670

 
2.6 Bcf/d

West to East
 
Colorado/Ohio
 
25

 
1,712

 
1.8 Bcf/d

† Owned by Phillips 66 Partners; Phillips 66 held a 56 percent ownership interest in Phillips 66 Partners at December 31, 2018 .
* Total pipeline system is 419 miles. Phillips 66 has an ownership interest in multiple segments totaling 49 miles.
** Total pipeline system consists of three zones for a total of 1,712 miles. The third zone of the pipeline is bi-directional and can transport 2.6 Bcf/d of natural gas from east to west.






5


The following table depicts our ownership interest in terminal and storage facilities at December 31, 2018 :
Facility Name
 
Location
 
Commodity Handled
 
Interest
 
Gross Storage Capacity (MBbl)
 
Gross Rack Capacity (MBD)
Albuquerque †
 
New Mexico
 
Refined Petroleum Products
 
100
%
 
274

 
18

Amarillo †
 
Texas
 
Refined Petroleum Products
 
100

 
296

 
29

Beaumont
 
Texas
 
Crude Oil, Refined Petroleum Products
 
100

 
14,600

 
8

Billings
 
Montana
 
Refined Petroleum Products
 
100

 
88

 
16

Billings Crude †
 
Montana
 
Crude Oil
 
100

 
236

 
 N/A

Borger
 
Texas
 
Crude Oil
 
50

 
772

 
 N/A

Bozeman
 
Montana
 
Refined Petroleum Products
 
100

 
130

 
13

Buffalo Crude †
 
Montana
 
Crude Oil
 
100

 
303

 
 N/A

Casper †
 
Wyoming
 
Refined Petroleum Products
 
100

 
365

 
7

Clemens †
 
Texas
 
NGL
 
100

 
9,000

 
 N/A

Clifton Ridge †
 
Louisiana
 
Crude Oil
 
100

 
3,800

 
 N/A

Coalinga
 
California
 
Crude Oil
 
100

 
817

 
 N/A

Colton
 
California
 
Refined Petroleum Products
 
100

 
207

 
21

Cushing †
 
Oklahoma
 
Crude Oil
 
100

 
675

 
 N/A

Cut Bank †
 
Montana
 
Crude Oil
 
100

 
315

 
 N/A

Denver
 
Colorado
 
Refined Petroleum Products
 
100

 
310

 
43

Des Moines
 
Iowa
 
Refined Petroleum Products
 
50

 
217

 
15

East St. Louis †
 
Illinois
 
Refined Petroleum Products
 
100

 
2,031

 
78

Freeport
 
Texas
 
Crude Oil, Refined Petroleum Products, NGL
 
100

 
3,624

 
 N/A

Glenpool †
 
Oklahoma
 
Refined Petroleum Products
 
100

 
571

 
19

Great Falls
 
Montana
 
Refined Petroleum Products
 
100

 
198

 
12

Hartford †
 
Illinois
 
Refined Petroleum Products
 
100

 
1,468

 
25

Helena
 
Montana
 
Refined Petroleum Products
 
100

 
195

 
10

Jefferson City †
 
Missouri
 
Refined Petroleum Products
 
100

 
103

 
16

Jones Creek
 
Texas
 
Crude Oil
 
100

 
2,580

 
 N/A

Junction
 
California
 
Crude Oil
 
100

 
524

 
 N/A

Kansas City †
 
Kansas
 
Refined Petroleum Products
 
100

 
1,410

 
66

Keene †
 
North Dakota
 
Crude Oil
 
50

 
503

 
 N/A

La Junta
 
Colorado
 
Refined Petroleum Products
 
100

 
109

 
10

LCPL Storage
 
Louisiana
 
Refined Petroleum Products
 
50

 
3,143

 
 N/A

Lincoln
 
Nebraska
 
Refined Petroleum Products
 
100

 
217

 
21

Linden †
 
New Jersey
 
Refined Petroleum Products
 
100

 
360

 
121

Los Angeles
 
California
 
Refined Petroleum Products
 
100

 
156

 
75

Lubbock †
 
Texas
 
Refined Petroleum Products
 
100

 
182

 
17

Medford Spheres †
 
Oklahoma
 
NGL
 
100

 
70

 
 N/A

Missoula
 
Montana
 
Refined Petroleum Products
 
50

 
365

 
29

Moses Lake
 
Washington
 
Refined Petroleum Products
 
50

 
216

 
13

Mount Vernon †
 
Missouri
 
Refined Petroleum Products
 
100

 
365

 
46

North Salt Lake
 
Utah
 
Refined Petroleum Products
 
50

 
755

 
41

North Spokane
 
Washington
 
Refined Petroleum Products
 
100

 
492

 
 N/A

Odessa †
 
Texas
 
Crude Oil
 
100

 
521

 
 N/A

Oklahoma City †
 
Oklahoma
 
Crude Oil, Refined Petroleum Products
 
100

 
355

 
48


6


Facility Name
 
Location
 
Commodity Handled
 
Interest
 
Gross Storage Capacity (MBbl)
 
Gross Rack Capacity (MBD)
Palermo †
 
North Dakota
 
Crude Oil
 
70
%
 
235

 
 N/A

Paola †
 
Kansas
 
Refined Petroleum Products
 
100

 
978

 
 N/A

Pasadena †
 
Texas
 
Refined Petroleum Products
 
100

 
3,234

 
65

Pecan Grove †
 
Louisiana
 
Crude Oil
 
100

 
177

 
 N/A

Ponca City †
 
Oklahoma
 
Refined Petroleum Products
 
100

 
51

 
23

Ponca City Crude †
 
Oklahoma
 
Crude Oil
 
100

 
1,229

 
 N/A

Portland
 
Oregon
 
Refined Petroleum Products
 
100

 
650

 
33

Renton
 
Washington
 
Refined Petroleum Products
 
100

 
243

 
20

Richmond
 
California
 
Refined Petroleum Products
 
100

 
343

 
28

River Parish †
 
Louisiana
 
NGL
 
100

 
1,500

 
 N/A

Rock Springs
 
Wyoming
 
Refined Petroleum Products
 
100

 
132

 
19

Sacramento
 
California
 
Refined Petroleum Products
 
100

 
146

 
13

San Bernard
 
Texas
 
Refined Petroleum Products
 
100

 
231

 
 N/A

Santa Margarita
 
California
 
Crude Oil
 
100

 
398

 
 N/A

Sheridan †
 
Wyoming
 
Refined Petroleum Products
 
100

 
94

 
15

Spokane
 
Washington
 
Refined Petroleum Products
 
100

 
351

 
24

Tacoma
 
Washington
 
Refined Petroleum Products
 
100

 
316

 
17

Torrance
 
California
 
Crude Oil, Refined Petroleum Products
 
100

 
2,128

 
 N/A

Tremley Point †
 
New Jersey
 
Refined Petroleum Products
 
100

 
1,701

 
25

Westlake
 
Louisiana
 
Refined Petroleum Products
 
100

 
128

 
16

Wichita Falls †
 
Texas
 
Crude Oil
 
100

 
225

 
 N/A

Wichita North †
 
Kansas
 
Refined Petroleum Products
 
100

 
769

 
19

Wichita South †
 
Kansas
 
Refined Petroleum Products
 
100

 
272

 
 N/A

Owned by Phillips 66 Partners; Phillips 66 held a 56 percent ownership interest in Phillips 66 Partners at December 31, 2018 .


The following table depicts our ownership interest in marine, rail and petroleum coke loading and offloading facilities at December 31, 2018 :
Facility Name
 
Location
 
Commodity Handled
 
Interest
 
 Gross Loading Capacity*
Marine
 
 
 
 
 
 
 
 
Beaumont
 
Texas
 
Crude Oil, Refined Petroleum Products
 
100
%
 
60

Clifton Ridge †
 
Louisiana
 
Crude Oil
 
100

 
48

Freeport
 
Texas
 
Crude Oil, Refined Petroleum Products, NGL
 
100

 
46

Hartford †
 
Illinois
 
Refined Petroleum Products
 
100

 
3

Pecan Grove †
 
Louisiana
 
Crude Oil
 
100

 
6

Portland
 
Oregon
 
Crude Oil
 
100

 
10

Richmond
 
California
 
Crude Oil
 
100

 
3

San Bernard
 
Texas
 
Refined Petroleum Products
 
100

 
2

Tacoma
 
Washington
 
Crude Oil
 
100

 
12

Tremley Point †
 
New Jersey
 
Refined Petroleum Products
 
100

 
7

Rail
 
 
 
 
 
 
 
 
Bayway †
 
New Jersey
 
Crude Oil
 
100

 
75

Beaumont
 
Texas
 
Crude Oil
 
100

 
20

Ferndale †
 
Washington
 
Crude Oil
 
100

 
30

Missoula
 
Montana
 
Refined Petroleum Products
 
50

 
41

Palermo †
 
North Dakota
 
Crude Oil
 
70

 
100

Thompson Falls
 
Montana
 
Refined Petroleum Products
 
50

 
41

Petroleum Coke
 
 
 
 
 
 
 
 
Lake Charles
 
Louisiana
 
Petroleum Coke
 
50

 
N/A

Owned by Phillips 66 Partners; Phillips 66 held a 56 percent ownership interest in Phillips 66 Partners at December 31, 2018 .
* Marine facilities in thousands of barrels per hour; Rail in thousands of barrels daily (MBD).




7


Marine Vessels
At December 31, 2018 , we had 13 international-flagged crude oil, refined petroleum product and NGL tankers and two Jones Act-compliant tankers under time charter contracts, with capacities ranging in size from 300,000 to 1,100,000 barrels.  Additionally, we had a variety of inland and offshore tug/barge units.  These vessels are used primarily to transport crude oil and other feedstocks and refined petroleum products for certain of our refineries.  In addition, the NGL tankers are used to export propane and butane from our fractionation, transportation and storage infrastructure.
 
