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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2023

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)

832-765-3010

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
	Title of each class	Trading Symbol(s)	Name of each exchange on which registered
	Common Stock, $0.01 Par Value	PSX	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐    No  ☒

The registrant had 445,287,928 shares of common stock, $0.01 par value, outstanding as of June 30, 2023.

Table of Contents

PHILLIPS 66

TABLE OF CONTENTS

	Page
Part I – Financial Information
Item 1. Financial Statements
Consolidated Statement of Income	1
Consolidated Statement of Comprehensive Income	2
Consolidated Balance Sheet	3
Consolidated Statement of Cash Flows	4
Consolidated Statement of Changes in Equity	5
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and      Results of Operations	37
Item 3. Quantitative and Qualitative Disclosures About Market Risk	68
Item 4. Controls and Procedures	68
Part II – Other Information
Item 1. Legal Proceedings	69
Item 1A. Risk Factors	70
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 5. Other Information	70
Item 6. Exhibits	71
Signatures	72

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Consolidated Statement of Income Phillips 66

	Millions of Dollars
	Three Months Ended June 30			Six Months Ended June 30
	2023		2022	2023	2022
Revenues and Other Income
Sales and other operating revenues	$	35,090	48,577	69,486	84,756
Equity in earnings of affiliates	563		917	1,174	1,602
Net gain (loss) on dispositions	(12)		—	22	1
Other income (loss)	99		(185)	147	(328)
Total Revenues and Other Income	35,740		49,309	70,829	86,031
Costs and Expenses
Purchased crude oil and products	30,571		42,645	59,912	76,140
Operating expenses	1,384		1,431	2,962	2,771
Selling, general and administrative expenses	593		488	1,198	921
Depreciation and amortization	495		359	971	697
Impairments	4		2	12	2
Taxes other than income taxes	174		118	381	267
Accretion on discounted liabilities	7		6	13	12
Interest and debt expense	266		133	458	268
Foreign currency transaction losses	2		21	27	19
Total Costs and Expenses	33,496		45,203	65,934	81,097
Income before income taxes	2,244		4,106	4,895	4,934
Income tax expense	510		924	1,084	1,095
Net Income	1,734		3,182	3,811	3,839
Less: net income attributable to noncontrolling interests	37		15	153	90
Net Income Attributable to Phillips 66	$	1,697	3,167	3,658	3,749
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
Basic	$	3.73	6.55	7.95	8.03
Diluted	3.72		6.53	7.92	8.00
Weighted-Average Common Shares Outstanding (thousands)
Basic	454,450		483,088	459,602	466,286
Diluted	456,168		485,035	461,906	468,338
See Notes to Consolidated Financial Statements.

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Consolidated Statement of Comprehensive Income Phillips 66

	Millions of Dollars
	Three Months Ended June 30			Six Months Ended June 30
	2023		2022	2023	2022
Net Income	$	1,734	3,182	3,811	3,839
Other comprehensive income (loss)
Defined benefit plans
Net actuarial loss arising during the period	—		(13)	—	(13)
Amortization of net actuarial loss, prior service credit and settlements	5		40	15	51
Plans sponsored by equity affiliates	—		1	3	6
Income taxes on defined benefit plans	(1)		(5)	(4)	(8)
Defined benefit plans, net of income taxes	4		23	14	36
Foreign currency translation adjustments	98		(245)	174	(327)
Income taxes on foreign currency translation adjustments	(1)		3	—	3
Foreign currency translation adjustments, net of income taxes	97		(242)	174	(324)
Income taxes on hedging activities	—		—	—	—
Hedging activities, net of income taxes	—		—	—	—
Other Comprehensive Income (Loss), Net of Income Taxes	101		(219)	188	(288)
Comprehensive Income	1,835		2,963	3,999	3,551
Less: comprehensive income attributable to noncontrolling interests	37		15	153	90
Comprehensive Income Attributable to Phillips 66	$	1,798	2,948	3,846	3,461

See Notes to Consolidated Financial Statements.

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Consolidated Balance Sheet Phillips 66

	Millions of Dollars
	June 30 2023		December 31 2022
Assets
Cash and cash equivalents	$	3,029	6,133
Accounts and notes receivable (net of allowances of $68 million in 2023 and $67 million in 2022)	8,234		9,497
Accounts and notes receivable—related parties	1,224		1,488
Inventories	6,380		3,276
Prepaid expenses and other current assets	1,031		1,528
Total Current Assets	19,898		21,922
Investments and long-term receivables	15,532		14,950
Net properties, plants and equipment	35,232		35,163
Goodwill	1,486		1,486
Intangibles	786		831
Other assets	1,952		2,090
Total Assets	$	74,886	76,442
Liabilities
Accounts payable	$	9,722	10,748
Accounts payable—related parties	714		575
Short-term debt	832		529
Accrued income and other taxes	1,181		1,397
Employee benefit obligations	557		764
Other accruals	1,965		1,876
Total Current Liabilities	14,971		15,889
Long-term debt	19,034		16,661
Asset retirement obligations and accrued environmental costs	876		879
Deferred income taxes	6,819		6,671
Employee benefit obligations	924		937
Other liabilities and deferred credits	1,202		1,299
Total Liabilities	43,826		42,336
Equity
Common stock (2,500,000,000 shares authorized at $0.01 par value)      Issued (2023—653,361,255 shares; 2022—652,373,645 shares)
Par value	7		7
Capital in excess of par	19,463		19,791
Treasury stock (at cost: 2023—208,073,327 shares; 2022—186,529,667 shares)	(17,422)		(15,276)
Retained earnings	28,122		25,432
Accumulated other comprehensive loss	(272)		(460)
Total Stockholders’ Equity	29,898		29,494
Noncontrolling interests	1,162		4,612
Total Equity	31,060		34,106
Total Liabilities and Equity	$	74,886	76,442

