UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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



For the quarterly period ended	~~September 30, 2019~~March 31, 2020



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



For the transition period from		to



Commission file number:	001-36011

Phillips 66 Partners LP

(Exact name of registrant as specified in its charter)



Delaware		38-3899432
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2331 CityWest Blvd., Houston, Texas 77042

(Address of principal executive offices) (Zip Code)

(855) 283-9237

(Registrant’s telephone number, including area code)

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”~~company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



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

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

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

The registrant had ~~227,574,092~~228,340,146 common units outstanding as of ~~September 30, 2019.~~March 31, 2020.

~~Table of Contents~~

PHILLIPS 66 PARTNERS LP

TABLE OF CONTENTS

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS



Consolidated Statement of Income	Phillips 66 Partners LP


	Millions of Dollars					Millions of Dollars
	Three Months Ended September 30			Nine Months Ended September 30		Three Months Ended March 31
	2019		2018	2019	2018	2020		2019
Revenues and Other Income
Operating revenues—related parties	$	262	256	814	749	$	258	296
Operating revenues—third parties	8		9	21	26	9		6
Equity in earnings of affiliates	139		118	395	316	136		119
Other income	2		1	5	2	1		2
Total revenues and other income	411		384	1,235	1,093	404		423

Costs and Expenses
Operating and maintenance expenses	91		84	315	266	88		139
Depreciation	30		30	88	87	30		29
General and administrative expenses	16		16	51	48	17		18
Taxes other than income taxes	10		8	30	27	11		11
Interest and debt expense	26		28	80	87	29		27
Other expenses	—		1	—	1	2		—
Total costs and expenses	173		167	564	516	177		224
Income before income taxes	238		217	671	577	227		199
Income tax expense	1		—	3	2	1		1
Net income	237		217	668	575	226		198
Less: Preferred unitholders’ interest in net income	9		9	28	28	10		10
Less: General partner’s interest in net income	—		64	140	172	—		69
Limited partners’ interest in net income	$	228	144	500	375	$	216	119

Net Income Per Limited Partner Unit (dollars)
Common units—basic	$	1.18	1.17	3.39	3.06	$	0.95	0.96
Common units—diluted	1.15		1.10	3.25	2.91	0.93		0.92

Weighted-Average Limited Partner Units Outstanding (thousands)
Common units—basic	192,274		123,270	147,368	122,362	228,312		124,258
Common units—diluted	206,093		137,090	161,187	136,182	242,132		138,078
See Notes to Consolidated Financial Statements.



Consolidated Statement of Comprehensive Income	Phillips 66 Partners LP


	Millions of Dollars					Millions of Dollars
	Three Months Ended September 30			Nine Months Ended September 30		Three Months Ended March 31
	2019		2018	2019	2018	2020		2019

Net Income	$	237	217	668	575	$	226	198
Defined benefit plans
Plan sponsored by equity affiliates, net of income taxes	—		—	—	—	—		—
Other comprehensive income	—		—	—	—	—		—
Comprehensive Income	$	237	217	668	575	$	226	198
See Notes to Consolidated Financial Statements.



Consolidated Balance Sheet	Phillips 66 Partners LP


	Millions of Dollars					Millions of Dollars
	September 30 2019			December 31 2018		March 31 2020			December 31 2019
Assets
Cash and cash equivalents	$	655		1		$	92		286
Accounts receivable—related parties	97			90		91			101
Accounts receivable—third parties	4			5		4			4
Materials and supplies	13			13		13			13
Prepaid expenses and other current assets	5			20		14			10
Total current assets	774			129		214			414
Equity investments	2,921			2,448		3,136			2,961
Net properties, plants and equipment	3,258			3,052		3,410			3,349
Goodwill	185			185		185			185
Other assets	52			5		52			52
Total Assets	$	7,190		5,819		$	6,997		6,961

Liabilities
Accounts payable—related parties	$	19		22		$	24		19
Accounts payable—third parties	79			88		75			84
Accrued interest	34			36		46			42
Deferred revenues	19			60		19			16
Short-term debt	325			50		25			25
Accrued property and other taxes	28			9		12			10
Other current liabilities	8			5		3			3
Total current liabilities	512			270		204			199
Long-term debt	3,490			2,998		3,491			3,491
Obligation from equity interest transfer	340			—		356			343
Other liabilities	94			42		93			94
Total Liabilities	4,436			3,310		4,144			4,127

Equity
Preferred unitholders (2019 and 2018—13,819,791 units issued and outstanding)	746			746
Common unitholders—public (2019—57,813,955 units issued and outstanding; 2018—55,343,918 units issued and outstanding)	2,664			2,485
Common unitholder—Phillips 66 (2019—169,760,137 units issued and outstanding; 2018—68,760,137 units issued and outstanding)	(655		)	592
General partner—Phillips 66 (2019—0 units issued and outstanding; 2018—2,480,051 units issued and outstanding)	—			(1,313	)
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)						2,723			2,717
Common unitholder—Phillips 66 (2020 and 2019—169,760,137 units issued and outstanding)						(616		)	(628	)
Accumulated other comprehensive loss	(1		)	(1	)	(1		)	(1	)
Total Equity	2,754			2,509		2,853			2,834
Total Liabilities and Equity	$	7,190		5,819		$	6,997		6,961
See Notes to Consolidated Financial Statements.



Consolidated Statement of Cash Flows	Phillips 66 Partners LP


	Millions of Dollars					Millions of Dollars
	Nine Months Ended September 30					Three Months Ended March 31
	2019			2018		2020			2019
Cash Flows From Operating Activities
Net income	$	668		575		$	226		198
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	88			87		30			29
Undistributed equity earnings	7			(5	)	4			2
Other liabilities	8			(39	)
Other						2			10
Working capital adjustments
Accounts receivable	(7		)	(9	)	10			4
Prepaid expenses and other current assets	15			(1	)	(4		)	9
Accounts payable	7			8		(3		)	(4	)
Accrued interest	(3		)	(2	)	4			(5	)
Deferred revenues	(44		)	29		3			(40	)
Other accruals	18			9		2			2
Net Cash Provided by Operating Activities	757			652		274			205

Cash Flows From Investing Activities
Cash capital expenditures and investments	(924		)	(410	)	(236		)	(634	)
Advances/loans—related party	(95		)	—
Collection of advances/loans—related party	95			—
Liberty acquisition						(75		)	—
Return of investment from equity affiliates	52			28		38			20
Proceeds from sale of equity interest	81			—		—			81
Net Cash Used in Investing Activities	(791		)	(382	)	(273		)	(533	)

Cash Flows From Financing Activities
Proceeds from equity interest transfer	341			—
Net proceeds from equity interest transfer						12			341
Issuance of debt	1,758			85		—			725
Repayment of debt	(985		)	(110	)	—			(585	)
Issuance of common units	133			114		2			32
Debt issuance costs	(6		)	—
Quarterly distributions to preferred unitholders	(28		)	(28	)	(9		)	(9	)
Quarterly distributions to common unitholders—public	(142		)	(114	)	(51		)	(46	)
Quarterly distributions to common unitholder—Phillips 66	(174		)	(147	)	(149		)	(58	)
Quarterly distributions to General Partner—Phillips 66	(206		)	(155	)	—			(67	)
Other distributions to Phillips 66	(3		)	—		—			(4	)
Net Cash Provided by (Used in) Financing Activities	688			(355	)	(195		)	329

Net Change in Cash and Cash Equivalents	654			(85	)	(194		)	1
Cash and cash equivalents at beginning of period	1			185		286			1
Cash and Cash Equivalents at End of Period	$	655		100		$	92		2
See Notes to Consolidated Financial Statements.