Truck and Rail
Our truck and rail fleets support our feedstock and distribution operations. Rail movements are provided via a fleet of more than 10,000 owned and leased railcars. Truck movements are provided through numerous third-party trucking companies, as well as through our wholly owned subsidiary, Sentinel Transportation LLC.

NGL and Other

Our NGL and Other business includes the following:

A U.S. Gulf Coast NGL market hub comprised of the Freeport LPG Export Terminal and Phillips 66 Partners’ 100,000-BPD Sweeny Fractionator. These assets are supported by 9 million barrels of gross capacity at Phillips 66 Partners’ Clemens Caverns storage facility. We refer to these facilities as the “Sweeny Hub.”

A 22.5 percent interest in Gulf Coast Fractionators, which owns an NGL fractionation plant in Mont Belvieu, Texas. We operate the facility, and our net share of its capacity is 32,625 BPD.

A 12.5 percent undivided interest in a fractionation plant in Mont Belvieu, Texas. Our net share of its capacity is 30,250 BPD.

A 40 percent undivided interest in a fractionation plant in Conway, Kansas. Our net share of its capacity is 43,200 BPD.

Phillips 66 Partners owns the River Parish NGL logistics system in southeast Louisiana, comprising approximately 500 miles of pipeline and a storage cavern connecting multiple fractionation facilities, refineries and a petrochemical facility.

Phillips 66 Partners owns a direct one-third interest in both the DCP Sand Hills Pipeline, LLC (Sand Hills) and DCP Southern Hills Pipeline, LLC, which own NGL pipeline systems that connect the Eagle Ford, Permian Basin and Midcontinent production areas to the Mont Belvieu, Texas, market hub.

Phillips 66 Partners, through its ownership of Merey Sweeny LLC, successor to Merey Sweeny, L.P. (both referred to herein as Merey Sweeny), owns a vacuum distillation unit with a capacity of 125,000 BPD and a delayed coker unit with a capacity of 70,000 BPD located at our Sweeny Refinery in Old Ocean, Texas.

Phillips 66 Partners’ Sweeny Fractionator is located adjacent to our Sweeny Refinery in Old Ocean, Texas, and supplies purity ethane to the petrochemical industry and purity NGL to domestic and global markets. Raw NGL supply to the fractionator is delivered from nearby major pipelines, including the Sand Hills Pipeline. The fractionator is supported by significant infrastructure including connectivity to two NGL supply pipelines, a pipeline connecting to the Mont Belvieu market center and the Clemens Caverns storage facility with access to our liquefied petroleum gas (LPG) export terminal in Freeport, Texas.

The Freeport LPG Export Terminal leverages our fractionation, transportation and storage infrastructure to supply petrochemical, heating and transportation markets globally. The terminal can simultaneously load two ships with refrigerated propane and butane at a combined rate of approximately 36,000 barrels per hour. In support of the terminal, we have a 100,000-BPD unit near the Sweeny Fractionator to upgrade domestic propane for export. In addition, the terminal exports 10,000 to 15,000 BPD of natural gasoline (C5+) produced at the Sweeny Fractionator.

8


At the Sweeny Hub, we are constructing two 150,000-BPD NGL fractionators and associated pipeline infrastructure, and Phillips 66 Partners is adding 6 million barrels of storage capacity at Clemens Caverns. DCP Midstream has committed to supply the fractionators with raw NGL and has an option to acquire up to a 30 percent ownership interest in the fractionators. Upon completion of the expansion, expected in late 2020, the Sweeny Hub will have 400,000 BPD of NGL fractionation capability and 15 million barrels of storage capacity at Clemens Caverns.

During 2018, Phillips 66 Partners continued development of a new 25,000-BPD isomerization unit at our Lake Charles Refinery to increase production of higher octane gasoline blend components. The project is expected to be completed in the third quarter of 2019.
 
DCP Midstream

Our Midstream segment includes our 50 percent equity investment in DCP Midstream, which is headquartered in Denver, Colorado. At December 31, 2018 , DCP Midstream owned or operated 49 active natural gas processing facilities, with a net processing capacity of approximately 6.7 billion cubic feet per day (Bcf/d). DCP Midstream’s owned or operated natural gas pipeline systems included gathering services for these facilities, as well as natural gas transmission, and totaled approximately 62,000 miles of pipeline. DCP Midstream also owned or operated 12 NGL fractionation plants, along with natural gas and NGL storage facilities, and NGL pipelines.

The residual natural gas, primarily methane, which results from processing raw natural gas, is sold by DCP Midstream at market-based prices to marketers and end users, including large industrial companies, natural gas distribution companies and electric utilities. DCP Midstream purchases or takes custody of substantially all of its raw natural gas from producers, principally under contractual arrangements that expose DCP Midstream to the prices of NGL, natural gas and condensate. DCP Midstream also has fee-based arrangements with producers to provide midstream services such as gathering and processing. In addition, DCP Midstream markets a portion of its NGL to us and our equity affiliates under existing contracts.
During 2018, DCP Midstream completed or advanced the following growth projects:
Construction of the 200-million-cubic-feet-per-day (MMcf/d) Mewbourn 3 natural gas processing plant located in the Denver-Julesburg (DJ) Basin was completed in the third quarter of 2018.
Continued construction of the 300-MMcf/d O'Connor 2 natural gas processing facility and associated gathering infrastructure in the DJ Basin. The O’Connor 2 facility will have 200 MMcf/d of processing capacity and up to 100 MMcf/d of bypass capacity, which are expected to be placed into service in the second and third quarters of 2019, respectively.
Development of the Gulf Coast Express pipeline project (GCX project), in which DCP Midstream owns a 25 percent interest. The GCX project is designed to transport up to approximately 2 Bcf/d of natural gas to the Gulf Coast markets. The mostly 42-inch pipeline would traverse approximately 500 miles and be placed in service in the fourth quarter of 2019.
The Cheyenne Connector pipeline will provide takeaway solutions with capacity of at least 600 MMcf/d for DCP Midstream's DJ Basin assets, connecting natural gas to Rockies Express Pipeline LLC’s Cheyenne Hub, where it can then be delivered to numerous markets across the country. DCP Midstream holds an option to invest in this pipeline at a later date.
Expansion of the Sand Hills Pipeline to 485,000 BPD was completed in the fourth quarter of 2018. This expansion included a partial looping of the pipeline and the addition of new pump stations.

9


CHEMICALS

The Chemicals segment consists of our 50 percent equity investment in CPChem, which is headquartered in The Woodlands, Texas. At December 31, 2018 , CPChem owned or had joint venture interests in 28 manufacturing facilities located in Belgium, Colombia, Qatar, Saudi Arabia, Singapore and the United States. Additionally, CPChem has two research and development centers in the United States.

We structure our reporting of CPChem’s operations around two primary business lines: Olefins and Polyolefins (O&P) and Specialties, Aromatics and Styrenics (SA&S). The O&P business line produces and markets ethylene and other olefin products. The ethylene produced is primarily used by CPChem to produce polyethylene, normal alpha olefins (NAO) and polyethylene pipe. The SA&S business line manufactures and markets aromatics and styrenics products, such as benzene, cyclohexane, styrene and polystyrene. SA&S also manufactures and/or markets a variety of specialty chemical products including organosulfur chemicals, solvents, catalysts, and chemicals used in drilling and mining.

The manufacturing of petrochemicals and plastics involves the conversion of hydrocarbon-based raw material feedstocks into higher-value products, often through a thermal process referred to in the industry as “cracking.” For example, ethylene can be produced by cracking ethane, propane, butane, natural gasoline or certain refinery liquids, such as naphtha and gas oil. Ethylene primarily is used as a raw material in the production of plastics, such as polyethylene and polyvinyl chloride (PVC). Plastic resins, such as polyethylene, are manufactured in a thermal/catalyst process, and the produced output is used as a further raw material for various applications, such as packaging and plastic pipe.

The following table reflects CPChem’s petrochemicals and plastics product capacities at December 31, 2018 :
 
 
Millions of Pounds per Year*
 
U.S.

 
Worldwide

O&P
 
 
 
Ethylene**
11,635

 
14,110

Propylene
2,675

 
3,180

High-density polyethylene
5,305

 
7,470

Low-density polyethylene
620

 
620

Linear low-density polyethylene
1,590

 
1,590

Polypropylene

 
310

Normal alpha olefins
2,335

 
2,850

Polyalphaolefins
125

 
255

Polyethylene pipe
500

 
500

Total O&P
24,785

 
30,885

 
 
 
 
SA&S
 
 
 
Benzene
1,600

 
2,530

Cyclohexane
1,060

 
1,455

Styrene
1,050

 
1,875

Polystyrene
835

 
1,070

Specialty chemicals
440

 
575

Total SA&S
4,985

 
7,505

Total O&P and SA&S
29,770

 
38,390

* Capacities include CPChem’s share in equity affiliates and excludes CPChem’s NGL fractionation capacity.
** Effective January 1, 2019, the U.S. and Worldwide ethylene capacities increased to 11,935 million pounds per year and 14,410 million pounds per year, respectively.



10


During 2018, CPChem completed its U.S. Gulf Coast (USGC) Petrochemicals Project. The ethane cracker at CPChem’s Cedar Bayou facility in Baytown, Texas, commenced operations in the second quarter of 2018. Along with the two polyethylene units that started up in the third quarter of 2017, the USGC project increased CPChem’s global ethylene and polyethylene capacity by 31 percent from January 1, 2017. Effective January 1, 2019, the capacity of the ethane cracker increased to 3.8 billion pounds per year.

In the fourth quarter of 2018, CPChem permanently shutdown its paraxylene operations in Pascagoula, Mississippi.

11


REFINING

Our Refining segment refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 13 refineries in the United States and Europe. 

