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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 endedJuneSeptember 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission file number:001-36011

Phillips 66 Partners LP
(Exact name of registrant as specified in its charter)
 
Delaware38-3899432
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2331 CityWest Blvd., Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
(855) 283-9237
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Units, Representing Limited Partner InterestsPSXPNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes     No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  
The registrant had 228,340,146 common units outstanding as of JuneSeptember 30, 2020.


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PHILLIPS 66 PARTNERS LP

TABLE OF CONTENTS
 

Page


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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
 

Consolidated Statement of IncomePhillips 66 Partners LP
Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
Revenues and Other IncomeRevenues and Other IncomeRevenues and Other Income
Operating revenues—related partiesOperating revenues—related parties$236  256  494  552  Operating revenues—related parties$256 262 750 814 
Operating revenues—third partiesOperating revenues—third parties  14  13  Operating revenues—third parties9 23 21 
Equity in earnings of affiliatesEquity in earnings of affiliates104  137  240  256  Equity in earnings of affiliates129 139 369 395 
Gain from equity interest transferGain from equity interest transfer84  —  84  —  Gain from equity interest transfer0 84 
Other incomeOther income    Other income0 2 
Total revenues and other incomeTotal revenues and other income430  401  834  824  Total revenues and other income394 411 1,228 1,235 
Costs and ExpensesCosts and ExpensesCosts and Expenses
Operating and maintenance expensesOperating and maintenance expenses84  85  172  224  Operating and maintenance expenses85 91 257 315 
DepreciationDepreciation31  29  61  58  Depreciation35 30 96 88 
General and administrative expensesGeneral and administrative expenses17  17  34  35  General and administrative expenses16 16 50 51 
Taxes other than income taxesTaxes other than income taxes10   21  20  Taxes other than income taxes9 10 30 30 
Interest and debt expenseInterest and debt expense28  27  57  54  Interest and debt expense32 26 89 80 
Other expensesOther expenses —   —  Other expenses0 7 
Total costs and expensesTotal costs and expenses175  167  352  391  Total costs and expenses177 173 529 564 
Income before income taxesIncome before income taxes255  234  482  433  Income before income taxes217 238 699 671 
Income tax expenseIncome tax expense—     Income tax expense1 2 
Net income255  233  481  431  
Net IncomeNet Income216 237 697 668 
Less: Net income attributable to noncontrolling interestLess: Net income attributable to noncontrolling interest10 10 
Net Income Attributable to the PartnershipNet Income Attributable to the Partnership206 237687 668 
Less: Preferred unitholders’ interest in net income attributable to the PartnershipLess: Preferred unitholders’ interest in net income attributable to the Partnership10 29 28 
Less: General partner’s interest in net income attributable to the PartnershipLess: General partner’s interest in net income attributable to the Partnership0 0 140 
Limited Partners’ Interest in Net Income Attributable to the PartnershipLimited Partners’ Interest in Net Income Attributable to the Partnership$196 228 658 500 
Less: Preferred unitholders’ interest in net income  19  19  
Less: General partner’s interest in net income—  71  —  140  
Limited partners’ interest in net income$246  153  462  272  
Net Income Per Limited Partner Unit (dollars)
Net Income Attributable to the Partnership Per Limited Partner Unit (dollars)
Net Income Attributable to the Partnership Per Limited Partner Unit (dollars)
Common units—basicCommon units—basic$1.07  1.23  2.02  2.19  Common units—basic$0.86 1.18 2.88 3.39 
Common units—dilutedCommon units—diluted1.05  1.15  1.99  2.07  Common units—diluted0.85 1.15 2.84 3.25 
Weighted-Average Limited Partner Units Outstanding (thousands)
Weighted-Average Limited Partner Units Outstanding (thousands)
Weighted-Average Limited Partner Units Outstanding (thousands)
Common units—basicCommon units—basic228,340  124,824  228,326  124,543  Common units—basic228,340 192,274 228,331 147,368 
Common units—dilutedCommon units—diluted242,160  138,644  242,146  138,362  Common units—diluted242,160 206,093 242,151 161,187 
See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.
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Consolidated Statement of Comprehensive IncomePhillips 66 Partners LP

Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
Net IncomeNet Income$255  233  481  431  Net Income$216 237 697 668 
Defined benefit plansDefined benefit plansDefined benefit plans
Plan sponsored by equity affiliates, net of income taxesPlan sponsored by equity affiliates, net of income taxes—  —  —  —  Plan sponsored by equity affiliates, net of income taxes0 0 
Other comprehensive incomeOther comprehensive income—  —  —  —  Other comprehensive income0 0 
Comprehensive IncomeComprehensive Income$255  233  481  431  Comprehensive Income216237697 668 
Less: Comprehensive income attributable to noncontrolling interestLess: Comprehensive income attributable to noncontrolling interest1010 
Comprehensive Income Attributable to the PartnershipComprehensive Income Attributable to the Partnership$206 237 687 668 
See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.
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Consolidated Balance SheetPhillips 66 Partners LP
 
Millions of DollarsMillions of Dollars
June 30
2020
December 31
2019
September 30
2020
December 31
2019
AssetsAssetsAssets
Cash and cash equivalentsCash and cash equivalents$ 286  Cash and cash equivalents$2 286 
Accounts receivable—related partiesAccounts receivable—related parties93  101  Accounts receivable—related parties85 101 
Accounts receivable—third partiesAccounts receivable—third parties  Accounts receivable—third parties3 
Materials and suppliesMaterials and supplies14  13  Materials and supplies14 13 
Prepaid expenses and other current assetsPrepaid expenses and other current assets10  10  Prepaid expenses and other current assets7 10 
Total current assetsTotal current assets128  414  Total current assets111 414 
Equity investmentsEquity investments3,340  2,961  Equity investments3,373 2,961 
Net properties, plants and equipmentNet properties, plants and equipment3,500  3,349  Net properties, plants and equipment3,575 3,349 
GoodwillGoodwill185  185  Goodwill185 185 
Other assetsOther assets50  52  Other assets50 52 
Total AssetsTotal Assets$7,203  6,961  Total Assets$7,294 6,961 
LiabilitiesLiabilitiesLiabilities
Accounts payable—related partiesAccounts payable—related parties$18  19  Accounts payable—related parties$17 19 
Accounts payable—third partiesAccounts payable—third parties88  84  Accounts payable—third parties104 84 
Accrued interestAccrued interest34  42  Accrued interest39 42 
Deferred revenuesDeferred revenues24  16  Deferred revenues22 16 
Short-term debtShort-term debt265  25  Short-term debt340 25 
Accrued property and other taxesAccrued property and other taxes22  10  Accrued property and other taxes28 10 
Other current liabilitiesOther current liabilities  Other current liabilities3 
Total current liabilitiesTotal current liabilities455  199  Total current liabilities553 199 
Long-term debtLong-term debt3,442  3,491  Long-term debt3,443 3,491 
Obligation from equity interest transferObligation from equity interest transfer—  343  Obligation from equity interest transfer0 343 
Other liabilitiesOther liabilities93  94  Other liabilities91 94 
Total LiabilitiesTotal Liabilities3,990  4,127  Total Liabilities4,087 4,127 
EquityEquityEquity
Preferred unitholders (2020 and 2019—13,819,791 units issued and outstanding)Preferred unitholders (2020 and 2019—13,819,791 units issued and outstanding)746  746  Preferred unitholders (2020 and 2019—13,819,791 units issued and outstanding)747 746 
Common unitholders—public (2020—58,580,009 units issued and outstanding;
2019—58,539,439 units issued and outstanding)
Common unitholders—public (2020—58,580,009 units issued and outstanding;
2019—58,539,439 units issued and outstanding)
2,735  2,717  
Common unitholders—public (2020—58,580,009 units issued and outstanding;
2019—58,539,439 units issued and outstanding)
2,734 2,717 
Common unitholder—Phillips 66 (2020 and 2019—169,760,137 units issued and outstanding)Common unitholder—Phillips 66 (2020 and 2019—169,760,137 units issued and outstanding)(572) (628) Common unitholder—Phillips 66 (2020 and 2019—169,760,137 units issued and outstanding)(578)(628)
Accumulated other comprehensive lossAccumulated other comprehensive loss(1) (1) Accumulated other comprehensive loss(1)(1)
Total unitholders’ equityTotal unitholders’ equity2,908  2,834  Total unitholders’ equity2,902 2,834 
Noncontrolling interestNoncontrolling interest305  —  Noncontrolling interest305 
Total EquityTotal Equity3,213  2,834  Total Equity3,207 2,834 
Total Liabilities and EquityTotal Liabilities and Equity$7,203  6,961  Total Liabilities and Equity$7,294 6,961 
See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.
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Consolidated Statement of Cash FlowsPhillips 66 Partners LP



Millions of Dollars

Millions of Dollars


Six Months Ended
June 30

Nine Months Ended
September 30


2020  2019  

2020 2019 
Cash Flows From Operating ActivitiesCash Flows From Operating Activities


Cash Flows From Operating Activities


Net incomeNet income$481  431  Net income$697 668 
Adjustments to reconcile net income to net cash provided by operating activitiesAdjustments to reconcile net income to net cash provided by operating activities


Adjustments to reconcile net income to net cash provided by operating activities


DepreciationDepreciation61  58  Depreciation96 88 
Undistributed equity earningsUndistributed equity earnings  Undistributed equity earnings9 
Gain from equity interest transferGain from equity interest transfer(84) —  Gain from equity interest transfer(84)
OtherOther 12  Other7 
Working capital adjustmentsWorking capital adjustments


Working capital adjustments


Accounts receivableAccounts receivable  Accounts receivable17 (7)
Materials and suppliesMaterials and supplies(1)
Prepaid expenses and other current assetsPrepaid expenses and other current assets—  12  Prepaid expenses and other current assets3 15 
Accounts payableAccounts payable(7) (3) Accounts payable20 
Accrued interestAccrued interest(7) —  Accrued interest(3)(3)
Deferred revenuesDeferred revenues (46) Deferred revenues6 (44)
Other accrualsOther accruals13   Other accruals18 18 
Net Cash Provided by Operating ActivitiesNet Cash Provided by Operating Activities489  481  Net Cash Provided by Operating Activities785 757 




Cash Flows From Investing ActivitiesCash Flows From Investing Activities


Cash Flows From Investing Activities


Cash capital expenditures and investmentsCash capital expenditures and investments(601) (759) Cash capital expenditures and investments(796)(924)
Advances/loans—related partyAdvances/loans—related party—  (95) Advances/loans—related party0 (95)
Collection of advances/loans—related partyCollection of advances/loans—related party—  95  Collection of advances/loans—related party0 95 
Liberty acquisitionLiberty acquisition(75) —  Liberty acquisition(75)
Return of investment from equity affiliatesReturn of investment from equity affiliates86  35  Return of investment from equity affiliates124 52 
Proceeds from sale of equity interestProceeds from sale of equity interest—  81  Proceeds from sale of equity interest0 81 
Net Cash Used in Investing ActivitiesNet Cash Used in Investing Activities(590) (643) Net Cash Used in Investing Activities(747)(791)