Consolidated Statement of Changes in Equity	Phillips 66 Partners LP

Millions of Dollars
Three Months Ended
September 30
Preferred Unitholders Public
Common Unitholders
Public

Common Unitholder
Phillips 66

General Partner
Phillips 66

Accum. Other
Comprehensive Loss

Total

June 30, 2019 $ 746
2,555
626
(1,310 ) (1 ) 2,616
Issuance of common units —
91
—
—
—
91
Net income 9
67
161
—
—
237
Quarterly cash distributions to unitholders and General Partner ($0.855 per common unit) (9 ) (49 ) (58 ) (70 ) —
(186 )
Conversion of GP economic interest —
—
(1,384 ) 1,381
—
(3 )
Other distributions to Phillips 66 —
—
—
(1 ) —
(1 )
September 30, 2019 $ 746
2,664
(655 ) —
(1 ) 2,754

June 30, 2018 $ 747
2,381
538
(1,332 ) (1 ) 2,333
Cumulative effect of accounting change —
—
(1 ) —
—
(1 )
Issuance of common units —
47
—
—
—
47
Net income 9
63
81
64
—
217
Quarterly cash distributions to unitholders and General Partner ($0.752 per common unit) (10 ) (40 ) (51 ) (57 ) —
(158 )
Other contributions from Phillips 66 —
—
—
5
—
5
September 30, 2018 $ 746
2,451
567
(1,320 ) (1 ) 2,443



	Millions of Dollars
	Three Months Ended March 31
	Preferred Unitholders Public			Common Unitholders Public		Common Unitholder Phillips 66		General Partner Phillips 66		Accum. Other Comprehensive Loss		Total

December 31, 2019	$	746		2,717		(628	)	—		(1	)	2,834
Issuance of common units	—			2		—		—		—		2
Net income	10			55		161		—		—		226
Quarterly cash distributions to unitholders ($0.875 per common unit)	(9		)	(51	)	(149	)	—		—		(209	)
March 31, 2020	$	747		2,723		(616	)	—		(1	)	2,853

December 31, 2018	$	746		2,485		592		(1,313	)	(1	)	2,509
Cumulative effect of accounting change	—			(1	)	—		—		—		(1	)
Issuance of common units	—			32		—		—		—		32
Net income	10			53		66		69		—		198
Quarterly cash distributions to unitholders and General Partner ($0.835 per common unit)	(9		)	(46	)	(58	)	(67	)	—		(180	)
Other contributions to Phillips 66	—			—		—		(4	)	—		(4	)
March 31, 2019	$	747		2,523		600		(1,315	)	(1	)	2,554

Units
Three Months Ended
September 30
Preferred Units Public
Common Units Public
Common Units Phillips 66
General Partner Units Phillips 66
Total Units

June 30, 2019 13,819,791
56,178,286
68,760,137
2,480,051
141,238,265
Units issued in public equity offerings —
1,635,669
—
—
1,635,669
Units issued in conversion of GP economic interest —
—
101,000,000
(2,480,051 ) 98,519,949
September 30, 2019 13,819,791
57,813,955
169,760,137
—
241,393,883

June 30, 2018 13,819,791
54,152,756
68,760,137
2,480,051
139,212,735
Units issued in public equity offerings —
898,313
—
—
898,313
September 30, 2018 13,819,791
55,051,069
68,760,137
2,480,051
140,111,048



	Units
	Three Months Ended March 31
	Preferred Units Public	Common Units Public	Common Units Phillips 66	General Partner Units Phillips 66	Total Units

December 31, 2019	13,819,791	58,539,439	169,760,137	—	242,119,367
Units issued in public equity offerings	—	40,570	—	—	40,570
March 31, 2020	13,819,791	58,580,009	169,760,137	—	242,159,937

December 31, 2018	13,819,791	55,343,918	68,760,137	2,480,051	140,403,897
Units issued in public equity offerings	—	622,032	—	—	622,032
March 31, 2019	13,819,791	55,965,950	68,760,137	2,480,051	141,025,929

See Notes to Consolidated Financial Statements.

Millions of Dollars
Nine Months Ended
September 30
Preferred Unitholders Public
Common Unitholders Public
Common Unitholder Phillips 66
General Partner Phillips 66
Accum. Other Comprehensive Loss
Total

December 31, 2018 746
2,485
592
(1,313 ) (1 ) 2,509
Cumulative effect of accounting change —
(1 ) —
—
—
(1 )
Issuance of common units —
133
—
—
—
133
Net income 28
189
311
140
—
668
Quarterly cash distributions to unitholders and General Partner ($2.535 per common unit) (28 ) (142 ) (174 ) (206 ) —
(550 )
Conversion of GP economic interest —
—
(1,384 ) 1,381
—
(3 )
Other distributions to Phillips 66 —
—
—
(2 ) —
(2 )
September 30, 2019 746
2,664
(655 ) —
(1 ) 2,754

December 31, 2017 746
2,274
487
(1,345 ) (1 ) 2,161
Cumulative effect of accounting change —
13
16
1
—
30
Issuance of common units —
114
—
—
—
114
Net income 28
164
211
172
—
575
Quarterly cash distributions to unitholders and General Partner ($2.144 per common unit) (28 ) (114 ) (147 ) (155 ) —
(444 )
Other contributions from Phillips 66 —
—
—
7
—
7
September 30, 2018 746
2,451
567
(1,320 ) (1 ) 2,443

Units
Nine Months Ended
September 30
Preferred Units Public
Common Units Public
Common Units Phillips 66
General Partner Units Phillips 66
Total Units

December 31, 2018 13,819,791
55,343,918
68,760,137
2,480,051
140,403,897
Units issued in public equity offerings —
2,470,037
—
—
2,470,037
Units issued in conversion of GP economic interest —
—
101,000,000
(2,480,051 ) 98,519,949
September 30, 2019 13,819,791
57,813,955
169,760,137
—
241,393,883

December 31, 2017 13,819,791
52,811,822
68,760,137
2,480,051
137,871,801
Units issued in public equity offerings —
2,239,247
—
—
2,239,247
September 30, 2018 13,819,791
55,051,069
68,760,137
2,480,051
140,111,048

~~See Notes to Consolidated Financial Statements.~~



Notes to Consolidated Financial Statements	Phillips 66 Partners LP

Note 1—Description of the Business

Unless otherwise stated or the context otherwise indicates, all references to “Phillips 66 Partners,” “the Partnership,” “us,” “our,” “we,” or similar expressions refer to Phillips 66 Partners LP, including its consolidated subsidiaries. References to Phillips 66 may refer to Phillips 66 and/or its subsidiaries, depending on the context. References to our “General Partner” 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 crude oil, refined petroleum products and NGL, 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.

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 the outstanding incentive distribution rights (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 101 million common units issued to Phillips 66 PDI. See Note 7—Net Income Per Limited Partner Unit for more information on how these transactions impact our earnings per unit calculations, and Note 10—Equity, for additional information on the impact to our equity accounts.

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 ~~2018~~2019 Annual Report on Form 10-K. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020, are not necessarily indicative of the results to be expected for the full year. ~~Certain prior period financial information has been recast to reflect the current year’s presentation.~~

~~Note 3—Changes in Accounting Principles~~

Effective January 1, 2019, we early adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments and off-balance sheet credit exposures. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. The adoption of the ASU did not have a material impact on our consolidated financial statements.

Effective January 1, 2019, we adopted ASU 2016-02, “Leases (Topic 842)” using the modified retrospective transition method. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and corresponding lease liability on the consolidated balance sheet for all operating leases with terms longer than 12 months. Leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated income statement.

We elected the package of practical expedients that allowed us to carry forward the determination of whether an arrangement contains a lease and lease classification, as well as our accounting for initial direct costs for existing contracts. We recorded a noncash cumulative effect adjustment to our opening consolidated balance sheet as of January 1, 2019, to record an aggregate operating lease ROU asset and a corresponding lease liability of $45 million. See Note 5—Lease Assets and Liabilities, for the new lease disclosures required by this ASU for lessees.

For arrangements where we are the lessor, effective for periods after January 1, 2019, we elected to account for lease and service elements of contracts classified as leases on a combined basis under the provisions of ASU No. 2016-02, except for leases of processing-type assets, which contain non-ratable fees related to turnaround activity. For these types of leases, we continued to separate the lease and service elements based on relative standalone prices and applied the new lease standard to the lease element and the revenue standard to the service element. We recorded a noncash cumulative effect adjustment of $1 million to decrease our opening equity balance as of January 1, 2019. See Note 4—Operating Revenues, for additional impacts of adopting this ASU, including new lease disclosures required for lessors.

Note 4—3—Operating Revenues

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

Total operating revenues disaggregated by asset type were as follows:


	Millions of Dollars					Millions of Dollars
	Three Months Ended September 30			Nine Months Ended September 30		Three Months Ended March 31
	2019		2018	2019	2018	2020		2019

Pipelines	$	121	123	347	336	$	111	109
Terminals	41		37	120	114	43		40
Storage, processing and other revenues	108		105	368	325	113		153
Total operating revenues	$	270	265	835	775	$	267	302

The majority of our agreements with Phillips 66 are considered operating leases under GAAP. ~~For reporting periods prior to our adoption of~~The lease’s classification as either an operating or financing lease requires judgment in assessing the ~~new lease accounting standard, ASU No. 2016-02, as of January 1, 2019, the~~contract’s lease and service ~~elements included~~components and in ~~these contracts were separated with~~determining the lease element recognized in accordance with the existing lease accounting standard and the service element recognized in accordance with the revenue accounting standard. Effective for periods after January 1, 2019, weasset’s fair value. We have elected to account for lease and service elements of contracts classified as leases on a combined basis, ~~under the provisions of ASU No. 2016-02,~~ except for leases of processing-type assets, which contain non-ratable fees related to turnaround activity. For these types of leases, we ~~continued~~continue to separate the lease and service elements based on relative standalone prices and applied the new lease standard to the lease element and the revenue standard to the service element. As a result of our change in accounting policy, our lease and service revenues, lease and service accounts receivable and lease and service deferred revenues reported for the three and nine months ended September 30, 2019, are not prepared on the same basis as the amounts reported for the three and nine months ended September 30, 2018.

