Phillips 66 Partners LP
Annual Report 2018

Plain-text annual report

Table of Contents Index to Financial Statements (Mark One) [X] For the fiscal year ended 2018 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 December 31, 2018 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-36011 Phillips 66 Partners LP (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 38-3899432 (I.R.S. Employer Identification No.) 2331 CityWest Blvd., Houston, Texas 77042 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (855) 283-9237 Securities registered pursuant to Section 12(b) of the Act: Common Units, Representing Limited Partnership Interests Title of each class Name of each exchange on which registered New York Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 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. 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). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging growth company [ ] [X] Yes [ ] No [ ] Yes [X] No [X] Yes [ ] No [X] Yes [ ] No [X] If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). The aggregate market value of the registrant’s common units held by non-affiliates of the registrant on June 29, 2018 , the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $51.06, was $2,756 million . This figure excludes common units beneficially owned by the directors and executive officers of Phillips 66 Partners GP LLC, our General Partner, and Phillips 66 and its subsidiaries. The registrant had 124,104,055 common units outstanding as of January 31, 2019 . [ ] Yes [X] No [ ] Documents incorporated by reference: None Table of Contents Index to Financial Statements Item 1 and 2. Business and Properties 1A. Risk Factors 1B. Unresolved Staff Comments 3. Legal Proceedings 4. Mine Safety Disclosures PHILLIPS 66 PARTNERS LP TABLE OF CONTENTS PART I PART II 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 6. Selected Financial Data 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7A. Quantitative and Qualitative Disclosures About Market Risk Cautionary Statement Regarding Forward-Looking Statements 8. Financial Statements and Supplementary Data 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 9A. Controls and Procedures 9B. Other Information PART III 10. Directors, Executive Officers and Corporate Governance 11. Executive Compensation 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 13. Certain Relationships and Related Transactions, and Director Independence 14. Principal Accounting Fees and Services PART IV 15. Exhibits, Financial Statement Schedules 16. Form 10-K Summary Signatures Page 1 15 32 32 32 33 35 36 55 57 58 98 98 98 99 103 115 117 119 120 120 126 Table of Contents Index to Financial Statements Unless the context otherwise indicates, all references to “Phillips 66 Partners LP,” “the Partnership,” “us,” “our,” “we,” or similar expressions refer to Phillips 66 Partners LP, including its consolidated subsidiaries, and references to “Phillips 66” include its consolidated subsidiaries. This Annual Report on Form 10-K contains forward-looking statements including, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions. 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 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.” Items 1 and 2. BUSINESS AND PROPERTIES ORGANIZATIONAL STRUCTURE PART I Phillips 66 Partners LP, headquartered in Houston, Texas, is a Delaware limited partnership formed in 2013 by Phillips 66 Company and Phillips 66 Partners GP LLC (our General Partner), both wholly owned subsidiaries of Phillips 66. On July 26, 2013, we completed our initial public offering, and our common units trade on the New York Stock Exchange (NYSE) under the symbol PSXP. On August 1, 2015, Phillips 66 Company transferred all of its limited partner interest in us and its 100 percent interest in our General Partner to its wholly owned subsidiary, Phillips 66 Project Development Inc. (Phillips 66 PDI). As of December 31, 2018 , Phillips 66, through Phillips 66 PDI, owned 68,760,137 common units, representing a 54 percent limited partner interest, as well as a 100 percent interest in our General Partner, which owned 2,480,051 general partner units, representing a 2 percent general partner interest. The public owned 55,343,918 common units, representing a 44 percent limited partner interest, and owned 13,819,791 perpetual convertible preferred units. We are a growth-oriented master limited partnership formed to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum products and natural gas liquids (NGL) transportation, processing, terminaling and storage facilities and systems. We are managed and operated by the executive officers of our General Partner, with oversight provided by its Board of Directors. Neither we nor our subsidiaries have any employees. Our General Partner has the sole responsibility for providing the employees and other personnel necessary to conduct our operations. We primarily generate revenue by providing fee-based transportation, processing, terminaling, storage and NGL fractionation services to Phillips 66 and other customers. Our equity affiliates primarily generate revenue from transporting and terminaling NGL, refined petroleum products and crude oil. Since we do not own any of the NGL, crude oil and refined petroleum products we handle and do not engage in the trading of NGL, crude oil and refined petroleum products, 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. 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, Phillips 66 pays us deficiency payments based on the calculations described in the agreements. We believe these agreements promote stable and predictable cash flows, and they are the source of a substantial portion of our revenue. We also have several other agreements with Phillips 66, including an amended omnibus agreement and an operational services agreement. See Note 21—Related Party Transactions , in the Notes to Consolidated Financial Statements, for a summary of all related party agreements. Our operations are all conducted in the United States and comprise one reportable segment. See Item 8. Financial Statements and Supplementary Data, for financial information on our operations and assets. 1 Table of Contents Index to Financial Statements 2018 DEVELOPMENTS We are constructing the Gray Oak Pipeline system, which will provide crude oil transportation from the Permian Basin and Eagle Ford to destinations in Corpus Christi and Freeport markets on the Texas Gulf Coast, including the Phillips 66 Sweeny Refinery. Supported by customer commitments, capacity of the pipeline will be 900,000 barrels per day (BPD). At December 31, 2018, we had an effective ownership interest in the pipeline system of 48.75 percent. In February 2019, another party exercised its option to acquire an interest in the pipeline system that reduced our effective ownership interest to 42.25 percent. The Gray Oak Pipeline system is anticipated to be in service by the end of 2019. In Corpus Christi, the Gray Oak Pipeline will connect to multiple terminals, including the new South Texas Gateway Terminal under development by a co-venturer. The marine terminal is planned to have two deepwater docks and storage capacity of 6.5 to 7 million barrels. It is expected to begin operations by mid-2020. We own a 25 percent interest in the terminal. We are constructing a 25,000-BPD isomerization unit at the Phillips 66 Lake Charles Refinery to increase production of higher-octane gasoline blend components. The project includes a long-term agreement with Phillips 66 for processing services with a minimum volume commitment. Completion is expected in the third quarter of 2019. The Bayou Bridge Pipeline operates from Nederland, Texas, to Lake Charles, Louisiana. An extension of the pipeline from Lake Charles to St. James, Louisiana, is expected to be in service in March 2019. We own a 40 percent interest in the joint venture. The Sand Hills Pipeline expansion was completed in the fourth quarter of 2018, increasing the capacity to 485,000 BPD. The pipeline transports natural gas liquids (NGL) from the Permian Basin and Eagle Ford to the Texas Gulf Coast. We own a 33.34 percent interest in the joint venture. In connection with Phillips 66’s project to add NGL fractionation capacity at the Sweeny Hub, we are increasing storage capacity at Clemens Caverns from 9 million barrels to 15 million barrels. The caverns project is expected to be completed in late 2020. We are expanding the Sweeny to Pasadena Pipeline by 80,000 BPD. In addition, product storage capacity will be increased by 300,000 barrels at the Pasadena Terminal and new connectivity will be added to third-party terminals. The project is expected to be completed in the second quarter of 2020. We are constructing a new pipeline that will connect storage in Lake Charles, Louisiana, to our Clifton Ridge Marine Terminal. This connection is expected to enable additional product exports of up to 50,000 BPD from the Phillips 66 Lake Charles Refinery. The project is backed by a long-term agreement with Phillips 66 that includes a minimum volume commitment. The pipeline is expected to be completed in the second quarter of 2019. 2 Table of Contents Index to Financial Statements SUMMARY OF ASSETS AND OPERATIONS Pipeline Assets The following table presents certain information regarding our pipeline assets as of December 31, 2018 . Each system listed below has an associated commercial agreement with Phillips 66. System Name Billings Crude System Glacier Billings Products System State of Origination/Terminus Commodity Handled Interest Length (Miles) Gross Capacity (MBD) Associated Phillips 66 Refinery Montana Crude Oil 79% 623 126 Billings Seminoe Montana/Wyoming Refined Petroleum Products Borger Crude System Line O New Mexico Crude West Texas Crude Borger Products System ATA Line Borger to Amarillo SAAL SAAL Oklahoma/Texas New Mexico/Texas Texas Crude Oil Crude Oil Crude Oil Texas/New Mexico Refined Petroleum Products Texas Texas Texas Refined Petroleum Products Refined Petroleum Products Refined Petroleum Products Clifton Ridge Crude System Louisiana Crude Oil Cross-Channel Connector Products System Eagle Ford Gathering System Gold Line Products System Texas Texas Refined Petroleum Products Crude Oil Gold Line Pipeline Texas/Illinois Refined Petroleum Products Paola Products Pipeline Kansas Refined Petroleum Products Hartford Connector Products System Hartford, Illinois to Explorer Pipeline Wood River Refinery to Hartford, Illinois Ponca Crude System CushPo North Texas Crude Oklahoma Crude Ponca Products System Brown Line Cherokee East Cherokee North Cherokee South Medford River Parish NGL System Illinois Illinois Refined Petroleum Products Refined Petroleum Products Oklahoma Texas Texas/Oklahoma Crude Oil Crude Oil Crude Oil Oklahoma/Kansas Natural Gas Liquids Oklahoma/Missouri Refined Petroleum Products Oklahoma/Kansas Refined Petroleum Products Oklahoma Oklahoma Louisiana Refined Petroleum Products Natural Gas Liquids Natural Gas Liquids Standish Pipeline Oklahoma/Kansas Refined Petroleum Products Sweeny to Pasadena Products System Texas Refined Petroleum Products 3 100 100 100 100 50 100 33 54 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 342 33 Billings 276 129 699 293 93 102 19 10 5 28 37 Borger 106 Borger 156 Borger 34 Borger 76 Borger 33 Borger 30 Borger 260 Lake Charles 180 Sweeny 54 Sweeny 686 120 106 96 Borger/Ponca City Borger/Ponca City 1 3 62 224 217 76 287 29 98 42 510 92 120 430 Wood River 80 Wood River 130 Ponca City 28 Ponca City 100 Ponca City 26 Ponca City 55 Ponca City 57 Ponca City 46 Ponca City 10 Ponca City 133 Alliance 72 Ponca City 294 Sweeny Table of Contents Index to Financial Statements The following table presents certain information regarding our equity investment pipeline assets as of December 31, 2018 . System Name State of Origination/Terminus Commodity Handled Interest Length (Miles) Gross Capacity (MBD) Bakken Pipeline Bayou Bridge Pipeline Explorer Pipeline Sacagawea Pipeline Sand Hills Pipeline Southern Hills Pipeline STACK Pipeline North Dakota/Texas Texas/Louisiana Crude Oil Crude Oil Texas/Indiana North Dakota Texas Oklahoma/Texas Oklahoma Refined Petroleum Products Crude Oil Natural Gas Liquids Natural Gas Liquids Crude Oil 4 25.00% 40.00 21.94 49.50 33.34 33.34 50.00 1,915 49 1,830 95 1,466 941 149 525 480 660 175 485 192 250 Table of Contents Index to Financial Statements Terminal, Rail Rack and Storage Assets The following table presents certain information regarding our wholly owned terminal, rail rack and storage assets as of December 31, 2018 . Each asset listed below has an associated commercial agreement with Phillips 66. Facility Name Location Commodity Handled Gross Storage Capacity (MBbl) Gross Loading Capacity (MBD) Associated Phillips 66 Refinery Bayway Products System Linden Tremley Point Bayway Rail Rack Billings Crude System Buffalo Crude Billings Crude Cut Bank Billings Products System Casper Sheridan Borger Crude System Buxton Crude Odessa Crude Borger Products System New Jersey New Jersey Refined Petroleum Products Refined Petroleum Products New Jersey Crude Oil Montana Montana Montana Crude Oil Crude Oil Crude Oil Wyoming Wyoming Refined Petroleum Products Refined Petroleum Products Oklahoma Texas Crude Oil Crude Oil Albuquerque Products New Mexico Refined Petroleum Products Amarillo Products Lubbock Products Clemens Caverns Clifton Ridge Crude System Clifton Ridge Pecan Grove Storage Ferndale Rail Rack Gold Line Products System East St. Louis Jefferson City Kansas City Paola Wichita North Texas Texas Texas Refined Petroleum Products Refined Petroleum Products Natural Gas Liquids Louisiana Louisiana Washington Crude Oil Crude Oil Crude Oil Illinois Missouri Kansas Kansas Kansas Refined Petroleum Products Refined Petroleum Products Refined Petroleum Products Refined Petroleum Products Refined Petroleum Products Hartford Connector Products System Hartford Medford Spheres Ponca Crude System Cushing Ponca City Wichita Falls Ponca Products System Illinois Refined Petroleum Products Oklahoma Natural Gas Liquids Oklahoma Oklahoma Texas Crude Oil Crude Oil Crude Oil Glenpool Oklahoma Refined Petroleum Products Mount Vernon Products Mount Vernon NGL Oklahoma City Products Ponca City Products Ponca City NGL Wichita South Missouri Missouri Oklahoma Oklahoma Oklahoma Kansas Refined Petroleum Products Natural Gas Liquids Refined Petroleum Products Refined Petroleum Products Natural Gas Liquids Refined Petroleum Products River Parish NGL System Louisiana Natural Gas Liquids Sweeny to Pasadena Products System 360 1,701 N/A 303 236 315 365 94 400 521 274 296 182 9,000 3,800 177 N/A 2,031 103 1,410 978 769 1,468 70 275 1,299 225 571 365 105 355 51 N/A 272 1,500 121 Bayway 25 Bayway 75 Bayway N/A Billings N/A Billings N/A Billings 7 Billings 15 Billings N/A Borger N/A Borger 18 Borger 29 Borger 17 Borger N/A N/A N/A Lake Charles N/A Lake Charles 30 Ferndale 78 Borger/ Ponca City 16 Borger/ Ponca City 66 Borger/ Ponca City N/A Borger/ Ponca City 19 Borger/ Ponca City 25 Wood River N/A Ponca City N/A Ponca City N/A Ponca City N/A Ponca City 19 Ponca City 46 Ponca City 16 Ponca City 48 Ponca City 23 Ponca City 6 Ponca City N/A Ponca City N/A Alliance Pasadena Texas Refined Petroleum Products 3,234 65 Sweeny 5 Table of Contents Index to Financial Statements The following table presents certain information regarding our equity investment terminal, rail rack and storage assets as of December 31, 2018 . System Name Location Commodity Handled Interest Gross Storage Capacity (MBbl) Active Terminaling Capacity* (MBD) Keene Terminal North Dakota Crude Oil Palermo Terminal *Active terminaling capacity represents the amount of railcar loading capacity currently available for use by our customers. North Dakota Crude Oil 50% 70 503 235 N/A 100 Marine Assets The following table presents certain information regarding our wholly owned marine assets as of December 31, 2018 . Each asset listed below has an associated commercial agreement with Phillips 66. System Name Location Commodity Handled Gross Loading Capacity (MBbl/h)* Associated Phillips 66 Refinery Clifton Ridge Crude System Clifton Ridge Ship Dock Louisiana Crude Oil Pecan Grove Barge Dock Louisiana Hartford Connector Products System Crude Oil; Lubricant Base Stocks Illinois Dyed Diesel; Naphtha; Lubricant Base Stocks 48 Lake Charles 6 Lake Charles 3 Wood River New Jersey Refined Petroleum Products 7 Bayway Hartford Barge Dock Bayway Products System Tremley Point *Marine capacity is in thousands of barrels per hour. Processing Assets The following table presents certain information regarding our other wholly owned assets as of December 31, 2018 . Each asset listed below has an associated commercial agreement with Phillips 66. Asset Name Location Commodity Handled Gross Processing Capacity (MBD) Merey Sweeny Delayed coker unit Vacuum distillation unit Sweeny Fractionator Texas Texas Texas Crude Oil Residuals Crude Oil Residuals Natural Gas Liquids 70 125 100 6 Table of Contents Index to Financial Statements COMMERCIAL AND OTHER AGREEMENTS WITH PHILLIPS 66 Many of our assets are physically connected to, and integral to the operations of, Phillips 66’s wholly owned Alliance, Bayway, Billings, Ferndale, Lake Charles, Ponca City and Sweeny refineries and its jointly owned Borger and Wood River refineries. We have entered into multiple commercial agreements with Phillips 66, which include minimum volume commitments and inflation escalators. These agreements are the source of a significant portion of our revenue. Under these long-term, fee-based agreements, we provide transportation, terminaling, storage, stevedoring, fractionation and processing services to Phillips 66, and Phillips 66 commits to provide us with minimum quarterly volumes of crude oil, refined petroleum products and NGL or minimum monthly capacity or service fees. See Note 21—Related Party Transactions , in the Notes to Consolidated Financial Statements, for summaries of the terms of commercial and other agreements with Phillips 66. COMPETITION Many of our assets are subject to contractual relationships with Phillips 66 under our commercial agreements and are directly connected to Phillips 66’s owned or operated refineries. As a result, we believe that we will not face significant competition from other pipelines, terminals, storage facilities, rail racks, fractionators and processing units for Phillips 66’s transportation and terminaling requirements to and from the refineries we support. If Phillips 66’s customers were to reduce their purchases of refined petroleum products, Phillips 66 might only ship the minimum volumes through our pipelines (or pay the shortfall payment if it does not ship the minimum