Cash Flows From Financing ActivitiesCash Flows From Financing Activities


Cash Flows From Financing Activities


Net proceeds from equity interest transfer40  341  
Issuance of debtIssuance of debt215  860  Issuance of debt290 1,758 
Repayment of debtRepayment of debt(25) (585) Repayment of debt(25)(985)
Issuance of common unitsIssuance of common units 42  Issuance of common units2 133 
Debt issuance costsDebt issuance costs0 (6)
Quarterly distributions to preferred unitholdersQuarterly distributions to preferred unitholders(19) (19) Quarterly distributions to preferred unitholders(28)(28)
Quarterly distributions to common unitholders—publicQuarterly distributions to common unitholders—public(102) (93) Quarterly distributions to common unitholders—public(153)(142)
Quarterly distributions to common unitholder—Phillips 66Quarterly distributions to common unitholder—Phillips 66(297) (116) Quarterly distributions to common unitholder—Phillips 66(446)(174)
Quarterly distributions to General Partner—Phillips 66Quarterly distributions to General Partner—Phillips 66—  (136) Quarterly distributions to General Partner—Phillips 660 (206)
Net proceeds from equity interest transferNet proceeds from equity interest transfer40 341 
Proceeds from noncontrolling interestProceeds from noncontrolling interest3 
Distributions to noncontrolling interestDistributions to noncontrolling interest(13)
Other distributions from (to) Phillips 66Other distributions from (to) Phillips 66 (3) Other distributions from (to) Phillips 668 (3)
Net Cash Provided by (Used in) Financing ActivitiesNet Cash Provided by (Used in) Financing Activities(178) 291  Net Cash Provided by (Used in) Financing Activities(322)688 




Net Change in Cash and Cash EquivalentsNet Change in Cash and Cash Equivalents(279) 129  Net Change in Cash and Cash Equivalents(284)654 
Cash and cash equivalents at beginning of periodCash and cash equivalents at beginning of period286   Cash and cash equivalents at beginning of period286 
Cash and Cash Equivalents at End of PeriodCash and Cash Equivalents at End of Period$ 130  Cash and Cash Equivalents at End of Period$2 655 
See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.
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Consolidated Statement of Changes in EquityPhillips 66 Partners LP
Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Three Months Ended
September 30
Preferred
Unitholders
Public
Common
Unitholders
Public
Common
Unitholder
Phillips 66
General
Partner
Phillips 66
Accum. Other
Comprehensive
Loss
Noncontrolling InterestTotalPreferred
Unitholders
Public
Common
Unitholders
Public
Common
Unitholder
Phillips 66
General
Partner
Phillips 66
Accum. Other
Comprehensive
Loss
Noncontrolling
Interest
Total
March 31, 2020$747  2,723  (616) —  (1) —  2,853  
June 30, 2020June 30, 2020$746 2,735 (572)(1)305 3,213 
Net incomeNet income 63  183  —  —  —  255  Net income10 50 146   10 216 
Quarterly cash distributions to unitholders ($0.875 per common unit)Quarterly cash distributions to unitholders ($0.875 per common unit)(10) (51) (148) —  —  —  (209) Quarterly cash distributions to unitholders ($0.875 per common unit)(9)(51)(149)   (209)
Transfer of equity interest—  —  —  —  —  305  305  
Other contributions from Phillips 66—  —   —  —  —   
June 30, 2020$746  2,735  (572) —  (1) 305  3,213  
March 31, 2019$747  2,523  600  (1,315) (1) —  2,554  
Proceeds from noncontrolling interestProceeds from noncontrolling interest     3 3 
Distributions to noncontrolling interestDistributions to noncontrolling interest     (13)(13)
Other distributions to Phillips 66Other distributions to Phillips 66  (3)   (3)
September 30, 2020September 30, 2020$747 2,734 (578)0 (1)305 3,207 
June 30, 2019June 30, 2019$746 2,555 626 (1,310)(1)2,616 
Issuance of common unitsIssuance of common units—  10  —  —  —  —  10  Issuance of common units— 91 — — — — 91 
Net incomeNet income 69  84  71  —  —  233  Net income67 161 — — — 237 
Quarterly cash distributions to unitholders and General Partner ($0.845 per common unit)(10) (47) (58) (69) —  —  (184) 
Other contributions from Phillips 66—  —  —   —  —   
June 30, 2019$746  2,555  626  (1,310) (1) —  2,616  
Quarterly cash distributions to unitholders and General Partner ($0.855 per common unit)Quarterly cash distributions to unitholders and General Partner ($0.855 per common unit)(9)(49)(58)(70)— — (186)
Conversion of GP economic interestConversion of GP economic interest— — (1,384)1,381 — — (3)
Other distributions to Phillips 66Other distributions to Phillips 66— — — (1)— — (1)
September 30, 2019September 30, 2019$746 2,664 (655)(1)2,754 

UnitsUnits
Three Months Ended
June 30
Three Months Ended
September 30
Preferred Units
Public
Common Units
Public
Common Units
Phillips 66
General Partner
Units
Phillips 66
Total UnitsPreferred Units
Public
Common Units
Public
Common Units
Phillips 66
General Partner
Units
Phillips 66
Total Units
March 31, 202013,819,791  58,580,009  169,760,137  —  242,159,937  
June 30, 2020June 30, 202013,819,791 58,580,009 169,760,137 242,159,937 
Units issued in public equity offeringsUnits issued in public equity offerings—  —  —  —  —  Units issued in public equity offerings 0   0 
June 30, 202013,819,791  58,580,009  169,760,137  —  242,159,937  
September 30, 2020September 30, 202013,819,791 58,580,009 169,760,137 0 242,159,937 
March 31, 201913,819,791  55,965,950  68,760,137  2,480,051  141,025,929  
June 30, 2019June 30, 201913,819,791 56,178,286 68,760,137 2,480,051 141,238,265 
Units issued in public equity offeringsUnits issued in public equity offerings—  212,336  —  —  212,336  Units issued in public equity offerings— 1,635,669 — — 1,635,669 
June 30, 201913,819,791  56,178,286  68,760,137  2,480,051  141,238,265  
Units issued in conversion of GP economic interestUnits issued in conversion of GP economic interest— — 101,000,000 (2,480,051)98,519,949 
September 30, 2019September 30, 201913,819,791 57,813,955 169,760,137 241,393,883 
See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.



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Consolidated Statement of Changes in EquityPhillips 66 Partners LP
Millions of DollarsMillions of Dollars
Six Months Ended
June 30
Nine Months Ended
September 30
Preferred
Unitholders
Public
Common
Unitholders
Public
Common
Unitholder
Phillips 66
General
Partner
Phillips 66
Accum. Other
Comprehensive
Loss
Noncontrolling InterestTotalPreferred
Unitholders
Public
Common
Unitholders
Public
Common
Unitholder
Phillips 66
General
Partner
Phillips 66
Accum. Other
Comprehensive
Loss
Noncontrolling
Interest
Total
December 31, 2019December 31, 2019$746  2,717  (628) —  (1) —  2,834  December 31, 2019$746 2,717 (628)(1)2,834 
Issuance of common unitsIssuance of common units—   —  —  —  —   Issuance of common units 2     2 
Net incomeNet income19  118  344  —  —  —  481  Net income29 168 490   10 697 
Quarterly cash distributions to unitholders ($0.875 per common unit)(19) (102) (297) —  —  —  (418) 
Quarterly cash distributions to unitholders ($2.625 per common unit)Quarterly cash distributions to unitholders ($2.625 per common unit)(28)(153)(446)   (627)
Transfer of equity interestTransfer of equity interest—  —  —  —  —  305  305  Transfer of equity interest     305 305 
Proceeds from noncontrolling interestProceeds from noncontrolling interest     3 3 
Distributions to noncontrolling interestDistributions to noncontrolling interest     (13)(13)
Other contributions from Phillips 66Other contributions from Phillips 66—  —   —  —  —   Other contributions from Phillips 66  6    6 
June 30, 2020$746  2,735  (572) —  (1) 305  3,213  
September 30, 2020September 30, 2020$747 2,734 (578) (1)305 3,207 
December 31, 2018December 31, 2018$746  2,485  592  (1,313) (1) —  2,509  December 31, 2018$746 2,485 592 (1,313)(1)2,509 
Cumulative effect of accounting changeCumulative effect of accounting change—  (1) —  —  —  —  (1) Cumulative effect of accounting change— (1)— — — — (1)
Issuance of common unitsIssuance of common units—  42  —  —  —  —  42  Issuance of common units— 133 — — — — 133 
Net incomeNet income19  122  150  140  —  —  431  Net income28 189 311 140 — — 668 
Quarterly cash distributions to unitholders and General Partner ($1.680 per common unit)(19) (93) (116) (136) —  —  (364) 
Quarterly cash distributions to unitholders and General Partner ($2.535 per common unit)Quarterly cash distributions to unitholders and General Partner ($2.535 per common unit)(28)(142)(174)(206)— — (550)
Conversion of GP economic interestConversion of GP economic interest— — (1,384)1,381 — — (3)
Other distributions to Phillips 66Other distributions to Phillips 66—  —  —  (1) —  —  (1) Other distributions to Phillips 66— — — (2)— — (2)
June 30, 2019$746  2,555  626  (1,310) (1) —  2,616  
September 30, 2019September 30, 2019$746 2,664 (655)(1)2,754 


UnitsUnits
Six Months Ended
June 30
Nine Months Ended
September 30
Preferred Units
Public
Common Units
Public
Common Units
Phillips 66
General Partner
Units
Phillips 66
Total UnitsPreferred Units
Public
Common Units
Public
Common Units
Phillips 66
General Partner
Units
Phillips 66
Total Units
December 31, 2019December 31, 201913,819,791  58,539,439  169,760,137  —  242,119,367  December 31, 201913,819,791 58,539,439 169,760,137 242,119,367 
Units issued in public equity offeringsUnits issued in public equity offerings—  40,570  —  —  40,570  Units issued in public equity offerings 40,570   40,570 
June 30, 202013,819,791  58,580,009  169,760,137  —  242,159,937  
September 30, 2020September 30, 202013,819,791 58,580,009 169,760,137 0 242,159,937 
December 31, 2018December 31, 201813,819,791  55,343,918  68,760,137  2,480,051  140,403,897  December 31, 201813,819,791 55,343,918 68,760,137 2,480,051 140,403,897 
Units issued in public equity offeringsUnits issued in public equity offerings—  834,368  —  —  834,368  Units issued in public equity offerings— 2,470,037 — — 2,470,037 
June 30, 201913,819,791  56,178,286  68,760,137  2,480,051  141,238,265  
Units issued in conversion of GP economic interestUnits issued in conversion of GP economic interest— — 101,000,000 (2,480,051)98,519,949 
September 30, 2019September 30, 201913,819,791 57,813,955 169,760,137 241,393,883 
See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial StatementsPhillips 66 Partners LP
 
Note 1—Description of the Business
Unless otherwise stated or the context otherwise indicates, all references to “Phillips 66 Partners,” “the Partnership,” “us,” “our,” “we,” or similar expressions refer to Phillips 66 Partners LP, including its consolidated subsidiaries. References to Phillips 66 may refer to Phillips 66 and/or its subsidiaries, depending on the context. References to our “General Partner” or “GP” refer to Phillips 66 Partners GP LLC, and references to “Phillips 66 PDI” refer to Phillips 66 Project Development Inc., the Phillips 66 subsidiary that holds a limited partner interest in us and wholly owns our General Partner.