The table below depicts information for each of our owned and joint venture refineries at December 31, 2018 :
 
 
 
 
 
 
Thousands of Barrels Daily
 
 
Region/Refinery
 
Location
 
Interest

 
Net Crude Throughput
Capacity
 
Net Clean Product
Capacity**
 
Clean
Product
Yield
Capability

At
December 31
2018

Effective January 1
2019

 
Gasolines

 
Distillates

 
Atlantic Basin/Europe
 
 
 
 
 
 
 
 
 
 
 
 
 
Bayway
 
Linden, NJ
 
100
%
 
258

258

 
155

 
130

 
92
%
Humber
 
N. Lincolnshire, United Kingdom
 
100

 
221

221

 
95

 
115

 
81

MiRO*
 
Karlsruhe, Germany
 
19

 
58

58

 
25

 
25

 
87

 
 
 
 
 
 
537

537

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gulf Coast
 
 
 
 
 
 
 
 
 
 
 
 
 
Alliance
 
Belle Chasse, LA
 
100

 
247

250

 
130

 
120

 
87

Lake Charles
 
Westlake, LA
 
100

 
249

249

 
100

 
115

 
70

Sweeny
 
Old Ocean, TX
 
100

 
256

265

 
135

 
120

 
86

 
 
 
 
 
 
752

764

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Central Corridor
 
 
 
 
 
 
 
 
 
 
 
 
 
Wood River
 
Roxana, IL
 
50

 
157

167

 
85

 
60

 
81

Borger
 
Borger, TX
 
50

 
73

75

 
50

 
30

 
91

Ponca City
 
Ponca City, OK
 
100

 
203

213

 
120

 
100

 
93

Billings
 
Billings, MT
 
100

 
60

60

 
35

 
30

 
90

 
 
 
 
 
 
493

515

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
West Coast
 
 
 
 
 
 
 
 
 
 
 
 
 
Ferndale
 
Ferndale, WA
 
100

 
105

105

 
65

 
35

 
81

Los Angeles
 
Carson/Wilmington, CA
 
100

 
139

139

 
85

 
65

 
90

San Francisco
 
Arroyo Grande/San Francisco, CA
 
100

 
120

120

 
60

 
65

 
85

 
 
 
 
 
 
364

364

 
 
 
 
 
 
 
 
 
 
 
 
2,146

2,180

 
 
 
 
 
 
* Mineraloelraffinerie Oberrhein GmbH.
** Clean product capacities are maximum rates for each clean product category, independent of each other. They are not additive when calculating the clean product yield capability for each refinery.


12


Primary crude oil characteristics and sources of crude oil for our owned and joint venture refineries are as follows:
 
 
Characteristics
 
Sources
 
Sweet
Medium
Sour
Heavy
Sour
High
TAN *  
 
United
States
Canada
South
America
Europe
Middle East
& Africa
Bayway
l
l
 
 
 
  l
l
 
 
l
Humber
l
l
 
l
 
  l
 
 
l
l
MiRO
l
l
l
 
 
 
 
 
l
l
Alliance
l
l
 
 
 
l
 
 
 
 
Lake Charles
l
l
l
l
 
l
l
l
 
l
Sweeny
l
l
l
l
 
l
l
l
 
 
Wood River
l
l
l
l
 
l
l
 
 
 
Borger
l
l
l
 
 
l
l
 
 
 
Ponca City
l
l
 
 
 
l
l
 
 
 
Billings
 
 
l
l
 
l
l
 
 
 
Ferndale
l
l
 
 
 
l
l
 
 
 
Los Angeles
 
l
l
l
 
l
l
l
 
l
San Francisco
l
l
l
l
 
l
l
l
 
l
* High TAN (Total Acid Number): acid content greater than or equal to 1.0 milligram of potassium hydroxide (KOH) per gram.


Atlantic Basin/Europe Region

Bayway Refinery
The Bayway Refinery is located on the New York Harbor in Linden, New Jersey. Bayway’s facilities include crude distilling, naphtha reforming, fluid catalytic cracking, solvent deasphalting, hydrodesulfurization and alkylation units. The complex also includes a polypropylene plant with the capacity to produce up to 775 million pounds per year. The refinery produces a high percentage of transportation fuels, as well as petrochemical feedstocks, residual fuel oil and home heating oil. Refined petroleum products are distributed to East Coast customers by pipeline, barge, railcar and truck.

Humber Refinery
The Humber Refinery is located on the east coast of England in North Lincolnshire, United Kingdom, approximately 180 miles north of London. Humber’s facilities include crude distilling, naphtha reforming, fluid catalytic cracking, hydrodesulfurization, thermal cracking and delayed coking units. The refinery has two coking units with associated calcining plants. Humber is the only coking refinery in the United Kingdom, and a producer of high-quality specialty graphite and anode-grade petroleum cokes. The refinery also produces a high percentage of transportation fuels. The majority of the light oils produced by the refinery are distributed to customers in the United Kingdom by pipeline, railcar and truck, while the other refined petroleum products are exported to the rest of Europe, West Africa and the United States by waterborne cargo.

MiRO Refinery
The MiRO Refinery is located on the Rhine River in Karlsruhe, Germany, approximately 95 miles south of Frankfurt, Germany. MiRO is a joint venture in which we own an 18.75 percent interest. Facilities include crude distilling, naphtha reforming, fluid catalytic cracking, petroleum coking and calcining, hydrodesulfurization, isomerization, ethyl tert-butyl ether and alkylation units. MiRO produces a high percentage of transportation fuels. Other products produced include petrochemical feedstocks, home heating oil, bitumen, and anode- and fuel-grade petroleum cokes. Refined petroleum products are distributed to customers in Germany, Switzerland and Austria by truck, railcar and barge.



13


Gulf Coast Region

Alliance Refinery
The Alliance Refinery is located on the Mississippi River in Belle Chasse, Louisiana, approximately 25 miles southeast of New Orleans, Louisiana. The single-train facility includes crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrodesulfurization, aromatics and delayed coking units. Alliance produces a high percentage of transportation fuels. Other products produced include petrochemical feedstocks, home heating oil and anode-grade petroleum coke. A majority of the refined petroleum products are distributed to customers in the southeastern and eastern United States through major common-carrier pipeline systems and by barge. Additionally, refined petroleum products are exported to customers primarily in Latin America by waterborne cargo.

Lake Charles Refinery
The Lake Charles Refinery is located in Westlake, Louisiana, approximately 150 miles east of Houston, Texas. Refinery facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrocracking, hydrodesulfurization and delayed coking units. Refinery facilities also include a specialty coker and calciner. The refinery produces a high percentage of transportation fuels. Other products produced include off-road diesel, home heating oil, feedstock for our Excel Paralubes joint venture in our M&S segment, and specialty graphite and fuel-grade petroleum cokes. A majority of the refined petroleum products are distributed to customers in the southeastern and eastern United States by truck, railcar, barge or major common carrier pipelines. Additionally, refined petroleum products are exported to customers primarily in Latin America and West Africa by waterborne cargo.

Sweeny Refinery
The Sweeny Refinery is located in Old Ocean, Texas, approximately 65 miles southwest of Houston, Texas. Refinery facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrodesulfurization, aromatics units, and a Phillips 66 Partners owned delayed coking unit. The refinery produces a high percentage of transportation fuels. Other products include petrochemical feedstocks, home heating oil and fuel-grade petroleum coke. A majority of the refined petroleum products are distributed to customers throughout the Midcontinent region, southeastern and eastern United States by pipeline, barge and railcar. Additionally, refined petroleum products are exported to customers primarily in Latin America by waterborne cargo.

Central Corridor Region

WRB Refining LP (WRB)
We are the operator and managing partner of WRB, a 50-percent-owned joint venture that owns the Wood River and Borger refineries.

Wood River Refinery
The Wood River Refinery is located in Roxana, Illinois, about 15 miles northeast of St. Louis, Missouri, at the confluence of the Mississippi and Missouri rivers. Refinery facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrocracking, hydrodesulfurization and delayed coking units. The refinery produces a high percentage of transportation fuels. Other products produced include petrochemical feedstocks, asphalt and fuel-grade petroleum coke. Refined petroleum products are distributed to customers throughout the Midcontinent region by pipeline, railcar, barge and truck.
 
Borger Refinery
The Borger Refinery is located in Borger, Texas, in the Texas Panhandle, approximately 50 miles north of Amarillo, Texas. Refinery facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrodesulfurization, and delayed coking units, as well as an NGL fractionation facility. The refinery produces a high percentage of transportation fuels, as well as fuel-grade petroleum coke, NGL and solvents. Refined petroleum products are distributed to customers in West Texas, New Mexico, Colorado and the Midcontinent region by pipeline.






14


Ponca City Refinery
The Ponca City Refinery is located in Ponca City, Oklahoma, approximately 95 miles northwest of Tulsa, Oklahoma. Refinery facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrodesulfurization, and delayed coking units. The refinery produces a high percentage of transportation fuels and anode-grade petroleum coke. Refined petroleum products are primarily distributed to customers throughout the Midcontinent region by company-owned and common-carrier pipelines.

Billings Refinery
The Billings Refinery is located in Billings, Montana. Refinery facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrodesulfurization and delayed coking units. The refinery produces a high percentage of transportation fuels and fuel-grade petroleum coke. Refined petroleum products are distributed to customers in Montana, Wyoming, Idaho, Utah, Colorado and Washington by pipeline, railcar and truck.

West Coast Region

Ferndale Refinery
The Ferndale Refinery is located on Puget Sound in Ferndale, Washington, approximately 20 miles south of the U.S.-Canada border. Facilities include crude distillation, naphtha reforming, fluid catalytic cracking, alkylation and hydrodesulfurization units. The refinery produces a high percentage of transportation fuels. Other products produced include residual fuel oil, which is supplied to the northwest marine bunker fuel market. Most of the refined petroleum products are distributed to customers in the northwest United States by pipeline and barge.