volumes), which would cause a decrease in our revenue. Phillips 66 competes with integrated petroleum companies, which have their own crude oil supplies and distribution and marketing systems, as well as with independent refiners, many of which also have their own distribution and marketing systems. Phillips 66 also competes with other suppliers that purchase refined petroleum products for resale. Many of the entities in which we hold equity investments compete with other interstate and intrastate pipelines, rail and truck fleet operations, including those affiliated with major integrated petroleum and petrochemical companies, in terms of transportation fees, reliability and quality of customer service. Competition in any particular geographic area is significantly affected by the volume of products produced by refineries in that area, the volume of crude oil and natural gas liquids gathered and transported, and the availability of products and the cost of transportation to that area from distant locations. RATES AND SAFETY REGULATIONS Pipeline Rates Our common carrier pipeline systems are subject to regulation by various federal, state and local agencies. The Federal Energy Regulatory Commission (FERC) regulates interstate transportation on our common carrier pipeline systems under the Interstate Commerce Act (ICA), the Energy Policy Act of 1992 (EPAct 1992) and the rules and regulations promulgated under those laws. FERC regulations require that rates for interstate service pipelines that transport crude oil and refined petroleum products (collectively referred to as “petroleum pipelines”) and certain other liquids be just and reasonable and must not be unduly discriminatory or confer any undue preference upon any shipper. FERC regulations also require interstate common carrier petroleum pipelines to file with FERC and publicly post tariffs stating their interstate transportation rates and terms and conditions of service. Under the ICA, FERC or interested persons may challenge existing or changed rates or services. FERC is authorized to investigate such changes and may suspend the effectiveness of a new rate for up to seven months. A successful rate challenge could result in a common carrier paying refunds together with interest for the period the rate was in effect. FERC may also order a pipeline to change its rates and may require a common carrier to pay shippers reparations for damages sustained for a period up to two years prior to the filing of a complaint. EPAct 1992 deemed certain interstate petroleum pipeline rates then in effect to be just and reasonable under the ICA. These rates are commonly referred to as “grandfathered rates.” Our rates in effect at the time of the passage of EPAct 1992 for interstate transportation service were deemed just and reasonable and therefore are grandfathered rates. New rates have been established subsequent to EPAct 1992 for certain of our pipeline systems. FERC may change grandfathered rates upon complaint only after it is shown that: • A substantial change has occurred since enactment in either the economic circumstances or the nature of the services that were a basis for the rate. 7 Table of Contents Index to Financial Statements • The complainant was contractually barred from challenging the rate prior to enactment of EPAct 1992 and filed the complaint within 30 days of the expiration of the contractual bar. • A provision of the tariff is unduly discriminatory or preferential. EPAct 1992 required FERC to establish a simplified methodology to adjust non-market-based tariff rates for inflation for interstate petroleum pipelines. As a result, FERC adopted an indexing rate methodology which, as currently in effect, allows common carriers to change their rates within prescribed ceiling levels that are tied to changes in the Producer Price Index (PPI) for finished goods. FERC’s indexing methodology is subject to review every five years. The indexing methodology is applicable to existing rates, including grandfathered rates, with the exclusion of market-based rates. In December 2015, FERC issued a Final Order concluding its five-year review of the indexing methodology. FERC established an index level permitting annual adjustment of an indexed ceiling by PPI for finished goods plus 1.23 percent for the five-year period commencing July 1, 2016, and ending June 30, 2021. A pipeline is not required to increase its rates up to the indexed ceiling but is permitted to do so. Rate increases made under the index are presumed to be just and reasonable unless a protesting party can demonstrate that the portion of the rate increase resulting from application of the index is substantially in excess of the pipeline’s increase in costs. Under the indexing rate methodology, in any year in which the index is negative, pipelines must file to lower their rates if those rates would otherwise be above the rate ceiling. On October 20, 2016, FERC issued an Advance Notice of Proposed Rulemaking. FERC is seeking comment on a number of proposals, including: (1) whether FERC should deny any increase in a rate ceiling or an annual index-based rate increase if a pipeline’s revenues exceed total costs by 15 percent for the prior 2 years; (2) a new percentage comparison test that would deny a proposed increase to a pipeline’s rate or ceiling level greater than 5 percent above the barrel-mile cost changes; and (3) a requirement that all pipelines file indexed ceiling levels annually, with the ceiling levels subject to challenge and restricting the pipeline’s ability to carry forward the full indexed increase to a future period. FERC has not taken any further action on this matter. While common carriers often use the indexing methodology to change their rates, they may elect to support proposed rates by using other methodologies such as cost-of-service rate making, market-based rates and settlement rates. A pipeline can follow a cost-of-service approach when seeking to increase its rates above the rate ceiling (or when seeking to avoid lowering rates to the reduced rate ceiling). A common carrier can charge market-based rates if it establishes that it lacks significant market power in the affected markets. In addition, a common carrier can establish rates under settlement if agreed upon by all current shippers. We primarily use indexed rates and settlement rates for our different pipeline systems. Intrastate services provided by certain of our pipeline systems are subject to regulation by state regulatory authorities. These state regulatory authorities use a complaint-based system of regulation, both as to matters involving rates and priority of access. State regulatory authorities could limit our ability to increase our rates or to set rates based on our costs or order us to reduce our rates and require the payment of refunds to shippers. FERC and state regulatory authorities generally have not investigated rates, unless the rates are the subject of a protest or a complaint. Phillips 66 has agreed not to contest our tariff rates applicable for our transportation services agreements for the term of those agreements. However, FERC or a state regulatory authority could investigate our rates on its own initiative or at the urging of a third party, and this could lead to a refund of previously collected revenue. 8 Table of Contents Index to Financial Statements Pipeline Safety Our assets are subject to increasingly strict safety laws and regulations. The transportation and storage of crude oil, natural gas liquids and refined petroleum products involves a risk that hazardous liquids may be released into the environment, potentially causing harm to the public or the environment. In turn, any such incidents may result in substantial expenditures for response actions, significant government penalties, liability to government agencies for natural resources damages, and significant business interruption. The United States Department of Transportation (DOT) has adopted safety regulations with respect to the design, construction, operation, maintenance, inspection and management of pipeline assets. These regulations contain requirements for the development and implementation of pipeline integrity management programs, which include the inspection and testing of pipelines and necessary maintenance or repairs. These regulations also require that pipeline operation and maintenance personnel meet certain qualifications and that pipeline operators develop comprehensive spill response plans. We are subject to regulation by the DOT under the Hazardous Liquid Pipeline Safety Act of 1979 (the HLPSA). The HLPSA delegated to DOT the authority to develop, prescribe, and enforce minimum federal safety standards for the transportation of hazardous liquids by pipeline. Congress also enacted the Pipeline Safety Act of 1992 (the PSA), which added the environment to the list of statutory factors that must be considered in establishing safety standards for hazardous liquid pipelines, required regulations be issued to define the term “gathering line” and establish safety standards for certain “regulated gathering lines,” and mandated that regulations be issued to establish criteria for operators to use in identifying and inspecting pipelines located in High Consequence Areas (HCAs), defined as those areas that are unusually sensitive to environmental damage, that cross a navigable waterway, or that have a high population density. In 1996, Congress enacted the Accountable Pipeline Safety and Partnership Act (the APSPA), which limited the operator identification requirement mandate to pipelines that cross a waterway where a substantial likelihood of commercial navigation exists, required that certain areas where a pipeline rupture would likely cause permanent or long-term environmental damage be considered in determining whether an area is unusually sensitive to environmental damage, and mandated that regulations be issued for the qualification and testing of certain pipeline personnel. In the Pipeline Inspection, Protection, Enforcement, and Safety Act of 2006, Congress required mandatory inspections for certain U.S. crude oil and natural gas transmission pipelines in HCAs and mandated that regulations be issued for low-stress hazardous liquid pipelines and pipeline control room management. We are also subject to the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011, which increased penalties for safety violations, established additional safety requirements for newly constructed pipelines, and required studies of certain safety issues that could result in the adoption of new regulatory requirements for existing pipelines. DOT’s Pipeline and Hazardous Materials Safety Administration (PHMSA) administers compliance with these statutes and has promulgated comprehensive safety standards and regulations for the transportation of hazardous liquid by pipeline, including regulations for (i) the design and construction of new pipeline systems or those that have been relocated, replaced, or otherwise changed; (ii) pressure testing of new pipelines; (iii) operation and maintenance of pipeline systems, establishing programs for public awareness and damage prevention, and managing the operation of pipeline control rooms; (iv) protection of steel pipelines from the adverse effects of internal and external corrosion; and (v) integrity management requirements for pipelines in HCAs. We monitor the structural integrity of our pipelines through a program of periodic internal assessments using high resolution internal inspection tools, as well as hydrostatic testing and direct assessment that conforms to regulatory standards. We accompany these assessments with a review of the data and repair anomalies, as required, to ensure the integrity of the pipeline. We then utilize sophisticated risk algorithms and a comprehensive data integration effort to ensure that the highest risk-assessed pipelines receive priority for subsequent integrity assessments. We use external coatings and impressed- current cathodic protection systems to protect against external corrosion. We conduct all cathodic protection work in accordance with National Association of Corrosion Engineers standards. We continually monitor, test and record the effectiveness of these corrosion inhibiting systems. 9 Table of Contents Index to Financial Statements Product Quality Standards Refined petroleum products that we transport are generally sold by our customers for use by the public. Various federal, state and local agencies have the authority to prescribe product quality specifications for products. Changes in product quality specifications or blending requirements could reduce our throughput volumes, require us to incur additional handling costs or require capital expenditures. For example, different product specifications for different markets affect the fungibility of the products in our system and could require the construction of additional storage. If we are unable to recover these costs through increased revenue, our cash flows and ability to pay cash distributions could be adversely affected. In addition, changes in the product quality of the products we receive on our product pipeline systems could reduce or eliminate our ability to blend products. Terminal and Processing Unit Safety Our operations are subject to regulations promulgated by the U.S. Occupational Safety and Health Administration (OSHA), DOT and comparable state and local regulations. We have identified which assets are subject to the jurisdiction of OSHA or DOT. Certain of our facilities are under the dual jurisdiction of OSHA and DOT, whereby certain portions of the facility are subject to OSHA regulation and other assets at the facility are subject to DOT regulation due to the type of asset and the configuration of the facility. Our facilities are operated in a manner consistent with industry safety practices and standards. The tanks designed for crude oil and refined petroleum product storage at our facilities are equipped with appropriate emission controls to promote safety. Our facilities have response plans, spill prevention and control plans, and other programs to respond to emergencies. Rail Safety Our rail operations involve crude oil loading, receiving and unloading activities. Generally, rail operations are subject to regulations promulgated by the U.S. Department of Transportation Federal Railroad Administration, PHMSA and comparable state and local regulations. We believe our rail operations are in material compliance with all applicable regulations and meet or exceed current industry standards and practices. Security We are also subject to Department of Homeland Security Chemical Facility Anti-Terrorism Standards, which are designed to regulate the security of high-risk chemical facilities, the Transportation Security Administration’s Pipeline Security Guidelines, and other comparable state and local regulations. We have an internal program of inspection designed to monitor and provide for compliance with all of these requirements. We believe that we are in material compliance with all applicable laws and regulations regarding the security of our facilities. However, these laws and regulations are subject to changes, or to changes in their interpretation, by the regulatory authorities, and continued and future compliance with such laws and regulations may require us to incur significant expenditures. In addition, any incidents may result in substantial expenditures for response actions, government penalties and business interruption. While we are not currently subject to governmental standards for the protection of computer-based systems and technology from cyber threats and attacks, proposals to establish such standards are being considered in the U.S. Congress and by U.S. Executive Branch departments and agencies, including the Department of Homeland Security, and we may become subject to such standards in the future. We currently are implementing our own cyber security programs and protocols; however, we cannot guarantee their effectiveness. A significant cyber attack could have a material effect on our operations and those of our customers. ENVIRONMENTAL REGULATIONS General Our operations are subject to extensive and frequently changing federal, state and local laws, regulations and ordinances relating to the protection of the environment. Among other things, these laws and regulations govern the emission or discharge of pollutants into or onto the land, air and water, the handling and disposal of solid and hazardous wastes and the remediation of contamination. As with the industry generally, our compliance with existing and anticipated environmental laws and regulations increases our overall cost of business, including our capital costs to construct, maintain, operate and upgrade equipment and facilities. While these laws and regulations affect our maintenance capital expenditures and net income, we believe they do not affect our competitive position, as the operations of our competitors are largely affected in a similar manner. We believe our facilities are in substantial compliance with applicable environmental laws and regulations. However, these laws and regulations are subject to changes, or to changes in their 10 Table of Contents Index to Financial Statements interpretation, by regulatory authorities, and continued and future compliance with such laws and regulations may require us to incur significant expenditures. Additionally, violation of environmental laws, regulations, and permits can result in the imposition of significant administrative, civil and criminal penalties, injunctions limiting our operations, investigatory or remedial liabilities or construction bans or delays in the construction of additional facilities or equipment. Further, a release of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, subject us to substantial expenses, including costs to comply with applicable laws and regulations and to resolve claims by third parties for personal injury or property damage, or by the U.S. federal government or state governments for natural resources damages. These impacts could directly and indirectly affect our business and have an adverse impact on our financial position, results of operations and liquidity. We cannot currently determine the amounts of such future impacts. Expensed environmental costs were $4 million in 2018 and are expected to be less than $5 million in 2019 and 2020. The majority of the environmental expenses forecasted for 2019 and 2020 relate to environmental matters attributable to ownership of our assets prior to their acquisition from Phillips 66. Phillips 66 has agreed to retain responsibility for these liabilities. Accordingly, although