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


	Millions of Dollars					Millions of Dollars
	Three Months Ended September 30			Nine Months Ended September 30		Three Months Ended March 31
	2019		2018	2019	2018	2020		2019

Lease revenues	$	217	159	688	446	$	218	257
Service revenues	53		106	147	329	49		45
Total operating revenues	$	270	265	835	775	$	267	302

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			Millions of Dollars
	September 30 2019		December 31 2018	March 31 2020		December 31 2019

Lease receivables	$	81	53	$	74	87
Service receivables	20		41	20		18
Other receivables	—		1	1		—
Total accounts receivable	$	101	95	$	95	105

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” ~~lines~~line items on our consolidated balance sheet.

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


	Millions of Dollars			Millions of Dollars
	September 30 2019		December 31 2018	March 31 2020		December 31 2019

Deferred lease revenues	$	43	73	$	41	41
Deferred service revenues	1		6	2		1
Total deferred revenues	$	44	79	$	43	42

Future Minimum Lease Payments from Customers

At ~~September 30, 2019,~~March 31, 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 2019	$	172
2020	682
Remainder of 2020			$	527
2021	679		698
2022	667		685
2023	624		642
2024			521
Remaining years	1,847		1,386
Total future minimum lease payments from customers	$	4,671	$	4,459

Remaining ~~Service~~ 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 11 years. These contracts include both fixed and variable transaction price components. At ~~September 30, 2019,~~March 31, 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 2019	$	36
2020	139
Remainder of 2020			$	109
2021	131		137
2022	130		136
2023	130		136
2024			116
Remaining years	754		671
Total future service revenues	$	1,320	$	1,305

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 5—Lease Assets and Liabilities~~

We have agreements with Phillips 66 to lease land underlying or associated with certain of our assets that are classified as operating leases. Due to the economic infeasibility of canceling these leases, we consider them non-cancellable. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices. There are no significant restrictions imposed on us in our lease agreements with regards to distribution payments, asset dispositions or borrowing ability.

Effective with our implementation of ASU No. 2016-02, we elected to discount lease obligations using our incremental borrowing rate. For all leases, we elected the practical expedient to not separate service and lease costs. Our right-of-way agreements in effect prior to January 1, 2019, were not accounted for as leases as they were not initially determined

to be leases at their commencement dates. However, modifications to these agreements or new agreements will be assessed and accounted for accordingly under ASU No. 2016-02. For short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that is reasonably certain to be exercised, we elected to not recognize the ROU asset and corresponding lease liability on our consolidated balance sheet.

Operating lease ROU assets are recorded in the “Other assets” line and lease liabilities are recorded in the “Other current liabilities” and “Other liabilities” lines on our consolidated balance sheet. At September 30, 2019, the total operating lease ROU asset was $44 million.

~~Future minimum lease payments and recorded short- and long-term lease liabilities at September 30, 2019, for operating leases were:~~

Millions
of Dollars

Remainder of 2019 $ 1
2020 3
2021 3
2022 3
2023 3
Remaining years 93
Future minimum lease payments 106
Amount representing interest or discounts (62 )
Total lease liabilities 44
Short-term lease liabilities (1 )
Long-term lease liabilities $ 43

~~Operating lease costs and operating cash outflows for the three and nine months ended September 30, 2019, were not material.~~

~~The weighted-average remaining lease term for our operating leases as of September 30, 2019, was~~ 36 ~~years. The weighted-average discount rate for our operating leases as of September 30, 2019, was 5.9%.~~

Note 6—4—Equity Investments and Loans

Equity Investments

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


			Millions of Dollars					Millions of Dollars
	Percentage Ownership		September 30 2019		December 31 2018	Percentage Ownership		March 31 2020		December 31 2019

Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC (Bakken Pipeline)	25.00	%	$	589	608	25.00	%	$	595	592
Bayou Bridge Pipeline, LLC (Bayou Bridge)	40.00		293		277	40.00		296		294
DCP Sand Hills Pipeline, LLC (Sand Hills)	33.34		599		601	33.34		598		595
DCP Southern Hills Pipeline, LLC (Southern Hills)	33.34		210		206	33.34		218		215
Explorer Pipeline Company (Explorer)	21.94		106		115	21.94		102		105
Gray Oak Pipeline, LLC (Gray Oak)	65.00		748		288
Gray Oak Pipeline, LLC						65.00		799		759
Liberty Pipeline LLC (Liberty)						50.00		103		—
Paradigm Pipeline LLC (Paradigm)	50.00		144		145	50.00		143		143
Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal)	70.00		70		71	70.00		67		70
South Texas Gateway Terminal LLC (South Texas Gateway Terminal)	25.00		49		20	25.00		102		74
STACK Pipeline LLC (STACK)	50.00		113		117	50.00		113		114
Total equity investments			$	2,921	2,448			$	3,136	2,961

Earnings from our equity investments were as follows:


	Millions of Dollars							Millions of Dollars
	Three Months Ended September 30				Nine Months Ended September 30			Three Months Ended March 31
	2019			2018	2019		2018	2020		2019

Bakken Pipeline	$	58		48	167		119	$	57	51
Bayou Bridge	9			2	21		10	10		4
Sand Hills	39			34	113		90	41		36
Southern Hills	10			12	34		28	11		13
Explorer	12			11	26		35	7		3
Gray Oak	(2		)	—	(2	)	—
Gray Oak Pipeline, LLC								5		—
Liberty								—		—
Paradigm	4			2	10		6	4		3
Phillips 66 Partners Terminal	6			6	18		21	—		6
South Texas Gateway Terminal	—			—	—		—	—		—
STACK	3			3	8		7	1		3
Total equity in earnings of affiliates	$	139		118	395		316	$	136	119

~~Gray Oak~~Liberty

In ~~April 2018,~~February 2020, we entered into a Purchase and Sale Agreement with Phillips 66 PDI to acquire its ~~100%~~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 variable interest entity (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 March 31, 2020, our maximum exposure to loss was $103 million, which represented the aggregate book value of our equity investment in Liberty. At March 31, 2020, Phillips 66 had an outstanding guarantee of $113 million to vendors for our proportionate share of the payment of certain purchase obligations of Liberty.

Gray Oak Pipeline, LLC

We have a consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. After deducting a co-venturer’s pending acquisition of a 35% interest in the consolidated holding company, we have an effective ownership interest of 42.25% in Gray Oak ~~Holdings LLC (Holdings LLC), a limited liability company that, at that time, owned a 100% interest in Gray Oak.~~Pipeline, LLC. Gray Oak ~~is developing~~Pipeline, LLC was formed to develop and ~~constructing~~construct the Gray Oak Pipeline which ~~upon completion, will provide~~transports crude oil ~~transportation~~ from the Permian and Eagle Ford to Texas Gulf Coast destinations inthat include Corpus Christi ~~Texas,~~ and the Sweeny ~~Texas,~~ area, including the Phillips 66 Sweeny ~~Refinery. The pipeline system is anticipated~~Refinery, as well as access to ~~begin initial service in~~ the ~~fourth quarter of 2019. We accounted for the acquisition of Holdings LLC as an acquisition of assets under common control accounting. Also in~~Houston market. On April 2018, a co-venturer acquired a 25% interest in Gray Oak, along with sufficient voting rights over key governance provisions such that we no longer could assert control over Gray Oak. As a result, we (through our consolidated subsidiary Holdings LLC) began using the equity method of accounting for our investment in Gray Oak at that time.

In December 2018, a third party exercised its option to acquire a 35% interest in Holdings LLC. Because Holdings LLC’s sole asset was its 75% ownership interest in Gray Oak, which is considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in Holdings LLC during the construction of1, 2020, the Gray Oak Pipeline ~~the legal sale~~commenced full operations from West Texas to Texas Gulf Coast destinations. The Eagle Ford segment of the pipeline commenced operations later in April. Accordingly, the co-venturer’s 35% interest did not qualify as a sale under GAAP. Rather, the third party’s cash contributions to Holdings LLC in 2019 to fund its share of previously incurred and future construction costs plus a premium to us are reflected as a long-term obligation in the “Obligation from equity interest transfer” line on our consolidated balance sheet and financing cash inflows in the “Proceeds from equity interest transfer” line on our consolidated statement of cash flows. After construction of the Gray Oak Pipelineholding company is ~~fully completed, these restrictions expire, and the sale will be recognized under GAAP. We will continue~~expected to ~~control and consolidate Holdings LLC after sale recognition, and therefore the third party’s 35% interest will~~ be recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet ~~at that time.~~in the second quarter. Also at that time, the premium paid by the co-venturer will be recharacterized from a long-term obligation to a gain in our consolidated statement of income. ~~During~~For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the ~~third party~~co-venturer contributed an aggregate of ~~$341~~$23 million ~~into Holdings LLC, which Holdings LLC used~~to the holding company to fund its portion of Gray ~~Oak’s~~Oak Pipeline, LLC’s cash calls.