Los Angeles Refinery
The Los Angeles Refinery consists of two facilities linked by pipeline located five miles apart in Carson and Wilmington, California, approximately 15 miles southeast of Los Angeles. The Carson facility serves as the front end of the refinery by processing crude oil, and the Wilmington facility serves as the back end of the refinery by upgrading the intermediate products to finished products. Refinery facilities include crude distillation, naphtha reforming, fluid catalytic cracking, alkylation, hydrocracking, and delayed coking units. The refinery produces a high percentage of transportation fuels. The refinery produces California Air Resources Board (CARB)-grade gasoline. Other products produced include fuel-grade petroleum coke. Refined petroleum products are distributed to customers in California, Nevada and Arizona by pipeline and truck.

San Francisco Refinery
The San Francisco Refinery consists of two facilities linked by a 200-mile pipeline. The Santa Maria facility is located in Arroyo Grande, California, 200 miles south of San Francisco, California, while the Rodeo facility is located in the San Francisco Bay Area. Intermediate refined products from the Santa Maria facility are shipped by pipeline to the Rodeo facility for upgrading into finished petroleum products. Refinery facilities include crude distillation, naphtha reforming, hydrocracking, hydrodesulfurization and delayed coking units, as well as a calciner. The refinery produces a high percentage of transportation fuels, including CARB-grade gasoline. Other products produced include fuel-grade petroleum coke. The majority of the refined petroleum products are distributed to customers in California by pipeline and barge. Additionally, refined petroleum products are exported to customers primarily in Latin America by waterborne cargo.




15


MARKETING AND SPECIALTIES

Our M&S segment purchases for resale and markets refined petroleum products (such as gasolines, distillates and aviation fuels), mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products (such as base oils and lubricants), as well as power generation operations.

Marketing

Marketing—United States
We market gasoline, diesel and aviation fuel through independently owned outlets that utilize the Phillips 66 , Conoco or 76  brands. At December 31, 2018 , we had approximately 7,520 independently owned marketing outlets in 48 states.

Our wholesale operations utilized a network of marketers operating approximately 5,600 outlets. We place a strong emphasis on the wholesale channel of trade because of its lower capital requirements. In addition, we held brand-licensing agreements covering approximately 1,120 sites. Our refined petroleum products are marketed on both a branded and unbranded basis. A high percentage of our branded marketing sales are made in the Midcontinent, Rockies and West Coast regions, where our wholesale marketing operations provide efficient off-take from our refineries. We continue to utilize consignment fuel arrangements with several marketers whereby we own the fuel inventory and pay the marketers a fixed monthly fee.

In the Gulf Coast and East Coast regions, most sales are conducted via the unbranded channel of trade, which does not require a highly integrated marketing and distribution infrastructure to secure product placement for refinery pull through. We are expanding our export capability at our U.S. coastal refineries to meet growing international demand and increase flexibility to provide product to the highest-value markets.

In addition to automotive gasoline and diesel, we produce and market aviation gasoline and jet fuel. Aviation gasoline and jet fuel were sold through dealers and independent marketers at approximately 800 Phillips 66 -branded locations.

Marketing—International
We have marketing operations in four European countries. Our European marketing strategy is to sell primarily through owned, leased or joint venture retail sites using a low-cost, high-volume approach. We use the JET brand name to market retail and wholesale products in Austria, Germany and the United Kingdom. In addition, we have an equity interest in a joint venture that markets refined petroleum products in Switzerland under the COOP brand name.

We also market aviation fuels, LPG, heating oils, transportation fuels, marine bunker fuels, bitumen and fuel-grade petroleum coke specialty products to commercial customers and into the bulk or spot markets in the above countries.

At December 31, 2018 , we had 1,310 marketing outlets in Europe, of which 985 were company owned and 325 were dealer owned. In addition, we had interests in 320 additional sites through our COOP joint venture operations in Switzerland.

Specialties

We manufacture lubricants and sell a variety of specialty products, including petroleum coke products, waxes, solvents and polypropylene.

Lubricants
We manufacture and sell automotive, commercial, industrial and specialty lubricants which are marketed worldwide under the Phillips 66, Kendall, Red Line and other private label brands. We also market Group III Ultra-S base oils through an agreement with South Korea’s S-Oil Corporation.

In addition, we own a 50 percent interest in Excel Paralubes LLC (Excel), an operated joint venture that owns a hydrocracked lubricant base oil manufacturing plant located adjacent to the Lake Charles Refinery. The facility has a nameplate capacity to produce 22,200 BPD of high-quality Group II clear hydrocracked base oils. Excel markets the produced base oil under the Pure Performance brand. The facility’s feedstock is sourced primarily from our Lake Charles Refinery.

16


Other Specialty Products
We market high-quality specialty graphite and anode-grade petroleum cokes in the United States, Europe and Asia for use in a variety of industries that include steel, aluminum, titanium dioxide and battery manufacturing.  We also market polypropylene in North America under the COPYLENE brand name for use in consumer products, and market specialty solvents that include pentane, iso-pentane, hexane, heptane and odorless mineral spirits for use in the petrochemical, agriculture and consumer markets. In addition, we market sulfur for use in agricultural and chemical applications, and fuel-grade petroleum coke for use in the making of cement, glass and power.

Other

Power Generation
We own a cogeneration power plant located adjacent to the Sweeny Refinery. The plant generates electricity and provides process steam to the refinery, as well as merchant power into the Texas market. The plant has a net electrical output of 440 megawatts and is capable of generating up to 3.6 million pounds per hour of process steam.

  
TECHNOLOGY DEVELOPMENT

Our Technology organization conducts applied and fundamental research to support our current business, provide new environmental solutions to address governmental regulations, and position us for future growth. Technology programs include evaluating advantaged crudes; and modeling to reduce energy consumption, increase product yield and increase reliability. Our sustainability group is focusing efforts on organic photovoltaic polymers, solid oxide fuel cells, atmospheric modeling and air chemistry, water use and reuse and renewable fuels. Additionally, we monitor for emerging technologies that could impact our business.


COMPETITION

The Midstream segment, through our equity investment in DCP Midstream and our other operations, competes with numerous integrated petroleum companies, as well as natural gas transmission and distribution companies, to deliver components of natural gas to end users in commodity natural gas markets. DCP Midstream is one of the leading natural gas gatherers and processors in the United States based on wellhead volumes, and one of the largest U.S. producers and marketers of NGL, based on published industry sources. Principal methods of competing include economically securing the right to purchase raw natural gas for gathering systems, managing the pressure of those systems, operating efficient NGL processing plants and securing markets for the products produced.

In the Chemicals segment, CPChem is ranked among the top 10 producers in many of its major product lines according to published industry sources, based on average 2018 production capacity. Petroleum products, petrochemicals and plastics are typically delivered into the worldwide commodity markets. Our Refining and M&S segments compete primarily in the United States and Europe. We are one of the largest refiners of petroleum products in the United States based on published industry sources. Elements of competition for both our Chemicals and Refining segments include product improvement, new product development, low-cost structures, ability to run advantaged feedstocks, and efficient manufacturing and distribution systems. In the marketing portion of the business, competitive factors include product properties and processibility, reliability of supply, customer service, price and credit terms, advertising and sales promotion, and development of customer loyalty to branded products.



17


GENERAL

At December 31, 2018 , we held a total of 382 active patents in 20 countries worldwide, including 298 active U.S. patents. The overall profitability of any business segment is not dependent on any single patent, trademark, license or franchise.

In support of our goal to attain zero incidents, we have implemented a comprehensive Health, Safety and Environmental (HSE) management system to support consistent management of HSE risks across our enterprise.  The management system is designed to ensure that personal safety, process safety, and environmental impact risks are identified, and mitigation steps are taken to reduce the risk.  The management system requires periodic audits to ensure compliance with government regulations, as well as our internal requirements. Our commitment to continuous improvement is reflected in annual goal setting and performance measurement.

See the environmental information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Contingencies” under the captions “Environmental” and “Climate Change.” It includes information on expensed and capitalized environmental costs for 2018 and those expected for 2019 and 2020 .


Website Access to SEC Reports

Our Internet website address is http://www.phillips66.com . Information contained on our Internet website is not part of this Annual Report on Form 10-K.

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website, free of charge, as soon as reasonably practicable after such reports are filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC). Alternatively, you may access these reports at the SEC’s website at http://www.sec.gov .



18


Item 1A. RISK FACTORS

You should carefully consider the following risk factors in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as the value of an investment in our common stock.

Our operating results and future rate of growth are exposed to the effects of changing commodity prices and refining, marketing and petrochemical margins.

Our revenues, operating results and future rate of growth are highly dependent on a number of factors, including fixed and variable expenses (including the cost of crude oil, NGL, and other refining and petrochemical feedstocks) and the margin we can derive from selling refined petroleum, petrochemical and plastics products. The prices of feedstocks and our products fluctuate substantially. These prices depend on numerous factors beyond our control, including the global supply and demand for feedstocks and our products, which are subject to, among other things:
 
Changes in the global economy and the level of foreign and domestic production of crude oil, natural gas and NGL and refined petroleum, petrochemical and plastics products.
Availability of feedstocks and refined petroleum products and the infrastructure to transport them.
Local factors, including market conditions, the level of operations of other facilities in our markets, and the volume of products imported and exported.
Threatened or actual terrorist incidents, acts of war and other global political conditions.
Government regulations.
Weather conditions, hurricanes or other natural disasters.

The price of crude oil influences prices for refined petroleum products. We do not produce crude oil and must purchase all of the crude oil we process. Many crude oils available on the world market will not meet the quality restrictions for use in our refineries. Others are not economical to use due to high transportation costs or for other reasons. The prices for crude oil and refined petroleum products can fluctuate differently based on global, regional and local market conditions, as well as by type and class of products, which can reduce refining margins and could have a significant impact on our refining, wholesale marketing and retail operations, revenues, operating income and cash flows. Also, crude oil supply contracts generally have market-responsive pricing provisions. We normally purchase our refinery feedstocks weeks before manufacturing and selling the refined petroleum products. Changes in prices that occur between when we purchase feedstocks and when we sell the refined petroleum products produced from these feedstocks could have a significant effect on our financial results. We also purchase refined petroleum products produced by others for sale to our customers. Price changes that occur between when we purchase and sell these refined petroleum products also could have a material adverse effect on our business, financial condition and results of operations.