these amounts would be expensed by us, there would be no required cash outflow from us. See the “Indemnification and Excluded Liabilities” section to follow for additional information on Phillips 66-retained liabilities. Capitalized environmental costs were $8 million in 2018 and are expected to be approximately the same in 2019 and 2020. These amounts do not include capital expenditures made for other purposes that have an indirect benefit on environmental compliance. Air Emissions and Climate Change We are subject to the Federal Clean Air Act (FCAA) and its regulations and comparable state and local statutes and regulations in connection with air emissions from our operations. Under these laws, permits may be required before construction can commence on a new source of potentially significant air emissions, and operating permits may be required for sources that are already constructed. These permits may require controls on our air emission sources, and we may become subject to more stringent regulations requiring the installation of additional emission control technologies. Future expenditures may be required to comply with the FCAA and other federal, state and local requirements for our various sites, including our pipeline and storage facilities. The impact of future legislative and regulatory developments, if enacted or adopted, could result in increased compliance costs and additional operating restrictions on our business, all of which could have an adverse impact on our financial position, results of operations and liquidity. Air emissions requirements also affect Phillips 66’s domestic refineries from which we directly or indirectly receive the majority of our revenue. Phillips 66 has been required in the past, and will likely be required in the future, to incur significant capital expenditures to comply with new legislative and regulatory requirements relating to its operations. To the extent these capital expenditures have a material effect on Phillips 66, they could have a material effect on our business and results of operations. In December 2007, Congress passed the Energy Independence and Security Act (EISA) that created a second Renewable Fuels Standard (RFS2). This standard requires the total volume of renewable transportation fuels (including ethanol and advanced biofuels) sold or introduced annually in the United States to rise to 36 billion gallons by 2022. The requirements could reduce future demand for petroleum products and thereby have an indirect effect on certain aspects of our business. For compliance years 2015 through 2019, the U.S. Environmental Protection Agency (EPA) reduced the statutory volumes of advanced and total renewable fuels using authority granted to it under the EISA. The EPA’s actions pertaining to these compliance years have been or, with respect to 2019, may soon be, legally challenged. Currently, various legislative and regulatory measures to address greenhouse gas (GHG) emissions (including carbon dioxide, methane and other gases) are in various phases of discussion or implementation. These include existing requirements to report emissions of GHGs to the EPA, and proposed federal legislation and regulation as well as state actions to develop statewide or regional programs, each of which require or could require reductions in our GHG emissions or those of Phillips 66. In addition, the United Nations Framework Convention on Climate Change, commonly known as the Paris Agreement, entered into force on November 4, 2016. The Paris Agreement could lead to further GHG emission reduction requirements. Requiring reductions in GHG emissions could result in increased costs to (1) operate and maintain our facilities, (2) install new emission controls at our facilities and (3) administer and manage any GHG emissions programs, including acquiring emission credits or allotments. These requirements may also impact Phillips 66’s domestic refinery operations and may have an indirect effect on our business, financial condition and results of 11 Table of Contents Index to Financial Statements operations. In 2017, however, the President of the United States announced his intention to withdraw the United States from the Paris Agreement. In addition, the EPA has proposed and may adopt further regulations under the FCAA addressing GHGs, some of which may directly impact Phillips 66’s domestic refinery operations, while others, such as the EPA’s Clean Power Plan (CO 2 emission rules for existing fossil fuel-fired electric generating units), which remains the subject of litigation and administrative reconsideration, may indirectly affect such operations. Both types of impacts may affect our business. In October 2017, the EPA commenced rulemaking proceedings to rescind the Clean Power Plan, and in December 2017, the EPA published an Advanced Notice of Proposed Rulemaking, announcing an intent to commence a new rulemaking to replace the Clean Power Plan with an alternative framework for regulating carbon dioxide. In August 2018, the EPA proposed the Affordable Clean Energy (ACE) rule as a replacement for the Clean Power Plan. Congress continues to consider legislation on GHG emissions, which may include a delay in the implementation of GHG regulations by the EPA or a limitation on the EPA’s authority to regulate GHGs, although the ultimate adoption and form of any federal legislation cannot presently be predicted. The impact of future regulatory and legislative developments, if adopted or enacted, including any cap-and-trade program, is likely to result in increased compliance costs, increased utility costs, additional operating restrictions on our business, and an increase in the cost of products generally. Although such costs may impact our business directly or indirectly by impacting Phillips 66’s facilities or operations, the extent and magnitude of that impact cannot be reliably or accurately estimated due to the present uncertainty regarding the additional measures and how they will be implemented. Waste Management and Related Liabilities To some extent, the environmental laws and regulations affecting our operations relate to the release of hazardous substances or solid wastes into soils, groundwater, and surface water, and include measures to control pollution of the environment. These laws generally regulate the generation, storage, treatment, transportation, and disposal of solid and liquid hazardous waste. They also require corrective action, including investigation and remediation, at a facility where such waste may have been released or disposed. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), which is also known as Superfund, and comparable state laws impose liability, without regard to fault or to the legality of the original conduct, on certain classes of persons that contributed to the release of a “hazardous substance” into the environment. These persons include the former and present owner or operator of the site where the release occurred and the transporters and generators of the hazardous substances found at the site. Under CERCLA, these persons may be subject to joint and several liabilities for the costs of cleaning up the hazardous substances released into the environment, for damages to natural resources, and for the costs of certain health studies. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment. In the course of our ordinary operations, we generate waste that falls within CERCLA’s definition of a “hazardous substance,” and, as a result, we may be jointly and severally liable under CERCLA for all or part of the costs required to clean up certain sites where we alleged to have liability. We also generate solid wastes, including hazardous wastes, that are subject to the requirements of the Resource Conservation and Recovery Act (RCRA) and comparable state statutes. From time to time, the EPA considers the adoption of stricter disposal standards for non-hazardous wastes. Hazardous wastes are subject to more rigorous and costly disposal requirements than are non-hazardous wastes. Any changes in the regulations could increase our maintenance capital expenditures and operating expenses. We continue to seek methods to minimize the generation of hazardous wastes in our operations. We currently own and lease, and Phillips 66 has in the past owned and leased, properties where hydrocarbons are being handled or for many years have been handled. Although we utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other waste may have been disposed of or released on or under the properties owned or leased by us or on or under other locations where these wastes have been transported for disposal. In addition, many of these properties were operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes were not under our control. These properties and wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under these laws, we could be required to remove or remediate previously disposed wastes 12 Table of Contents Index to Financial Statements (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater), or to perform remedial operations to prevent further contamination. Water Our operations can result in the discharge of pollutants, including crude oil and petroleum products. Regulations under the Water Pollution Control Act of 1972 (Clean Water Act), Oil Pollution Act of 1990 (OPA 90) and comparable state laws impose regulatory burdens on our operations. Spill Prevention Control and Countermeasure (SPCC) requirements of federal laws and some state laws require containment to prevent or mitigate contamination of navigable waters in the event of an oil overflow, rupture, or leak. For example, the Clean Water Act requires us to maintain SPCC plans at many of our facilities. We maintain numerous discharge permits as required under the National Pollutant Discharge Elimination System program of the Clean Water Act and have implemented systems to oversee our compliance efforts. In addition, the transportation and storage of crude oil and petroleum products over and adjacent to water involves risk and subjects us to the provisions of OPA 90 and related state requirements. Among other requirements, OPA 90 requires the owner or operator of a vessel or a facility to maintain an emergency plan to respond to releases of oil or hazardous substances. Also, in case of any such release, OPA 90 requires the responsible entity to pay resulting removal costs and damages. OPA 90 also provides for civil penalties and imposes criminal sanctions for violations of its provisions. We operate facilities at which releases of oil and hazardous substances could occur. We have implemented emergency spill response plans for all of our components and facilities covered by OPA 90, and we have established SPCC plans for facilities subject to Clean Water Act SPCC requirements. Construction or maintenance of our pipelines, terminals and storage facilities may impact wetlands, which are also regulated under the Clean Water Act by the EPA and the United States Army Corps of Engineers. Regulatory requirements governing wetlands (including associated mitigation projects) may result in the delay of our projects while we obtain necessary permits and may increase the cost of new projects and maintenance activities. Workplace Safety We are subject to requirements promulgated by OSHA and comparable state statutes that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe our operations are in substantial compliance with OSHA requirements, including general industry standards, record keeping requirements, and monitoring of occupational exposure to regulated substances. Endangered Species Act The Endangered Species Act and its state law equivalents restrict activities that may affect endangered species or their habitats. While some of our facilities are in areas that may be designated as habitats for endangered species, we believe we are in substantial compliance with the Endangered Species Act. However, the discovery of previously unidentified endangered species could cause us to incur additional costs or become subject to operating restrictions or bans in the affected area. Hazardous Materials Transportation Requirements The DOT regulations affecting pipeline safety require pipeline operators to implement measures designed to reduce the environmental impact of crude oil and petroleum products discharge from onshore crude oil and petroleum product pipelines. These regulations require operators to maintain comprehensive spill response plans, including extensive spill response training for pipeline personnel. In addition, the DOT regulations contain detailed specifications for pipeline operation and maintenance. We believe our operations are in substantial compliance with these regulations. The DOT also has a pipeline integrity management rule, with which we are in substantial compliance. Indemnification and Excluded Liabilities Under our amended omnibus agreement and pursuant to the terms of various agreements under which we acquired assets from Phillips 66, Phillips 66 will indemnify us, or assume responsibility, for certain environmental liabilities, tax liabilities, litigation and any other liabilities attributable to the ownership or operation of the assets contributed to us and that arose prior to the effective date of each acquisition. These indemnifications and exclusions from liability have, in some cases, time limits and deductibles. When Phillips 66 performs under any of these indemnifications or exclusions from liability, we recognize non-cash expenses and associated non-cash capital contributions from our General Partner, as these are considered liabilities paid for by a principal unitholder. 13 Table of Contents Index to Financial Statements GENERAL Major Customer Phillips 66 accounted for 96 percent , 95 percent , and 95 percent of our total operating revenues in the years ended December 31, 2018 , 2017 and 2016 , respectively. Through our wholly owned and joint venture operations, we provide crude oil, refined petroleum products and NGL pipeline transportation, terminaling and storage, and crude oil gathering, NGL fractionation, crude oil processing, and rail-unloading services to Phillips 66. Seasonality The volumes of crude oil, refined petroleum products and NGL transported in our wholly owned and joint venture pipelines, stored in our terminals, rail racks and storage facilities and processed through our fractionator and processing units are directly affected by the level of supply and demand for crude oil, refined petroleum products and NGL in the markets served directly or indirectly by our assets. The effects of seasonality on our cash flows should be substantially mitigated through the use of fee-based commercial agreements that include minimum volume commitments. Pipeline Control Operations Our wholly owned pipeline systems are operated from a central control room owned and operated by Phillips 66. The control center operates with a supervisory control and data acquisition system equipped with computer systems designed to continuously monitor operational data. Monitored data includes pressures, temperatures, gravities, flow rates and alarm conditions. The control center operates remote pumps, motors and valves associated with the receipt and delivery of crude oil and refined petroleum products, and provides for the remote-controlled shutdown of pump stations on the pipeline systems. A fully functional back-up operations center is also maintained and routinely operated throughout the year to ensure safe and reliable operations. Employees We are managed and operated by the executive officers of our General Partner with oversight provided by its Board of Directors. Neither we nor our subsidiaries have any employees. Our General Partner has the sole responsibility for providing the employees and other personnel necessary to conduct our operations. As of December 31, 2018 , Phillips 66 employed approximately 600 people who provided direct support for our operations. Website Access to SEC Reports Our Internet website address is http://www.phillips66partners.com . Information contained on our Internet website is not part of this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments and exhibits to these reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available on our website, free of charge, as soon as reasonably practicable after such reports are filed with, or furnished to, the Securities and Exchange Commission (the SEC). Alternatively, you may access these reports at the SEC’s website at http://www.sec.gov . We also post on our website our beneficial ownership reports filed by officers and directors of our General Partner, as well as principal security holders, under Section 16(a) of the Securities Exchange Act of 1934, governance guidelines, audit and conflicts committee charters, code of business ethics and conduct, and information on how to contact our General Partner’s Board of Directors. 14 Table of Contents Index to Financial Statements Item 1A. RISK FACTORS You should carefully consider the risks described below with all of the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common units. Risks Related to Our Business Phillips 66 accounts for a substantial portion of our revenue. If Phillips 66 changes its business strategy and is unable to satisfy its obligations under our commercial agreements or significantly reduces the volumes transported through our pipelines or terminals, stored at our storage assets or processed in our processing units, our financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be materially and adversely affected. We derive a substantial portion of our revenue from multiple commercial agreements with Phillips 66. Any event that materially and adversely affects Phillips 66’s financial condition, results of operations or cash flows may adversely affect our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are indirectly subject to the operational and business risks of Phillips 66, the most significant of which include the following: • • The effects of changing commodity prices and refining, marketing and petrochemical margins. The ability of Phillips 66 to obtain credit and financing on acceptable terms in light of uncertainty and illiquidity in credit and capital markets, which could also adversely affect the financial strength of business partners. • A deterioration in Phillips 66’s credit profile could increase Phillips 66’s costs of borrowing money and limit Phillips 66’s access to the capital markets and commercial credit, which could also trigger co-venturer rights under Phillips 66’s joint venture arrangements. • • • • • • • • • The substantial capital expenditures and operating costs required to comply with existing and future environmental laws and regulations, including climate change regulations, could impact or limit Phillips 66’s current business plans and reduce product demand. The effects of domestic and worldwide political and economic developments could materially reduce Phillips 66’s profitability and cash flows. Large capital projects can take many years to complete, and market conditions could significantly deteriorate between the project approval date and the project startup date, negatively impacting Phillips 66’s project returns. Investments in joint ventures decrease Phillips 66’s ability to manage risk and may adversely affect the distributions that Phillips 66 receives from the joint ventures. Significant losses resulting from the hazards and risks of operations may not be fully covered by insurance and could adversely affect Phillips 66’s operations and financial results. Interruptions of supply and increased costs as a result of Phillips 66’s reliance on third-party transportation of crude oil, natural gas liquids (NGL) and refined petroleum products. Increased regulation of hydraulic fracturing could result in reductions or delays in domestic production of crude oil and natural gas, which could adversely impact Phillips 66’s results of operations. Competitors that produce their own supply of feedstocks, have more extensive retail outlets, or have greater financial resources may have a competitive advantage over Phillips 66. Potential losses from Phillips 66’s forward-contract and derivative transactions may have an adverse impact on its results of operations and financial condition. 