In February 2019, Holdings LLC transferred a 10% interest in Gray Oak to a third party that exercised a purchase option, for proceeds of $81 million. This transfer was accounted for as a sale and resulted in a decrease in Holdings LLC’s ownership interest in Gray Oak from 75% to 65% and the recognition of an immaterial gain. The proceeds received from this sale are reflected as an investing cash inflow in the “Proceeds from sale of equity interest” line on our consolidated statement of cash flows. At September 30, 2019, our effective ownership interest in the Gray Oak Pipeline, ~~was 42.25%.~~

In ~~June 2019, Gray Oak entered into~~LLC has a third-party term loan facility with ~~an initial~~a borrowing capacity of ~~$1,230~~$1,379 million, ~~which was increased in~~ ~~July 2019~~ ~~to $1,317 million.~~inclusive of accrued interest. Borrowings under the facility are 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. Under the agreement, our maximum potential~~ amount, ~~of future obligations is $556 million,~~ plus any additional accrued interest and associated fees, ~~which would be required~~ if the term loan facility is fully utilized and Gray Oak Pipeline, LLC defaults on certain of its ~~obligations.~~obligations thereunder. At ~~September 30, 2019,~~March 31, 2020, the term loan facility was fully utilized by Gray Oak ~~had borrowings of $904 million outstanding,~~Pipeline, LLC and our 42.25% proportionate exposure under the equity contribution agreement was ~~$382~~$583 million. The net proceeds from the term loan were used by Gray Oak for construction of the Gray Oak Pipeline and repayment of amounts borrowed under a related party loan agreement that we and our co-venturers executed in ~~March 2019~~ ~~and terminated upon the repayment by Gray Oak in June. Our total related party loan to and repayment received from Gray Oak was $95 million.~~

Gray Oak Pipeline, LLC is considered a ~~variable interest entity~~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-venturers jointly direct the activities of Gray Oak Pipeline, LLC that most significantly impact economic performance. At ~~September 30, 2019,~~March 31, 2020, our maximum exposure to loss was ~~$1,130~~$1,382 million, which represented our guarantee of the third-party term loan facility of ~~$382~~$583 million and the aggregate book value of our equity method investment in Gray Oak Pipeline, LLC of ~~$748~~$799 million.

Bakken Pipeline

In March 2019, a wholly owned subsidiary of Dakota Access, LLC (Dakota Access) closed on an offering of $2,500 million aggregate principal amount of unsecured senior notes. ~~The net proceeds from the issuance of these notes were used to repay amounts outstanding under existing credit facilities of~~ Dakota Access and Energy Transfer Crude Oil Company, LLC (ETCO)~~. 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, if Dakota Access receives an unfavorable court ruling in the litigation related to certain disputed construction permits and Dakota Access determines that an equity contribution trigger event has occurred, the ~~venturers~~co-venturers may be severally required to make proportionate equity contributions to Dakota Access and ETCO up to an aggregate maximum of approximately $2,525 million. Our share of the maximum potential equity contributions under the CECU is approximately $631 ~~million.~~million at March 31, 2020. In March 2020, the court in such litigation requested an Environmental Impact Statement from the U.S. Army Corps of Engineers, and requested additional information to make a further decision regarding whether the

Dakota Access Pipeline should be shut down while the Environmental Impact Statement is being prepared. Currently, this ruling does not have any immediate impact on the operations of Dakota Access and ETCO.

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



	Millions of Dollars
	Three Months Ended March 31
	2020		2019

Revenues	$	258	236
Income before income taxes	186		157
Net income	186		157

Note 7—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 ~~IDRs.~~incentive distribution rights (IDRs). Effective August 1, 2019, common units are the only ~~class of~~ participating ~~security.~~securities. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ our preferred units are potentially dilutive securities and were dilutive to net income per limited partner unit. ~~See Note 10—Equity, for a discussion of the elimination of our General Partner’s IDRs and 2% economic interest effective August 1, 2019.~~

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, including those attributable to the General Partner’s IDRs, if applicable.~~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-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 Dollars					Millions of Dollars
	Three Months Ended September 30			Nine Months Ended September 30		Three Months Ended March 31
	2019		2018	2019	2018	2020		2019

Net income	$	237	217	668	575	$	226	198
Less:
General partner’s distributions declared (including IDRs)*	—		61	139	169	—		69
Limited partners’ distributions declared on preferred units*	9		9	28	28	10		10
Limited partners’ distributions declared on common units*	197		99	409	278	199		105
Distributions less than net income	$	31	48	92	100	$	17	14

*Distributions declared are attributable to the indicated periods.



	Limited Partners’ Common Units		Limited Partners’ Preferred Units	Total
Three Months Ended March 31, 2020
Net income (millions):
Distributions declared	$	199	10	209
Distributions less than (more than) net income	17		—	17
Net income (basic)	216		10	226
Dilutive effect of preferred units	10
Net income (diluted)	$	226

Weighted-average units outstanding—basic	228,312,261
Dilutive effect of preferred units	13,819,791
Weighted-average units outstanding—diluted	242,132,052

Net income per limited partner unit—basic (dollars)	$	0.95
Net income per limited partner unit—diluted (dollars)	0.93

Limited Partners’
Common Units

Limited Partners’
Preferred Units

Total
Three Months Ended September 30, 2019
Net income (millions):

Distributions declared $ 197
9
206
Distributions less than net income 31
—
31
Net income (basic) 228
9
237
Dilutive effect of preferred units 9

Net income (diluted) $ 237

Weighted-average units outstanding—basic 192,273,672

Dilutive effect of preferred units 13,819,792

Weighted-average units outstanding—diluted 206,093,464

Net income per limited partner unit—basic (dollars)
$ 1.18

Net income per limited partner unit—diluted (dollars)
1.15


	Limited Partners’ Common Units		General Partner (including IDRs)	Limited Partners’ Preferred Units	Total	Limited Partners’ Common Units		General Partner (including IDRs)	Limited Partners’ Preferred Units	Total
Three Months Ended September 30, 2018
Three Months Ended March 31, 2019
Net income (millions):
Distributions declared	$	99	61	9	169	$	105	69	10	184
Distributions less than net income	45		3	—	48	14		—	—	14
Net income (basic)	144		64	9	217	119		69	10	198
Dilutive effect of preferred units*	7					8
Net income (diluted)	$	151				$	127

Weighted-average units outstanding—basic	123,269,827					124,257,933
Dilutive effect of preferred units*	13,819,791					13,819,791
Weighted-average units outstanding—diluted	137,089,618					138,077,724

Net income per limited partner unit—basic (dollars)	$	1.17				$	0.96
Net income per limited partner unit—diluted (dollars)	1.10					0.92
*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.	*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.					*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 (millions):

Distributions declared $ 409
139
28
576
Distributions less than net income 91
1
—
92
Net income (basic) 500
140
28
668
Dilutive effect of preferred units* 23

Net income (diluted) $ 523

Weighted-average units outstanding—basic 147,367,681

Dilutive effect of preferred units* 13,819,791

Weighted-average units outstanding—diluted 161,187,472

Net income per limited partner unit—basic (dollars)
$ 3.39

Net income per limited partner unit—diluted (dollars)
3.25

*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.

Nine Months Ended September 30, 2018
Net income (millions):

Distributions declared $ 278
169
28
475
Distributions less than net income 97
3
—
100
Net income (basic) 375
172
28
575
Dilutive effect of preferred units* 21

Net income (diluted) $ 396

Weighted-average units outstanding—basic 122,362,079

Dilutive effect of preferred units* 13,819,791

Weighted-average units outstanding—diluted 136,181,870

Net income per limited partner unit—basic (dollars)
$ 3.06

Net income per limited partner unit—diluted (dollars)
2.91

*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.

On ~~October 16, 2019,~~April 21, 2020, the Board of Directors of our General Partner declared a quarterly cash distribution of ~~$0.865~~$0.875 per common unit which, excluding distributions to holders of our preferred units, will result in a total distribution of ~~$197~~$199 million attributable to the ~~third~~first quarter of ~~2019.~~2020. This distribution is payable on ~~November 13, 2019,~~May 14, 2020, to unitholders of record as of ~~October 31, 2019.~~May 1, 2020.

Note 8—6—Properties, Plants and Equipment

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


	Millions of Dollars					Millions of Dollars
	September 30 2019			December 31 2018		March 31 2020			December 31 2019

Land	$	19		19		$	19		19
Buildings and improvements	92			89		94			94
Pipelines and related assets*	1,413			1,398		1,447			1,424
Terminals and related assets*	742			710		761			741
Rail racks and related assets*	137			137		137			137
Processing and related assets*	1,033			842		1,047			1,041
Caverns and related assets*	585			584		585			585
Construction-in-progress	266			216		409			367
Gross PP&E	4,287			3,995		4,499			4,408
Accumulated depreciation	(1,029		)	(943	)	(1,089		)	(1,059	)
Net PP&E	$	3,258		3,052		$	3,410		3,349
*Assets for which we are the lessor.