We are a growth-oriented master limited partnership formed to own, operate, develop and acquire primarily fee-based midstream assets. Our operations consist of crude oil, refined petroleum products and natural gas liquids (NGL) transportation, terminaling, processing and storage assets. We conduct our operations through both wholly owned and joint venture operations. The majority of our wholly owned assets are associated with, and are integral to the operation of, 9 of Phillips 66’s owned or joint venture refineries. Our operations consist of 1 reportable segment.

We primarily generate revenue by providing fee-based transportation, terminaling, processing, storage and fractionation services to Phillips 66 and other customers. Our equity affiliates primarily generate revenue from transporting and terminaling crude oil, refined petroleum products and NGL. Since we do not own any of the crude oil, refined petroleum products and NGL we handle and do not engage in the trading of those commodities, we have limited direct exposure to risks associated with fluctuating commodity prices, although these risks indirectly influence our activities and results of operations over the long term.


Note 2—Interim Financial Information

The unaudited interim financial information presented in the financial statements included in this report is prepared in accordance with generally accepted accounting principles in the United States (GAAP) and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of our financial position, results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our 2019 Annual Report on Form 10-K. The results of operations for the three and sixnine months ended JuneSeptember 30, 2020, are not necessarily indicative of the results to be expected for the full year.

The Coronavirus Disease 2019 (COVID-19) pandemic continues to result in economic disruption globally. Reduced demand for petroleum products has resulted in decreased volumes through logistics infrastructure. The depth and duration of the economic consequences of the COVID-19 pandemic remain unknown. We continue to assess our long-lived assets and equity investments for impairment in this challenging business environment. Impairments may be required in the future if there is a further deterioration in our projected cash flows.


Note 3—Operating Revenues

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





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Total operating revenues disaggregated by asset type were as follows:
Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
PipelinesPipelines$97  117  208  226  Pipelines$117121325347
TerminalsTerminals33  39  76  79  Terminals3641112120
Storage, processing and other revenuesStorage, processing and other revenues111  107  224  260  Storage, processing and other revenues112108336368
Total operating revenuesTotal operating revenues$241  263  508  565  Total operating revenues$265270773835


The majority of our agreements with Phillips 66 are considered operating leases under GAAP. The lease’s classification of a lease as either an operating or a financing lease requires judgment in assessing the contract’s lease and service components and in determining the asset’s fair value. We have elected to account for lease and service elements of contracts classified as leases on a combined basis, except for leases of processing-type assets, which contain non-ratable fees related to turnaround activity. For these types of leases, we continue to separate the lease and service elements based on relative standalone prices and apply the lease standard to the lease element and the revenue standard to the service element.
Total operating revenues disaggregated by lease and service revenues were as follows:
Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
Lease revenuesLease revenues$195  214  413  471  Lease revenues$209 217 622 688 
Service revenuesService revenues46  49  95  94  Service revenues56 53 151 147 
Total operating revenuesTotal operating revenues$241  263  508  565  Total operating revenues$265 270 773 835 


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

Total accounts receivable by revenue type was as follows:

Millions of Dollars
June 30
2020
December 31
2019
Lease receivables$76  87  
Service receivables21  18  
Total accounts receivable$97  105  






Millions of Dollars
September 30
2020
December 31
2019
Lease receivables$69 87 
Service receivables19 18 
Total accounts receivable$88 105 


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Deferred Revenues
Our deferred revenues represent payments received from our customers, mainly Phillips 66, in advance of the period in which lease and service contract performance obligations have been fulfilled. The majority of our deferred revenues relate to a tolling agreement and a storage agreement that are classified as leases. The remainder of our deferred revenues relate to lease and service agreements that contain minimum volume commitments with recovery provisions. Our deferred revenues are recorded in the “Deferred revenues” and “Other liabilities” line items on our consolidated balance sheet.
Total deferred revenues under our lease and service agreements were as follows:
Millions of DollarsMillions of Dollars
June 30
2020
December 31
2019
September 30
2020
December 31
2019
Deferred lease revenuesDeferred lease revenues$44  41  Deferred lease revenues$41 41 
Deferred service revenuesDeferred service revenues  Deferred service revenues3 
Total deferred revenuesTotal deferred revenues$47  42  Total deferred revenues$44 42 


Future Minimum Lease Payments from Customers
At JuneSeptember 30, 2020, future minimum payments to be received under our lease agreements with customers were estimated to be:
Millions
of Dollars
Millions
of Dollars
Remainder of 2020Remainder of 2020$354  Remainder of 2020$178 
20212021702  2021706 
20222022690  2022694 
20232023646  2023648 
20242024525  2024526 
Remaining yearsRemaining years1,389  Remaining years1,389 
Total future minimum lease payments from customersTotal future minimum lease payments from customers$4,306  Total future minimum lease payments from customers$4,141 


Remaining Performance Obligations
We typically have long-term service contracts with our customers, of which the original durations range from 5 to 15 years. The weighted-average remaining duration of these contracts is 1110 years. These contracts include both fixed and variable transaction price components. At JuneSeptember 30, 2020, future service revenues expected to be recognized for the fixed component of the transaction price of our remaining performance obligations from service contracts with our customers that have an original expected duration of greater than one year were:

Millions
of Dollars
Millions
of Dollars
Remainder of 2020Remainder of 2020$80  Remainder of 2020$39 
20212021152  2021152 
20222022152  2022151 
20232023152  2023151 
20242024132  2024132 
Remaining yearsRemaining years756  Remaining years756 
Total future service revenuesTotal future service revenues$1,424  Total future service revenues$1,381 

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


Note 4—Equity Investments

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

Millions of DollarsMillions of Dollars
Percentage OwnershipJune 30
2020
December 31
2019
Percentage
Ownership
September 30
2020
December 31
2019
Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (Bakken Pipeline)Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (Bakken Pipeline)25.00 %$588  592  Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (Bakken Pipeline)25.00 %$578 592 
Bayou Bridge Pipeline, LLC (Bayou Bridge)Bayou Bridge Pipeline, LLC (Bayou Bridge)40.00  293  294  Bayou Bridge Pipeline, LLC (Bayou Bridge)40.00 292 294 
DCP Sand Hills Pipeline, LLC (Sand Hills)DCP Sand Hills Pipeline, LLC (Sand Hills)33.34  595  595  DCP Sand Hills Pipeline, LLC (Sand Hills)33.34 586 595 
DCP Southern Hills Pipeline, LLC (Southern Hills)DCP Southern Hills Pipeline, LLC (Southern Hills)33.34  218  215  DCP Southern Hills Pipeline, LLC (Southern Hills)33.34 215 215 
Explorer Pipeline Company (Explorer)Explorer Pipeline Company (Explorer)21.94  100  105  Explorer Pipeline Company (Explorer)21.94 98 105 
Gray Oak Pipeline, LLCGray Oak Pipeline, LLC65.00  896  759  Gray Oak Pipeline, LLC65.00 896 759 
Liberty Pipeline LLC (Liberty)Liberty Pipeline LLC (Liberty)50.00  202  —  Liberty Pipeline LLC (Liberty)50.00 239 
Paradigm Pipeline LLC (Paradigm)Paradigm Pipeline LLC (Paradigm)50.00  142  143  Paradigm Pipeline LLC (Paradigm)50.00 141 143 
Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal)Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal)70.00  66  70  Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal)70.00 66 70 
South Texas Gateway Terminal LLC (South Texas Gateway Terminal)South Texas Gateway Terminal LLC (South Texas Gateway Terminal)25.00  129  74  South Texas Gateway Terminal LLC (South Texas Gateway Terminal)25.00 152 74 
STACK Pipeline LLC (STACK)STACK Pipeline LLC (STACK)50.00  111  114  STACK Pipeline LLC (STACK)50.00 110 114 
Total equity investmentsTotal equity investments$3,340  2,961  Total equity investments$3,373 2,961 


Earnings from our equity investments were as follows:

Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
Bakken PipelineBakken Pipeline$30  58  87  109  Bakken Pipeline$37 58 124 167 
Bayou BridgeBayou Bridge  17  12  Bayou Bridge6 23 21 
Sand HillsSand Hills37  38  78  74  Sand Hills33 39 111 113 
Southern HillsSouthern Hills10  11  21  24  Southern Hills11 10 32 34 
ExplorerExplorer 11  11  14  Explorer6 12 17 26 
Gray Oak Pipeline, LLCGray Oak Pipeline, LLC14  —  19  —  Gray Oak Pipeline, LLC30 (2)49 (2)
LibertyLiberty—  —  —  —  Liberty0 0 
ParadigmParadigm    Paradigm4 10 10 
Phillips 66 Partners TerminalPhillips 66 Partners Terminal(1)  (1) 12  Phillips 66 Partners Terminal(1)(2)18 
South Texas Gateway TerminalSouth Texas Gateway Terminal—  —  —  —  South Texas Gateway Terminal2 2 
STACKSTACK    STACK1 3 
Total equity in earnings of affiliatesTotal equity in earnings of affiliates$104  137  240  256  Total equity in earnings of affiliates$129 139 369 395 


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Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of $2.5 billion aggregate principal amount of senior unsecured senior notes, consisting of:

$650 million aggregate principal amount of 3.625% Senior Notes due 2022.
$1.0 billion aggregate principal amount of 3.900% Senior Notes due 2024.
$850 million aggregate principal amount of 4.625% Senior Notes due 2029.

Dakota Access and ETCO have guaranteed repayment of the notes.  In addition, we and our co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering.  Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the ongoing litigation related to an easement granted by the U.S. Army Corps of Engineers (USACE) to allow the pipeline to be constructed under Lake Oahe in North Dakota. Contributions may be required if Dakota Access determines that the issues included in any such final judgment cannot be remediated and Dakota Access has or is projected to have insufficient funds to satisfy repayment of the notes. If Dakota Access undertakes remediation to cure issues raised in a final judgment, contributions may be required if any series of the notes become due, whether by acceleration or at maturity, during such time, to the extent Dakota Access has or is projected to have insufficient funds to pay such amounts. At JuneSeptember 30, 2020, our share of the maximum potential equity contributions under the CECU was approximately $631 million.