15 Table of Contents Index to Financial Statements • A significant interruption, including interruptions related to disruptions in information technology systems, in one or more of Phillips 66’s facilities could adversely affect its business. • Any decision by Phillips 66 to temporarily or permanently curtail or shut down operations at one or more of its domestic refineries or other facilities and reduce or terminate its obligations under our commercial agreements. • Indemnification of ConocoPhillips by Phillips 66 for various matters that may arise related to Phillips 66’s separation from ConocoPhillips may have an adverse impact on its results of operations and financial condition. Phillips 66 is not obligated to use our services with respect to volumes of crude oil, NGL or products in excess of the minimum volume commitments under its commercial agreements with us. We may not generate sufficient distributable cash flow to sustain the payment of distributions to our unitholders at their current level. The amount of cash we can distribute to our unitholders principally depends upon the amount of cash we generate from our operations, as well as distributions from our joint ventures, which will fluctuate from quarter to quarter based on, among other things: • • • • The volume of NGL, crude oil and refined petroleum products we or our joint ventures transport and terminal, the volume of NGL we fractionate, and the volume of crude oil residuals we process. The fees and rates we charge with respect to volumes that we transport, store, terminal, process and fractionate. Changes in revenue we realize under the loss allowance provisions of our regulated tariffs resulting from changes in underlying commodity prices. Prevailing economic conditions, including commodity prices. In addition, the actual amount of distributable cash flow we generate will also depend on other factors, some of which are beyond our control, including but not limited to the following: • • • • The amount of our operating expenses and general and administrative expenses, including reimbursements to Phillips 66, which are not subject to any caps or other limits. Phillips 66’s application of credit amounts under our throughput and deficiency agreements, which may be applied towards deficiency payments in future periods. Phillips 66’s application of any remaining credit amounts to any volumes handled by our assets after the expiration or termination of our commercial agreements. The level of maintenance capital expenditures we make. • Our debt service requirements and other liabilities. • Our ability to borrow funds and access capital markets. • Restrictions contained in our revolving credit facility and other debt service requirements. 16 Table of Contents Index to Financial Statements Phillips 66 may suspend, reduce or terminate its obligations under our commercial agreements, which could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders. Our commercial agreements and operational services agreement with Phillips 66 include provisions that permit Phillips 66 to suspend, reduce or terminate its obligations if certain events occur, such as Phillips 66’s determination to suspend refining operations at one of its refineries with which any of our assets are associated, either permanently or indefinitely for a period that will continue for at least twelve months. Under our commercial agreements, Phillips 66’s minimum volume commitments cover less than 100 percent of the operating capacity of our assets. Any reduction, suspension or termination of Phillips 66’s obligations could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders. Certain components of our revenue have exposure to direct commodity price risk. We have exposure to direct commodity price risk through the loss allowance provisions of our regulated tariffs and the commodity imbalance provisions of our commercial agreements. Any future losses due to our commodity price risk exposure could adversely affect our results of operations and financial condition and our ability in the future to make distributions to our unitholders. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk, for more information. Our operations and Phillips 66’s refining operations are subject to many risks and operational hazards, some of which may result in business interruptions and shutdowns of our or Phillips 66’s facilities and damages for which we may not be fully covered by insurance. If a significant accident or event occurs that results in a business interruption or shutdown for which we are not adequately insured, our operations and financial results could be materially and adversely affected. Our operations are subject to all of the risks and operational hazards inherent in processing, fractionating, transporting, terminaling and storing crude oil, NGL and refined petroleum products, including: • Damages to pipelines, terminals and facilities, related equipment and surrounding properties caused by earthquakes, tornados, hurricanes, floods, fires, severe weather, explosions and other natural disasters and acts of terrorism. • Maintenance, repairs, or mechanical or structural failures at our or Phillips 66’s facilities or at third-party facilities on which our or Phillips 66’s operations are dependent, including electrical shortages, power disruptions and power grid failures. • Damages to and loss of availability of interconnecting third-party pipelines, terminals and other means of delivering crude oil, feedstocks, NGL and refined petroleum products. • Disruption or failure of information technology systems and network infrastructure due to various causes, including unauthorized access or attack. Curtailments of operations due to severe seasonal weather. Riots, strikes, lockouts or other industrial disturbances. Inadvertent damage to pipelines from construction, farm and utility equipment. • • • 17 Table of Contents Index to Financial Statements These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage, as well as business interruptions or shutdowns of our facilities. Any such event or unplanned shutdown could have a material adverse effect on our business, financial condition and results of operations. In addition, Phillips 66’s refining operations, on which our operations are substantially dependent, are subject to similar operational hazards and risks inherent in refining crude oil. A serious accident at our facilities or at Phillips 66’s facilities could result in serious injury or death to employees or contractors working at those facilities, and could expose us to significant liability for personal injury claims and reputational risk. We have no control over the operations at Phillips 66’s refineries and their associated facilities. We do not maintain insurance coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We carry separate policies for certain property damage, business interruption and third-party liabilities, which includes pollution liabilities, and are also insured under certain of Phillips 66’s liability policies and are subject to Phillips 66’s policy limits under these policies. The occurrence of an event that is not fully covered by insurance or failure by one or more insurers to honor its coverage commitments for an insured event could have a material adverse effect on our business, financial condition and results of operations. Our expansion of existing assets and construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our results of operations, financial condition or our ability to make distributions to our unitholders. In order to optimize our existing asset base, we intend to evaluate and capitalize on organic opportunities for expansion projects in order to increase revenue on our pipeline, terminal, fractionation, processing and storage systems. The expansion of an existing pipeline, terminal, fractionation, processing or storage facility, such as by adding horsepower, pump stations or loading/unloading racks, or the construction of a new pipeline, terminal, fractionator, processing or storage asset, involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. If we undertake these projects, they may not be completed on schedule, at the budgeted cost, or at all. Moreover, we may not receive sufficient long-term contractual commitments from customers to provide the revenue needed to support such projects, and we may be unable to negotiate acceptable interconnection agreements with third-party pipelines to provide destinations for increased throughput. Even if we receive such commitments or make such interconnections, we may not realize an increase in revenue for an extended period of time. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could materially and adversely affect our results of operations and financial condition and our ability in the future to make distributions to our unitholders. If we are unable to make acquisitions on economically acceptable terms from Phillips 66 or third parties, our future growth beyond organic opportunities could be reduced, and any acquisitions we may make may lower, rather than increase, our cash flows and ability to make distributions to our unitholders. A portion of our strategy to grow our business and increase distributions to our unitholders is dependent on our ability to make acquisitions that result in an increase in distributable cash flow per unit. The acquisition component of our growth strategy is based, in large part, on our expectation of ongoing divestitures of transportation and storage assets by industry participants, including Phillips 66. If we are unable to make acquisitions from Phillips 66 or third parties because (1) there is a material decrease in divestitures of transportation and storage assets, (2) we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, (3) we are unable to obtain financing for these acquisitions on economically acceptable terms, (4) we are outbid by competitors or (5) for any other reason, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in distributable cash flow per unit as a result of incorrect assumptions in our evaluation of such acquisitions or unforeseen consequences or other external events beyond our control. Unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we consider in any possible future acquisitions before they are consummated. 18 Table of Contents Index to Financial Statements Failure to successfully combine our business with assets or businesses we acquire in executing our growth strategy or an inaccurate estimate by us of the benefits to be realized from any such acquisition, may adversely affect our future results. Any acquisition of assets or businesses involves potential risks, including: • • • • • • The failure to realize expected profitability, growth or accretion. Environmental or regulatory compliance matters or liabilities. Title or permit issues. The diversion of management's attention from our existing businesses. The incurrence of significant charges, such as impairment of goodwill, or property, plant and equipment or restructuring charges. The incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate. The expected benefits from an acquisition may not be realized if our estimates of the potential net cash flows associated with the acquisition are materially inaccurate or if we fail to identify operating problems or liabilities associated with the acquisition. The accuracy of our estimates of the potential net cash flows attributable to an acquisition is inherently uncertain. If problems are identified after closing of an acquisition, we may have limited recourse against the seller. If any of these risks or unanticipated liabilities or costs were to materialize, any desired benefits from an acquisition may not be fully realized, if at all, and our future financial performance, results of operations and cash available for distribution could be negatively impacted. We may be unable to obtain or renew permits necessary for our operations, which could inhibit our ability to do business. Our facilities operate under a number of federal and state permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards in order to operate. All of these permits, licenses, approval limits and standards require a significant amount of monitoring, record keeping and reporting in order to demonstrate compliance with the underlying permit, license, approval limit or standard. Noncompliance or incomplete documentation of our compliance status may result in the imposition of fines, penalties and injunctive relief. A decision by a government agency to deny or delay issuing a new or renewed material permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations and on our financial condition, results of operations and cash flows. Our investments in joint ventures involve numerous risks that may affect the ability of these joint ventures to make distributions to us. We conduct some of our operations through joint ventures in which we share control with our joint venture participants. Our joint venture participants may have economic, business or legal interests or goals that are inconsistent with ours, or those of the joint venture. Additionally, our joint venture participants may be unable to meet their economic or other obligations, and we may be required to fulfill those obligations alone. Failure by us, or an entity in which we have a joint venture interest, to adequately manage the risks associated with any acquisitions or joint ventures could have a material adverse effect on the financial condition or results of operations of our joint ventures and, in turn, our business and operations. In addition, should any of these risks materialize, it could have a material adverse effect on the ability of the venture to make future distributions to us. 19 Table of Contents Index to Financial Statements We do not own all of the land on which our operations are located, which could result in disruptions to our operations. We do not own all of the land on which our operations are located, and therefore, we are subject to the possibility of more onerous terms and increased costs to retain necessary land use if we do not have valid leases or rights-of-way or if such rights-of-way lapse or terminate. We obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies, and some of our agreements may grant us those rights for only a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders. Restrictions in our revolving credit facility and senior note indentures could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units. We depend on the earnings and cash flows generated by our operations in order to meet any debt service obligations and to make cash distributions to our unitholders. The operating and financial restrictions and covenants in our revolving credit facility, senior note indentures and any other financing agreements could restrict our ability to finance our future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to make cash distributions to our unitholders. The provisions of our revolving credit facility and senior note indentures could affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our revolving credit facility could result in an event of default that would enable our lenders to terminate their commitments and declare any outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If the payment of our debt is accelerated, defaults under our senior note indentures and other debt instruments, if any, may be triggered. If triggered, our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity, for additional information about our revolving credit facility. Our assets and operations are subject to federal, state and local laws and regulations relating to environmental protection and safety, including spills, releases, and pipeline integrity, any of which could require us to make substantial expenditures. Our assets and operations involve the transportation of crude oil, NGL and refined petroleum products, which are subject to increasingly stringent federal, state and local laws and regulations related to protection of the environment. These laws and regulations have raised operating costs for the crude oil, NGL and refined petroleum products industry, and compliance with such laws and regulations may cause us to incur potentially material capital expenditures. Transportation of crude oil, NGL and refined petroleum products involves inherent risks of spills and releases from our facilities, and can subject us to various federal and state laws governing spills and releases, including reporting and remediation obligations. The costs associated with such obligations can be substantial, as can costs associated with related enforcement matters, including possible fines and penalties. Transportation of such products over water or proximate to navigable water bodies involves inherent risks and could subject us to the provisions of the OPA 90 and similar state environmental laws should a spill occur from our pipelines. We have contracted with various spill response service companies in the areas in which we transport or store crude oil and refined petroleum products; however, these