Note 9—7—Debt


	Millions of Dollars					Millions of Dollars
	September 30 2019			December 31 2018		March 31 2020			December 31 2019

2.646% Senior Notes due February 2020	$	300		300
2.450% Senior Notes due December 2024	300			—		$	300		300
3.605% Senior Notes due February 2025	500			500		500			500
3.550% Senior Notes due October 2026	500			500		500			500
3.750% Senior Notes due March 2028	500			500		500			500
3.150% Senior Notes due December 2029	600			—		600			600
4.680% Senior Notes due February 2045	450			450		450			450
4.900% Senior Notes due October 2046	625			625		625			625
Tax-exempt bonds due April 2020 and April 2021 at 1.910% and 1.885% at September 30, 2019, and December 31, 2018, respectively	75			75
Revolving credit facility due January 2019 at 3.669% at December 31, 2018	—			125
Tax-exempt bonds due April 2020 and April 2021 at 1.465% and 1.85% at March 31, 2020, and December 31, 2019, respectively						75			75
Debt at face value	3,850			3,075		3,550			3,550
Net unamortized discounts and debt issuance costs	(35		)	(27	)	(34		)	(34	)
Total debt	3,815			3,048		3,516			3,516
Short-term debt	(325		)	(50	)	(25		)	(25	)
Long-term debt	$	3,490		2,998		$	3,491		3,491

The fair value of our fixed-rate and floating-rate debt is estimated based on observable market prices and is classified in level 2 of the fair value hierarchy. The fair value of our fixed-rate debt ~~amounted to $3,927~~was $3,083 million and ~~$2,660~~$3,650 million at ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, respectively. The fair value of our floating-rate debt approximated carrying value of $75 million ~~and $200 million~~ at ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018, respectively.~~2019.

~~2019 Senior Notes~~

~~On September 6, 2019, we closed on a public offering of $900 million aggregate principal amount of unsecured notes consisting of:~~


•	~~$300 million~~ ~~aggregate principal amount of~~ ~~2.450%~~ ~~Senior Notes due~~ ~~December 15, 2024~~.


•	~~$600 million~~ ~~aggregate principal amount of~~ ~~3.150%~~ ~~Senior Notes due~~ ~~December 15, 2029~~.

~~Interest on each series of senior notes is payable semi-annually in arrears on June 15~~At March 31, 2020, and December 15 of each year, commencing on June 15, 2020. Total proceeds received from the offering were $892 million, net of underwriting discounts and commissions. On September 13, 2019, we used a portion of the proceeds to repay the $400 million outstanding principal balance of the term loans due ~~March 2020, and on October 15, 2019, we used a portion of the proceeds to repay the $300 million outstanding principal balance of our 2.646% Senior Notes due~~ ~~February 2020~~.

~~Revolving Credit Facility~~

On July 30, 2019, we amended and restated our revolving credit agreement. The agreement extended the termination date from October 3, 2021, to July 30, 2024. No other material amendments were made to the agreement, and the overall capacity remains at $750 million with an option to increase the overall capacity to $1 billion, subject to certain conditions.

~~As of September 30,~~31, 2019, 0 amount had been directly drawn under our $750 million revolving credit facility; however, $3 million and $1 million in letters of credit had been issued ~~that were supported by~~under this ~~facility. As of~~facility at March 31, 2020, and December 31, ~~2018,~~2019, respectively.

On April 1, 2020, we ~~had an aggregate~~repaid at maturity a $25 million tranche of ~~$125 million borrowed and outstanding under the credit facility.~~tax-exempt bonds that was included in short-term debt at March 31, 2020.

Note ~~10—Equity~~

~~ATM Programs~~

Our initial $250 million continuous offering of common units, or at-the-market (ATM) program, was completed in June 2018. At that time, we commenced issuing common units under our second $250 million ATM program. For the three and nine months ended September 30, 2019, on a settlement date basis, we issued an aggregate of 1,635,669 and 2,470,037 common units under our ATM programs, respectively, generating net proceeds of $91 million and $133 million, respectively. For the three and nine months ended September 30, 2018, we issued an aggregate of 898,313 and 2,239,247 common units under our ATM programs, respectively, generating net proceeds of $47 million and $114 million, respectively. Since inception in June 2016 through September 30, 2019, we issued an aggregate of 8,721,001 common units under our ATM programs, generating net proceeds of $452 million, after broker commissions of $5 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 assigned no value; rather, our General Partner’s historical negative equity balance of $1.4 billion as of August 1, 2019, was transferred to Phillips 66’s limited partner equity account.

~~Note 11—~~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.

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

Environmental

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

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 ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~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.

Note ~~12—Cash Flow Information~~9—Equity

~~Capital Expenditures~~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 ~~Investments~~

~~Our~~December 2019, respectively. For the three months ended March 31, 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 months ended March 31, 2019, we issued an aggregate of 622,032 common units under our ATM programs, generating net proceeds of $32 million. Since inception in June 2016 through March 31, 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 ~~investments consisted of:~~

Millions of Dollars
Nine Months Ended
September 30
2019
2018

Cash capital expenditures and investments $ 924
410
Change in capital expenditure accruals (17 ) 35
Total capital expenditures and investments $ 907
445

additions to working capital.

Note ~~13—~~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.

~~Tax Sharing Agreement~~

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

~~Related Party Transactions~~

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

Millions of Dollars
Three Months Ended
September 30 Nine Months Ended
September 30
2019
2018
2019
2018

Operating and maintenance expenses $ 48
46
203
161
General and administrative expenses 14
15
47
45
Total $ 62
61
250
206

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

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

Tax Sharing Agreement

Related Party Transactions

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



	Millions of Dollars
	Three Months Ended March 31
	2020		2019

Operating and maintenance expenses	$	48	105
General and administrative expenses	17		17
Total	$	65	122

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


	Millions of Dollars			Millions of Dollars
	September 30 2019		December 31 2018	March 31 2020		December 31 2019

Prepaid expenses and other current assets	$	3	4	$	12	7
Other assets	44		—	48		44
Deferred revenues	18		60	18		16
Other current liabilities	1		—	1		1
Other liabilities	70		18	68		70

Equity Affiliate ~~Guarantee~~Arrangements

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

In June 2019, we issued a guarantee through an equity contribution agreement for 42.25% of the third-party term loan facility for Gray ~~Oak.~~Oak Pipeline, LLC. See Note 6—4—Equity Investments and Loans, for additional information.

Note 11—Cash Flow Information

Capital Expenditures and Investments

Our capital expenditures and investments consisted of:



	Millions of Dollars
	Three Months Ended March 31
	2020			2019

Cash capital expenditures and investments	$	236		634
Change in capital expenditure accruals	(2		)	(2	)
Total capital expenditures and investments	$	234		632


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

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 identify forward-looking statements. 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.

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.

Operating and Maintenance Expenses

Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses primarily consist of labor expenses (including contractor services), utility costs, and repair and maintenance expenses. Operating and maintenance expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities,

particularly maintenance activities, performed during the period. 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, 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;~~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.

The GAAP performance measure most directly comparable to EBITDA and adjusted EBITDA is net income. The GAAP liquidity measure most directly comparable to EBITDA and distributable cash flow is net cash provided by operating

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

Business Environment

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 crude oil, refined petroleum products and NGL, 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.

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 global markets for crude oil and petroleum products were materially disrupted during the first quarter of 2020 by two significant events:

The outbreak of the Coronavirus Disease 2019 (COVID-19) and its development into a pandemic resulted in significant economic disruption globally. Actions taken by governments to prevent the spread of the disease included severe travel and business restrictions, which resulted in substantial decreases in the demand for many refined petroleum products, particularly gasoline and jet fuel. This drop in demand led refiners to reduce crude oil processing rates and eventually to lower crude oil demand and prices.

The dispute over production levels between Russia and the members of the Organization of Petroleum Exporting Countries (OPEC), including Saudi Arabia, resulted in an oversupply of crude oil, which exacerbated the decline in crude oil prices and eventually led to lower petroleum product prices as well.

We expect these events may result in reduced transportation and terminaling volumes in the near term. In March 2020, we announced that we were reducing our planned capital spending in 2020, including deferring the Liberty Pipeline project and postponing a final investment decision on the ACE Pipeline.

OPEC has agreed to crude oil production cuts into 2022, but the near-term outlook for petroleum product demand remains highly uncertain, prices remain volatile, and margins and volumes remain challenged. The depth and duration of the economic consequences of the COVID-19 pandemic are currently unknown. However, the adverse economic effects on our customers, including Phillips 66, will likely be significant in the near term.