In March 2020, the trial court presiding over this litigation ordered the USACE to prepare an Environmental Impact Statement (EIS), and requested additional information to enable a decision on whether the Dakota Access Pipeline should be shut down while the EIS is being prepared. On July 6, 2020, the trial court ordered the Dakota Access Pipeline to be shut down and emptied of crude oil by August 5, 2020,within 30 days, and that the pipeline should remain shut down pending the preparation of the EIS by the USACE, which the USACE has indicated is expected to take approximately 13 months. Dakota Access filed an appeal and a request for a stay of the order. On July 14, 2020,order, which was granted. The case is now on an appeals court granted a temporary stay of the lower court’s order directingexpedited appellate track and oral arguments regarding whether the pipeline to be shut downeasement is valid and emptied of crude oil. The appeals court has not yet ruled onwhether the motionUSACE must prepare an EIS are set for early November 2020, with a stay during the appeals process.decision expected in late 2020 or early 2021. In addition to the potential obligations underproceedings in the CECU, ifappellate court, the trial court has been asked to issue an injunction to shut down the pipeline until the USACE completes the EIS, which could be ruled on as early as late December 2020. If the pipeline is required to cease operations pending the preparation of the EIS, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we also could be asked to support our share of the ongoing expenses, including scheduled interest payments on the notes of approximately $25 million annually.annually, in addition to the potential obligations under the CECU.

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

Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
RevenuesRevenues$169  254  427  490  Revenues$196 258 623 748 
Income before income taxesIncome before income taxes94  181  280  338  Income before income taxes121 189 401 527 
Net incomeNet income94  181  280  338  Net income121 189 401 527 


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Gray Oak Pipeline, LLC
Gray Oak Pipeline, LLC was formed to develop and construct the Gray Oak Pipeline, which transports crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi and the Sweeny area, including the Phillips 66 Sweeny Refinery, as well as access to the Houston market. We have a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. In December 2018, a third party exercised its option to acquire a 35% interest in the holding company. Because the holding company’s sole asset was its ownership interest in Gray Oak Pipeline, LLC, which was considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in the holding company during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP at that time. The Gray Oak Pipeline commenced full operations in the
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second quarter of 2020 and the restrictions placed on the co-venturer were lifted on June 30, 2020, resulting in the recognition of the sale under GAAP. Accordingly, at June 30, 2020, the co-venturer’s 35% interest in the holding company was recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet. In addition,sheet, and the premium of $84 million previously paid by the co-venturer in 2019 was recharacterized from a long-term obligation to a gain in our consolidated statement of income forincome. For the three and sixnine months ended June 30, 2020. For the six months ended JuneSeptember 30, 2020, the co-venturer contributed an aggregate of $61$64 million to the holding company to fund its portion of Gray Oak Pipeline, LLC’s cash calls. Excluding the co-venturer’s 35% interest in the consolidated holding company, weWe have an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC.LLC, after considering our co-venturer’s 35% interest in the consolidated holding company.

In September 2020, Gray Oak Pipeline, LLC hasclosed its offering of $1.4 billion aggregate principal amount of senior unsecured notes with maturities ranging from 2023 to 2027. These senior notes are not guaranteed by the Partnership or any of its co-venturers. Net proceeds from the offering were used to repay a third-party term loan facility with a borrowing capacity of $1,379 million, inclusiveand for general company purposes. Concurrent with the full repayment of accrued interest. Borrowings under the third-party term loan facility, are due on June 3, 2022. We and our co-venturers provided athe associated guarantee we issued through an equity contribution agreement requiring proportionate equity contributions to Gray Oak Pipeline, LLC up to the total outstanding loan amount, plus any additional accrued interest and associated fees, if Gray Oak Pipeline, LLC defaults on certain of its obligations thereunder. At June 30, 2020, the term loan facility was fully utilized by Gray Oak Pipeline, LLC and our 42.25% proportionate exposure under the equity contribution agreement was $583 million.terminated.

During its development phase, Gray Oak Pipeline, LLC was considered a variable interest entity (VIE) because it did not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We determined we were not the primary beneficiary because we and our co-venturers jointly directed the activities of Gray Oak Pipeline, LLC that most significantly impact economic performance. The Gray Oak Pipeline commenced full operations in the second quarter of 2020 and ceased being a VIE.

Liberty
In February 2020, we entered into a Purchase and Sale Agreement with Phillips 66 PDI to acquire its 50% interest in the Liberty Pipeline joint venture for $75 million. The purchase price reflected the reimbursement of project costs incurred by Phillips 66 prior to the effective date of the transaction. The transaction was funded through a combination of cash on hand and our revolving credit facility, and closed on March 2, 2020. Liberty was formed to develop and construct the Liberty Pipeline system which, upon completion, will transport crude oil from the Rockies and Bakken production areas to Cushing, Oklahoma. On March 24, 2020, we and our co-venturer announced we are deferring the development and construction of the Liberty Pipeline system as a result of the current challenging business environment.

Liberty is considered a VIE because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of Liberty that most significantly impact economic performance. At JuneSeptember 30, 2020, our maximum exposure to loss was $202$239 million, which represented the aggregate book value of our equity investment in Liberty. At JuneSeptember 30, 2020, Phillips 66 had an outstanding guarantee of $49$13 million to vendors for our proportionate share of the payment of certain purchase obligations of Liberty.


Note 5—Net Income Per Limited Partner Unit

Net income per limited partner unit applicable to common units is computed by dividing the limited partners’ interest in net income by the weighted-average number of common units outstanding for the period. Prior to August 1, 2019, we had more than one class of participating securities and used the two-class method to calculate net income per unit applicable to the limited partners. The classes of participating securities prior to August 1, 2019, included common units, general partner units and incentive distribution rights (IDRs). Effective August 1, 2019, common units are the only participating securities. For the three and sixnine months ended JuneSeptember 30, 2020 and 2019, our preferred units are potentially dilutive securities and were dilutive to net income per limited partner unit.

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Net income earned by the Partnership is allocated between the classes of participating securities in accordance with our partnership agreement, after giving effect to priority income allocations to the holders of the preferred units. First, earnings are allocated based on actual cash distributions declared to our unitholders. To the extent net income exceeds or is less than cash distributions declared, this difference is allocated based on the unitholders’ respective ownership percentages, after consideration of any priority allocations of earnings. For the diluted net income per limited partner unit calculation, the preferred units are assumed to be converted at the beginning of the period into common limited partner units on a one-for-one1-for-one basis, and the distribution formula for available cash in our partnership agreement is recalculated, using the original available cash amount increased only for the preferred distributions which would not have been paid after conversion. 

Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
Net income$255  233  481  431  
Net income attributable to the PartnershipNet income attributable to the Partnership$206 237 687 668 
Less:Less:Less:
General partners’ distributions declared (including IDRs)*General partners’ distributions declared (including IDRs)*—  70  —  139  General partners’ distributions declared (including IDRs)*0 0 139 
Limited partners’ distributions declared on preferred units*Limited partners’ distributions declared on preferred units*  19  19  Limited partners’ distributions declared on preferred units*10 29 28 
Limited partners’ distributions declared on common units*Limited partners’ distributions declared on common units*200  107  399  212  Limited partners’ distributions declared on common units*200 197 599 409 
Distributions less than net income$46  47  63  61  
Distributions less than (more than) net income attributable to the PartnershipDistributions less than (more than) net income attributable to the Partnership$(4)31 59 92 
*Distributions declared are attributable to the indicated periods.
Limited Partners’
Common Units
Limited Partners’
Preferred Units
Total
Three Months Ended June 30, 2020
Net income (millions):
Distributions declared$200   209  
Distributions less than net income46  —  46  
Net income (basic)246   255  
Dilutive effect of preferred units 
Net income (diluted)$255  
Weighted-average units outstanding—basic228,340,146  
Dilutive effect of preferred units13,819,791  
Weighted-average units outstanding—diluted242,159,937  
Net income per limited partner unit—basic (dollars)
$1.07  
Net income per limited partner unit—diluted (dollars)
1.05  


Limited
Partners’
Common
Units
Limited
Partners’
Preferred
Units
Total
Three Months Ended September 30, 2020
Net income attributable to the Partnership (millions):
Distributions declared$200 10 210 
Distributions more than net income attributable to the Partnership(4)0 (4)
Net income attributable to the Partnership (basic)196 10 206 
Dilutive effect of preferred units10 
Net income attributable to the Partnership (diluted)$206 
Weighted-average units outstanding—basic228,340,146 
Dilutive effect of preferred units13,819,791 
Weighted-average units outstanding—diluted242,159,937 
Net income attributable to the Partnership per limited partner unit—basic (dollars)
$0.86 
Net income attributable to the Partnership per limited partner unit—diluted (dollars)
0.85 


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Limited Partners’
Common Units
General Partner
(including IDRs)
Limited Partners’
Preferred Units
Total
Three Months Ended June 30, 2019
Net income (millions):
Distributions declared$107  70   186  
Distributions less than net income46   —  47  
Net income (basic)153  71   233  
Dilutive effect of preferred units* 
Net income (diluted)$159  
Weighted-average units outstanding—basic124,824,010  
Dilutive effect of preferred units*13,819,791  
Weighted-average units outstanding—diluted138,643,801  
Net income per limited partner unit—basic (dollars)
$1.23  
Net income per limited partner unit—diluted (dollars)
1.15  
*The dilutive effect of preferred units assumes the reallocation of net income to the limited and general partners, including a reallocation associated with IDRs, pursuant to the available cash formula in the partnership agreement.
Limited
Partners’
Common
Units
Limited
Partners’
Preferred
Units
Total
Three Months Ended September 30, 2019
Net income attributable to the Partnership (millions):
Distributions declared$197 206 
Distributions less than net income attributable to the Partnership31 31 
Net income attributable to the Partnership (basic)228 237 
Dilutive effect of preferred units
Net income attributable to the Partnership (diluted)$237 
Weighted-average units outstanding—basic192,273,672 
Dilutive effect of preferred units13,819,792 
Weighted-average units outstanding—diluted206,093,464 
Net income attributable to the Partnership per limited partner unit—basic (dollars)
$1.18 
Net income attributable to the Partnership per limited partner unit—diluted (dollars)
1.15 
Limited Partners’
Common Units
Limited Partners’
Preferred Units
Total
Six Months Ended June 30, 2020
Net income (millions):
Distributions declared$399  19  418  
Distributions less than net income63  —  63  
Net income (basic)462  19  481  
Dilutive effect of preferred units19  
Net income (diluted)$481  
Weighted-average units outstanding—basic228,326,203  
Dilutive effect of preferred units13,819,791  
Weighted-average units outstanding—diluted242,145,994  
Net income per limited partner unit—basic (dollars)
$2.02  
Net income per limited partner unit—diluted (dollars)
1.99  


Limited
Partners’
Common
Units
Limited
Partners’
Preferred
Units
Total
Nine Months Ended September 30, 2020
Net income attributable to the Partnership (millions):
Distributions declared$599 29 628 
Distributions less than net income attributable to the Partnership59 0 59 
Net income attributable to the Partnership (basic)658 29 687 
Dilutive effect of preferred units29 
Net income attributable to the Partnership (diluted)$687 
Weighted-average units outstanding—basic228,330,885 
Dilutive effect of preferred units13,819,791 
Weighted-average units outstanding—diluted242,150,676 
Net income attributable to the Partnership per limited partner unit—basic (dollars)
$2.88 
Net income attributable to the Partnership per limited partner unit—diluted (dollars)
2.84 