companies may not be able to adequately contain a “worst case discharge” in all instances, and we cannot ensure that all of their services would be available at any given time. In these and other cases, we may be subject to liability in connection with the discharge of crude oil or petroleum products into navigable waters. We could incur potentially significant additional expenses should we determine that any of our assets are not in compliance with applicable laws and regulations. Our failure to comply with these or any other environmental, safety or pipeline-related regulations could result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of injunctions that may subject us to additional operational constraints. Any such penalties or liability could have a material adverse effect on our business, financial condition, or results of operations. Even if we are insured or indemnified against such risks, we may be responsible for costs or penalties to the extent our insurers or indemnitors do not fulfill their obligations to us. See Items 1 and 2. Business and Properties—Environmental 20 Table of Contents Index to Financial Statements Regulations and Items 1 and 2. Business and Properties—Rates and Safety Regulations—Pipeline Safety, for additional information. Evolving environmental laws and regulations on climate change could adversely affect our financial performance. Potential additional laws and regulations regarding climate change could affect our operations. Currently, various U.S. legislative and regulatory agencies and bodies are considering various measures in regard to GHG emissions. These measures include EPA programs to control GHG emissions and state actions to develop statewide or regional programs, each of which could impose reductions in GHG emissions. These actions could result in increased (1) costs to operate and maintain our facilities, (2) capital expenditures to install new emission controls on our facilities and (3) costs to administer and manage any potential GHG emissions regulations or carbon trading or tax programs. These actions could also have an indirect adverse effect on our business if Phillips 66’s refinery operations are adversely affected due to increased regulation of Phillips 66’s facilities or reduced demand for crude oil, refined petroleum products and NGL, and a direct adverse effect on our business from increased regulation of our facilities. See Items 1 and 2. Business and Properties—Environmental Regulations—Air Emissions and Climate Change, for additional information. Climate change may adversely affect our facilities and our ongoing operations. The potential physical effects of climate change on our operations are highly uncertain and depend upon the unique geographic and environmental factors present. Examples of such effects include rising sea levels at our coastal facilities, changing storm patterns and intensities, and changing temperature levels. As many of our facilities are located near coastal areas or serve refineries in coastal areas, rising sea levels may disrupt our ability to transport crude oil and refined petroleum products. Extended periods of such disruption could have an adverse effect on our results of operations. Similar potential physical effects, impacts and disruptions could affect facilities and operations of Phillips 66, with which our facilities and operations are connected. Evolving environmental laws and regulations on hydraulic fracturing could have an indirect effect on our financial performance. Hydraulic fracturing is a common practice used to stimulate production of crude oil and/or natural gas from dense subsurface rock formations, and presently, is primarily regulated by state agencies. However, Congress has previously considered, and may in the future consider, legislation to empower federal agencies to regulate hydraulic fracturing. Many states have already adopted laws and/or regulations that require disclosure of the chemicals used in hydraulic fracturing and are considering legal requirements that could impose more stringent permitting, disclosure and well construction requirements on oil and/or natural gas drilling activities. The EPA also has adopted regulations requiring “green completions” of hydraulically fractured wells and is moving forward with, among other things, various regulations relating to certain emission requirements for some midstream equipment. We do not believe these new regulations will have a direct effect on our operations. If new or more stringent federal, state or local legal restrictions relating to such drilling activities or to the hydraulic fracturing process are adopted in areas where producers of product we ship operate, those producers could incur potentially significant added costs to comply with such requirements and experience delays or curtailment in the pursuit of production or development activities. The producers’ added costs or delays could reduce demand for our transportation and midstream services. New and proposed regulations governing fuel efficiency and renewable fuels could have an indirect but material adverse effect on our business. Increases in fuel mileage standards and the increased use of renewable fuels could decrease demand for refined petroleum products, which could have an indirect, but material, adverse effect on our business, financial condition and results of operations. For example, in 2007, Congress passed the EISA, which, among other things, sets a target of 35 miles per gallon for the combined fleet of cars and light trucks in the United States by model year 2020, and contains RFS2. In August 2012, the National Highway Traffic Safety Administration enacted regulations establishing an average industry fleet fuel economy standard of 54.5 miles per gallon by 2025. RFS2 presents production and logistics challenges for both the renewable fuels and petroleum refining industries. RFS2 has required, and may in the future continue to require, additional capital expenditures or expenses by Phillips 66 to accommodate increased renewable fuels use. Phillips 66 may experience a decrease in demand for refined petroleum products due to an increase in combined fleet mileage or due to the replacement of refined petroleum products with renewable fuels. 21 Table of Contents Index to Financial Statements P lans we may have to expand existing assets or construct new assets are subject to risks associated with societal and political pressures and other forms of opposition to the future development, transportation and use of carbon-based fuels. Such risks could adversely impact our ability to realize certain growth strategies. Certain of our planned expenditures are based upon the assumption that societal sentiment will continue to enable, and existing regulations will remain intact to allow for, the future development, transportation and use of carbon-based fuels. A portion of our growth strategy is dependent on our ability to expand existing assets and to construct additional assets. Policy decisions relating to the production, refining, transportation and marketing of carbon- based fuels are subject to political pressures and the influence and protests of environmental and other special interest groups. For example, our growth plans include the construction or expansion of pipelines, which can involve numerous regulatory, environmental, political, and legal uncertainties, many of which are beyond our control. Our growth projects may not be completed on schedule or at the budgeted cost. In addition, our revenues may not increase immediately upon the expenditure of funds on a particular project. Delays or cost increases related to capital spending programs could negatively impact our results of operations, cash flows and our return on capital employed. Many of our assets have been in service for many years and require significant expenditures to maintain them. As a result, our maintenance or repair costs may increase in the future. Our pipelines, terminals, fractionator, processing and storage assets are generally long-lived assets, and many of them have been in service for many years. The age and condition of our assets could result in increased maintenance or repair expenditures in the future. Any significant increase in these expenditures could adversely affect our results of operations, financial position or cash flows, as well as our ability to make cash distributions to our unitholders. Terrorist attacks and threats, cyber attacks, or escalation of military activity in response to these attacks could have a material adverse effect on our business, financial condition or results of operations. Terrorist attacks and threats, cyber attacks, or escalation of military activity in response to these attacks may have significant effects on general economic conditions, fluctuations in consumer confidence and spending and market liquidity, each of which could materially and adversely affect our business. Strategic targets, such as energy-related assets and transportation assets, may be at greater risk of future terrorist or cyber attacks than other targets in the United States. Additionally, we rely on the information technology infrastructure of Phillips 66 to conduct our operations. The systems and networks we rely on, as well as those of our vendors and counterparties, may become the target of cyber attacks or information security breaches, which in turn could result in the unauthorized release and misuse of confidential or proprietary information as well as disrupt our operations or damage our facilities. Additionally, as cyber incidents continue to evolve and escalate, we may be required to reimburse Phillips 66 for additional costs incurred associated with the modification or enhancement of systems or networks that directly serve our operations in order to prevent or remediate such attacks. We do not maintain specialized insurance for possible liability or loss resulting from a cyber attack on our assets that may shut down all or part of our business. It is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition and results of operations. We may incur greater than anticipated costs and liabilities in order to comply with safety regulations, including pipeline integrity management program testing and related repairs. The DOT, through its PHMSA, has adopted regulations requiring, among other things, pipeline operators to develop integrity management programs for transmission pipelines located where a leak or rupture could harm HCAs. The regulations require operators, including us, to, among other matters, perform ongoing assessments of pipeline integrity; repair and remediate pipelines as necessary; and implement preventative and mitigating actions. PHMSA is considering whether to revise the integrity management requirements or to include additional pipelines in HCAs, which could have a material adverse effect on our operations and costs of transportation services. 22 Table of Contents Index to Financial Statements Although some of our facilities fall within a class that is currently not subject to these requirements, we may incur significant costs and liabilities associated with repair, remediation, preventative or mitigation measures associated with our non-exempt pipelines. We have not estimated the costs for any repair, remediation, preventative or mitigating actions that may be determined to be necessary as a result of these safety regulations, which could be substantial, or any lost cash flows resulting from shutting down our pipelines during the pendency of such repairs. Additionally, should we fail to comply with the DOT or comparable state regulations, we could be subject to penalties and fines. The tariff rates of our regulated assets are subject to review and possible adjustment by federal and state regulators, which could adversely affect our revenue and our ability to make distributions to our unitholders. Certain of our pipelines provide interstate service that is subject to regulation by FERC. FERC uses prescribed rate methodologies to develop regulated tariff rates for interstate oil and product pipelines. Our tariff rates approved by FERC may not recover all of our costs of providing services. In addition, these methodologies and changes to FERC’s approved rate methodologies, or challenges to our application of an approved methodology, could also adversely affect our rates. Shippers may protest (and FERC may investigate) the lawfulness of new or changed tariff rates. FERC can suspend those tariff rates for up to seven months and can also require refunds of amounts collected pursuant to rates that are ultimately found to be unlawful and prescribe new rates prospectively. FERC and interested parties can also challenge tariff rates that have become final and effective. Under our existing commercial agreements, Phillips 66 has agreed not to challenge, or to cause others to challenge or assist others in challenging, our tariff rates in effect during the term of the agreements, except to the extent changes to the base tariff rate are inconsistent with FERC’s indexing methodology or other rate changing methodologies. This agreement does not prevent other shippers or interested persons from challenging our tariffs, including our tariff rates and proration rules. Due to the complexity of rate making, the lawfulness of any rate is never assured. A successful challenge of our rates could adversely affect our revenues and our ability to make distributions to our unitholders. Our pipelines are common carriers and, as a consequence, we may be required to provide service to customers with credit and other performance characteristics with whom we would otherwise choose not to do business. Certain of our pipelines provide intrastate service that is subject to regulation by various state agencies. These state agencies could limit our ability to increase our rates or to set rates based on our costs or could order us to reduce our rates and could require the payment of refunds to shippers. Such regulation or a successful challenge to our intrastate pipeline rates could adversely affect our financial position, cash flows or results of operations. See Items 1 and 2. Business and Properties—Rates and Safety Regulations, for additional information. Risks Inherent in an Investment in Us Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions. Our partnership agreement requires that we distribute all of our available cash to our unitholders. As a result, we expect to primarily rely upon external financing sources, including related-party financing from Phillips 66, borrowings under our revolving credit facility and future issuances of equity and debt securities, to fund our acquisitions and expansion capital expenditures. Therefore, to the extent we are unable to finance our growth externally, our cash distribution policy may significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units as to distributions or in liquidation or that have special voting rights and other rights, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. Additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may reduce the amount of cash that we have available to distribute to our unitholders. 23 Table of Contents Index to Financial Statements Our General Partner’s discretion in establishing cash reserves may reduce the amount of cash we have available to distribute to our unitholders. The partnership agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash we have available to distribute to our unitholders. Our General Partner and its affiliates, including Phillips 66, have conflicts of interest with us, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over the business decisions and operations of Phillips 66, and Phillips 66 is under no obligation to adopt a business strategy that favors us. As of December 31, 2018 , Phillips 66 owned, through Phillips 66 PDI, a 2 percent general partner interest and a 54 percent limited partner interest in us and owned and controlled our General Partner. Although our General Partner has a duty to manage us in a manner that is in the best interests of our partnership and our unitholders, the directors and officers of our General Partner also have a duty to manage our General Partner in a manner that is in the best interests of its owner, Phillips 66. Conflicts of interest may arise between Phillips 66 and its affiliates, including our General Partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, our General Partner may favor its own interests and the interests of its affiliates, including Phillips 66, over the interests of our common unitholders. These conflicts include, among others, the following: • Neither our partnership agreement nor any other agreement requires Phillips 66 to pursue a business strategy that favors us or utilizes our assets. For example, Phillips 66 could decide to increase or decrease refinery production, shut down or reconfigure a refinery, pursue and grow particular markets, or undertake acquisition or disposition opportunities, all without regard for the decisions’ impact on us. Phillips 66’s directors and officers have a fiduciary duty to make these decisions in the best interests of the stockholders of Phillips 66. • • Phillips 66, as our primary customer, has an economic incentive to cause us to not seek higher tariff rates, even if such higher rates or fees would reflect rates and fees that could be obtained in arm’s length, third-party transactions. Phillips 66 may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interests. • Our General Partner will determine the amount and timing of asset acquisitions and sales, borrowings, issuance of additional partnership securities and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash that is distributed to our unitholders. • Our General Partner will determine the amount and timing of many of our cash expenditures and whether a cash expenditure is classified as an expansion capital expenditure, which would not reduce operating surplus, or a maintenance capital expenditure, which would reduce our operating surplus. This determination can affect the amount of available cash from operating surplus that is distributed to our unitholders and to our General Partner and the amount of adjusted operating surplus generated in any given period. • Our General Partner will determine which costs incurred by it are reimbursable by us. • Our General Partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make incentive distributions. • Our partnership agreement permits us to classify up to $60 million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions to our General Partner in respect of the general partner interest or the incentive distribution rights. 