While we believe we have substantially mitigated our indirect exposure to commodity price fluctuations through the minimum volume commitments in our commercial agreements with Phillips 66 and a majority of our joint ventures 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.

RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020, is based on a comparison with the corresponding period of ~~2018.~~2019.


	Millions of Dollars					Millions of Dollars
	Three Months Ended September 30			Nine Months Ended September 30		Three Months Ended March 31
	2019		2018	2019	2018	2020		2019
Revenues and Other Income
Operating revenues—related parties	$	262	256	814	749	$	258	296
Operating revenues—third parties	8		9	21	26	9		6
Equity in earnings of affiliates	139		118	395	316	136		119
Other income	2		1	5	2	1		2
Total revenues and other income	411		384	1,235	1,093	404		423

Costs and Expenses
Operating and maintenance expenses	91		84	315	266	88		139
Depreciation	30		30	88	87	30		29
General and administrative expenses	16		16	51	48	17		18
Taxes other than income taxes	10		8	30	27	11		11
Interest and debt expense	26		28	80	87	29		27
Other expenses	—		1	—	1	2		—
Total costs and expenses	173		167	564	516	177		224
Income before income taxes	238		217	671	577	227		199
Income tax expense	1		—	3	2	1		1
Net income	237		217	668	575	226		198
Less: Preferred unitholders’ interest in net income	9		9	28	28	10		10
Less: General partner’s interest in net income	—		64	140	172	—		69
Limited partners’ interest in net income	$	228	144	500	375	$	216	119

Net cash provided by operating activities	$	276	255	757	652	$	274	205

Adjusted EBITDA	$	323	305	923	828	$	321	281

Distributable cash flow	$	255	218	735	616	$	269	226


	Three Months Ended September 30			Nine Months Ended September 30		Three Months Ended March 31
	2019		2018	2019	2018	2020		2019
Wholly Owned Operating Data
Pipelines
Pipeline revenues (millions of dollars)	$	121	123	347	336	$	111	109
Pipeline volumes⁽¹⁾ (thousands of barrels daily)
Crude oil	998		1,047	986	1,005	941		959
Refined petroleum products and NGL	990		959	918	893	866		768
Total	1,988		2,006	1,904	1,898	1,807		1,727

Average pipeline revenue per barrel (dollars)	$	0.66	0.66	0.67	0.65	$	0.67	0.70

Terminals
Terminal revenues (millions of dollars)	$	41	37	120	114	$	43	40
Terminal throughput (thousands of barrels daily)
Crude oil⁽²⁾	493		436	473	463	460		471
Refined petroleum products	819		754	788	760	748		736
Total	1,312		1,190	1,261	1,223	1,208		1,207

Average terminaling revenue per barrel (dollars)	$	0.33	0.33	0.34	0.34	$	0.39	0.36

Storage, processing and other revenues (millions of dollars)	$	108	105	368	325	$	113	153
Total operating revenues (millions of dollars)	$	270	265	835	775	$	267	302

Joint Venture Operating Data⁽³⁾
Crude oil, refined petroleum products and NGL (thousands of barrels daily)	786		668	749	636	838		687

⁽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.

The following tables present reconciliations of EBITDA and adjusted EBITDA to net income, and EBITDA and distributable cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.


	Millions of Dollars								Millions of Dollars
	Three Months Ended September 30				Nine Months Ended September 30				Three Months Ended March 31
	2019		2018		2019		2018		2020		2019
Reconciliation to Net Income
Net income	$	237	217		668		575		$	226	198
Plus:
Depreciation	30		30		88		87		30		29
Net interest expense	25		28		78		86		28		27
Income tax expense	1		—		3		2		1		1
EBITDA	293		275		837		750		285		255
Plus:
Proportional share of equity affiliates’ net interest, taxes and depreciation and amortization	30		30		85		73		35		26
Expenses indemnified or prefunded by Phillips 66	—		—		1		1		—		—
Transaction costs associated with acquisitions	—		—		—		4		1		—
Adjusted EBITDA	323		305		923		828		321		281
Plus:
Deferred revenue impacts*^†	—		(5	)	(4	)	(5	)	2		—
Less:
Equity affiliate distributions less than proportional EBITDA	9		22		31		50		1		9
Maintenance capital expenditures^†	25		23		46		43		15		9
Net interest expense	25		28		78		86		28		27
Preferred unit distributions	9		9		28		28		10		10
Income taxes paid	—		—		1		—
Distributable cash flow	$	255	218		735		616		$	269	226

*Difference between cash receipts and revenue recognition.

^†Excludes Merey Sweeny capital reimbursements and turnaround impacts.


	Millions of Dollars									Millions of Dollars
	Three Months Ended September 30					Nine Months Ended September 30				Three Months Ended March 31
	2019			2018		2019		2018		2020			2019
Reconciliation to Net Cash Provided by Operating Activities
Net cash provided by operating activities	$	276		255		757		652		$	274		205
Plus:
Net interest expense	25			28		78		86		28			27
Income tax expense	1			—		3		2		1			1
Changes in working capital	(9		)	(7	)	14		(34	)	(12		)	34
Undistributed equity earnings	(4		)	(2	)	(7	)	5		(4		)	(2	)
Deferred revenues and other liabilities	2			1		(6	)	44		—			(9	)
Other	2			—		(2	)	(5	)	(2		)	(1	)
EBITDA	293			275		837		750		285			255
Plus:
Proportional share of equity affiliates’ net interest, taxes and depreciation and amortization	30			30		85		73		35			26
Expenses indemnified or prefunded by Phillips 66	—			—		1		1		—			—
Transaction costs associated with acquisitions	—			—		—		4		1			—
Adjusted EBITDA	323			305		923		828		321			281
Plus:
Deferred revenue impacts*^†	—			(5	)	(4	)	(5	)	2			—
Less:
Equity affiliate distributions less than proportional EBITDA	9			22		31		50		1			9
Maintenance capital expenditures^†	25			23		46		43		15			9
Net interest expense	25			28		78		86		28			27
Preferred unit distributions	9			9		28		28		10			10
Income taxes paid	—			—		1		—
Distributable cash flow	$	255		218		735		616		$	269		226

*Difference between cash receipts and revenue recognition.

^†Excludes Merey Sweeny capital reimbursements and turnaround impacts.

Statement of Income Analysis

Operating revenues ~~increased $60~~decreased $35 million, or 12%, in the ~~nine-month period~~first quarter of ~~2019.~~2020. The ~~increase~~decrease was attributable to the recognition of ~~previously~~ deferred revenues ~~associated with fees charged to Phillips 66~~in the first quarter of 2019 related to turnaround activity at Merey Sweeny LLC (Merey Sweeny) ~~in the first quarter of 2019, and~~, partially offset by higher volumes ~~and rates~~ on wholly owned ~~assets.~~assets during the three-month period of 2020.

Equity in earnings of affiliates increased ~~$21~~$17 million, or ~~18%, and increased $79 million, or 25%~~14%, in the ~~third~~first quarter ~~and nine-month period~~ of ~~2019, respectively.~~2020. The ~~increases in both periods were~~increase was attributable to higher earnings from Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO), ~~together referred to as the Bakken~~Bayou Bridge Pipeline, LLC, Gray Oak Pipeline, LLC and DCP Sand Hills Pipeline, LLC, ~~(Sand Hills), and Bayou Bridge Pipeline, LLC (Bayou Bridge),~~ primarily due to improved volumes. These higher ~~volumes. In addition, the increase in the nine-month period of 2019 was~~earnings were partially offset by a decrease in earnings from ~~Explorer Pipeline Company~~Phillips 66 Partners Terminal due to ~~a one-time benefit from U.S. tax reform in the first quarter of 2018.~~lower contractual rates.

Operating and maintenance expenses ~~increased~~decreased by ~~$49~~$51 million, or ~~18%~~37%, in the ~~nine-month period~~first quarter of ~~2019.~~2020. The ~~increase~~decrease was primarily due to turnaround activity at Merey ~~Sweeny.~~Sweeny in 2019.

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, ~~and~~ issuances of additional debt and equity ~~securities.~~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 ~~$757~~$274 million in cash from operations during the first ~~nine~~three months of ~~2019,~~2020, an improvement over cash from operations of ~~$652~~$205 million for the corresponding period of ~~2018.~~2019. The improvement was primarily driven by ~~higher~~lower deferred revenue impacts, lower operating ~~revenues~~ and maintenance expenses and higher 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 three months of 2020, cash from operations included distributions of $141 million from our equity affiliates, ~~offset~~compared with $121 million during the same period of 2019. We cannot control the amount or timing of future dividends from equity affiliates; therefore, future dividend payments by ~~higher operating expenses.~~these and other equity affiliates are not assured.