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Limited Partners’
Common Units
General Partner
(including IDRs)
Limited Partners’
Preferred Units
Total
Six Months Ended June 30, 2019
Net income (millions):
Distributions declared$212  139  19  370  
Distributions less than net income60   —  61  
Net income (basic)272  140  19  431  
Dilutive effect of preferred units*14  
Net income (diluted)$286  
Weighted-average units outstanding—basic124,542,536  
Dilutive effect of preferred units*13,819,791  
Weighted-average units outstanding—diluted138,362,327  
Net income per limited partner unit—basic (dollars)
$2.19  
Net income per limited partner unit—diluted (dollars)
2.07  
*The dilutive effect of preferred units assumes the reallocation of net income to the limited and general partners, including a reallocation associated with IDRs, pursuant to the available cash formula in the partnership agreement.
Limited
Partners’
Common
Units
General
Partner
(including
IDRs)
Limited
Partners’
Preferred
Units
Total
Nine Months Ended September 30, 2019
Net income attributable to the Partnership (millions):
Distributions declared$409 139 28 576 
Distributions less than net income attributable to the Partnership91 92 
Net income attributable to the Partnership (basic)500 140 28 668 
Dilutive effect of preferred units*23 
Net income attributable to the Partnership (diluted)$523 
Weighted-average units outstanding—basic147,367,681 
Dilutive effect of preferred units*13,819,791 
Weighted-average units outstanding—diluted161,187,472 
Net income attributable to the Partnership per limited partner unit—basic (dollars)
$3.39 
Net income attributable to the Partnership per limited partner unit—diluted (dollars)
3.25 
*The dilutive effect of preferred units assumes the reallocation of net income attributable to the partnership to the limited and general partners, including a reallocation associated with IDRs, pursuant to the available cash formula in the partnership agreement.


On July 21,October 20, 2020, the Board of Directors of our General Partner declared a quarterly cash distribution of $0.875 per common unit, which excluding distributions to holders of our preferred units, will result in a total distribution of $200 million attributable to the secondthird quarter of 2020. This distribution is payable on AugustNovember 13, 2020, to common unitholders of record as of July 31,October 30, 2020.


Note 6—Properties, Plants and Equipment

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

Millions of DollarsMillions of Dollars
June 30
2020
December 31
2019
September 30
2020
December 31
2019
LandLand$19  19  Land$1919
Buildings and improvementsBuildings and improvements94  94  Buildings and improvements9594
Pipelines and related assets*
Pipelines and related assets*
1,452  1,424  
Pipelines and related assets*
1,5221,424
Terminals and related assets*
Terminals and related assets*
779  741  
Terminals and related assets*
840741
Rail racks and related assets*
Rail racks and related assets*
137  137  
Rail racks and related assets*
137137
Processing and related assets*
Processing and related assets*
1,059  1,041  
Processing and related assets*
1,0581,041
Caverns and related assets*
Caverns and related assets*
636  585  
Caverns and related assets*
742585
Construction-in-progressConstruction-in-progress444  367  Construction-in-progress312367
Gross PP&EGross PP&E4,620  4,408  Gross PP&E4,7254,408
Accumulated depreciationAccumulated depreciation(1,120) (1,059) Accumulated depreciation(1,150)(1,059)
Net PP&ENet PP&E$3,500  3,349  Net PP&E$3,5753,349
*Assets for which we are the lessor.*Assets for which we are the lessor.*Assets for which we are the lessor.

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Note 7—Debt

Millions of DollarsMillions of Dollars
June 30
2020
December 31
2019
September 30
2020
December 31
2019
2.450% Senior Notes due December 20242.450% Senior Notes due December 2024$300  300  2.450% Senior Notes due December 2024$300 300 
3.605% Senior Notes due February 20253.605% Senior Notes due February 2025500  500  3.605% Senior Notes due February 2025500 500 
3.550% Senior Notes due October 20263.550% Senior Notes due October 2026500  500  3.550% Senior Notes due October 2026500 500 
3.750% Senior Notes due March 20283.750% Senior Notes due March 2028500  500  3.750% Senior Notes due March 2028500 500 
3.150% Senior Notes due December 20293.150% Senior Notes due December 2029600  600  3.150% Senior Notes due December 2029600 600 
4.680% Senior Notes due February 20454.680% Senior Notes due February 2045450  450  4.680% Senior Notes due February 2045450 450 
4.900% Senior Notes due October 20464.900% Senior Notes due October 2046625  625  4.900% Senior Notes due October 2046625 625 
Tax-exempt bonds due April 2020 and April 2021 at 0.550% and 1.850% at June 30, 2020, and December 31, 2019, respectively50  75  
Revolving credit facility due July 2020 at 1.423%215  —  
Tax-exempt bonds due April 2020 and April 2021 at 0.535% and 1.85% at September 30, 2020, and December 31, 2019, respectivelyTax-exempt bonds due April 2020 and April 2021 at 0.535% and 1.85% at September 30, 2020, and December 31, 2019, respectively50 75 
Revolving credit facility borrowings due October 2020 at 1.401%Revolving credit facility borrowings due October 2020 at 1.401%290 
Debt at face valueDebt at face value3,740  3,550  Debt at face value3,815 3,550 
Net unamortized discounts and debt issuance costsNet unamortized discounts and debt issuance costs(33) (34) Net unamortized discounts and debt issuance costs(32)(34)
Total debtTotal debt3,707  3,516  Total debt3,783 3,516 
Short-term debtShort-term debt(265) (25) Short-term debt(340)(25)
Long-term debtLong-term debt$3,442  3,491  Long-term debt$3,443 3,491 


The fair value of our fixed-rate and floating-rate debt is estimated based on observable market prices and is classified inas Level 2 of the fair value hierarchy. The fair value of our fixed-rate debt was $3,685$3,567 million and $3,650 million at JuneSeptember 30, 2020, and December 31, 2019, respectively. The fair value of our floating-rate debt approximated carrying value of $265$340 million and $75 million at JuneSeptember 30, 2020, and December 31, 2019, respectively.

At JuneSeptember 30, 2020, borrowings of $215$290 million were outstanding and $3 million in letters of credit had been drawn under our $750 million revolving credit facility.

On April 1, 2020, we repaid the $25 million tranche of tax-exempt bonds due April 2020. The 2 remaining tranches, totaling $50 million, mature in April 2021.


Note 8—Contingencies

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


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

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

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

Legal Proceedings
Under our amended omnibus agreement, Phillips 66 provides certain services for our benefit, including legal support services, and we pay an operational and administrative support fee for these services. Phillips 66’s legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. The process facilitates the early evaluation and quantification of potential exposures in individual cases and enables tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, Phillips 66’s legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required. As of JuneSeptember 30, 2020, and December 31, 2019, we did not have any material accrued contingent liabilities associated with litigation matters.

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


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Note 9—Equity

ATM Programs
We have authorized an aggregate of $750 million under 3 $250 million continuous offerings of common units, or at-the-market (ATM) programs. The first two programs concluded in June 2018 and December 2019, respectively. We did 0t issue any common units under ourthe current ATM programsprogram during the three months ended JuneSeptember 30, 2020. For the sixnine months ended JuneSeptember 30, 2020, on a settlement date basis, we issued an aggregate of 40,570 common units, under our ATM programs, generating net proceeds of $2 million. For the three and sixnine months ended JuneSeptember 30, 2019, we issued an aggregate of 212,3361,635,669 and 834,3682,470,037 common units, under our ATM programs, respectively, generating net proceeds of $10$91 million and $42$133 million, respectively. Since inception in June 2016 through JuneSeptember 30, 2020, we issued an aggregate of 9,487,055 common units under our ATM programs, and generated net proceeds of $494 million, after broker commissions of $5 million and other costs of $3 million. The net proceeds from sales under the ATM programs are used for general partnership purposes, which may include debt repayment, acquisitions, capital expenditures and additions to working capital.

Restructuring Transaction
On August 1, 2019, we closed on the transactions contemplated by the Partnership Interests Restructuring Agreement, dated July 24, 2019, entered into with our General Partner. Pursuant to this agreement, all of the outstanding IDRs held by our General Partner were eliminated and its approximately 2% general partner interest in us was converted into a non-economic general partner interest; both in exchange for an aggregate of 101 million common units issued to Phillips 66 PDI. Because these transactions were between entities under common control, the common units issued to Phillips 66 PDI were not assigned any value; rather, our General Partner’s negative equity balance of $1.4 billion at August 1, 2019, was transferred to Phillips 66’s limited partner equity account.

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Note 10—Related Party Transactions

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

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

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

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


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

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

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Related Party Transactions
Significant related party transactions included in our total costs and expenses were:

Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
Operating and maintenance expensesOperating and maintenance expenses$42  50  90  155  Operating and maintenance expenses$46 48 136 203 
General and administrative expensesGeneral and administrative expenses21  16  38  33  General and administrative expenses15 14 46 47 
Total$63  66  128  188  


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

Millions of DollarsMillions of Dollars
June 30
2020
December 31
2019
September 30
2020
December 31
2019
Prepaid expenses and other current assetsPrepaid expenses and other current assets$  Prepaid expenses and other current assets$47
Other assetsOther assets48  44  Other assets4844
Deferred revenuesDeferred revenues24  16  Deferred revenues2216
Other current liabilitiesOther current liabilities  Other current liabilities11
Other liabilitiesOther liabilities67  70  Other liabilities6670


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

In June 2019,September 2020, concurrent with the full repayment of a third-party term loan facility by Gray Oak Pipeline, LLC, the associated guarantee we issued a guarantee through an equity contribution agreement for 42.25% of the third-party term loan facility for Gray Oak Pipeline, LLC.was terminated. See Note 4—Equity Investments, for additional information.


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Note 11—Cash Flow Information

Capital Expenditures and Investments
Our capital expenditures and investments consisted of:
Millions of DollarsMillions of Dollars
Six Months Ended
June 30
Nine Months Ended
September 30
2020  2019  2020 2019 
Cash capital expenditures and investmentsCash capital expenditures and investments$601  759  Cash capital expenditures and investments$796 924 
Change in capital expenditure accrualsChange in capital expenditure accruals10  (13) Change in capital expenditure accruals(1)(17)
Total capital expenditures and investmentsTotal capital expenditures and investments$611  746  Total capital expenditures and investments$795 907 


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

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

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


BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW

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

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

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

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

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

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

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

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

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

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

Transaction costs associated with acquisitions.

Certain other noncash items, including expenses indemnified by Phillips 66.