24 Table of Contents Index to Financial Statements • Our partnership agreement does not restrict our General Partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf. • Our General Partner intends to limit its liability regarding our contractual and other obligations. • Our General Partner controls the enforcement of obligations owed to us by our General Partner and its affiliates, including our commercial agreements with Phillips 66. • Our General Partner decides whether to retain separate counsel, accountants or others to perform services for us. • Our General Partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our General Partner’s incentive distribution rights without the approval of the conflicts committee of the Board of Directors of our General Partner, which we refer to as our Conflicts Committee, or our unitholders. This election may result in lower distributions to our common unitholders in certain situations. Affiliates of our General Partner, including Phillips 66, DCP Midstream, LLC (DCP Midstream) and Chevron Phillips Chemical Company LLC (CPChem), may compete with us, and neither our General Partner nor its affiliates have any obligation to present business opportunities to us. Neither our partnership agreement nor our amended omnibus agreement prohibits Phillips 66 or any other affiliates of our General Partner, including DCP Midstream and CPChem, from owning assets or engaging in businesses that compete directly or indirectly with us. Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our General Partner or any of its affiliates, including Phillips 66, DCP Midstream and CPChem. Any such entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us does not have any duty to communicate or offer such opportunity to us. Consequently, Phillips 66 and other affiliates of our General Partner, including DCP Midstream and CPChem, may acquire, construct or dispose of additional midstream assets in the future without any obligation to offer us the opportunity to purchase any of those assets. As a result, competition from Phillips 66 and other affiliates of our General Partner, including DCP Midstream and CPChem, could materially and adversely impact our results of operations and distributable cash flow. Our partnership agreement replaces our General Partner’s fiduciary duties to holders of our common units with contractual standards governing its duties. Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to limited partners and the partnership, provided that partnership agreements may not eliminate the implied contractual covenant of good faith and fair dealing. This implied covenant is a judicial doctrine utilized by Delaware courts in connection with interpreting ambiguities in partnership agreements and other contracts, and does not form the basis of any separate or independent fiduciary duty in addition to the express contractual duties set forth in our partnership agreement. Under the implied contractual covenant of good faith and fair dealing, a court will enforce the reasonable expectations of the partners where the language in the partnership agreement does not provide for a clear course of action. As permitted by Delaware law, our partnership agreement contains provisions that eliminate the fiduciary standards to which our General Partner would otherwise be held by state fiduciary duty law and replaces those duties with several different contractual standards. For example, our partnership agreement permits our General Partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our General Partner, free of any duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing. This provision entitles our General Partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. By purchasing a common unit, a unitholder is treated as having consented to the provisions in our partnership agreement, including the provisions discussed above. 25 Table of Contents Index to Financial Statements Our partnership agreement restricts the remedies available to holders of our common units for actions taken by our General Partner that might otherwise constitute breaches of fiduciary duty. Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our General Partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement: • • • • Provides that whenever our General Partner makes a determination or takes, or declines to take, any other action in its capacity as our General Partner, our General Partner is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the determination or the decision to take or decline to take such action was in the best interests of the partnership, and will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity. Provides that our General Partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith. Provides that our General Partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our General Partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal. Provides that our General Partner will not be in breach of its obligations under our partnership agreement or its fiduciary duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is approved in accordance with, or otherwise meets the standards set forth in, our partnership agreement. In connection with a situation involving a transaction with an affiliate or a conflict of interest, our partnership agreement provides that any determination by our General Partner must be made in good faith, and that our Conflicts Committee and the Board of Directors of our General Partner are entitled to a presumption that they acted in good faith. In any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Cost reimbursements, which will be determined in our General Partner’s sole discretion, and fees due to our General Partner and its affiliates for services provided will be substantial and will reduce the amount of cash we have available for distribution to our unitholders. Under our partnership agreement, we are required to reimburse our General Partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our amended omnibus agreement, amended and restated operational services agreement and tax sharing agreement, our General Partner determines the amount of these expenses. Under the terms of the amended omnibus agreement we will be required to reimburse Phillips 66 for the provision of certain operational and administrative support services to us. Under our amended and restated operational services agreement, we will be required to reimburse Phillips 66 for the provision of certain maintenance, operating, administrative and construction services in support of our operations. Under our tax sharing agreement, we will reimburse Phillips 66 for our share of state and local income and other taxes that are incurred by Phillips 66 due to our results of operations being included in a combined or consolidated tax return filed by Phillips 66. Our General Partner and its affiliates also may provide us other services for which we will be charged fees as determined by our General Partner. The costs and expenses for which we are required to reimburse our General Partner and its affiliates are not subject to any caps or other limits. Payments to our General Partner and its affiliates will be substantial and will reduce the amount of cash we have available to distribute to unitholders. Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our General Partner without its consent. Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. For example, unlike 26 Table of Contents Index to Financial Statements holders of stock in a public corporation, unitholders will not have “say-on-pay” advisory voting rights. Unitholders did not elect our General Partner or the Board of Directors of our General Partner and will have no right to elect our General Partner or the Board of Directors of our General Partner on an annual or other continuing basis. The Board of Directors of our General Partner is chosen by the member of our General Partner, which is a wholly owned subsidiary of Phillips 66. Furthermore, if the unitholders are dissatisfied with the performance of our General Partner, they have little ability to remove our General Partner. As a result of these limitations, the price at which our common units trade could be diminished because of the absence or reduction of a takeover premium in the trading price. The unitholders are unable initially to remove our General Partner without its consent because our General Partner and its affiliates own sufficient units to be able to prevent its removal. The vote of the holders of at least 66 2/3 percent of all outstanding common units and Series A preferred units (on an as-converted basis) voting as a single class is required to remove our General Partner. As of December 31, 2018, our General Partner and its affiliates owned approximately 50 percent of our total outstanding common units and Series A preferred units (on an as-converted basis) in aggregate. Unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20 percent or more of any class of units then outstanding, other than our General Partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of the Board of Directors of our General Partner, cannot vote on any matter. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management. Our general partner units or the control of our General Partner may be transferred to a third party without unitholder consent. Our General Partner may transfer its general partner units to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of Phillips 66 to transfer its membership interest in our General Partner to a third party. The new owner of our General Partner would then be in a position to replace the Board of Directors and officers of our General Partner with its own choices. We may issue additional units without unitholder approval, which would dilute unitholder interests. At any time, we may issue an unlimited number of general partner interests or limited partner interests of any type without the approval of our unitholders and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such general partner interests or limited partner interests. Further, there are no limitations in our partnership agreement on our ability to issue equity securities that rank equal or senior to our common units as to distributions or in liquidation or that have special voting rights and other rights. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects: • Our unitholders’ proportionate ownership interest in us will decrease. • • • • The amount of cash we have available to distribute on each unit may decrease. The ratio of taxable income to distributions may increase. The relative voting strength of each previously outstanding unit may be diminished. The market price of our common units may decline. The issuance by us of additional general partner interests may have the following effects, among others, if such general partner interests are issued to a person who is not an affiliate of Phillips 66: • Management of our business may no longer reside solely with our General Partner. 27 Table of Contents Index to Financial Statements • Affiliates of the newly admitted general partner may compete with us, and neither that general partner nor such affiliates will have any obligation to present business opportunities to us. Phillips 66 may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units. At December 31, 2018, Phillips 66 held 68,760,137 common units. We have agreed to provide Phillips 66 with certain registration rights under applicable securities laws. The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop. Our General Partner, or any transferee holding incentive distribution rights, may elect to cause us to issue common units and general partner units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of our Conflicts Committee or the holders of our common units. This could result in lower distributions to holders of our common units. Our General Partner has the right, at any time when it has received distributions on its incentive distribution rights at the highest level to which it is entitled (48 percent, in addition to distributions paid on its 2 percent general partner interest) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution. If our General Partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and general partner units. The number of common units to be issued to our General Partner will be equal to that number of common units that would have entitled their holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our General Partner on the incentive distribution rights in such two quarters. Our General Partner will also be issued the number of general partner units necessary to maintain our General Partner’s interest in us at the level that existed immediately prior to the reset election. We anticipate that our General Partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our General Partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions they would have otherwise received had we not issued new common units and general partner units in connection with resetting the target distribution levels. Additionally, our General Partner has the right to transfer all or any portion of our incentive distribution rights at any time, and such transferee shall have the same rights as the General Partner relative to resetting target distributions if our General Partner concurs that the tests for resetting target distributions have been fulfilled. Our General Partner has a limited call right that may require unitholders to sell their common units at an undesirable time or price. If at any time our General Partner and its affiliates own more than 80 percent of our then-outstanding common units, our General Partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our General Partner and its affiliates owned approximately 55 percent of our common units in aggregate as of December 31, 2018 . Including Series A preferred units on an as-converted basis, our General Partner would own 50 percent of our common units in aggregate at December 31, 2018 . 28 Table of Contents Index to Financial Statements If a unitholder is not both a citizenship eligible holder and a rate eligible holder, its common units may be subject to redemption. In order to avoid (1) any material adverse effect on the maximum applicable rates that can be charged to customers by our subsidiaries on assets that are subject to rate regulation by FERC or any analogous regulatory body, and (2) any substantial risk of cancellation or forfeiture of any property, including any governmental permit, endorsement or other authorization, in which we have an interest, we have adopted certain requirements regarding those investors who may own our common units. Citizenship eligible holders are individuals or entities whose nationality, citizenship or other related status does not create a substantial risk of cancellation or forfeiture of any property, including any governmental permit, endorsement or authorization, in which we have an interest, and will generally include individuals and entities who are U.S. citizens. Rate eligible holders are individuals or entities subject to U.S. federal income taxation on the income generated by us or entities not subject to U.S. federal income taxation on the income generated by us, so long as all of the entity’s owners are subject to such taxation. If a unitholder does not meet the requirements to be a citizenship eligible holder and a rate eligible holder runs the risk of having its units redeemed by us at the market price as of the date three days before the date the notice of redemption is mailed. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our General Partner. In addition, a unitholder who does not meet the requirements to be a citizenship eligible holder will not be entitled to voting rights. Our significant indebtedness and the restrictions in our debt agreements may adversely affect our future financial and operating flexibility. We have significant indebtedness and may incur substantial additional indebtedness in the future. Our indebtedness may impose various restrictions and covenants on us that could have material adverse consequences, including: • • Limiting our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes. Reducing our funds available for operations, business opportunities and distributions to unitholders because of the amount of our cash flow required to make interest payments on our debt. • Making us more vulnerable to competitive pressures or a downturn in our business or the economy, generally. • Limiting our flexibility to respond to changing business and economic conditions. Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, investments or capital expenditures, selling assets or issuing equity, which could materially and adversely affect our financial condition, results of operations, cash flows and ability to make distributions to unitholders, as well as the trading price of our common units. We may not be able to affect any of these actions on satisfactory terms or at all. A deterioration of our credit profile could limit our access to the capital markets, which could materially and adversely affect our business. A decrease in our debt or commercial credit capacity, including a deterioration of our credit profile, could increase our costs of borrowing money and/or limit our access to the capital markets and commercial credit, which could materially and adversely affect our business, financial condition, results of operations and cash flows. The terms of our debt arrangements may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with such terms could result in an event of default that would enable our lenders to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered. Our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment. 29 Table of Contents Index to Financial Statements Increases in interest rates could adversely impact the price of our common units, our ability to issue equity, or our ability to make distributions at our intended levels. Similar to other yield-oriented securities, our common unit price is impacted by our level of distributions and the implied distribution yield of our common units. The distribution yield is often utilized by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positively or negatively, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on the price of our common units, our ability to issue equity, or our ability to make distributions at our intended levels. The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements. We currently list our common units on the NYSE under the symbol PSXP. Because we are a publicly traded limited partnership, the NYSE does not require us to have a majority of independent directors on our General Partner’s Board of Directors or to establish a compensation committee or a nominating and corporate governance committee. Additionally, any future issuance of additional common units or other securities, including to affiliates, will not be subject to the NYSE’s shareholder approval rules that apply to a corporation. Accordingly, unitholders do not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. See Item 10. Directors, Executive Officers and Corporate Governance, for additional information. Tax Risks Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service (IRS) were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then our distributable cash flow to our unitholders would be substantially reduced. The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested a ruling from the IRS on this or any other tax matter affecting us. Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity. If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 21 percent, and would likely pay state and local income tax at varying rates. Distributions would generally be taxable to the unitholder as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to unitholders. Because a tax would be imposed upon us as a corporation, our distributable cash flow would be substantially reduced. In addition, changes in current state law may subject us to additional entity-level taxation by individual states. Several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce the cash available for distribution to unitholders. Therefore, if we were treated as a corporation for federal income tax purposes or otherwise subjected to a material amount of entity-level taxation, there would be material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units. Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us. 30 Table of Contents Index to Financial Statements The present federal income tax treatment of publicly traded partnerships, including us, may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Any modification to the federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for federal income tax purposes. We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us, and any such changes could negatively impact the value of an investment in our common units. If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our distributable cash flow to our unitholders. We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our General Partner because the costs will reduce our distributable cash flow. If the IRS makes audit adjustments to our income tax returns for tax years beginning after 2017, it may collect any resulting taxes (including any applicable penalties and interest) directly from us, in which case our cash available for distribution to our unitholders might be substantially reduced. Pursuant to the Bipartisan Budget Act of 2015, if the IRS makes audit adjustments to our income tax returns for tax years beginning after 2017, it may collect any resulting taxes (including any applicable penalties and interest) directly from us. We will generally have the ability to shift any such tax liability to our General Partner and our unitholders in accordance with their interests in us during the year under audit, but there can be no assurance that we will be able to do so under all circumstances. If we are required to make payments of taxes, penalties and interest resulting from audit adjustments, our cash available for distribution to our unitholders might be substantially reduced. We treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of our common units. Because we cannot match transferors and transferees of common units and because of other reasons, we adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to unitholders. It also could affect the timing of these tax benefits or the amount of gain from sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to our unitholders’ tax returns. We prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first business day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge aspects of our proration method, and, if successful, we would be required to change the allocation of items of income, gain, loss and deduction among our unitholders. We prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first business day of each month, instead of on the basis of the date a particular unit is transferred. Treasury Regulations permit publicly traded partnerships to use a monthly simplifying convention that is similar to ours, but they do not specifically authorize all aspects of the proration method we have adopted. If the IRS were to successfully challenge this method, we could be required to change the allocation of items of income, gain, loss and deduction among our unitholders. 31 Table of Contents Index to Financial Statements We have adopted certain valuation methodologies in determining a unitholder’s allocations of income, gain, loss and deduction. The IRS may challenge these methodologies or the resulting allocations, and such a challenge could adversely affect the value of our common units. In determining the items of income, gain, loss and deduction allocable to our unitholders, in certain circumstances, including when we issue additional units, we must determine the fair market value of our assets. Although we may, from time to time, consult with professional appraisers regarding valuation matters, we make many fair market value estimates using a methodology based on the market value of our common units as a means to measure the fair market value of our assets. The IRS may challenge these valuation methods and the resulting allocations of income, gain, loss and deduction. A successful IRS challenge to these methods or allocations could adversely affect the amount, character and timing of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions. We may be required to deduct and withhold amounts from distributions to foreign unitholders related to withholding tax obligations arising from the sale or disposition of our units by foreign unitholders. Upon the sale, exchange or other disposition of a unit by a foreign unitholder, the transferee is generally required to withhold 10 percent of the amount realized on such sale, exchange or other disposition if any portion of the gain on such sale, exchange or other disposition would be treated as effectively connected with a U.S. trade or business. If the transferee fails to satisfy this withholding requirement, we will be required to deduct and withhold such amount (plus interest) from future distributions to the transferee. Because the “amount realized” would include a unitholder’s share of our nonrecourse liabilities, 10 percent of the amount realized could exceed the total cash purchase price for such disposed units. Due to this fact, our inability to match transferors and transferees of units, and other uncertainty surrounding the application of these withholding rules, the U.S. Department of the Treasury and the IRS have currently suspended these rules for transfers of certain publicly traded partnership interests, including transfers of our units, until regulations or other guidance has been issued. It is unclear when such regulations or other guidance will be issued. Item 1B. UNRESOLVED STAFF COMMENTS None. Item 3. LEGAL PROCEEDINGS Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not a party to any reportable litigation or governmental or other proceeding, including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment, that we believe will have a material adverse impact on our consolidated financial position. In addition, as discussed in Note 14—Contingencies , in the Notes to Consolidated Financial Statements, 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. Item 4. MINE SAFETY DISCLOSURES Not applicable. 32 Table of Contents Index to Financial Statements PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common units trade on the New York Stock Exchange (NYSE) under the symbol PSXP. At January 31, 2019, there were 12 unitholders of record of our common units. In determining the number of unitholders, we consider clearing agencies and security position listings as one unitholder for each agency or listing. Distributions of Available Cash Our partnership agreement requires that, within 45 days after the end of each quarter, we distribute all of our “available cash” to unitholders of record on the applicable record date. Definition of Available Cash. Available cash is defined in our partnership agreement. Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter: less , the amount of cash reserves established by our General Partner to: • • • Provide for the proper conduct of our business (including reserves for our future capital expenditures, future acquisitions and future credit needs), Comply with applicable law or any of our debt instruments or other agreements, Provide funds for distributions to our unitholders and to our General Partner for any one or more of the next four quarters (provided that our General Partner may not establish cash reserves for distributions if the effect of the establishment of such reserves will prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter); plus , if our General Partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter. Preferred Unit Distribution. The holders of perpetual convertible preferred units (preferred units) are entitled to receive cumulative quarterly distributions equal to $0.678375 per unit for any quarter ending on or before September 30, 2020, and thereafter the quarterly distributions on each preferred unit will equal the greater of $0.678375 per unit or the amount that would have been distributed with respect to such preferred unit if it had been converted into common units at the then applicable conversion rate. The Partnership may not pay any distributions for any quarter on any securities that rank junior to the preferred units, including any common units and incentive distribution rights, unless the distribution payable to the preferred units with respect to such quarter, together with any previously accrued but unpaid distributions to the preferred units, have been paid in full. Intent to Distribute the Minimum Quarterly Distribution. Under our current cash distribution policy, we intend to make at least the minimum quarterly distribution to the holders of our common units of $0.2125 per unit, to the extent we have sufficient available cash after the establishment of cash reserves. However, there is no guarantee that we will pay the minimum quarterly distribution on our common units in any quarter. The amount of distributions paid under our cash distribution policy and the decision to make any distribution is determined by our General Partner, in accordance with the terms of our partnership agreement. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility, for a discussion of the covenants included in our revolving credit facility that may restrict our ability to make distributions. General Partner Interest and Incentive Distribution Rights. Our General Partner is entitled to 2 percent of all quarterly distributions that we make, other than with respect to any distributions we make on our preferred units as defined above. This general partner interest was represented by 2,480,051 general partner units at December 31, 2018 . Our General Partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. The general partner’s 2 percent interest in distributions will be reduced if we issue additional units in the future and our General Partner does not contribute a proportionate amount of capital to us to maintain its 2 percent general partner interest. 33 Table of Contents Index to Financial Statements Our General Partner also holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48 percent, of the available cash we distribute from operating surplus (as defined in our partnership agreement) in excess of $0.244375 per unit per quarter. The maximum distribution of 48 percent does not include any distributions that our General Partner or its affiliates may receive on common or general partner units that they own. Percentage Allocations of Available Cash. The following table illustrates the percentage allocations of available cash from operating surplus between the common unitholders and our General Partner based on the specified target distribution levels in the partnership agreement. The amounts presented under “Marginal Percentage Interest in Distributions” are the percentage interests of our General Partner and the common unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit Target Amount.” The percentage interests shown for our common unitholders and our General Partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests presented below for our General Partner include its 2 percent general partner interest and assume that our General Partner has contributed any additional capital necessary to maintain its 2 percent general partner interest, our General Partner has not transferred its incentive distribution rights and there are no arrearages on common units. Minimum Quarterly Distribution First Target Distribution Second Target Distribution Third Target Distribution Thereafter Total Quarterly Distribution Per Unit Target Amount up to $0.244375 up to $0.265625 up to $0.318750 $0.212500 Above $0.212500 Above $0.244375 Above $0.265625 Above $0.318750 34 Marginal Percentage Interest in Distributions Common Unitholders General Partner 98% 98% 85% 75% 50% 2% 2% 15% 25% 50% Table of Contents Index to Financial Statements Item 6. SELECTED FINANCIAL DATA The following table presents selected financial data as of and for each of the five years in the period ended December 31, 2018 . To ensure full understanding, the selected financial data presented below should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. Acquisitions from Phillips 66 are considered common control transactions. When businesses are acquired from Phillips 66 and consolidated by us, the financial information contained in the table below for periods prior to the acquisition date is retrospectively adjusted to include the historical financial results of the businesses acquired. When an asset or an investment accounted for by the equity method is acquired from Phillips 66, the financial information in the table below includes the results of those investments or assets prospectively from the date of acquisition. See Note 4—Acquisitions and Note 5—Equity Investments , in the Notes to Consolidated Financial Statements, for information on our acquisitions, including those that were common control transactions, that affect the comparability of the information below. Statement of income data: Operating revenues—related parties Operating revenues—third parties Equity in earnings of affiliates Net income Net income attributable to the Partnership Limited partners’ interest in net income attributable to the Partnership Net income attributable to the Partnership per limited partner unit Common units—basic Common units—diluted Subordinated units—Phillips 66—basic and diluted Cash distributions paid per limited partner unit Balance sheet data: Total assets Long-term debt Notes payable—related parties 35 Millions of Dollars Except Per Unit Amounts 2018 2017 2016 2015 2014 $ 1,012 33 439 796 796 519 894 40 223 524 461 292 727 31 114 408 301 209 582 30 77 306 194 153 531 24 — 245 116 108 4.22 4.00 — 2.9360 2.60 2.59 — 2.4050 2.20 2.20 — 1.9750 2.02 2.02 1.24 1.5380 1.48 1.48 1.45 1.1176 5,819 2,998 — 5,334 2,920 — 4,109 2,396 — 3,662 1,091 964 2,034 18 764 Table of Contents Index to Financial Statements Item 7. 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 significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. It contains forward-looking statements including, without limitation, statements relating to the 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 Delaware limited partnership formed in 2013 by Phillips 66 Company and Phillips 66 Partners GP LLC (our General Partner), both wholly owned subsidiaries of Phillips 66. On August 1, 2015, Phillips 66 Company transferred all of its limited partner interest in us and its 100 percent interest in Phillips 66 Partners GP LLC to its wholly owned subsidiary, Phillips 66 Project Development Inc. (Phillips 66 PDI). We are a growth-oriented master limited partnership formed to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum products and natural gas liquids (NGL) pipelines and terminals, and other transportation and midstream assets. Our common units trade on the New York Stock Exchange under the symbol PSXP. Basis of Presentation We have acquired assets from Phillips 66 that were considered transfers of businesses between entities under common control. This required the transactions to be accounted for as if the transfers had occurred at the beginning of the period of transfer, with prior periods retrospectively adjusted to furnish comparative information. We refer to these pre-acquisition operations as those of our “Predecessors.” See the “Basis of Presentation” section of Note 1—Business and Basis of Presentation , in the Notes to Consolidated Financial Statements, for additional information on the content and comparability of our historical financial statements. Executive Overview Net income attributable to the Partnership was $796 million in 2018 . We generated cash from operations of $892 million and raised net proceeds of $228 million through debt and equity financings. This cash was primarily used to fund capital expenditures and make quarterly cash distributions to our unitholders and General Partner. As of December 31, 2018 , we had cash and cash equivalents of $1 million , total debt of $3,048 million , and unused capacity under our revolving credit facility of $625 million . 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 NGL fractionator systems. In addition, our equity affiliates generate revenue from transporting and terminaling NGL, crude oil and refined petroleum products. These volumes are primarily affected by the supply of, and demand for, NGL, crude oil and refined petroleum products 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. 