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows Phillips 66

	Millions of Dollars
	Six Months Ended June 30
	2023		2022
Cash Flows From Operating Activities
Net income	$	3,811	3,839
Adjustments to reconcile net income to net cash provided by operating    activities
Depreciation and amortization	971		697
Impairments	12		2
Accretion on discounted liabilities	13		12
Deferred income taxes	265		290
Undistributed equity earnings	(566)		(490)
Loss on early redemption of debt	53		—
Net gain on dispositions	(22)		(1)
Unrealized investment loss	26		390
Other	(101)		120
Working capital adjustments
Accounts and notes receivable	1,548		(5,634)
Inventories	(2,939)		(1,265)
Prepaid expenses and other current assets	372		(1,030)
Accounts payable	(923)		5,285
Taxes and other accruals	(366)		704
Net Cash Provided by Operating Activities	2,154		2,919
Cash Flows From Investing Activities
Capital expenditures and investments	(929)		(746)
Return of investments in equity affiliates	119		48
Proceeds from asset dispositions	90		2
Advances/loans—related parties	—		(75)
Collection of advances/loans—related parties	—		101
Other	23		(49)
Net Cash Used in Investing Activities	(697)		(719)
Cash Flows From Financing Activities
Issuance of debt	5,047		—
Repayment of debt	(2,459)		(1,481)
Issuance of common stock	12		67
Repurchase of common stock	(2,109)		(66)
Dividends paid on common stock	(960)		(871)
Distributions to noncontrolling interests	(125)		(101)
Repurchase of noncontrolling interests	(3,957)		—
Other	(59)		(37)
Net Cash Used in Financing Activities	(4,610)		(2,489)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	49		(49)
Net Change in Cash and Cash Equivalents	(3,104)		(338)
Cash and cash equivalents at beginning of period	6,133		3,147
Cash and Cash Equivalents at End of Period	$	3,029	2,809

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Changes in Equity Phillips 66

	Millions of Dollars
	Three Months Ended June 30
	Attributable to Phillips 66
	Common Stock
	Par Value		Capital in Excess of Par	Treasury Stock	Retained Earnings	Accum. Other Comprehensive Loss	Noncontrolling Interests	Total
March 31, 2023	$	7	19,795	(16,083)	26,903	(373)	4,667	34,916
Net income	—		—	—	1,697	—	37	1,734
Other comprehensive income	—		—	—	—	101	—	101
Dividends paid on common stock ($1.05 per share)	—		—	—	(474)	—	—	(474)
Repurchase of common stock	—		—	(1,339)	—	—	—	(1,339)
Benefit plan activity	—		46	—	(4)	—	4	46
Distributions to noncontrolling interests	—		—	—	—	—	(67)	(67)
Acquisition of noncontrolling interests in DCP Midstream, LP	—		(378)	—	—	—	(3,479)	(3,857)
June 30, 2023	$	7	19,463	(17,422)	28,122	(272)	1,162	31,060
March 31, 2022	$	7	19,667	(13,736)	16,391	(514)	306	22,121
Net income	—		—	—	3,167	—	15	3,182
Other comprehensive loss	—		—	—	—	(219)	—	(219)
Dividends paid on common stock ($0.97 per share)	—		—	—	(467)	—	—	(467)
Repurchase of common stock	—		—	(66)	—	—	—	(66)
Benefit plan activity	—		82	—	(4)	—	—	78
Distributions to noncontrolling interests	—		—	—	—	—	(24)	(24)
Acquisition of noncontrolling interest in Phillips 66 Partners LP	—		(32)	—	—	—	—	(32)
June 30, 2022	$	7	19,717	(13,802)	19,087	(733)	297	24,573

	Shares
	Three Months Ended June 30
	Common Stock Issued	Treasury Stock
March 31, 2023	653,266,184	194,403,868
Repurchase of common stock	—	13,669,459
Shares issued—share-based compensation	95,071	—
June 30, 2023	653,361,255	208,073,327
March 31, 2022	651,046,617	169,946,591
Repurchase of common stock	—	700,145
Shares issued—share-based compensation	651,216	—
June 30, 2022	651,697,833	170,646,736
See Notes to Consolidated Financial Statements.