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

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

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

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

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

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

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


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

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

The outbreak of Coronavirus Disease 2019 (COVID-19) and its development into a pandemic continues to result in significant economic disruption globally. Actions taken by governments to prevent the spread of the disease have included travel and business restrictions, which have resulted in substantial decreases in the demand for crude oil and many refined petroleum products, particularly gasoline and jet fuel. The lack of demand for petroleum products has resulted in low crude oil prices and refining margins. As a result, crude oil producers have shut in high cost production and refiners have reduced crude oil processing rates. These actions have reduced throughput volumes on both our and our joint ventures’ assets.

The depth and duration of the economic consequences of the COVID-19 pandemic are currently unknown. However, the near-term outlook for petroleum product demand remains highly uncertain, prices remain volatile, and margins and volumes remain challenged. Our customers, including Phillips 66, may continue to haveexperience adverse economic effects in the near term.term as the depth and duration of the economic consequences of the COVID-19 pandemic remain unknown. We continue to assess our long-lived assets and equity investments for impairment in this challenging business environment. Impairments may be required in the future if there is a further deterioration in our projected cash flows.

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


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RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three and sixnine months ended JuneSeptember 30, 2020, is based on a comparison with the corresponding periods of 2019.

Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
Revenues and Other IncomeRevenues and Other IncomeRevenues and Other Income
Operating revenues—related partiesOperating revenues—related parties$236  256  494  552  Operating revenues—related parties$256 262 750 814 
Operating revenues—third partiesOperating revenues—third parties  14  13  Operating revenues—third parties9 23 21 
Equity in earnings of affiliatesEquity in earnings of affiliates104  137  240  256  Equity in earnings of affiliates129 139 369 395 
Gain from equity interest transferGain from equity interest transfer84  —  84  —  Gain from equity interest transfer — 84 — 
Other incomeOther income    Other income 2 
Total revenues and other incomeTotal revenues and other income430  401  834  824  Total revenues and other income394 411 1,228 1,235 
Costs and ExpensesCosts and ExpensesCosts and Expenses
Operating and maintenance expensesOperating and maintenance expenses84  85  172  224  Operating and maintenance expenses85 91 257 315 
DepreciationDepreciation31  29  61  58  Depreciation35 30 96 88 
General and administrative expensesGeneral and administrative expenses17  17  34  35  General and administrative expenses16 16 50 51 
Taxes other than income taxesTaxes other than income taxes10   21  20  Taxes other than income taxes9 10 30 30 
Interest and debt expenseInterest and debt expense28  27  57  54  Interest and debt expense32 26 89 80 
Other expensesOther expenses —   —  Other expenses — 7 — 
Total costs and expensesTotal costs and expenses175  167  352  391  Total costs and expenses177 173 529 564 
Income before income taxesIncome before income taxes255  234  482  433  Income before income taxes217 238 699 671 
Income tax expenseIncome tax expense—     Income tax expense1 2 
Net income255  233  481  431  
Net IncomeNet Income216 237 697 668 
Less: Net income attributable to noncontrolling interestLess: Net income attributable to noncontrolling interest10 — 10 — 
Net Income Attributable to the PartnershipNet Income Attributable to the Partnership206 237 687 668 
Less: Preferred unitholders’ interest in net income attributable to the PartnershipLess: Preferred unitholders’ interest in net income attributable to the Partnership10 29 28 
Less: General partner’s interest in net income attributable to the PartnershipLess: General partner’s interest in net income attributable to the Partnership —  140 
Limited Partners’ Interest in Net Income Attributable to the PartnershipLimited Partners’ Interest in Net Income Attributable to the Partnership$196 228 658 500 
Less: Preferred unitholders’ interest in net income  19  19  
Less: General partner’s interest in net income—  71  —  140  
Limited partners’ interest in net income$246  153  462  272  
Net cash provided by operating activities$215  276  489  481  
Net Cash Provided by Operating ActivitiesNet Cash Provided by Operating Activities$296 276 785 757 
Adjusted EBITDAAdjusted EBITDA$269  319  590  600  Adjusted EBITDA$313 323 903 923 
Distributable cash flow$218  254  487  480  
Distributable Cash FlowDistributable Cash Flow$243 255 730 735 
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Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
Wholly Owned Operating DataWholly Owned Operating DataWholly Owned Operating Data
PipelinesPipelinesPipelines
Pipeline revenues (millions of dollars)
Pipeline revenues (millions of dollars)
$97  117  208  226  
Pipeline revenues (millions of dollars)
$117 121 325 347 
Pipeline volumes(1) (thousands of barrels daily)
Pipeline volumes(1) (thousands of barrels daily)
Pipeline volumes(1) (thousands of barrels daily)
Crude oilCrude oil806  1,000  873  980  Crude oil867 998 871 986 
Refined petroleum products and NGLRefined petroleum products and NGL825  995  846  882  Refined petroleum products and NGL907 990 866 918 
TotalTotal1,631  1,995  1,719  1,862  Total1,774 1,988 1,737 1,904 
Average pipeline revenue per barrel (dollars)
Average pipeline revenue per barrel (dollars)
$0.65  0.64  0.66  0.67  
Average pipeline revenue per barrel (dollars)
$0.71 0.66 0.68 0.67 
TerminalsTerminalsTerminals
Terminal revenues (millions of dollars)
Terminal revenues (millions of dollars)
$33  39  76  79  
Terminal revenues (millions of dollars)
$36 41 112 120 
Terminal throughput (thousands of barrels daily)
Terminal throughput (thousands of barrels daily)
Terminal throughput (thousands of barrels daily)
Crude oil(2)
Crude oil(2)
380  456  420  463  
Crude oil(2)
296 493 378 473 
Refined petroleum productsRefined petroleum products690  809  719  773  Refined petroleum products700 819 713 788 
TotalTotal1,070  1,265  1,139  1,236  Total996 1,312 1,091 1,261 
Average terminaling revenue per barrel (dollars)
Average terminaling revenue per barrel (dollars)
$0.33  0.33  0.36  0.34  
Average terminaling revenue per barrel (dollars)
$0.39 0.33 0.37 0.34 
Storage, processing and other revenues (millions of dollars)
Storage, processing and other revenues (millions of dollars)
$111  107  224  260  
Storage, processing and other revenues (millions of dollars)
$112 108 336 368 
Total operating revenues (millions of dollars)
$241  263  508  565  
Total Operating Revenues (millions of dollars)
Total Operating Revenues (millions of dollars)
$265 270 773 835 
Joint Venture Operating Data(3)
Joint Venture Operating Data(3)
Joint Venture Operating Data(3)
Crude oil, refined petroleum products and NGL (thousands of barrels daily)
Crude oil, refined petroleum products and NGL (thousands of barrels daily)
942  772  890  730  
Crude oil, refined petroleum products and NGL (thousands of barrels daily)
1,142 786 975 749 
(1) Represents the sum of volumes transported through each separately tariffed pipeline segment.
(2) Bayway and Ferndale rail rack volumes included in crude oil terminals.
(3) Proportional share of total pipeline and terminal volumes of joint ventures consistent with recognized equity in earnings of affiliates.


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The following tables present reconciliations of EBITDA and adjusted EBITDA to net income, and EBITDA and distributable cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.
 
Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
Reconciliation to Net Income
Net income$255  233  481  431  
Reconciliation to Net Income Attributable to the PartnershipReconciliation to Net Income Attributable to the Partnership
Net Income Attributable to the PartnershipNet Income Attributable to the Partnership$206 237 687 668 
Plus:Plus:
Net income attributable to noncontrolling interestNet income attributable to noncontrolling interest10 — 10 — 
Net IncomeNet Income216 237 697 668 
Plus:Plus:Plus:
DepreciationDepreciation31  29  61  58  Depreciation35 30 96 88 
Net interest expenseNet interest expense29  26  57  53  Net interest expense31 25 88 78 
Income tax expenseIncome tax expense—     Income tax expense1 2 
EBITDAEBITDA315  289  600  544  EBITDA283 293 883 837 
Plus:Plus:
Proportional share of equity affiliates’ net interest, taxes and depreciation and amortizationProportional share of equity affiliates’ net interest, taxes and depreciation and amortization38  29  73  55  Proportional share of equity affiliates’ net interest, taxes and depreciation and amortization45 30 118 85 
Expenses indemnified or prefunded by Phillips 66Expenses indemnified or prefunded by Phillips 66—   —   Expenses indemnified or prefunded by Phillips 661 — 1 
Transaction costs associated with acquisitionsTransaction costs associated with acquisitions—  —   —  Transaction costs associated with acquisitions — 1 — 
Less:Less:
Gain from equity interest transferGain from equity interest transfer(84) —  (84) —  Gain from equity interest transfer — 84 — 
Adjusted EBITDA attributable to noncontrolling interestAdjusted EBITDA attributable to noncontrolling interest16 — 16 — 
Adjusted EBITDAAdjusted EBITDA269  319  590  600  Adjusted EBITDA313 323 903 923 
Plus:Plus:Plus:
Deferred revenue impacts*†
Deferred revenue impacts*†
 (4)  (4) 
Deferred revenue impacts*†
(3)— 4 (4)
Less:Less:Less:
Equity affiliate distributions less than (more than) proportional EBITDAEquity affiliate distributions less than (more than) proportional EBITDA(10) 13  (9) 22  Equity affiliate distributions less than (more than) proportional EBITDA4 (5)31 
Maintenance capital expenditures
Maintenance capital expenditures
28  12  43  21  
Maintenance capital expenditures
21 25 64 46 
Net interest expenseNet interest expense29  26  57  53  Net interest expense31 25 88 78 
Preferred unit distributionsPreferred unit distributions  19  19  Preferred unit distributions10 29 28 
Income taxes paidIncome taxes paid—   —   Income taxes paid1 — 1 
Distributable cash flow$218  254  487  480  
Distributable Cash FlowDistributable Cash Flow$243 255 730 735 
*Difference between cash receipts and revenue recognition.
Excludes Merey Sweeny capital reimbursements and turnaround impacts.
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Millions of DollarsMillions of Dollars
Three Months Ended
June 30
Six Months Ended
June 30
Three Months Ended
September 30
Nine Months Ended
September 30
2020  2019  2020  2019  2020 2019 2020 2019 
Reconciliation to Net Cash Provided by Operating ActivitiesReconciliation to Net Cash Provided by Operating ActivitiesReconciliation to Net Cash Provided by Operating Activities
Net cash provided by operating activities$215  276  489  481  
Net Cash Provided by Operating ActivitiesNet Cash Provided by Operating Activities$296 276785 757
Plus:Plus:Plus:
Net interest expenseNet interest expense29  26  57  53  Net interest expense31 25 88 78 
Income tax expenseIncome tax expense—     Income tax expense1 2 
Changes in working capitalChanges in working capital(3) (11) (15) 23  Changes in working capital(45)(9)(60)14 
Undistributed equity earningsUndistributed equity earnings(5) (1) (9) (3) Undistributed equity earnings (4)(9)(7)
Gain from equity interest transferGain from equity interest transfer84  —  84  —  Gain from equity interest transfer — 84 — 
Deferred revenues and other liabilitiesDeferred revenues and other liabilities   (8) Deferred revenues and other liabilities1 3 (6)
OtherOther(7) (3) (9) (4) Other(1)(10)(2)
EBITDAEBITDA315  289  600  544  EBITDA283 293 883 837 
Plus:Plus:
Proportional share of equity affiliates’ net interest, taxes and depreciation and amortizationProportional share of equity affiliates’ net interest, taxes and depreciation and amortization38  29  73  55  Proportional share of equity affiliates’ net interest, taxes and depreciation and amortization45 30 118 85 
Expenses indemnified or prefunded by Phillips 66Expenses indemnified or prefunded by Phillips 66—   —   Expenses indemnified or prefunded by Phillips 661 — 1 
Transaction costs associated with acquisitionsTransaction costs associated with acquisitions—  —   —  Transaction costs associated with acquisitions — 1 — 
Less:Less:
Gain from equity interest transferGain from equity interest transfer(84) —  (84) —  Gain from equity interest transfer — 84 — 
Adjusted EBITDA attributable to noncontrolling interestAdjusted EBITDA attributable to noncontrolling interest16 — 16 — 
Adjusted EBITDAAdjusted EBITDA269  319  590  600  Adjusted EBITDA313 323 903 923 
Plus:Plus:Plus:
Deferred revenue impacts*†
Deferred revenue impacts*†
 (4)  (4) 
Deferred revenue impacts*†
(3)— 4 (4)
Less:Less:Less:
Equity affiliate distributions less than (more than) proportional EBITDAEquity affiliate distributions less than (more than) proportional EBITDA(10) 13  (9) 22  Equity affiliate distributions less than (more than) proportional EBITDA4 (5)31 
Maintenance capital expenditures
Maintenance capital expenditures
28  12  43  21  
Maintenance capital expenditures
21 25 64 46 
Net interest expenseNet interest expense29  26  57  53  Net interest expense31 25 88 78 
Preferred unit distributionsPreferred unit distributions  19  19  Preferred unit distributions10 29 28 
Income taxes paidIncome taxes paid—   —   Income taxes paid1 — 1 
Distributable cash flow$218  254  487  480  
Distributable Cash FlowDistributable Cash Flow$243 255 730 735 
*Difference between cash receipts and revenue recognition.
Excludes Merey Sweeny capital reimbursements and turnaround impacts.