The price of feedstocks also influences prices for petrochemical and plastics products. Although our Chemicals segment transports and fractionates feedstocks to meet a portion of their demand and has certain long-term feedstock supply contracts with others, it is still subject to volatile feedstock prices. In addition, the petrochemicals industry is both cyclical and volatile. Cyclicality occurs when periods of tight supply, resulting in increased prices and profit margins, are followed by periods of capacity expansion, resulting in oversupply and declining prices and profit margins. Volatility occurs as a result of changes in supply and demand for products, changes in energy prices, and changes in various other economic conditions around the world.

Uncertainty and illiquidity in credit and capital markets can impair our ability to obtain credit and financing on acceptable terms and can adversely affect the financial strength of our business partners.

Our ability to obtain credit and capital depends in large measure on the state of the credit and capital markets, which is beyond our control. Our ability to access credit and capital markets may be restricted at a time when we would like, or need, access to those markets, which could constrain our flexibility to react to changing economic and business conditions. In addition, the cost and availability of debt and equity financing may be adversely impacted by unstable or illiquid market conditions. Protracted uncertainty and illiquidity in these markets also could have an adverse impact on our lenders, commodity hedging counterparties, or our customers, preventing them from meeting their obligations to us.

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From time to time, our cash needs may exceed our internally generated cash flow, and our business could be materially and adversely affected if we are unable to obtain necessary funds from financing activities. From time to time, we may need to supplement cash generated from operations with proceeds from financing activities. Uncertainty and illiquidity in financial markets may materially impact the ability of the participating financial institutions to fund their commitments to us under our liquidity facilities. Accordingly, we may not be able to obtain the full amount of the funds available under our liquidity facilities to satisfy our cash requirements, and our failure to do so could have a material adverse effect on our operations and financial position.

Deterioration in our credit profile could increase our costs of borrowing money and limit our access to the capital markets and commercial credit, and could trigger co-venturer rights under joint venture arrangements.

Our or Phillips 66 Partners’ credit ratings could be lowered or withdrawn entirely by a rating agency if, in its judgment, the circumstances warrant. If a rating agency were to downgrade our rating below investment grade, our or Phillips 66 Partners’ borrowing costs would increase, and our funding sources could decrease. In addition, a failure by us to maintain an investment grade rating could affect our business relationships with suppliers and operating partners. For example, our agreement with Chevron regarding CPChem permits Chevron to buy our 50 percent interest in CPChem for fair market value if we experience a change in control or if both Standard & Poor’s Financial Services LLC and Moody’s Investors Service, Inc. lower our credit ratings below investment grade and the credit rating from either rating agency remains below investment grade for 365 days thereafter, with fair market value determined by agreement or by nationally recognized investment banks. As a result of these factors, a downgrade of credit ratings could have a materially adverse impact on our future operations and financial position.

We expect to continue to incur substantial capital expenditures and operating costs as a result of our compliance with existing and future environmental laws and regulations. Likewise, future environmental laws and regulations may impact or limit our current business plans and reduce demand for our products.

Our business is subject to numerous laws and regulations relating to the protection of the environment. These laws and regulations continue to increase in both number and complexity and affect our operations with respect to, among other things:
 
The discharge of pollutants into the environment.
Emissions into the atmosphere (such as nitrogen oxides, sulfur dioxide and mercury emissions, and greenhouse gas emissions as they are, or may become, regulated).
The quantity of renewable fuels that must be blended into motor fuels.
The handling, use, storage, transportation, disposal and cleanup of hazardous materials and hazardous and nonhazardous wastes.
The dismantlement and abandonment of our facilities and restoration of our properties at the end of their useful lives.

We have incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of these laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, our business, financial condition, results of operations and cash flows in future periods could be materially adversely affected.

The U.S. Environmental Protection Agency (EPA) has implemented a Renewable Fuel Standard (RFS) pursuant to the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007. The RFS program sets annual quotas for the quantity of renewable fuels (such as ethanol) that must be blended into motor fuels consumed in the United States. To provide certain flexibility in compliance options available to the industry, a Renewable Identification Number (RIN) is assigned to each gallon of renewable fuel produced in, or imported into, the United States. As a producer of petroleum-based motor fuels, we are obligated to blend renewable fuels into the products we produce at a rate that is at least commensurate to the EPA’s quota and, to the extent we do not, we must purchase RINs in the open market to satisfy our obligation under the RFS program. To the extent the EPA mandates a blending quantity of renewable fuel that exceeds the amount that is commercially feasible to blend into motor fuel (a situation commonly referred to as “the blend wall”), our operations could be materially adversely impacted, up to and including a reduction in produced motor fuel.


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The adoption of climate change legislation or regulation could result in increased operating costs and reduced demand for the refined petroleum products we produce.

The U.S. government, including the EPA, as well as several state and international governments, have either considered or adopted legislation or regulations in an effort to reduce greenhouse gas (GHG) emissions. These proposed or promulgated laws apply or could apply in states and/or countries where we have interests or may have interests in the future. In addition, various groups suggest that additional laws may be needed in an effort to address climate change, as illustrated by the Paris Agreement negotiated at the 2015 United Nations Conference on Climate Change, referred to as COP 21, which entered into force on November 4, 2016. We cannot predict the extent to which any such legislation or regulation will be enacted and, if so, what its provisions would be. To the extent we incur additional costs required to comply with the adoption of new laws and regulations that are not ultimately recovered in the prices of our products and services, our business, financial condition, results of operations and cash flows in future periods could be materially adversely affected. In addition, demand for the refined petroleum products we produce could be adversely affected.

Climate change may adversely affect our facilities and our ongoing operations.

The potential physical effects of climate change on our operations are highly uncertain and depend upon the unique geographic and environmental factors present. Examples of such effects include rising sea levels at our coastal facilities, changing storm patterns and intensities, and changing temperature levels. As many of our facilities are located near coastal areas, rising sea levels may disrupt our ability to operate those facilities or transport crude oil and refined petroleum products. Extended periods of such disruption could have an adverse effect on our results of operation. We could also incur substantial costs to prevent or repair damage to these facilities.

Political and economic developments could affect our operations and materially reduce our profitability and cash flows.

Actions of federal, state, local and international governments through legislation or regulation, executive order, permit or other review of infrastructure or facility development, and commercial restrictions could delay projects, increase costs, limit development, or otherwise reduce our operating profitability both in the United States and abroad. Any such actions may affect many aspects of our operations, including:

Requiring permits or other approvals that may impose unforeseen or unduly burdensome conditions or potentially cause delays in our operations.
Further limiting or prohibiting construction or other activities in environmentally sensitive or other areas.
Requiring increased capital costs to construct, maintain or upgrade equipment or facilities.
Restricting the locations where we may construct facilities or requiring the relocation of facilities.

In addition, the U.S. government can prevent or restrict us from doing business in foreign countries and from doing business with entities affiliated with foreign governments, which can include state oil companies and U.S. subsidiaries of those companies. The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and national security matters.  For example, sanctions are currently in effect against Venezuela and certain entities affiliated with it. The effect of any such OFAC sanctions could disrupt transactions with or operations involving entities affiliated with sanctioned countries, and could limit our ability to obtain optimum crude slates and other refinery feedstocks and effectively distribute refined petroleum products.

Other risks inherent in doing business internationally include global financial market turmoil; economic volatility and global economic slowdown; currency exchange rate fluctuations and inflationary pressures; import or export restrictions and changes in trade regulations; acts of terrorism, war, civil unrest and other political risks; difficulties in developing, staffing and managing foreign operations; and potentially adverse tax developments. If any of these events occur, our businesses and those of our joint ventures may be adversely affected.

Additionally, renewable fuels, alternative energy mandates and energy conservation efforts could reduce demand for refined petroleum products. Tax incentives and other subsidies can make renewable fuels and alternative energy more competitive with refined petroleum products than they otherwise might be, which may reduce refined petroleum product margins and hinder the ability of refined petroleum products to compete with renewable fuels.

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Large capital projects can take many years to complete, and market conditions could deteriorate significantly between the project approval date and the project startup date, negatively impacting expected project returns.

Our basis for approving a large-scale capital project is the expectation that it will deliver an acceptable level of return on the capital invested. We base these forecasted project economics on our best estimate of future market conditions. Most large-scale projects take several years to complete. During this multi-year period, market conditions can change from those we forecast, and these changes could be significant. Accordingly, we may not be able to realize our expected returns from a large investment in a capital project, and this could negatively impact our results of operations, cash flows and our return on capital employed.

Plans we may have to expand existing assets or construct new assets, particularly in our Midstream segment, are subject to risks associated with societal and political pressures and other forms of opposition to the future development, transportation and use of carbon-based fuels. Such risks could adversely impact our ability to realize certain growth strategies.

Certain of our planned expenditures are based upon the assumption that societal sentiment will continue to enable, and existing regulations will remain intact to allow for, the future development, transportation and use of carbon-based fuels. A portion of our growth strategy is dependent on our ability to expand existing assets and to construct additional assets. Policy decisions relating to the production, refining, transportation and marketing of carbon-based fuels are subject to political pressures and the influence and protests of environmental and other special interest groups. For example, our Midstream segment’s growth plans include the construction or expansion of pipelines, which can involve numerous regulatory, environmental, political, and legal uncertainties, many of which are beyond our control. Our growth projects may not be completed on schedule or at the budgeted cost. In addition, our revenues may not increase immediately upon the expenditure of funds on a particular project. Delays or cost increases related to capital spending programs could negatively impact our results of operations, cash flows and our return on capital employed.

Our operations are subject to business interruptions and casualty losses. Failure to manage risks associated with business interruptions could adversely impact our operations, financial condition, results of operations and cash flows.