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	Millions of Dollars
	Six Months Ended June 30
	Attributable to Phillips 66
	Common Stock
	Par Value		Capital in Excess of Par	Treasury Stock	Retained Earnings	Accum. Other Comprehensive Loss	Noncontrolling Interests	Total
December 31, 2022	$	7	19,791	(15,276)	25,432	(460)	4,612	34,106
Net income	—		—	—	3,658	—	153	3,811
Other comprehensive income	—		—	—	—	188	—	188
Dividends paid on common stock ($2.10 per share)	—		—	—	(960)	—	—	(960)
Repurchase of common stock	—		—	(2,146)	—	—	—	(2,146)
Benefit plan activity	—		50	—	(8)	—	1	43
Distributions to noncontrolling interests	—		—	—	—	—	(125)	(125)
Acquisition of noncontrolling interests in DCP Midstream, LP	—		(378)	—	—	—	(3,479)	(3,857)
June 30, 2023	$	7	19,463	(17,422)	28,122	(272)	1,162	31,060
December 31, 2021	$	7	20,504	(17,116)	16,216	(445)	2,471	21,637
Net income	—		—	—	3,749	—	90	3,839
Other comprehensive loss	—		—	—	—	(288)	—	(288)
Dividends paid on common stock ($1.89 per share)	—		—	—	(871)	—	—	(871)
Repurchase of common stock	—		—	(66)	—	—	—	(66)
Benefit plan activity	—		114	—	(7)	—	—	107
Distributions to noncontrolling interests	—		—	—	—	—	(101)	(101)
Acquisition of noncontrolling interest in Phillips 66 Partners LP	—		(901)	3,380	—	—	(2,163)	316
June 30, 2022	$	7	19,717	(13,802)	19,087	(733)	297	24,573

	Shares
	Six Months Ended June 30
	Common Stock Issued	Treasury Stock
December 31, 2022	652,373,645	186,529,667
Repurchase of common stock	—	21,543,660
Shares issued—share-based compensation	987,610	—
June 30, 2023	653,361,255	208,073,327
December 31, 2021	650,026,318	211,771,827
Repurchase of common stock	—	700,145
Shares issued—share-based compensation	1,671,515	—
Shares issued—acquisition of noncontrolling interest in Phillips 66 Partners LP	—	(41,825,236)
June 30, 2022	651,697,833	170,646,736
See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements Phillips 66

Note 1—Interim Financial Information

The unaudited interim financial information presented in the financial statements included in this report is prepared in accordance with generally accepted accounting principles in the United States (GAAP) and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2022 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2023, are not necessarily indicative of the results expected for the full year.

Note 2—Change in Accounting Principle

Effective January 1, 2023, we adopted ASU 2022-04, “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” This ASU requires the buyer in a supplier finance program to disclose qualitative and quantitative information about the program. At the time of adoption, this ASU did not have a material impact on our consolidated financial statements.

Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers

DCP Midstream, LLC and Gray Oak Holdings LLC Merger (DCP Midstream Merger)

On August 17, 2022, we and our co-venturer, Enbridge Inc. (Enbridge), agreed to merge DCP Midstream, LLC (DCP Midstream) and Gray Oak Holdings LLC (Gray Oak Holdings), with DCP Midstream as the surviving entity.

Prior to the DCP Midstream Merger, we and Enbridge each held a 50% interest and jointly governed DCP Midstream, whose primary assets are its general partner and limited partner interests in DCP Midstream, LP (DCP LP), and we each held indirect economic interests in DCP LP of 28.26%. DCP LP is a variable interest entity (VIE) because its limited partners do not have the ability to remove its general partner with a simple majority vote, nor do its limited partners have substantive participating rights in the significant decisions made in the ordinary course of business. DCP Midstream ultimately consolidates DCP LP because one of its wholly owned subsidiaries is the primary beneficiary of DCP LP.

We and Enbridge also held 65% and 35% interests, respectively, in Gray Oak Holdings, whose primary asset was a 65% noncontrolling interest in Gray Oak Pipeline, LLC (Gray Oak Pipeline). Our and Enbridge’s indirect economic interests in Gray Oak Pipeline were 42.25% and 22.75%, respectively. We had voting control over and consolidated Gray Oak Holdings and reported Gray Oak Holdings’ 65% interest in Gray Oak Pipeline as an equity investment and Enbridge’s interest in Gray Oak Holdings as a noncontrolling interest.

In connection with the DCP Midstream Merger, we and Enbridge entered into a Third Amended and Restated Limited Liability Company Agreement of DCP Midstream (Amended and Restated LLC Agreement), which realigned the members’ economic interests and governance responsibilities. Under the Amended and Restated LLC Agreement, two classes of membership interests in DCP Midstream were created, Class A and Class B, that are intended to track the assets, liabilities, revenues and expenses of the following operating segments of DCP Midstream:

•Class A Segment comprised of the businesses, activities, assets and liabilities of DCP LP and its subsidiaries and its general partner entities (DCP Midstream Class A Segment).

•Class B Segment comprised of the business, activities, assets and liabilities of Gray Oak Pipeline (DCP Midstream Class B Segment).

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We hold a 76.64% Class A membership interest, which represents an indirect economic interest in DCP LP of 43.3%, and a 10% Class B membership interest, which represents an indirect economic interest in Gray Oak Pipeline of 6.5%. Enbridge holds the remaining Class A and Class B membership interests. We have been designated as the managing member of DCP Midstream Class A Segment and are responsible for conducting, directing and managing all activities associated with this segment, except as limited in certain instances. Enbridge has been designated as the managing member of DCP Midstream Class B Segment. Earnings and distributions from each segment are allocated to the members based on their membership interest in each membership class, except as otherwise provided.