Statement of Income Analysis

Operating revenues decreased $22$62 million, or 8%, and decreased $57 million, or 10%7%, in the second quarter and six-monthnine-month period of 2020, respectively.2020. The decrease in the second quarter was primarily attributable to lower volumes on wholly owned assets. The decrease in the six-month period was primarily attributable to the recognition of deferred revenues related to turnaround activity at Merey Sweeny LLC (Merey Sweeny) in the first quarter of 2019, as well as lower volumes.volumes, partially offset by increased rates.

Equity in earnings of affiliates decreased $33$10 million, or 24%7%, and decreased $16$26 million, or 6%7%, in the secondthird quarter and six-monthnine-month period of 2020, respectively. The decreases in both periods were attributable to lower earnings primarily due to decreased volumes. These lower earnings werevolumes, partially offset by an increase in equity earnings from Gray Oak Pipeline, LLC, as the pipelinewhich commenced full operations during the second quarter of 2020. See Note 4—Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.


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

Operating and maintenance expenses decreased by $52$58 million, or 23%18%, in the six-monthnine-month period of 2020. The decrease was primarily due to turnaround activity at Merey Sweeny in 2019.

Depreciation increased $5 million, or 17%, and increased $8 million, or 9%, in the third quarter and nine-month period of 2020, respectively. The increases in both periods were attributable to additional assets placed in operation, including the isomerization unit at the Phillips 66 Lake Charles Refinery and additional storage capacity at Clemens Caverns.

Interest and debt expense increased $6 million, or 23%, and increased $9 million, or 11%, in the third quarter and nine-month period of 2020, respectively. The increases in both periods were attributable to lower capitalized interest and increased borrowings on our revolving credit facility.

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

Operating Activities
We generated $489$785 million in cash from operations during the first sixnine months of 2020, an improvement over cash from operations of $481$28 million forcompared with the corresponding period of 2019. The improvement was primarily driven by lower deferred revenue impacts and lower operating and maintenance expenses, partly offset by lower operating distributions from equity affiliates.

Equity Affiliate Operating Distributions
Our operating cash flows are also impacted by distribution decisions made by our equity affiliates. During the first sixnine months of 2020, cash from operations included distributions of $249$378 million from our equity affiliates, compared with $259$402 million during the same period of 2019. We cannot control the amount or timing of future distributions from equity affiliates; therefore, future distribution payments by these and other equity affiliatesdistributions are not assured.

ATM Programs
We have authorized an aggregate of $750 million under three $250 million continuous offerings of common units, or at-the-market (ATM) programs. The first two programs concluded in June 2018 and December 2019, respectively. We did not issue any common units under ourthe current ATM programsprogram during the three months ended JuneSeptember 30, 2020. For the sixnine months ended JuneSeptember 30, 2020, on a settlement date basis, we issued an aggregate of 40,570 common units, under our ATM programs, generating net proceeds of $2 million. For the three and sixnine months ended JuneSeptember 30, 2019, we issued an aggregate of 212,3361,635,669 and 834,3682,470,037 common units, under our ATM programs, respectively, generating net proceeds of $10$91 million and $42$133 million, respectively. Since inception in June 2016 through JuneSeptember 30, 2020, we issued an aggregate of 9,487,055 common units under our ATM programs, and generated net proceeds of $494 million, after broker commissions of $5 million and other costs of $3 million. The net proceeds from sales under the ATM programs are used for general partnership purposes, which may include debt repayment, acquisitions, capital expenditures and additions to working capital.

Revolving Credit Facility
At JuneSeptember 30, 2020, borrowings of $215$290 million were outstanding and $3 million in letters of credit had been drawn under our $750 million revolving credit facility.


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Transfer of Equity Interest
Gray Oak Pipeline, LLC was formed to develop and construct the Gray Oak Pipeline, which transports crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi and the Sweeny area, including the Phillips 66 Sweeny Refinery, as well as access to the Houston market. We have a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. In December 2018, a third party exercised its option to acquire a 35% interest in the holding company. Because the holding company’s sole asset was its ownership interest in Gray Oak Pipeline, LLC, which was considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in the holding company during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP at that time. The Gray Oak Pipeline commenced full operations in the second quarter of 2020 and the restrictions placed on the co-venturer were lifted on June 30, 2020, resulting in the recognition of the sale under GAAP. Accordingly, at June 30, 2020, the co-venturer’s 35% interest in the holding
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company was recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet. In addition,sheet, and the premium of $84 million previously paid by the co-venturer in 2019 was recharacterized from a long-term obligation to a gain in our consolidated statement of income forincome. For the three and sixnine months ended June 30, 2020. For the six months ended JuneSeptember 30, 2020, the co-venturer contributed an aggregate of $61$64 million to the holding company to fund its portion of Gray Oak Pipeline, LLC’s cash calls. Excluding the co-venturer’s 35% interest in the consolidated holding company, weWe have an effective ownership interest of 42.25% in Gray Oak Pipeline, LLC.LLC, after considering our co-venturer’s 35% interest in the consolidated holding company.


Off-Balance Sheet Arrangements

Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)
In March 2019, a wholly owned subsidiary of Dakota Access closed an offering of $2.5 billion aggregate principal amount of senior unsecured senior notes, consisting of:

$650 million aggregate principal amount of 3.625% Senior Notes due 2022.
$1.0 billion aggregate principal amount of 3.900% Senior Notes due 2024.
$850 million aggregate principal amount of 4.625% Senior Notes due 2029.

Dakota Access and ETCO have guaranteed repayment of the notes.  In addition, we and our co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering.  Under the CECU, the co-venturers may be severally required to make proportionate equity contributions to Dakota Access if there is an unfavorable final judgment in the ongoing litigation related to an easement granted by the U.S. Army Corps of Engineers (USACE) to allow the pipeline to be constructed under Lake Oahe in North Dakota. Contributions may be required if Dakota Access determines that the issues included in any such final judgment cannot be remediated and Dakota Access has or is projected to have insufficient funds to satisfy repayment of the notes. If Dakota Access undertakes remediation to cure issues raised in a final judgment, contributions may be required if any series of the notes become due, whether by acceleration or at maturity, during such time, to the extent Dakota Access has or is projected to have insufficient funds to pay such amounts. At JuneSeptember 30, 2020, our share of the maximum potential equity contributions under the CECU was approximately $631 million.

In March 2020, the trial court presiding over this litigation ordered the USACE to prepare an Environmental Impact Statement (EIS), and requested additional information to enable a decision on whether the Dakota Access Pipeline should be shut down while the EIS is being prepared. On July 6, 2020, the trial court ordered the Dakota Access Pipeline to be shut down and emptied of crude oil by August 5, 2020,within 30 days, and that the pipeline should remain shut down pending the preparation of the EIS by the USACE, which the USACE has indicated is expected to take approximately 13 months. Dakota Access filed an appeal and a request for a stay of the order. On July 14, 2020,order, which was granted. The case is now on an appeals court granted a temporary stay of the lower court’s order directingexpedited appellate track and oral arguments regarding whether the pipeline to be shut downeasement is valid and emptied of crude oil. The appeals court has not yet ruled onwhether the motionUSACE must prepare an EIS are set for early November 2020, with a stay during the appeals process.decision expected in late 2020 or early 2021. In addition to the potential obligations underproceedings in the CECU, ifappellate court, the trial court has been asked to issue an injunction to shut down the pipeline until the USACE completes the EIS, which could be ruled on as early as late December 2020. If the pipeline is required to cease operations pending the preparation of the EIS, and should Dakota Access and ETCO not have sufficient funds to pay ongoing expenses, we also could be asked to support our share of the ongoing expenses, including scheduled interest payments on the notes of approximately $25 million annually.annually, in addition to the potential obligations under the CECU.

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Gray Oak Pipeline, LLC
Gray Oak Pipeline, LLC hashad a third-party term loan facility with a borrowing capacity of $1,379 million, inclusive of accrued interest. Borrowings under the facility arewere due on June 3, 2022. We and our co-venturers provided a guarantee through an equity contribution agreement requiring proportionate equity contributions to Gray Oak Pipeline, LLC up to the total outstanding loan amount, plus any additional accrued interest and associated fees, if Gray Oak Pipeline, LLC defaults on certain of its obligations thereunder. At June 30,In September 2020, Gray Oak Pipeline, LLC fully repaid the outstanding balance of the term loan facility was fully utilized by Gray Oak Pipeline, LLC and our 42.25% proportionate exposure under the associated guarantee we issued through an equity contribution agreement was $583 million.
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Capital Requirements

Liberty Acquisition
In February 2020, we entered into a Purchase and Sale Agreement with Phillips 66 PDI to acquire its 50% interest in the Liberty Pipeline joint venture for $75 million. The purchase price reflected the reimbursement of project costs incurred by Phillips 66 prior to the effective date of the transaction. The transaction was funded through a combination of cash on hand and our revolving credit facility, and closed on March 2, 2020. Liberty Pipeline LLC was formed to develop and construct the Liberty Pipeline system which, upon completion, will transport crude oil from the Rockies and Bakken production areas to Cushing, Oklahoma. On March 24, 2020, we and our co-venturer announced we are deferring the development and construction of the Liberty Pipeline system as a result of the current challenging business environment.