Our operations are subject to business interruptions due to scheduled refinery turnarounds, unplanned maintenance or unplanned events such as explosions, fires, refinery or pipeline releases or other incidents, power outages, severe weather, labor disputes, or other natural or man-made disasters, such as acts of terrorism, including cyber-intrusion. The inability to operate one or more of our facilities due to any of these events could significantly impair our ability to manufacture our products. Additionally, our manufacturing equipment is becoming increasingly dependent on our information technology systems. A disruption in our information technology systems due to a catastrophic event or security breach could interrupt or damage our operations.

Explosions, fires, refinery or pipeline releases or other incidents involving our assets or operations could result in serious personal injury or loss of human life, significant damage to property and equipment, environmental pollution, impairment of operations and substantial losses to us. For assets located near populated areas, including residential areas, commercial business centers, industrial sites and other public gathering areas, the level of damage resulting from these risks could be greater. Damages resulting from an incident involving any of our assets or operations may result in our being named as a defendant in one or more lawsuits asserting potentially substantial claims or in our being assessed potentially substantial fines by governmental authorities. Should any of these risks materialize at any of our equity affiliates, it could have a material adverse effect on the business and financial condition of the equity affiliate and negatively impact their ability to make future distributions to us.

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There are certain hazards and risks inherent in our operations that could adversely affect those operations and our financial results.

The operation of refineries, power plants, fractionators, pipelines, terminals and vessels is inherently subject to the risks of spills, discharges or other inadvertent releases of petroleum or hazardous substances. If any of these events had previously occurred or occurs in the future in connection with any of our refineries, pipelines or refined petroleum products terminals, or in connection with any facilities that receive our wastes or by-products for treatment or disposal, other than events for which we are indemnified, we could be liable for all costs and penalties associated with their remediation under federal, state, local and international environmental laws or common law, and could be liable for property damage to third parties caused by contamination from releases and spills.

We do not insure against all potential losses, and, therefore, our business, financial condition, results of operations and cash flows could be adversely affected by unexpected liabilities and increased costs.

We maintain insurance coverage in amounts we believe to be prudent against many, but not all, potential liabilities arising from operating hazards. Uninsured liabilities arising from operating hazards, including but not limited to, explosions, fires, refinery or pipeline releases or other incidents involving our assets or operations, could reduce the funds available to us for capital and investment spending and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our investments in joint ventures decrease our ability to manage risk.

We conduct some of our operations, including parts of our Midstream, Refining and M&S segments, and our entire Chemicals segment, through joint ventures in which we share control with our joint venture participants. Our joint venture participants may have economic, business or legal interests or goals that are inconsistent with ours or those of the joint venture, or our joint venture participants may be unable to meet their economic or other obligations, and we may be required to fulfill those obligations alone. Failure by us, or an entity in which we have a joint venture interest, to adequately manage the risks associated with any acquisitions or joint ventures could have a material adverse effect on the financial condition or results of operations of our joint ventures and, in turn, our business and operations.

We are subject to interruptions of supply and increased costs as a result of our reliance on third-party transportation of crude oil, NGL and refined petroleum products.

We often utilize the services of third parties to transport crude oil, NGL and refined petroleum products to and from our facilities. In addition to our own operational risks discussed above, we could experience interruptions of supply or increases in costs to deliver refined petroleum products to market if the ability of the pipelines or vessels to transport crude oil or refined petroleum products is disrupted because of weather events, accidents, governmental regulations or third-party actions. A prolonged disruption of the ability of a pipeline or vessel to transport crude oil, NGL or refined petroleum products to or from one or more of our refineries or other facilities could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Increased regulation of hydraulic fracturing could result in reductions or delays in U.S. production of crude oil and natural gas, which could adversely impact our results of operations.

An increasing percentage of crude oil supplied to our refineries and the crude oil and gas production of our Midstream segment’s customers is being produced from unconventional oil shale reservoirs. These reservoirs require hydraulic fracturing completion processes to release the hydrocarbons from the rock so they can flow through casing to the surface. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into a formation to stimulate hydrocarbon production. The EPA, as well as several state agencies, have commenced studies and/or convened hearings regarding the potential environmental impacts of hydraulic fracturing activities. At the same time, certain environmental groups have suggested that additional laws may be needed to more closely and uniformly regulate the hydraulic fracturing process, and legislation has been proposed to provide for such regulation. In addition, some communities have adopted measures to ban hydraulic fracturing in their communities. We cannot predict whether any such legislation will ever be enacted and, if so, what its provisions would be. Any additional levels of regulation and permits required with the adoption of new laws and regulations at the federal or state level could result in our having to rely on higher priced crude oil for our refineries. This could lead to delays, increased operating costs and process prohibitions that could reduce

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the volumes of natural gas that move through DCP Midstream’s gathering systems and could reduce supplies and increase costs of NGL feedstocks to CPChem’s facilities. This could materially adversely affect our results of operations and the ability of DCP Midstream and CPChem to make cash distributions to us.

DCP Midstream’s success depends on its ability to obtain new sources of natural gas and NGL. Any decrease in the volumes of natural gas DCP Midstream gathers could adversely affect its business and operating results.

DCP Midstream’s gathering and transportation pipeline systems are connected to or dependent on the level of production from natural gas wells, which naturally declines over time. As a result, its cash flows associated with these wells will also decline over time. In order to maintain or increase throughput levels on its gathering and transportation pipeline systems and NGL pipelines and the asset utilization rates at its natural gas processing plants, DCP Midstream must continually obtain new supplies. The primary factors affecting DCP Midstream’s ability to obtain new supplies of natural gas and NGL, and to attract new customers to its assets, include the level of successful drilling activity near these assets, prices of, and the demand for, natural gas and crude oil, producers’ desire and ability to obtain necessary permits in an efficient manner, natural gas field characteristics and production performance, surface access and infrastructure issues, and its ability to compete for volumes from successful new wells. If DCP Midstream is not able to obtain new supplies of natural gas to replace the natural decline in volumes from existing wells or because of competition, throughput on its pipelines and the utilization rates of its treating and processing facilities would decline. This could have a material adverse effect on its business, results of operations, financial position and cash flows, and its ability to make cash distributions to us.

Competitors that produce their own supply of feedstocks, have more extensive retail outlets, or have greater financial resources may have a competitive advantage.

The refining and marketing industry is highly competitive with respect to both feedstock supply and refined petroleum product markets. We compete with many companies for available supplies of crude oil and other feedstocks and for outlets for our refined petroleum products. We do not produce any of our crude oil feedstocks. Some of our competitors, however, obtain a portion of their feedstocks from their own production and some have more extensive retail outlets than we have. Competitors that have their own production or extensive retail outlets (and greater brand-name recognition) are at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better positioned to withstand periods of depressed refining margins or feedstock shortages.

Some of our competitors also have materially greater financial and other resources than we have. Such competitors have a greater ability to bear the economic risks inherent in all phases of our business. In addition, we compete with other industries that provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial and individual customers.

We may incur losses as a result of our forward contracts and derivative transactions.

We currently use commodity derivative instruments, and we expect to use them in the future. If the instruments we utilize to hedge our exposure to various types of risk are not effective, we may incur losses. Derivative transactions involve the risk that counterparties may be unable to satisfy their obligations to us. The risk of counterparty default is heightened in a poor economic environment. 

One of our subsidiaries acts as the general partner of a publicly traded master limited partnership, Phillips 66 Partners, which may involve a greater exposure to legal liability than our historic business operations.

One of our subsidiaries acts as the general partner of Phillips 66 Partners, a publicly traded master limited partnership. Our control of the general partner of Phillips 66 Partners may increase the possibility that we could be subject to claims of breach of fiduciary duties, including claims of conflicts of interest, related to Phillips 66 Partners. Any liability resulting from such claims could have a material adverse effect on our future business, financial condition, results of operations and cash flows.

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Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect sensitive data, including personally identifiable information of our customers and employees. Despite our security measures, our information technology and infrastructure , or information technology and infrastructure of our third-party service providers (e.g., cloud-based service providers), may be vulnerable to attacks by malicious actors or breached due to human error, malfeasance or other disruptions. Although we have experienced occasional, actual or attempted breaches of our cybersecurity, none of these breaches has had a material effect on our business, operations or reputation (or compromised any customer data). Any such breaches could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of customer information, including the European Union’s General Data Protection Regulation, disrupt the services we provide to customers, and damage our reputation, any of which could adversely affect our business.

The level of returns on pension and postretirement plan assets and the actuarial assumptions used for valuation purposes could affect our earnings and cash flows in future periods.

Assumptions used in determining projected benefit obligations and the expected return on plan assets for our pension plans and other postretirement benefit plans are evaluated by us based on a variety of independent sources of market information and in consultation with outside actuaries. If we determine that changes are warranted in the assumptions used, such as the discount rate, expected long-term rate of return, or health care cost trend rate, our future pension and postretirement benefit expenses and funding requirements could increase. In addition, several factors could cause actual results to differ significantly from the actuarial assumptions that we use. Funding obligations are determined based on the value of assets and liabilities on a specific date as required under relevant regulations. Future pension funding requirements, and the timing of funding payments, could be affected by legislation enacted by governmental authorities.

In connection with the Separation, ConocoPhillips has indemnified us for certain liabilities and we have agreed to indemnify ConocoPhillips for certain liabilities. If we are required to act on these indemnities to ConocoPhillips, we may need to use cash to meet those obligations and our financial results could be negatively impacted. The ConocoPhillips indemnity may not be sufficient to insure us against the full amount of liabilities for which it has been allocated responsibility, and ConocoPhillips may not be able to satisfy its indemnification obligations in the future.