DCP Midstream Class A Segment and DCP Midstream Class B Segment were determined to be silos under the variable interest consolidation model. As a result, DCP Midstream was also determined to be a VIE. We determined that we are the primary beneficiary of DCP Midstream Class A Segment because of the governance rights granted to us under the Amended and Restated LLC Agreement as managing member of the segment.

We hold a 33.33% direct ownership interest in DCP Sand Hills Pipeline, LLC (DCP Sand Hills) and DCP Southern Hills Pipeline, LLC (DCP Southern Hills). DCP LP holds the remaining 66.67% ownership interest in these entities. As a result of the governance rights granted to us over DCP Midstream Class A Segment and the governance rights we hold through our direct ownership interests, we obtained controlling financial interests in these entities in connection with the DCP Midstream Merger. As a result, our aggregate direct and indirect economic interests in DCP Sand Hills and DCP Southern Hills increased to 62.2% from 52.2%.

Starting on August 18, 2022, we began consolidating the financial results of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills and reporting the direct and indirect economic interests held by others in these entities as noncontrolling interests on our financial statements.

We account for our remaining indirect economic interest in Gray Oak Pipeline, now held through DCP Midstream Class B Segment, using the equity method of accounting. As a result of the DCP Midstream Merger, we derecognized Enbridge’s noncontrolling interest in Gray Oak Holdings.

We accounted for our consolidation of DCP Midstream Class A Segment, DCP Sand Hills and DCP Southern Hills as a business combination using the acquisition method of accounting. See Note 4—Business Combinations, for additional information regarding our accounting for this transaction. See Note 21—DCP Midstream Class A Segment, for additional information regarding our variable interest in DCP Midstream Class A Segment.

DCP LP Merger

On June 15, 2023, we completed the acquisition of all publicly held common units of DCP LP pursuant to the terms of the Agreement and Plan of Merger, dated as of January 5, 2023 (DCP LP Merger Agreement). The DCP LP Merger Agreement was entered into with DCP LP, its subsidiaries and its general partner entities, pursuant to which one of our wholly owned subsidiaries merged with and into DCP LP, with DCP LP surviving as a Delaware limited partnership. Under the terms of the DCP LP Merger Agreement, at the effective time of the DCP LP Merger, each publicly held common unit representing a limited partner interest in DCP LP (other than the common units owned by DCP Midstream and its subsidiaries) issued and outstanding as of immediately prior to the effective time was converted into the right to receive $41.75 per common unit in cash, without interest. We accounted for the DCP LP Merger as an equity transaction. The DCP LP Merger increased our economic interest in DCP LP from 43.3% to 86.8%.

See Note 21—DCP Midstream Class A Segment, for additional information regarding the equity transaction.

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Note 4—Business Combinations

On August 17, 2022, we realigned our economic interest in, and governance rights over, DCP Midstream and Gray Oak Holdings through the DCP Midstream Merger, with DCP Midstream as the surviving entity. As part of the DCP Midstream Merger, we transferred a 35.75% indirect economic interest in Gray Oak Pipeline and contributed $404 million of cash to DCP Midstream, which was then paid to Enbridge, in return for a 15.05% incremental indirect economic ownership interest in DCP LP. As noted above, the additional governance rights we were granted as part of this transaction resulted in us consolidating the DCP Midstream Class A Segment, as well as DCP Sand Hills and DCP Southern Hills. Given the nature of this transaction, we have accounted for the consolidation of these entities using the acquisition method of accounting.

The components of the fair value of the DCP Midstream Merger consideration are:

	Millions of Dollars
Cash contributed	$	404
Fair value of transferred equity interest	634
Fair value of previously held equity interests	3,853
Total merger consideration	$	4,891

The aggregate purchase consideration noted above was allocated to the assets acquired and liabilities assumed of the entities consolidated based upon a preliminary estimate of their fair values as of the August 17, 2022, DCP Midstream Merger date. Due to the level of effort required to develop fair value measurements, the valuation information necessary to determine the fair values of assets acquired and liabilities assumed is preliminary, including the underlying cash flows, appraisals and other information used to estimate the fair values of the net assets acquired and noncontrolling interests in those net assets. We continue to evaluate the factors used in establishing the fair values of assets and liabilities as of the acquisition date, including, but not limited to, those factors that could affect the estimated fair values of properties, plants and equipment (PP&E), investments in unconsolidated affiliates accounted for under the equity method, inventories, identifiable intangible assets, leases, financial instruments, asset retirement and environmental obligations, legal and tax contingencies, debt and noncontrolling interests. We will complete a final determination of the fair values of assets acquired and liabilities assumed within the one-year measurement period from the date of the DCP Midstream Merger. Any adjustments made in subsequent periods could be material to the preliminary values.