ATM Programs

~~Our initial~~We have authorized an aggregate of $750 million under three $250 million continuous ~~offering~~offerings of common units, or at-the-market (ATM) ~~program, was completed~~programs. The first two programs concluded in June ~~2018. At that time, we commenced issuing common units under our second $250 million ATM program.~~2018 and December 2019, respectively. For the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, on a settlement date basis, we issued an aggregate of 1,635,669 and 2,470,037 common units under our ATM programs, respectively, generating net proceeds of $91 million and $133 million, respectively. For the three and nine months ended September 30, 2018, we issued an aggregate of 898,313 and 2,239,247 common units under our ATM programs, respectively, generating net proceeds of $47 million and $114 million, respectively. Since inception in June 2016 through September 30, 2019, we issued an aggregate of 8,721,00140,570 common units under our ATM programs, generating net proceeds of ~~$452~~$2 million. For the three months ended March 31, 2019, we issued an aggregate of 622,032 common units under our ATM programs, generating net proceeds of $32 million. Since inception in June 2016 through March 31, 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

~~On July 30, 2019, we amended~~At March 31, 2020, and restated our revolving credit agreement. The agreement extended the termination date from October 3, 2021 to July 30, 2024. No other material amendments were made to the agreement, and the overall capacity remains at $750 million with an option to increase the overall capacity to $1 billion, subject to certain conditions.

~~As of September 30,~~December 31, 2019, no amount had been directly drawn under our $750 million revolving credit facility; however, $3 million and $1 million in letters of credit had been issued ~~that were supported by~~under this ~~facility.~~facility at March 31, 2020, and December 31, 2019, respectively.

~~2019 Senior Notes~~

~~On September 6, 2019, we closed on a public offering of $900 million aggregate principal amount of unsecured notes consisting of:~~

~~$300 million aggregate principal amount of 2.450% Senior Notes due December 15, 2024.~~

~~$600 million aggregate principal amount of 3.150% Senior Notes due December 15, 2029.~~

Interest on each series of senior notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2020. Total proceeds received from the offering were $892 million, net of underwriting discounts and commissions. On September 13, 2019, we used a portion of the proceeds to repay the $400 million outstanding principal balance of the term loans due March 2020, and on October 15, 2019, we used a portion of the proceeds to repay the $300 million outstanding principal balance of our 2.646% Senior Notes due February 2020.

~~Transfers~~Transfer of Equity Interests

~~In December 2018,~~We have a ~~third party exercised an option to acquire~~consolidated holding company that owns 65% of Gray Oak Pipeline, LLC. After deducting a co-venturer’s pending acquisition of a 35% interest in the consolidated holding company, we have an effective ownership interest of 42.25% in Gray Oak Holdings LLC (Holdings LLC), a consolidated subsidiary. This transfer did not qualify as a sale under GAAP because of certain restrictions placed on the acquirer. The contributions received by Holdings LLC from the third party to cover capital calls fromPipeline, LLC. Gray Oak Pipeline, LLC ~~(Gray Oak) are presented~~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. On April 1, 2020, the Gray Oak Pipeline commenced full operations from West Texas to Texas Gulf Coast destinations. The Eagle Ford segment of the pipeline commenced operations later in April. Accordingly, the co-venturer’s 35% interest in the holding company is expected to be recharacterized from a long-term obligation to a noncontrolling interest on our consolidated balance sheet ~~and financing cash inflows on~~in the second quarter. Also at that time, the premium paid by the co-venturer will be recharacterized from a long-term obligation to a gain in our consolidated statement of ~~cash flows until construction of~~income. For the ~~Gray Oak Pipeline is completed and the restrictions expire. During the first~~ three months ~~of 2019,~~ended March 31, 2020, the ~~third party~~co-venturer contributed an aggregate of ~~$341~~$23 million ~~into Holdings LLC, which Holdings LLC used~~to the holding company to fund its portion of Gray ~~Oak’s~~Oak Pipeline, LLC’s cash calls.

In February 2019, Holdings LLC sold a 10% ownership interest in Gray Oak to a third party that exercised a purchase option, for proceeds of $81 million. The proceeds received from this sale are presented as an investing cash inflow on our consolidated statement of cash flows.

See Note 6—4—Equity Investments and Loans, in the Notes to Consolidated Financial Statements, for additional information regarding these transactions.

Shelf Registration

We have a universal shelf registration statement on file with the U.S. Securities and Exchange Commission (SEC) under which we, as a well-known seasoned issuer, have the ability to issue and sell an indeterminate amount of common units representing limited partner interests, preferred units representing limited partner interests, and debt securities.

Off-Balance Sheet Arrangements

In March 2019, a wholly owned subsidiary of Dakota Access closed on an offering of $2,500 million aggregate principal amount of unsecured senior notes. ~~The net proceeds from the issuance of these notes were used to repay amounts outstanding under existing credit facilities of Dakota Access and ETCO.~~ 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, if Dakota Access receives an unfavorable court ruling in the litigation related to certain disputed construction permits and Dakota Access determines that an equity contribution trigger event has occurred, the ~~venturers~~co-venturers may be severally required to make proportionate equity contributions to Dakota Access and ETCO up to an aggregate maximum of approximately $2,525 million. Our share of the maximum potential equity contributions under the CECU is approximately $631 ~~million.~~million at March 31, 2020. In March 2020, the court in such litigation requested an Environmental Impact Statement from the U.S. Army Corps of Engineers, and requested additional information to make a further decision regarding whether the Dakota Access Pipeline should be shut down while the Environmental Impact Statement is being prepared. Currently, this ruling does not have any immediate impact on the operations of Dakota Access and ETCO.

In ~~June 2019~~, Gray Oak ~~entered into~~Pipeline, LLC has a third-party term loan facility with ~~an initial~~a borrowing capacity of ~~$1,230~~$1,379 million, ~~which was increased in~~ ~~July 2019~~ ~~to $1,317 million.~~inclusive of accrued interest. Borrowings under the facility are 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. Under the agreement, our maximum potential~~ amount, ~~of future obligations is $556 million,~~ plus any additional accrued interest and associated fees, ~~which would be required~~ if the term loan facility is fully utilized and Gray Oak Pipeline, LLC defaults on certain of its ~~obligations.~~obligations thereunder. At ~~September 30, 2019,~~March 31, 2020, the term loan facility was fully utilized by Gray Oak ~~had borrowings of $904 million outstanding,~~Pipeline, LLC and our 42.25% proportionate exposure under the equity contribution agreement was ~~$382~~$583 million. The net proceeds from the term loan were used by Gray Oak for construction of the Gray Oak Pipeline and repayment of amounts borrowed under a related party loan agreement that we and our co-venturers executed in ~~March 2019~~ ~~and terminated upon the repayment by Gray Oak in June. Our total related party loan to and repayment received from Gray Oak was $95 million.~~

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. ~~Expansion~~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. In contrast, 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.

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 ~~of our Gray Oak~~ 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 certain surplus determinations. Further, we generally fund expansion capital spending with both operating and financing cash flows and fund maintenance capital spending with operating cash flows.

Our capital expenditures and investments were:


	Millions of Dollars				Millions of Dollars
	Nine Months Ended September 30				Three Months Ended March 31
	2019			2018	2020			2019
Capital expenditures and investments
Capital expenditures and investments	$	907		445	$	234		632
Capital expenditures and investments funded by Gray Oak joint venture partners*	(422		)	—
Capital expenditures and investments funded by certain joint venture partners*					(23		)	(422	)
Adjusted capital spending	$	485		445	$	211		210

Expansion	$	433		399	$	196		195
Maintenance	52			46	15			15

*See Note 6—4—Equity Investments and Loans, in the Notes to Consolidated Financial Statements, for additional information.

Our capital expenditures and investments for the first ~~nine~~three months of ~~2019~~2020 were primarily associated with the following activities:

Contributions to Gray Oak Pipeline, LLC to progress construction of the pipeline which will provide crude oil transportation from the Permian Basin and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi, the Sweeny area, including the Phillips 66 Sweeny Refinery, as well as access to the Houston market.system.

~~Construction activities related~~Contributions to ~~increasing storage capacity at Clemens Caverns.~~

~~Construction activities related~~Liberty Pipeline LLC to ~~a new ethane pipeline~~progress construction of the Liberty Pipeline, which will transport crude oil from the ~~Clemens Caverns~~Rockies and Bakken production areas to ~~petrochemical facilities in Gregory, Texas, near Corpus Christi.~~

~~Construction activities related to the new isomerization unit at the Phillips 66 Lake Charles Refinery.~~Cushing, Oklahoma. As discussed below, this project has been deferred.

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

~~Contributions~~Construction activities related to ~~Bayou Bridge~~increasing capacity on the Sweeny to ~~complete the pipeline segment from Lake Charles to St. James, Louisiana.~~Pasadena refined petroleum products pipeline.

Construction activities related to a new ethane pipeline from the ~~Lake Charles products pipeline that connects~~Clemens Caverns to petrochemical facilities in Gregory, Texas, near Corpus Christi.

Construction activities related to increasing storage ~~in Lake Charles to its Clifton Ridge Marine Terminal.~~capacity at Clemens Caverns.