Pursuant to the Indemnification and Release Agreement and certain other agreements with ConocoPhillips entered into in connection with the Separation, ConocoPhillips agreed to indemnify us for certain liabilities, and we agreed to indemnify ConocoPhillips for certain liabilities. Indemnities that we may be required to provide ConocoPhillips are not subject to any cap, may be significant and could negatively impact our business, particularly indemnities relating to our actions that could impact the tax-free nature of the distribution of Phillips 66 stock. Third parties could also seek to hold us responsible for any of the liabilities that ConocoPhillips has agreed to retain. Further, the indemnity from ConocoPhillips may not be sufficient to protect us against the full amount of such liabilities, and ConocoPhillips may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from ConocoPhillips any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, results of operations and financial condition.

We are subject to continuing contingent liabilities of ConocoPhillips following the Separation.

Notwithstanding the Separation, there are several significant areas where the liabilities of ConocoPhillips may become our obligations. For example, under the Internal Revenue Code and the related rules and regulations, each corporation that was a member of the ConocoPhillips consolidated U.S. federal income tax reporting group during any taxable period or portion of any taxable period ending on or before the effective time of the Separation is jointly and severally liable for the U.S. federal income tax liability of the entire ConocoPhillips consolidated tax reporting group for that taxable period. In connection with the Separation, we entered into the Tax Sharing Agreement with ConocoPhillips that allocates the responsibility for prior period taxes of the ConocoPhillips consolidated tax reporting group between us and ConocoPhillips. ConocoPhillips may be unable to pay any prior period taxes for which it is responsible, and we could be required to pay the entire amount of such taxes. Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans as well as other contingent liabilities.

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If the distribution in connection with the Separation, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, our stockholders and ConocoPhillips could be subject to significant tax liability and, in certain circumstances, we could be required to indemnify ConocoPhillips for material taxes pursuant to indemnification obligations under the Tax Sharing Agreement.

ConocoPhillips received a private letter ruling from the Internal Revenue Service (IRS) substantially to the effect that, among other things, the distribution, together with certain related transactions, qualified as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code. The private letter ruling and the tax opinion that ConocoPhillips received relied on certain representations, assumptions and undertakings, including those relating to the past and future conduct of our business, and neither the private letter ruling nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter ruling does not address all the issues that are relevant to determining whether the distribution qualified for tax-free treatment. Notwithstanding the private letter ruling and the tax opinion, the IRS could determine the distribution should be treated as a taxable transaction for U.S. federal income tax purposes if it determines any of the representations, assumptions or undertakings that were included in the request for the private letter ruling are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling.

If the IRS were to determine that the distribution failed to qualify for tax-free treatment, in general, ConocoPhillips would be subject to tax as if it had sold the Phillips 66 common stock in a taxable sale for its fair market value, and ConocoPhillips stockholders who received shares of Phillips 66 common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.

Under the Tax Sharing Agreement, we would generally be required to indemnify ConocoPhillips against any tax resulting from the distribution to the extent that such tax resulted from (i) any of our representations or undertakings being incorrect or violated, or (ii) other actions or failures to act by us. Our indemnification obligations to ConocoPhillips and its subsidiaries, officers and directors are not limited by any maximum amount. If we are required to indemnify ConocoPhillips or such other persons under the circumstances set forth in the Tax Sharing Agreement, we may be subject to substantial liabilities.


Item 1B. UNRESOLVED STAFF COMMENTS

None.



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Item 3. LEGAL PROCEEDINGS

The following is a description of reportable legal proceedings, including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment. While it is not possible to accurately predict the final outcome of these pending proceedings, if any one or more of such proceedings were decided adversely to Phillips 66, we expect there would be no material effect on our consolidated financial position. Nevertheless, such proceedings are reported pursuant to Securities and Exchange Commission (SEC) regulations.

Our U.S. refineries are implementing two separate consent decrees, regarding alleged violations of the Federal Clean Air Act, with the U.S. Environmental Protection Agency (EPA), five states and one local air pollution agency. Some of the requirements and limitations contained in the decrees provide for stipulated penalties for violations. Stipulated penalties under the decrees are not automatic, but must be requested by one of the agency signatories. As part of periodic reports under the decrees or other reports required by permits or regulations, we occasionally report matters that could be subject to a request for stipulated penalties. If a specific request for stipulated penalties meeting the reporting threshold set forth in SEC rules is made pursuant to these decrees based on a given reported exceedance, we will separately report that matter and the amount of the proposed penalty.

New Matters
In November 2018, the California Air Resources Board (CARB) demanded penalties to resolve a Notice of Violation (NOV) alleging that initial fuel certifications submitted by the company in November and December 2016 with respect to eight batches of gasoline were non-compliant with CARB regulations. We agreed to resolve the NOV with a penalty payment of $150,000.

In late 2018, Phillips 66 and the EPA agreed to resolve certain flaring violations alleged to have occurred at our Billings Refinery between May 2010 and September 2018. EPA's proposed resolution includes payments of a $150,000 penalty and approximately $220,000 for supplemental environmental projects. We are working with the EPA to finalize settlement terms to resolve this matter.

Matters Previously Reported (unresolved or resolved since the quarterly report on Form 10-Q for the quarterly period ended September 30, 2018 )
In September 2018, the South Coast Air Quality Management District (District) demanded penalties to resolve nine NOVs issued in 2016 and 2017. The NOVs pertain to alleged violations of air permit requirements or other air pollution regulatory requirements at our Los Angeles Refinery and Colton Terminal. This matter was resolved with a settlement payment of $93,500 to the District on December 6, 2018.

In May 2012, the Illinois Attorney General’s office filed and notified us of a complaint with respect to operations at the Wood River Refinery alleging violations of the Illinois groundwater standards and a third-party’s hazardous waste permit. The complaint seeks as relief remediation of area groundwater; compliance with the hazardous waste permit; enhanced pipeline and tank integrity measures; additional spill reporting; and fines and penalties exceeding $100,000. We are working with the Illinois Environmental Protection Agency and Attorney General’s office to resolve these allegations.


Item 4. MINE SAFETY DISCLOSURES

Not applicable.

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EXECUTIVE OFFICERS OF THE REGISTRANT
 
Name
Position Held
Age*

 
 
 
Greg C. Garland
Chairman and Chief Executive Officer
61

Robert A. Herman
Executive Vice President, Refining
59

Paula A. Johnson
Executive Vice President, Legal and Government Affairs, General Counsel and Corporate Secretary
55

Brian M. Mandell
Senior Vice President, Marketing and Commercial
55

Kevin J. Mitchell
Executive Vice President, Finance and Chief Financial Officer
52

Chukwuemeka A. Oyolu
Vice President and Controller
49

Timothy D. Roberts
Executive Vice President, Midstream
57

* On February 22, 2019 .


There are no family relationships among any of the officers named above. The Board of Directors annually elects the officers to serve until a successor is elected and qualified or as otherwise provided in our By-Laws. Set forth below is information about the executive officers identified above.

Greg C. Garland is the Chairman and Chief Executive Officer of Phillips 66, a position he has held since June 2014. Previously, Mr. Garland served as Phillips 66’s Chairman, President and Chief Executive Officer from April 2012 to June 2014. Mr. Garland previously served as ConocoPhillips’ Senior Vice President, Exploration and Production—Americas from October 2010 to April 2012, and as President and Chief Executive Officer of CPChem from 2008 to 2010.

Robert A. Herman is Executive Vice President, Refining of Phillips 66, a position he has held since September 2017. Previously, Mr. Herman served Phillips 66 as Executive Vice President, Midstream from June 2014 to September 2017, Senior Vice President, HSE, Projects and Procurement from February 2014 to June 2014, and Senior Vice President, Health, Safety, and Environment from April 2012 to February 2014.

Paula A. Johnson is Executive Vice President, Legal and Government Affairs, General Counsel and Corporate Secretary of Phillips 66, a position she has held since October 2016. Previously, Ms. Johnson served as Executive Vice President, Legal, General Counsel and Corporate Secretary of Phillips 66 from May 2013 to October 2016.

Brian M. Mandell is Senior Vice President, Marketing and Commercial of Phillips 66, a position he has held since August 2018. Previously, Mr. Mandell served as Senior Vice President, Commercial from November 2016 to August 2018, President, Global Marketing from March 2015 to November 2016, and Global Trading Lead, Clean Products, Commercial from May 2012 to March 2015.

Kevin J. Mitchell is Executive Vice President, Finance and Chief Financial Officer of Phillips 66, a position he has held since January 2016. Previously, Mr. Mitchell served as Phillips 66’s Vice President, Investor Relations from September 2014, when he joined the company, to January 2016. Prior to joining the company, he served as the General Auditor of ConocoPhillips from May 2010 until September 2014.

Chukwuemeka A. Oyolu is Vice President and Controller of Phillips 66, a position he has held since December 2014. Mr. Oyolu was Phillips 66’s General Manager, Finance for Refining, Marketing and Transportation from May 2012 to February 2014 when he became General Manager, Planning and Optimization.

Timothy D. Roberts is Executive Vice President, Midstream of Phillips 66, a position he has held since August 2018. Previously, Mr. Roberts served as Executive Vice President, Marketing and Commercial, from January 2017 to August 2018 and as Executive Vice President Strategy and Business Development from April 2016 to January 2017. Before joining Phillips 66, Mr. Roberts served in a number of executive roles at LyondellBasell Industries N.V. since 2011, most recently as Executive Vice President, Global Olefins and Polyolefins from October 2013 to March 2016.

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PART II

Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Phillips 66’s common stock is traded on the New York Stock Exchange under the symbol “PSX.” At January 31, 2019 , our number of stockholders of record was 36,550 .

Performance Graph
CHART-33FF1B44CAFD5A1145E.JPGClick to enlarge
The performance graph above includes a peer index (the “Peer Group”) composed of Celanese Corporation; Delek US Holdings, Inc.; Eastman Chemical Co.; Enterprise Products Partners, LP; HollyFrontier Corporation; Huntsman Corporation; LyondellBasell Industries N.V.; Marathon Petroleum Corporation; Oneok, Inc.; PBF Energy Inc.; Targa Resources Corp.; Valero Energy Corporation; and Westlake Chemical Corp. Additionally, Andeavor is included as a peer for periods prior to its acquisition by Marathon Petroleum Corporation.