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The following table shows the preliminary purchase price allocation as of the date of the DCP Midstream Merger, and cumulative adjustments we have made as of June 30, 2023:

	Millions of Dollars
	As Originally Reported		Adjustments	As Adjusted
Fair value of assets acquired:
Cash and cash equivalents	$	98	—	98
Accounts and notes receivable	1,003		—	1,003
Inventories	74		166	240
Prepaid expenses and other current assets	439		—	439
Investments and long-term receivables	2,192		57	2,249
Properties, plants and equipment	12,837		23	12,860
Intangibles	36		(36)	—
Other assets	343		(158)	185
Total assets acquired	17,022		52	17,074
Fair value of liabilities assumed:
Accounts payable	912		—	912
Short-term debt	625		(2)	623
Accrued income and other taxes	107		(11)	96
Employee benefit obligation—current	50		22	72
Other accruals	497		(11)	486
Long-term debt	4,541		40	4,581
Asset retirement obligations and accrued environmental costs	168		16	184
Deferred income taxes	40		14	54
Employee benefit obligations	54		—	54
Other liabilities and deferred credits	227		(5)	222
Total liabilities assumed	7,221		63	7,284
Fair value of net assets	9,801		(11)	9,790
Less: Fair value of noncontrolling interests	4,910		(11)	4,899
Total merger consideration	$	4,891	—	4,891

The adjustments reflected in the table above include reclassification adjustments we have made to the preliminary purchase price allocation to conform with our historical presentation and adjustments we have made to the estimated fair value of certain assets acquired and liabilities assumed. The adjustments recorded in the six months ended June 30, 2023, were not material.

Marketing and Specialties Acquisition

On August 1, 2023, we acquired certain marketing operations on the U.S. West Coast for cash consideration of approximately $260 million plus an adjustment for net working capital.

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Note 5—Sales and Other Operating Revenues

Disaggregated Revenues

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

	Millions of Dollars
	Three Months Ended June 30			Six Months Ended June 30
	2023		2022	2023	2022
Product Line and Services
Refined petroleum products	$	26,517	39,410	51,235	68,792
Crude oil resales	4,650		5,793	9,215	9,548
Natural gas liquids (NGL) and natural gas	3,257		3,255	7,678	6,485
Services and other*	666		119	1,358	(69)
Consolidated sales and other operating revenues	$	35,090	48,577	69,486	84,756
Geographic Location**
United States	$	27,990	38,899	55,055	67,784
United Kingdom	3,251		5,043	7,181	8,683
Germany	1,372		1,793	2,678	3,175
Other countries	2,477		2,842	4,572	5,114
Consolidated sales and other operating revenues	$	35,090	48,577	69,486	84,756
* Includes derivatives-related activities. See Note 14—Derivatives and Financial Instruments, for additional information.
** Sales and other operating revenues are attributable to countries based on the location of the operations generating the revenues.

Contract-Related Assets and Liabilities

At June 30, 2023, and December 31, 2022, receivables from contracts with customers were $7,633 million and $8,749 million, respectively. Significant noncustomer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.

Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At June 30, 2023, and December 31, 2022, our asset balances related to such payments were $525 million and $505 million, respectively.

Our contract liabilities represent advances from our customers prior to product or service delivery. At June 30, 2023, and December 31, 2022, contract liabilities were $221 million and $156 million, respectively.

Remaining Performance Obligations

Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We do not disclose remaining performance obligations for these contracts as the expected duration is one year or less or because the variable consideration has been allocated entirely to an unsatisfied performance obligation. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing. At June 30, 2023, the remaining performance obligations related to these minimum volume commitment contracts amounted to $416 million. This amount excludes variable consideration and estimates of variable rate escalation clauses in our contracts with customers, and is expected to be recognized through 2031 with a weighted average remaining life of three years as of June 30, 2023.

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Note 6—Credit Losses

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

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

At June 30, 2023, and December 31, 2022, we reported $9,458 million and $10,985 million of accounts and notes receivable, respectively, net of allowances of $68 million and $67 million, respectively. Based on an aging analysis at June 30, 2023, more than 95% of our accounts receivable were outstanding less than 60 days.

We are also exposed to credit losses from off-balance sheet exposures, such as guarantees of joint venture debt and standby letters of credit. See Note 12—Guarantees, and Note 13—Contingencies and Commitments, for more information regarding these off-balance sheet exposures.

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Note 7—Inventories

Inventories consisted of the following:

	Millions of Dollars
	June 30 2023		December 31 2022
Crude oil and petroleum products	$	5,982	2,914
Materials and supplies	398		362
	$	6,380	3,276

Inventories valued on the last-in, first-out (LIFO) basis totaled $5,799 million and $2,635 million at June 30, 2023, and December 31, 2022, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $5.4 billion and $6.3 billion at June 30, 2023, and December 31, 2022, respectively.

Certain planned reductions in inventory that are not expected to be replaced by the end of the year cause liquidations of LIFO inventory values. LIFO inventory liquidations increased our net income by $1 million and $5 million in the three and six months ended June 30, 2023, respectively. LIFO inventory liquidations increased our net income by $3 million and $43 million in the three and six months ended June 30, 2022, respectively.

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Note 8—Investments, Loans and Long-Term Receivables

Equity Investments

Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)

In 2020, the trial court presiding over litigation brought by the Standing Rock Sioux Tribe (the Tribe) ordered the U.S. Army Corps of Engineers (USACE) to prepare an Environmental Impact Statement (EIS) addressing an easement under Lake Oahe in North Dakota. The court later vacated the easement. Although the easement is vacated, the USACE has no plans to stop pipeline operations while it proceeds with the EIS, and the Tribe’s request for a shutdown was denied in May 2021. In June 2021, the trial court dismissed the litigation entirely. Once the EIS is completed, new litigation or challenges may be filed.