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

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

Our capital expenditures and investments were:

Millions of DollarsMillions of Dollars
Six Months Ended
June 30
Nine Months Ended
September 30
2020  2019  2020 2019 
Capital expenditures and investments
Capital Expenditures and InvestmentsCapital Expenditures and Investments
Capital expenditures and investmentsCapital expenditures and investments$611  746  Capital expenditures and investments$795 907 
Capital expenditures and investments funded by certain joint venture partners*Capital expenditures and investments funded by certain joint venture partners*(61) (422) Capital expenditures and investments funded by certain joint venture partners*(64)(422)
Adjusted capital spending$550  324  
Adjusted Capital SpendingAdjusted Capital Spending$731 485 
ExpansionExpansion$507  297  Expansion$667 433 
MaintenanceMaintenance43  27  Maintenance64 52 
*See Note 4—Equity Investments, in the Notes to Consolidated Financial Statements, for additional information.


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Our capital expenditures and investments for the first sixnine months of 2020 were primarily associated with the following activities:

Contributions to Gray Oak Pipeline, LLC to complete construction of the pipeline system.

Contributions to Liberty Pipeline LLC for its committed purchases.previous commitments related to the development and construction of the crude oil pipeline system.

Construction activities related to a new ethane pipeline from the Clemens Caverns to petrochemical facilities in Gregory, Texas, near Corpus Christi.

Contributions to South Texas Gateway Terminal for construction activities related to the marine export terminal that will connectconnects to the Gray Oak Pipeline in Corpus Christi, Texas.

ConstructionCompletion of construction activities related to increasing capacity on the Sweeny to Pasadena refined petroleum products pipeline.

ConstructionCompletion of construction activities related to increasing storage capacity at Clemens Caverns.

Spending associated with other return, reliability and maintenance projects.

2021 Capital Budget
We currently expect our 2021 capital budget to be approximately $300 million.

Cash Distributions
On July 21,October 20, 2020, the Board of Directors of our General Partner declared a quarterly cash distribution of $0.875 per common unit, which excluding distributions to holders of our preferred units, will result in a total distribution of $200 million attributable to the secondthird quarter of 2020. This distribution is payable on AugustNovember 13, 2020, to common unitholders of record as of July 31,October 30, 2020.

The holders of our preferred units are entitled to receive cumulative quarterly distributions equal to $0.678375 per preferred unit. Preferred unitholders will receive $9$10 million of distributions attributable to the secondthird quarter of 2020. This distribution is payable on AugustNovember 13, 2020, to preferred unitholders of record as of July 31,October 30, 2020.

Beginning with the distribution to preferred unitholders attributable to the fourth quarter of 2020, the preferred unitholders are entitled to receive a quarterly distribution equal to the greater of $0.678375 per unit, or the per-unit distribution amount paid to the common unitholders.

Debt Repayment
On April 1, 2020, we repaid the $25 million tranche of tax-exempt bonds due April 2020. The two remaining tranches, totaling $50 million, mature in April 2021.

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


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

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

Legal and Tax Matters
Under our amended omnibus agreement, Phillips 66 provides certain services for our benefit, including legal and tax support services, and we pay an operational and administrative support fee for these services. Phillips 66’s legal and tax organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions. Phillips 66’s legal organization employs a litigation management process to manage and monitor the legal proceedings against us. The process facilitates the early evaluation and quantification of potential exposures in individual cases and enables tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, Phillips 66’s legal organization regularly assesses the adequacy of current accruals and recommends if adjustment of existing accruals, or establishment of new accruals, is required. As of JuneSeptember 30, 2020, and December 31, 2019, we did not have any material accrued contingent liabilities associated with litigation matters.

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

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


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

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


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

General domestic and international economic and political developments including: armed hostilities; expropriation of assets; changes in governmental policies relating to crude oil, refined petroleum products or NGL pricing, regulation or taxation; actions taken by the members of OPEC affecting the production and pricing of crude oil; and other political, economic or diplomatic developments, including those caused by public health issues, outbreaks of diseases and pandemics, including the COVID-19 pandemic.
The continued ability of Phillips 66 to satisfy its obligations under our commercial and other agreements.
Reductions in the volume of crude oil, refined petroleum products and NGL we or our equity affiliates transport, fractionate, process, terminal and store.
Changes to the tariff rates with respect to volumes that we transporttransported through our regulated assets, which rates are subject to review and possible adjustment by federal and state regulators.
Changes in revenue we realize under the loss allowance provisions of our regulated tariffs resulting from changes in underlying commodity prices.
Fluctuations in the prices and demand for crude oil, refined petroleum products and NGL.
Changes in global economic conditions and the effects of a global economic downturn on the business of Phillips 66 and the business of its suppliers, customers, business partners and credit lenders.
The continuing effects of the COVID-19 pandemic and its negative impact on the demand for crude oil and refined petroleum products, as well as the extent and duration of recovery of economies and the demand for crude oil and refined petroleum products after the pandemic subsides.
Actions taken by OPEC and other countries impacting supply and demand and, correspondingly, commodity prices.
Changes in governmental policies relating to crude oil, refined petroleum products or NGL pricing, regulation, taxation, or exports.
Potential liabilities associated with the risks and operational hazards inherent in transporting, fractionating, processing, terminaling and storing crude oil, refined petroleum products and NGL.
Curtailment of operations due to severe weather (including as a result of climate change) disruption or natural disasters; riots, strikes, lockouts or other industrial disturbances; or failuredisturbances.
Failure of information technology systems due to various causes, including unauthorized access or attack.
Accidents or other unscheduled shutdowns affecting our pipelines, processing, fractionating, terminaling, and storage facilities or equipment, or those of our equity affiliates, suppliers or customers.
TheOur, and our equity affiliates’, inability to obtain or maintain permits, in a timely manner ifor at all, including those necessary for capital projects, orand the possibility of the revocation or modification of existingsuch permits.
The inability to comply with government regulations or make capital expenditures required to maintain compliance.
The failure to complete construction of announced and future capital projects in a timely manner, and any cost overruns associated with such projects, and the ability to obtain or maintain permits necessary for such projects.
Our ability to successfully execute our growth strategies, whether through organic growth or acquisitions.
The operation, financing and distribution decisions of our joint ventures, which we may not control.
Costs or liabilities associated with federal, state, and local laws and regulations relating to environmental protection and safety, including spills, releases and pipeline integrity.
Costs associated with compliance with evolving environmental laws and regulations on climate change.
Costs associated with compliance with safety regulations, including pipeline integrity management program testing and related repairs.
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Changes in the cost or availability of third-party vessels, pipelines, railcars and other means of delivering and transporting crude oil, refined petroleum products and NGL.
General domestic and international economic and political developments including armed hostilities, expropriation of assets, and other political, economic or diplomatic developments, including those caused by public health issues and outbreaks of diseases and pandemics.
Direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war.
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Our ability to comply with the terms of our credit facility, indebtedness and other financing arrangements, which, if accelerated, we may not be able to repay.
Our ability to incur additional indebtedness or our ability to obtain financing on terms that we deem acceptable, including the refinancing of our current obligations; higher interest rates and costs of financing would increase our expenses.
Changes in tax, environmental and other laws and regulations.
The factors generally described in “ItemItem 1A. Risk Factors”Factors in our 2019 Annual Report on Form 10-K filed with the SEC on February 21, 2020, and in Item 1A.— Risk Factors of Part II ofin this report.Quarterly Report on Form 10-Q.
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Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our commodity price risk and interest rate risk at JuneSeptember 30, 2020, did not differ materially from that disclosed under Item 7A of our 2019 Annual Report on Form 10-K.


Item 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our General Partner’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of JuneSeptember 30, 2020, our General Partner’s Chairman and Chief Executive Officer and its Vice President and Chief Financial Officer, with the participation of the General Partner’s management, carried out an evaluation, pursuant to Rule 13a-15(b) of the Act, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our General Partner’s Chairman and Chief Executive Officer and its Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of JuneSeptember 30, 2020.

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the quarterly period ended JuneSeptember 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

Under our amended omnibus agreement, and pursuant to the terms of various agreements under which we acquired assets from Phillips 66, Phillips 66 indemnifies us or assumes responsibility for certain liabilities relating to litigation and environmental matters attributable to the ownership or operation of our assets prior to their contribution to us from Phillips 66. See Note 10—Related Party Transactions, in the Notes to Consolidated Financial Statements, for additional information.

ThisIn this section, identifieswe identify reportable legal proceedings attributable to the ownership or operation of our assets, including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment, for this reporting period. There are no new matters to report.


Item 1A.  RISK FACTORS

Except as provided below, there were no material changes from the risk factors disclosed in Item 1A of our 2019 Annual Report on Form 10-K.

The outbreak of Coronavirus Disease 2019 (COVID-19) pandemic has materially adversely affected, and may continue to materially adversely affect, general economic, financial and business conditions, and could materially and adversely affect our business, financial condition, results of operations and cash flows and thoseflow. The impacts of COVID-19 also may have materially adverse effects on our equity affiliates as well as our customers, suppliers and other counterparties.

The outbreak of COVID-19 pandemic has had, and is negatively impactingcontinuing to have, a negative impact on worldwide economic and commercial activity and financial markets. Responses of governmental authorities, companies and individuals to prevent the spread of COVID-19, including travel restrictions, business and school closures, and stay at home orders have significantly reduced global economic activity. The reduction in economic activity has resulted in substantial decreases in the demand for many refined petroleum products, which has led refiners to reduce crude oil processing rates and also to lower crude oil demand and prices. These events have negatively impacted the volumes of products we transport and terminal.

The extent to which COVID-19 will continue to negatively impact our business and operations, as well as the business and operations of our equity affiliates, as well as our customers, including Phillips 66, will depend on the severity, location and duration of the effects and spread of COVID-19, related impacts on overall economic activity, including the actions undertaken by national, regional and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume.

To the extent COVID-19 adversely affects our business, financial condition, results of operations and liquidity, or the business, financial condition, results of operation and liquidity of our equity affiliates, as well as our customers, including Phillips 66, counterpartiessuppliers or suppliers,counterparties, it may also have the effect of heightening many of the other risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

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Item 6. EXHIBITS
Exhibit
Number
Exhibit Description
101.INS*Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*Inline XBRL Taxonomy Extension Schema Document.
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith.
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SIGNATURES

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

PHILLIPS 66 PARTNERS LP
By: Phillips 66 Partners GP LLC, its general partner
/s/ Chukwuemeka A. Oyolu
Chukwuemeka A. Oyolu
Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
Date: July 31,October 30, 2020
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