Spending associated with other return, reliability and maintenance projects.

2020 Budget Update

In late March 2020, we announced an update to the 2020 capital budget that was included in our 2019 Annual Report on Form 10-K. In response to the current challenging business environment, we reduced our 2020 capital spending plans from $962 million to $932 million. Capital spending net of cash capital contributions from certain joint venture partners (adjusted capital spending) is expected to be $863 million. The development and construction of the Liberty Pipeline system has been deferred and we are postponing our final investment decision regarding the ACE Pipeline. We will continue to fund Liberty Pipeline’s cash calls in 2020, primarily for its committed purchases from vendors.

Cash Distributions

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 ~~third~~first quarter of ~~2019.~~2020. This distribution is payable on ~~November 13, 2019,~~May 14, 2020, to preferred unitholders of record as of ~~October~~May 1, 2020.

Debt Repayment

On April 1, 2020, we repaid at maturity a $25 million tranche of tax-exempt bonds that was included in short-term debt at March 31, ~~2019.~~2020.

Contingencies

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 ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~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.

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

Indemnification and Excluded Liabilities

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements. You can 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.

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

The 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 transport, fractionate, process, terminal and store.

Changes to the tariff rates with respect to volumes that we transport 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.

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 disruption or natural disasters; riots, strikes, lockouts or other industrial disturbances; or 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 suppliers or customers.

Our inability to obtain or maintain permits in a timely manner, if at all, including those necessary for capital projects, or the revocation or modification of existing permits.

Our 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.

Our ability to successfully execute growth strategies, whether through organic growth or acquisitions.

The operation, financing and distribution decisions of our joint ventures.

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.

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; 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 and outbreaks of diseases.

Direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war.

Our ability to comply with the terms of our credit facility, indebtedness and other financing arrangements, which, if accelerated, we may not be able to repay.

Our ability to incur additional indebtedness or our ability to obtain financing on terms that we deem acceptable, including the refinancing of our current obligations; higher interest rates and costs of financing would increase our expenses.

Changes in tax, environmental and other laws and regulations.

The factors generally described in “Item 1A. Risk Factors” in our ~~2018~~2019 Annual Report on Form 10-K filed with the SEC on February ~~22, 2019.~~21, 2020 and in Item 1A. of Part II of this Quarterly Report on Form 10-Q.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~Commodity Price Risk~~

Our commodity price risk and interest rate risk at ~~September 30, 2019,~~March 31, 2020, did not differ materially from that disclosed under Item 7A of our ~~2018~~2019 Annual Report on Form 10-K.

~~Interest Rate Risk~~

During the third quarter of 2019, we repaid our $400 million term loans due March 2020. On September 6, 2019, we issued $900 million in aggregate principal amount of senior notes with varying maturity dates. Fixed-rate debt, such as our senior notes, exposes us to changes in the fair value of our debt due to changes in market interest rates. The following table presents the principal cash flow and associated interest rates of these notes by their expected maturity dates, as of September 30, 2019. We estimated the fair value using quoted market prices.

Millions of Dollars, Except as Indicated
Expected Maturity Date Fixed-Rate Maturity
Weighted-Average Interest Rate
Floating Rate Maturity
Weighted-Average Interest Rate

At September 30, 2019
2019 $ —
$ —

2020 300
2.6 % 25
1.9 %
2021 —
50
1.9 %
2022 —
—

2023 —
—

Thereafter 3,475
3.8 % —

Total $ 3,775
$ 75

Fair value $ 3,927
$ 75

Item 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our General Partner’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of ~~September 30, 2019,~~March 31, 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 ~~September 30, 2019.~~March 31, 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 ~~September 30, 2019,~~March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 ~~11—Contingencies,~~10—Related Party Transactions, in the Notes to Consolidated Financial Statements, for additional information.

This section identifies 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

~~There were no material changes from~~The following risk factor should be read in conjunction with the risk factors ~~disclosed~~included in Item 1A of our ~~2018~~2019 Annual Report on Form 10-K.

The outbreak of Coronavirus Disease 2019 (COVID-19) 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 those of our customers, suppliers and other counterparties.

The outbreak of COVID-19 is negatively impacting 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 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 customers, including Phillips 66, counterparties or suppliers, 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.

Item 6. EXHIBITS

Incorporated by Reference
Exhibit
Number Exhibit Description Form Exhibit Number Filing Date SEC File No.

3.1

Third Amended and Restated Agreement of Limited Partnership of Phillips 66 Partners LP dated as of August 1, 2019.
8-K 3.1 8/1/2019 001-36011

As permitted by Item 601(b)(4)(iii)(A) of
Regulation S-K, the partnership has not filed with this Quarterly Report on Form 10- Q certain instruments defining the rights of holders of long-term debt of the partnership and its subsidiaries because the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the partnership and its subsidiaries on a consolidated basis. The partnership agrees to furnish a copy of such agreements to the Commission upon request.

10.1

Partnership Interests Restructuring Agreement, dated as of July 24, 2019, by and between Phillips 66 Partners LP and Phillips 66 Partners GP LLC.
8-K 10.1 7/26/2019 001-36011

10.2

Amended and Restated Credit Agreement dated as of July 30, 2019, among Phillips 66 Partners Holdings LLC, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.
8-K 10.1 8/1/2019 001-36011

31.1*

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

31.2*

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

32*

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

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

101.SCH* Inline XBRL Taxonomy Extension Schema Document.

101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB* Inline XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document.

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



		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Exhibit Number	Filing Date	SEC File No.

1.1	Equity Distribution Agreement, dated as of February 25, 2020, by and among the Partnership and the General Partner, on the one hand, and RBC Capital Markets, LLC, BofA Securities, Inc., Barclays Capital Inc., BMO Capital Markets Corp., BNP Paribas Securities Corp., BTIG, LLC, CIBC World Markets Corp., Citigroup Global Markets Inc., Commerz Markets LLC, Credit Agricole Securities (USA) Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, HSBC Securities (USA) Inc., J.P. Morgan Securities LLC, Jefferies LLC, Mizuho Securities USA LLC, MUFG Securities Americas Inc., Scotia Capital (USA) Inc., SMBC Nikko Securities America, Inc., SunTrust Robinson Humphrey, Inc., TD Securities (USA) LLC, and Wells Fargo Securities, LLC.	8-K	1.1	2/25/2020	001-36011

	As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the partnership has not filed with this Quarterly Report on Form 10- Q certain instruments defining the rights of holders of long-term debt of the partnership and its subsidiaries because the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the partnership and its subsidiaries on a consolidated basis. The partnership agrees to furnish a copy of such agreements to the Commission upon request.

10.1*	Eighth Amendment to the Omnibus Agreement, dated as of March 1, 2020, by and among Phillips 66 Partners LP, Phillips 66 Partners GP LLC, Phillips 66 Company, Phillips 66 Pipeline LLC, Phillips 66 Partners Holdings LLC, and Phillips 66 Carrier LLC.

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

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

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

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

101.SCH*	Inline XBRL Taxonomy Extension Schema Document.

101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*	Inline XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document.

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

* Filed herewith.

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: ~~October 25, 2019~~May 1, 2020

3836



	Page
Part I – Financial Information	1

Item 1. Financial Statements	1
Consolidated Statement of Income	1
Consolidated Statement of Comprehensive Income	2
Consolidated Balance Sheet	3
Consolidated Statement of Cash Flows	4
Consolidated Statement of Changes in Equity	5
Notes to Consolidated Financial Statements	76

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2219

Item 3. Quantitative and Qualitative Disclosures About Market Risk	3533

Item 4. Controls and Procedures	3533

Part II – Other Information	3634

Item 1. Legal Proceedings	3634

Item 1A. Risk Factors	3634

Item 6. Exhibits	3735

Signatures	3836



Nine Months Ended September 30, 2018
Net income (millions):
Distributions declared	$	278	169	28	475
Distributions less than net income	97		3	—	100
Net income (basic)	375		172	28	575
Dilutive effect of preferred units*	21
Net income (diluted)	$	396

Weighted-average units outstanding—basic	122,362,079
Dilutive effect of preferred units*	13,819,791
Weighted-average units outstanding—diluted	136,181,870

Net income per limited partner unit—basic (dollars)	$	3.06
Net income per limited partner unit—diluted (dollars)	2.91
*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.



	Millions of Dollars, Except as Indicated
Expected Maturity Date	Fixed-Rate Maturity		Weighted-Average Interest Rate		Floating Rate Maturity		Weighted-Average Interest Rate

At September 30, 2019
2019	$	—			$	—
2020	300		2.6	%	25		1.9	%
2021	—				50		1.9	%
2022	—				—
2023	—				—
Thereafter	3,475		3.8	%	—
Total	$	3,775			$	75

Fair value	$	3,927			$	75

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Units, Representing Limited ~~Partner~~Partnership Interests

New York Stock Exchange