In February 2022, the U.S. Supreme Court (the Court) denied Dakota Access’ writ of certiorari requesting the Court to review the lower court’s decision to order the EIS and vacate the easement. Therefore, the requirement to prepare the EIS stands. Also in February 2022, the Tribe withdrew as a cooperating agency, causing the USACE to halt the EIS process while the USACE engaged with the Tribe on their reasons for withdrawing. The draft EIS process resumed in August 2022, and release is expected in the third quarter of 2023.

Dakota Access and ETCO have guaranteed repayment of senior unsecured notes issued by a wholly owned subsidiary of Dakota Access in March 2019. On April 1, 2022, Dakota Access’ wholly owned subsidiary repaid $650 million aggregate principal amount of its outstanding senior notes upon maturity. We funded our 25% share, or $163 million, with a capital contribution of $89 million in March 2022 and $74 million of distributions we elected not to receive from Dakota Access in the first quarter of 2022. At June 30, 2023, the aggregate principal amount outstanding of Dakota Access’ senior unsecured notes was $1.85 billion.

In conjunction with the notes offering, Phillips 66 Partners LP (Phillips 66 Partners), now a wholly owned subsidiary of Phillips 66, and its co-venturers in Dakota Access also provided a Contingent Equity Contribution Undertaking (CECU). Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the above-mentioned ongoing litigation. At June 30, 2023, our 25% share of the maximum potential equity contributions under the CECU was approximately $467 million.

If the pipeline is required to cease operations, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we could be required to support our 25% share of the ongoing expenses, including scheduled interest payments on the notes of approximately $20 million annually, in addition to the potential obligations under the CECU at June 30, 2023.

At June 30, 2023, the aggregate book value of our investments in Dakota Access and ETCO was $651 million.

CF United LLC (CF United)

We own a 50% voting interest and a 48% economic interest in CF United, a retail marketing joint venture with operations primarily on the U.S. West Coast. CF United is considered a VIE because our co-venturer has an option to require us to purchase its interest based on a fixed multiple. The put option becomes effective July 1, 2023, and expires on March 31, 2024. The put option is viewed as a variable interest as the purchase price on the exercise date may not represent the then-current fair value of CF United. We have determined that we are not the primary beneficiary because we and our co-venturer jointly direct the activities of CF United that most significantly impact economic performance. At June 30, 2023, our maximum exposure to loss was comprised of our $283 million investment in CF United, and any potential future loss resulting from the put option should the purchase price based on a fixed multiple exceed the then-current fair value of CF United.

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OnCue Holdings, LLC (OnCue)

We hold a 50% interest in OnCue, a joint venture that owns and operates retail convenience stores. We fully guaranteed various debt agreements of OnCue and our co-venturer did not participate in the guarantees. This entity is considered a VIE because our debt guarantees resulted in OnCue not being exposed to all potential losses. We have determined we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact economic performance. At June 30, 2023, our maximum exposure to loss was $220 million, which represented the book value of our investment in OnCue of $153 million and guaranteed debt obligations of $67 million.

DCP Midstream, DCP Sand Hills, DCP Southern Hills, and Gray Oak Pipeline—Prior to the DCP Midstream Merger, we held:

•A 50% interest in DCP Midstream a joint venture that owns and operates NGL and gas pipelines, gas plants, gathering systems, storage facilities and fractionation plants, through its subsidiary DCP LP.

•A 33.33% direct ownership interest in DCP Sand Hills a joint venture that owns a NGL pipeline system that extends from the Permian Basin and Eagle Ford to facilities on the Texas Gulf Coast and to the Mont Belvieu, Texas, market hub.

•A 33.33% direct ownership interest in DCP Southern Hills a joint venture that owns a NGL pipeline system that extends from the Midcontinent region to the Mont Belvieu, Texas, market hub.

•A 65% interest in Gray Oak Pipeline, which was held through a consolidated holding company, Gray Oak Holdings. Our indirect interest in Gray Oak Pipeline was 42.25%, after considering a co-venturer’s 35% interest in Gray Oak Holdings. Gray Oak Pipeline is a crude oil pipeline that extends from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi, Texas, and the Sweeny area, including our Sweeny Refinery.

Midstream Investment Disposition

On August 1, 2023, we sold our 25% ownership interest in the South Texas Gateway Terminal for approximately $275 million. At June 30, 2023, the book value of our investment was $171 million.