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Issuer Purchases of Equity Securities

 
 
 
 
 
 
 
Millions of Dollars

Period
Total Number of Shares Purchased*

 
Average Price Paid per Share

 
Total Number of Shares Purchased
as Part of Publicly Announced Plans
or Programs**

 
Approximate Dollar Value of Shares
that May Yet Be Purchased Under the Plans or Programs

 
 
 
 
 
 
 
 
October 1-31, 2018
1,972,339

 
$
108.57

 
1,972,339

 
$
1,890

November 1-30, 2018
1,339,525

 
96.47

 
1,339,525

 
1,761

December 1-31, 2018
1,761,225

 
87.35

 
1,761,225

 
1,607

Total
5,073,089

 
$
98.01

 
5,073,089

 
 
* Includes repurchase of shares of common stock from company employees in connection with the company’s broad-based employee incentive plans, when applicable.
** As of December 31, 2018 , our Board of Directors has authorized repurchases totaling up to $12 billion of our outstanding common stock. The authorizations from the Board of Directors do not have expiration dates. The share repurchases are expected to be funded primarily through available cash. The authorized shares will be repurchased from time to time in the open market at the company’s discretion, subject to market conditions and other factors, and in accordance with applicable regulatory requirements. We are not obligated to acquire any particular amount of common stock and may commence, suspend or discontinue purchases at any time or from time to time without prior notice. Shares of stock repurchased are held as treasury shares.



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Item 6. SELECTED FINANCIAL DATA

 
Millions of Dollars Except Per Share Amounts
 
2018

 
2017

 
2016

 
2015

 
2014

 
 
 
 
 
 
 
 
 
 
Sales and other operating revenues*
$
111,461

 
102,354

 
84,279

 
98,975

 
161,212

Income from continuing operations
5,873

 
5,248

 
1,644

 
4,280

 
4,091

Income from continuing operations attributable to Phillips 66
5,595

 
5,106

 
1,555

 
4,227

 
4,056

Per common share
 
 
 
 
 
 
 
 
 
Basic
11.87

 
9.90

 
2.94

 
7.78

 
7.15

Diluted
11.80

 
9.85

 
2.92

 
7.73

 
7.10

Net income
5,873

 
5,248

 
1,644

 
4,280

 
4,797

Net income attributable to Phillips 66
5,595

 
5,106

 
1,555

 
4,227

 
4,762

Per common share
 
 
 
 
 
 
 
 
 
Basic
11.87

 
9.90

 
2.94

 
7.78

 
8.40

Diluted
11.80

 
9.85

 
2.92

 
7.73

 
8.33

Total assets
54,302

 
54,371

 
51,653

 
48,580

 
48,692

Long-term debt
11,093

 
10,069

 
9,588

 
8,843

 
7,793

Cash dividends declared per common share
3.10

 
2.73

 
2.45

 
2.18

 
1.89

* Sales and other operating revenues for the years ended December 31, 2014 through 2017, are presented in accordance with accounting standards in effect prior to our adoption of ASU No. 2014-09 on January 1, 2018. See Note 2—Changes in Accounting Principles, in the Notes to Consolidated Financial Statements, for further discussion regarding our adoption of ASU No. 2014-09.


In December 2013, we entered into an agreement to exchange the stock of Phillips Specialty Products Inc. (PSPI), a flow improver business, which was included in our Marketing and Specialties segment, for shares of Phillips 66 common stock owned by the other party. The PSPI share exchange was completed in February 2014. Accordingly, the selected income from continuing operations data above for the year ended December 31, 2014, excludes income from PSPI’s discontinued operations of $706 million.

To ensure full understanding, you should read the selected financial data presented above in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated, “the company,” “we,” “our,” “us” and “Phillips 66” are used in this report to refer to the businesses of Phillips 66 and its consolidated subsidiaries.

Management’s Discussion and Analysis is the company’s analysis of its financial performance, financial condition, and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. It contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. 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 identify forward-looking statements. The company 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 company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”

The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to net income (loss) attributable to Phillips 66. The terms “pre-tax income” or “pre-tax loss” as used in Management’s Discussion and Analysis refer to income (loss) before income taxes.


EXECUTIVE OVERVIEW AND BUSINESS ENVIRONMENT

Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. At December 31, 2018 , we had total assets of $54.3 billion .

Executive Overview

In 2018 , we reported earnings of $5.6 billion , generated $7.6 billion in cash from operating activities and raised net proceeds of $1.5 billion from the issuance of senior notes. We used available cash primarily for repurchases of our common stock of $4.6 billion , capital expenditures and investments of $2.6 billion , dividend payments on our common stock of $1.4 billion and the early repayment of $550 million of debt. We ended 2018 with $3.0 billion of cash and cash equivalents and approximately $5.6 billion of total committed capacity available under our credit facilities.

We continue to focus on the following strategic priorities:

Operating Excellence. Our commitment to operating excellence guides everything we do. We are committed to protecting the health and safety of everyone who has a role in our operations and the communities in which we operate. Continuous improvement in safety, environmental stewardship, reliability and cost efficiency is a fundamental requirement for our company and employees. We employ rigorous training and audit programs to drive ongoing improvement in both personal and process safety as we strive for zero incidents. Since we cannot control commodity prices, controlling operating expenses and overhead costs, within the context of our commitment to safety and environmental stewardship, is a high priority.  Senior management actively monitors these costs. We are committed to protecting the environment and strive to reduce our environmental footprint throughout our operations. Optimizing utilization rates at our refineries through reliable and safe operations enables us to capture the value available in the market in terms of prices and margins. During 2018 , our worldwide refining crude oil capacity utilization rate was 95 percent .

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Growth. We have budgeted $3.2 billion in capital expenditures and investments in 2019, including $0.9 billion for Phillips 66 Partners LP (Phillips 66 Partners). The Phillips 66 Partners’ capital budget includes $0.3 billion of capital expected to be cash funded by noncontrolling interests. Additionally, our share of expected self-funded capital spending by joint ventures DCP Midstream, LLC (DCP Midstream), Chevron Phillips Chemical Company LLC (CPChem) and WRB Refining LP (WRB) in 2019 is $1.2 billion . In Midstream, we will continue building out our integrated logistics infrastructure network, including pipelines, storage, export and fractionation facilities. In Chemicals, CPChem’s growth capital will fund continuing development of a second U.S. Gulf Coast petrochemicals project and debottlenecking opportunities on existing assets. Growth capital in Refining will be directed toward high-return projects to enhance the yield of higher-value products, as well as other low-capital, quick-payout projects, while in Marketing and Specialties (M&S) it will be to further grow and enhance retail sites in Europe.

Returns. We plan to improve refining returns by increasing throughput of advantaged feedstocks, disciplined capital allocation and portfolio optimization. A disciplined capital allocation process ensures we focus investments in projects that generate competitive returns throughout the business cycle. In 2018 , our Midstream segment benefited from higher equity earnings and cash distributions from our investments in joint venture pipelines. Our Refining segment maintained a strong clean product yield and a high advantaged crude oil throughput rate at our U.S. refineries. Additionally, our M&S segment continued to enhance our network and brand by re-imaging sites in the United States.

Distributions. We believe shareholder value is enhanced through, among other things, consistent growth of regular dividends, complemented by share repurchases. We increased our quarterly dividend rate by 14 percent during 2018 , and have increased it every year since the company’s inception in 2012. Regular dividends demonstrate the confidence our Board of Directors and management have in our capital structure and operations’ capability to generate free cash flow throughout the business cycle. In 2018 , we repurchased $4.6 billion , or approximately 48 million shares, of our common stock. At the discretion of our Board of Directors, we plan to increase dividends annually and fund our share repurchase program while continuing to invest in the growth of our business.

High-Performing Organization. We strive to attract, develop and retain individuals with the knowledge and skills to implement our business strategy and who support our values and culture. Throughout the company, we focus on getting results in the right way and believe success is both what we do and how we do it. We encourage collaboration throughout our company, while valuing differences, respecting diversity, and creating a great place to work. We foster an environment of learning and development through structured programs focused on enhancing functional and technical skills where employees are engaged in our business and committed to their own, as well as the company’s, success.


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Business Environment

The price of U.S. benchmark crude oil, West Texas Intermediate (WTI) at Cushing, Oklahoma, increased to an average of $64.92 per barrel during 2018, compared with an average of $50.90 per barrel in 2017. The WTI discount versus the international benchmark Dated Brent widened in 2018 , compared with 2017, due to growing U.S. crude production. A widening differential generally benefits our results. Over the course of 2018, commodity prices had both favorable and unfavorable impacts on our businesses that vary by segment.

The Midstream segment, which includes our 50 percent equity investment in DCP Midstream, contains fee-based operations that are not directly exposed to commodity price risk, as well as operations that are directly linked to natural gas liquids (NGL) prices, natural gas prices and crude oil prices. Natural gas prices were relatively flat in 2018, compared with 2017, while NGL prices were higher in 2018 due to higher global crude oil prices and increased domestic demand for ethane.
 
The Chemicals segment consists of our 50 percent equity investment in CPChem. The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on supply and demand, as well as cost factors. During 2018, the high-density polyethylene chain margin contracted mainly due to rapidly expanding North American supply. In addition, lower naptha-based feedstock costs internationally narrowed the difference between naptha-based and ethane-based margins. However, North American ethane-based crackers integrated through ethylene derivatives continue to benefit from a feedstock price advantage associated with abundant domestic supply and continue to capture a higher polyethylene chain margin than crackers in most other regions of the world.

Our Refining segment results are driven by several factors, including refining margins, cost control, refinery throughput, feedstock costs, product yields and turnaround activity. Industry crack spread indicators, the difference between market prices for refined petroleum products and crude oil, are used to estimate refining margins. During 2018 , the U.S. 3:2:1 crack spread (three barrels of crude oil producing two barrels of gasoline and one barrel of diesel) decreased compared with 2017, pri