Other Investments

In September 2021, we acquired 78 million ordinary shares, representing a 16% ownership interest, in NOVONIX Limited (NOVONIX), which are traded on the Australian Securities Exchange. NOVONIX is a Brisbane, Australia-based company that develops technology and supplies materials for lithium-ion batteries. Since we do not have significant influence over the operating and financial policies of NOVONIX and the shares we own have a readily determinable fair value, our investment is recorded at fair value at the end of each reporting period. The fair value of our investment is recorded in the “Investments and long-term receivables” line item on our consolidated balance sheet. The change in the fair value of our investment due to fluctuations in NOVONIX’s stock price, or unrealized investment losses, is recorded in the “Other income (loss)” line item of our consolidated statement of income, while changes due to foreign currency fluctuations are recorded in the “Foreign currency transaction losses” line item on our consolidated statement of income. The fair value of our investment in NOVONIX was $51 million at June 30, 2023. The fair value of our investment in NOVONIX declined by $15 million and $27 million during the three and six months ended June 30, 2023, respectively, reflecting unrealized investment losses of $15 million and $26 million and immaterial unrealized foreign currency losses in both periods. See Note 15—Fair Value Measurements, for additional information regarding the recurring fair value measurement of our investment in NOVONIX.

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Note 9—Properties, Plants and Equipment

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

	Millions of Dollars
	June 30, 2023				December 31, 2022
	Gross PP&E		Accum. D&A	Net PP&E	Gross PP&E	Accum. D&A	Net PP&E
Midstream	$	25,705	3,943	21,762	25,422	3,524	21,898
Chemicals	—		—	—	—	—	—
Refining	24,611		12,719	11,892	24,200	12,523	11,677
Marketing and Specialties	1,842		1,113	729	1,800	1,058	742
Corporate and Other	1,617		768	849	1,568	722	846
	$	53,775	18,543	35,232	52,990	17,827	35,163

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Note 10—Earnings Per Share

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

	Three Months Ended June 30					Six Months Ended June 30
	2023			2022		2023		2022
	Basic		Diluted	Basic	Diluted	Basic	Diluted	Basic	Diluted
Amounts Attributed to Phillips 66 Common Stockholders (millions):
Net Income Attributable to Phillips 66	$	1,697	1,697	3,167	3,167	3,658	3,658	3,749	3,749
Income allocated to participating securities	(3)		(1)	(3)	—	(6)	—	(5)	—
Net income available to common stockholders	$	1,694	1,696	3,164	3,167	3,652	3,658	3,744	3,749
Weighted-average common shares outstanding (thousands):	452,752		454,450	481,105	483,088	457,783	459,602	464,249	466,286
Effect of share-based compensation	1,698		1,718	1,983	1,947	1,819	2,304	2,037	2,052
Weighted-average common shares outstanding—EPS	454,450		456,168	483,088	485,035	459,602	461,906	466,286	468,338
Earnings Per Share of Common Stock (dollars)	$	3.73	3.72	6.55	6.53	7.95	7.92	8.03	8.00

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Note 11—Debt

Debt Issuances and Repayments

On May 19, 2023, DCP LP redeemed its 5.850% junior subordinated notes due May 2043 with an aggregate principal amount outstanding of $550 million using borrowings under its revolving credit and accounts receivable securitization facilities. On the date of redemption, our carrying value of DCP LP’s junior subordinated notes was $497 million, which resulted in a $53 million loss before income taxes. DCP LP’s junior subordinated notes were adjusted to fair value on August 17, 2022, in connection with the consolidation of DCP LP. See Note 15—Fair Value Measurements, for additional information regarding the preliminary fair value of DCP LP’s junior subordinated notes.

On March 29, 2023, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, issued $1.25 billion aggregate principal amount of senior unsecured notes consisting of:

•$750 million aggregate principal amount of 4.950% Senior Notes due December 2027 (2027 Notes).

•$500 million aggregate principal amount of 5.300% Senior Notes due June 2033 (2033 Notes).

The 2027 Notes and 2033 Notes (collectively, the Notes) are fully and unconditionally guaranteed by Phillips 66. Interest on the 2027 Notes is payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2023. Interest on the 2033 Notes is payable semi-annually on June 30 and December 30 of each year, commencing on December 30, 2023.

On March 15, 2023, DCP LP repaid its 3.875% senior unsecured notes due March 2023 with an aggregate principal amount of $500 million using borrowings under its revolving credit and accounts receivable securitization facilities.

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

Related Party Advance Term Loan Agreement

On May 31, 2023, we borrowed $75 million from WRB Refining LP (WRB) through an Advance Term Loan Agreement. The debt matures on May 31, 2038. Borrowings will bear interest at a floating rate of 1.042% plus Adjusted Term SOFR, payable on the last day of each month.

Term Loan Agreement

On March 27, 2023, Phillips 66 Company, a wholly owned subsidiary of Phillips 66, entered into a $1.5 billion delayed draw term loan agreement guaranteed by Phillips 66 (the Term Loan Agreement). The Term Loan Agreement provides for a single borrowing during a 90-day period commencing on the closing date, which borrowing was contingent upon the completion of the DCP LP Merger. The Term Loan Agreement contains customary covenants similar to those contained in our revolving credit agreement, including a maximum consolidated net debt-to-capitalization ratio of 65% as of the last day of each fiscal quarter. The Term Loan Agreement has customary events of default, such as nonpayment of principal when due; nonpayment of interest, fees or other amounts after grace periods; and violation of covenants. We may at any time prepay outstanding borrowings under the Term Loan Agreement, in whole or in part, without premium or penalty. Outstanding borrowings under the Term Loan Agreement bear interest at either: (a) Adjusted Term SOFR in effect from time to time plus the applicable margin; or (b) the reference rate plus the applicable margin, as defined in the Term Loan Agreement. As of June 30, 2023, $1.25 billion was borrowed under the Term Loan Agreement, which matures in June 2026.

See Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers, for additional information regarding the DCP LP Merger.

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Credit Facilities and Commercial Paper

Phillips 66 and Phillips 66 Company

On June 23, 2022, we entered into a $5 billion revolving credit facility with Phillips 66 Company as the borrower and Phillips 66 as the guarantor. At both June 30, 2023, and December 31, 2022, no amount had been drawn under the $5 billion revolving credit facility or $5 billion uncommitted commercial paper program.

DCP Midstream Class A Segment

At June 30, 2023, DCP LP had $850 million of borrowings outstanding under its $1.4 billion credit facility and $2 million of letters of credit had been issued that supported the credit facility. At December 31, 2022, DCP LP had no borrowings outstanding under its $1.4 billion credit facility, and $10 million in letters of credit had been issued that are supported by the credit facility.

As of June 30, 2023, and December 31, 2022, $280 million and $40 million of borrowings, respectively, were outstanding under DCP LP’s accounts receivable securitization facility, which are secured by its accounts receivable at DCP Receivables LLC.

Note 12—Guarantees

At June 30, 2023, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantees and expect future performance to be either immaterial or have only a remote chance of occurrence.

Lease Residual Value Guarantees

Under the operating lease agreement for our headquarters facility in Houston, Texas, we have the option, at the end of the lease term in September 2025, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. We have a residual value guarantee associated with the operating lease agreement with a maximum potential future exposure of $514 million at June 30, 2023. We also have residual value guarantees associated with railcar, airplane and truck leases with maximum potential future exposures totaling $164 million. These leases have remaining terms of four to ten years.

Guarantees of Joint Venture Obligations

In March 2019, Phillips 66 Partners and its co-venturers in Dakota Access provided a CECU in conjunction with a senior unsecured notes offering. See Note 8—Investments, Loans and Long-Term Receivables, for additional information regarding Dakota Access and the CECU.

At June 30, 2023, we also had other guarantees outstanding primarily for our portion of certain joint venture debt, which have remaining terms of up to two years. The maximum potential future exposures under these guarantees were approximately $82 million. Payment would be required if a joint venture defaults on its obligations.

Indemnifications

Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnifications. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses, employee claims, and real estate tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. At June 30, 2023, and December 31, 2022, the carrying amount of recorded indemnifications was $143 million and $137 million, respectively.

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We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information to support the reversal. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. At June 30, 2023, and December 31, 2022, environmental accruals for known contamination of $115 million and $108 million, respectively, were included in the carrying amount of the recorded indemnifications noted above. These environmental accruals were primarily included in the “Asset retirement obligations and accrued environmental costs” line item on our consolidated balance sheet. For additional information about environmental liabilities, see Note 13—Contingencies and Commitments.

Indemnification and Release Agreement

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

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Note 13—Contingencies and Commitments

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

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

Environmental

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

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

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At June 30, 2023, our total environmental accruals were $449 million, compared with $434 million at December 31, 2022. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

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Legal Proceedings

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

Other Contingencies

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

At June 30, 2023, we had performance obligations secured by letters of credit and bank guarantees of $1 billion related to various purchase and other commitments incident to the ordinary conduct of business.

Note 14—Derivatives and Financial Instruments

Derivative Instruments

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

Purchase and sales contracts with firm minimum notional volumes for commodities that are readily convertible to cash are recorded on our consolidated balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception, whereby the contracts are recorded on an accrual basis. We generally apply the normal purchases and normal sales exception to eligible crude oil, refined petroleum product, NGL, natural gas, renewable feedstock, and power commodity contracts to purchase or sell quantities we expect to use or sell in the normal course of business. All other derivative instruments are recorded at fair value on our consolidated balance sheet. For further information regarding the fair value of derivatives, see Note 15—Fair Value Measurements.

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

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DCP Midstream Class A Segment

Through DCP LP’s operations, DCP Midstream Class A Segment is exposed to a variety of risks including but not limited to changes in the prices of commodities that DCP LP buys or sells. Effective from the date of the DCP Midstream Merger, we include DCP LP’s financial instruments in our financial statements. See Note 3—DCP Midstream, LLC and DCP Midstream, LP Mergers, for additional information regarding the DCP Midstream Merger and the associated accounting treatment.

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

	Millions of Dollars
	June 30, 2023					December 31, 2022
	Commodity Derivatives			Effect of Collateral Netting	Net Carrying Value Presented on the Balance Sheet	Commodity Derivatives		Effect of Collateral Netting	Net Carrying Value Presented on the Balance Sheet
	Assets		Liabilities			Assets	Liabilities
Assets
Prepaid expenses and other current assets	$	2,264	(2,000)	(28)	236	1,331	(1,110)	—	221
Other assets	19		(1)	—	18	46	(1)	—	45
Liabilities
Other accruals	177		(244)	10	(57)	471	(750)	90	(189)
Other liabilities and deferred credits	25		(27)	—	(2)	12	(35)	—	(23)
Total	$	2,485	(2,272)	(18)	195	1,860	(1,896)	90