36 Table of Contents Index to Financial Statements 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 NGL, crude oil, or refined petroleum product 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 attributable to both the Partnership and our Predecessors. Adjusted EBITDA is the EBITDA attributable to the Partnership after deducting the EBITDA attributable to our Predecessors, further adjusted for: • • • The proportional share of equity affiliates’ net interest expense, income taxes and depreciation and amortization. Transaction costs associated with acquisitions. Certain other noncash items, including expenses indemnified by Phillips 66. Distributable cash flow is defined as adjusted EBITDA less (i) equity affiliate distributions less than proportional EBITDA, (ii) maintenance capital expenditures, (iii) net interest expense, (iv) income taxes paid and (v) preferred unit distributions, plus adjustments for deferred revenue impacts. EBITDA, adjusted EBITDA, and distributable cash flow are not presentations made in accordance with generally accepted accounting principles in the United States (GAAP). EBITDA, adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management believes external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may find useful to assess: • Our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of EBITDA and adjusted EBITDA, financing methods. • The ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders. • Our ability to incur and service debt and fund capital expenditures. • The viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. 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. 37 Table of Contents Index to Financial Statements Business Environment Since we do not own any of the NGL, crude oil and refined petroleum products we handle and do not engage in the trading of NGL, crude oil and refined petroleum products, 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. 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 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. 38 Table of Contents Index to Financial Statements RESULTS OF OPERATIONS Years Ended December 31 Revenues and Other Income Operating revenues—related parties Operating revenues—third parties Equity in earnings of affiliates Other income Total revenues and other income Costs and Expenses Operating and maintenance expenses Depreciation General and administrative expenses Taxes other than income taxes Interest and debt expense Other expenses Total costs and expenses Income before income taxes Income tax expense Net income Less: Net income attributable to Predecessors Net income attributable to the Partnership Less: Preferred unitholders’ interest in net income attributable to the Partnership Less: General partner’s interest in net income attributable to the Partnership Limited partners’ interest in net income attributable to the Partnership Net cash provided by operating activities Adjusted EBITDA Distributable cash flow 39 Millions of Dollars 2017 2018 2016 $ $ $ $ $ 1,012 33 439 2 1,486 894 40 223 12 1,169 354 117 64 35 115 1 686 800 4 796 — 796 37 240 519 321 116 69 33 101 1 641 528 4 524 63 461 9 160 292 892 724 1,137 754 854 572 727 31 114 1 873 216 96 65 33 52 1 463 410 2 408 107 301 — 92 209 492 471 380 Table of Contents Index to Financial Statements Wholly Owned Operating Data Pipelines Pipeline revenues (millions of dollars) Pipeline volumes (1) (thousands of barrels daily) Crude oil Refined petroleum products and NGL Total Average pipeline revenue per barrel (dollars) Terminals Terminal revenues (millions of dollars) Terminal throughput (thousands of barrels daily) Crude oil (2) Refined petroleum products Total Average terminaling revenue per barrel (dollars) Storage, processing and other revenues (millions of dollars) Total operating revenues (millions of dollars) Year Ended December 31 2018 2017 2016 454 424 1,016 929 1,945 916 950 1,866 408 940 881 1,821 0.64 0.62 0.61 157 152 462 780 1,242 421 767 1,188 0.34 0.35 434 1,045 358 934 160 428 755 1,183 0.37 190 758 $ $ $ $ $ $ Joint Venture Operating Data (3) Crude oil, refined petroleum products and NGL (thousands of barrels daily) (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. 652 472 293 40 Table of Contents Index to Financial Statements 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 Year Ended December 31 2018 2017 2016 Reconciliation to Net Income Attributable to the Partnership Net income attributable to the Partnership Plus: Net income attributable to Predecessors Net income Plus: Depreciation Net interest expense Income tax expense EBITDA Plus: Proportional share of equity affiliates’ net interest, taxes and depreciation Expenses indemnified or prefunded by Phillips 66 Transaction costs associated with acquisitions Less: EBITDA attributable to Predecessors Adjusted EBITDA Plus: Deferred revenue impacts* † Less: Equity affiliate distributions less than proportional EBITDA Maintenance capital expenditures † Net interest expense Preferred unit distributions Distributable cash flow *Difference between cash receipts and revenue recognition. † Excludes Merey Sweeny capital reimbursements and turnaround impacts. $ 796 — 796 117 114 4 1,031 101 1 4 — 1,137 (6) 64 62 114 37 461 63 524 116 99 4 743 66 8 4 67 754 6 29 50 100 9 572 301 107 408 96 52 2 558 45 6 4 142 471 11 28 22 52 — 380 $ 854 41 Table of Contents Index to Financial Statements Millions of Dollars Year Ended December 31 2018 2017 2016 Reconciliation to Net Cash Provided by Operating Activities Net cash provided by operating activities Plus: $ 892 Net interest expense Income tax expense Changes in working capital Undistributed equity earnings Deferred revenues and other liabilities Other EBITDA Plus: Proportional share of equity affiliates’ net interest, taxes and depreciation Expenses indemnified or prefunded by Phillips 66 Transaction costs associated with acquisitions Less: EBITDA attributable to Predecessors Adjusted EBITDA Plus: Deferred revenue impacts* † Less: Equity affiliate distributions less than proportional EBITDA Maintenance capital expenditures † Net interest expense Preferred unit distributions Distributable cash flow *Difference between cash receipts and revenue recognition. † Excludes Merey Sweeny capital reimbursements and turnaround impacts. Statement of Income Analysis 2018 vs. 2017 114 4 (20) 5 42 (6) 1,031 101 1 4 — 1,137 (6) 64 62 114 37 $ 854 724 99 4 (30) 1 (43) (12) 743 66 8 4 67 754 6 29 50 100 9 572 492 52 2 28 (1) (9) (6) 558 45 6 4 142 471 11 28 22 52 — 380 Operating revenues increased $111 million , or 12 percent , in 2018 . The increase was primarily due to higher processing revenues at Merey Sweeny LLC, successor to Merey Sweeny, L.P. (both referred to herein as Merey Sweeny), and improved pipeline volumes and rates. Equity in earnings of affiliates increased $216 million , or 97 percent , in 2018 , mainly resulting from a full year of earnings from Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO), together referred to as the Bakken Pipeline, and higher earnings from DCP Sand Hills Pipeline, LLC (Sand Hills), Explorer Pipeline Company (Explorer), and Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal), primarily due to improved volumes. Other income decreased $10 million in 2018 . The decrease was primarily due to the receipt of tax-related contractual make-whole payments in 2017 associated with the transfer of a co-venturer’s interests in Sand Hills and DCP Southern Hills Pipeline, LLC (Southern Hills) to DCP Midstream, LP. Operating and maintenance expenses increased $33 million , or 10 percent , in 2018 . The increase was primarily due to higher operating expenses at Merey Sweeny and maintenance expenses for the Ponca Products System. 42 Table of Contents Index to Financial Statements Interest and debt expense increased $14 million , or 14 percent , in 2018 , due to higher average debt principal balances as a result of the issuance of $650 million of senior notes in October 2017. See Note 11—Debt , in the Notes to Consolidated Financial Statements, for additional information. 2017 vs. 2016 Operating revenues increased $176 million , or 23 percent , in 2017 . The increase was primarily related to the acquisition of Merey Sweeny in 2017. In addition, the increase in revenues was due to higher volumes due to a full year of operations at the River Parish NGL System acquired in November 2016, and additional storage capacity coming online at Clemens Caverns. Equity in earnings of affiliates increased $109 million , or 96 percent , in 2017 , mainly resulting from the Bakken Pipeline acquisition in 2017. In addition, the increase was due to higher earnings from Sand Hills, Phillips 66 Partners Terminal, and a full year of earnings from Bayou Bridge Pipeline, LLC (Bayou Bridge). Other income increased $11 million in 2017 . The increase was primarily due to the receipt of tax-related contractual make-whole payments associated with the transfer of a co-venturer’s interest in Sand Hills and Southern Hills to DCP Midstream, LP. Operating and maintenance expenses increased $105 million , or 49 percent , in 2017 . The increase was primarily due to additional operating expenses associated with the acquisition of Merey Sweeny in 2017 and the River Parish NGL System acquired in November 2016. Depreciation increased $20 million , or 21 percent , in 2017 , mainly attributable to the Merey Sweeny acquisition in 2017 and the River Parish NGL System acquired in November 2016. Additionally, the increase was due to additional storage capacity coming online at Clemens Caverns and accelerated depreciation for assets taken out of service. Interest and debt expense increased $49 million , or 94 percent , in 2017 , due to a higher average debt principal balance as a result of the issuances of $1,125 million and $650 million in aggregate senior notes in October 2016 and October 2017, respectively. See Note 11—Debt , in the Notes to Consolidated Financial Statements, for additional information. CAPITAL RESOURCES AND LIQUIDITY Significant Sources of Capital Our sources of liquidity include cash generated from operations, borrowings from related parties and under our revolving credit facility, and issuances of additional debt and equity securities. 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 During 2018 , we generated $892 million in cash from operations, a 23 percent improvement over cash from operations of $724 million in 2017 . The improvement was primarily driven by higher operating revenues and distributions from equity affiliates, partially offset by decreased deferred revenue and increased operating and maintenance expenses in 2018. During 2017 , cash provided by operating activities was $724 million , a 47 percent improvement over cash from operations of $492 million in 2016 . The improvement was mainly driven by distributions from the Bakken Pipeline in the second half of 2017, reflecting commencement of commercial operations in June 2017, earnings from Merey Sweeny and working capital impacts. 43 Table of Contents Index to Financial Statements Common Units In October 2017, we completed a private placement of 6,304,204 common units representing limited partner interests at a price of $47.59 per common unit, for total proceeds of $295 million , net of underwriting discounts and commissions. The net proceeds were used in part to fund the cash portion of the Bakken Pipeline/Merey Sweeny Acquisition. See Note 4— Acquisitions , in the Notes to Consolidated Financial Statements, for additional information. In August 2016, we completed a public offering of 6,000,000 common units representing limited partner interests at a price of $50.22 per common unit. We received proceeds of $299 million from the offering, net of underwriting discounts and commissions. We utilized the net proceeds to repay the Initial Note assumed as part of the Initial Fractionator Acquisition and to repay other short-term borrowings incurred to fund our acquisition of an additional interest in Explorer and our contribution to form STACK Pipeline LLC (STACK). See Note 4— Acquisitions and Note 11— Debt , in the Notes to Consolidated Financial Statements, for additional information. In May 2016, we completed a public offering, consisting of an aggregate of 12,650,000 common units representing limited partner interests at a price of $52.40 per common unit. We received proceeds of $656 million from the offering, net of underwriting discounts and commissions. We utilized the net proceeds to partially repay debt assumed as part of the Subsequent Fractionator Acquisition. See Note 4— Acquisitions and Note 11— Debt , in the Notes to Consolidated Financial Statements, for additional information. Preferred Units In October 2017, we completed the private placement of 13,819,791 perpetual convertible preferred units (preferred units) representing limited partner interests at a price of $54.27 per preferred unit. We received proceeds of $737 million from the offering, net of offering and transaction expenses. The net proceeds were used in part to fund the cash portion of the Bakken Pipeline/Merey Sweeny Acquisition. The preferred units rank senior to all common units with respect to distributions and rights upon liquidation. The holders of the preferred units are entitled to receive cumulative quarterly distributions equal to $0.678375 per unit, beginning for the quarter ended December 31, 2017, with a prorated amount from the date of issuance. Following the third anniversary of the issuance of the preferred units, the holders of the preferred units will receive as a quarterly distribution the greater of $0.678375 per unit or the amount of per-unit distributions paid to common unitholders as if such preferred units had converted into common units immediately prior to the record date. The holders of the preferred units may convert their preferred units into common units, on a one-for-one basis, at any time after the second anniversary of the issuance date, in full or in part, subject to minimum conversion amounts and conditions. After the third anniversary of the issuance date, we may convert the preferred units into common units at any time, in whole or in part, subject to certain minimum conversion amounts and conditions. See Note 12—Equity , in the Notes to Consolidated Financial Statements, for additional information on the preferred unit conversion features. ATM Program 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 year ended December 31, 2018, on a settlement date basis, we had issued an aggregate of 2,532,096 common units under our ATM programs, generating net proceeds of $128 million . During the year ended December 31, 2017 , on a settlement-date basis, we issued an aggregate of 3,372,716 common units under our ATM Program, generating net proceeds of $173 million . Since inception through December 31, 2018, we had issued an aggregate of 6,250,964 common units under our ATM programs, generating net proceeds of $320 million , after broker commissions 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. Issuances of common units under our ATM programs can reduce our General Partner’s interest below 2 percent. We expect the General Partner’s interest to be periodically restored to 2 percent in connection with dropdown transactions or through direct equity contributions. However, these future contributions from our General Partner cannot be assured. At December 31, 2018 , our General Partner’s interest was slightly less than 2 percent. 44 Table of Contents Index to Financial Statements Revolving Credit Facility At December 31, 2018 , we had borrowings of $125 million outstanding under our $750 million revolving credit facility established by our Credit Agreement dated June 7, 2013, as amended (the Credit Agreement). We have the option to increase the overall capacity of the Credit Agreement by up to an additional $250 million to a total of $1 billion , subject to, among other things, the consent of the existing lenders whose commitments will be increased or any additional lenders providing such additional capacity. We also have the option to extend the Credit Agreement for two additional one - year terms after its October 3, 2021, maturity date, subject to, among other things, the consent of the lenders holding the majority of the commitments and of each lender extending its commitment. Outstanding borrowings under the Credit Agreement bear interest, at our option, at either: (a) the Eurodollar rate in effect from time to time plus the applicable margin; or (b) the base rate (as described in the Credit Agreement) plus the applicable margin. The pricing levels for the commitment fee and interest-rate margins are determined based on our credit ratings in effect from time to time. Outstanding borrowings bearing interest at the Eurodollar rate become due and payable on the revolving credit facility’s termination date. Outstanding borrowings bearing interest at the base rate plus the applicable margin become due and payable on the earlier of the revolving credit facility’s termination date or the fourteenth business day after such borrowings were made. We may at any time and from time to time prepay outstanding borrowings under the Credit Agreement, in whole or in part, without premium or penalty. The Credit Agreement requires that the Partnership’s ratio of total debt to EBITDA for the prior four fiscal quarters must be no greater than 5.0 :1.0 as of the last day of each fiscal quarter (and 5.5 :1.0 during the period following certain specified acquisitions). Our revolving credit facility is subject to customary financial covenants and limitations. We are in compliance with all such financial covenants and limitations. Tax-Exempt Bonds In connection with the Bakken Pipeline/Merey Sweeny Acquisition, we assumed four $25 million tranches of tax-exempt bonds issued by the Brazos River Harbor Navigation District. We repaid one tranche in 2018, with another maturing in 2020 and two in 2021. The tranches accrue interest monthly based on a daily rate derived by the remarketing agent for the bonds. The interest rates are designed to represent the lowest rate acceptable by the tax-exempt, variable-rate bond market and approximate the tax-exempt bonds trading at par. Senior Bonds In May 2017 and prior to their maturity, we repaid Merey Sweeny senior bonds assumed in the Bakken Pipeline/Merey Sweeny Acquisition with a carrying value of $136 million on the repayment date, which resulted in an immaterial gain. Notes Payable In March 2016, in connection with the Initial Fractionator Acquisition, we entered into an Assignment and Assumption of Note agreement with subsidiaries of Phillips 66, pursuant to which we assumed the obligations under a term promissory note (the Initial Note) with a $212 million principal balance. In August 2016, using proceeds from a unit offering, we repaid the note in its entirety. In May 2016, in connection with the Subsequent Fractionator Acquisition, we entered into three separate Assignment and Assumption of Note agreements with subsidiaries of Phillips 66, pursuant to which we assumed the obligations under three term promissory notes (the Subsequent Notes), each with a $225 million principal balance. Also in May 2016, using proceeds from a unit offering, we repaid two of the Subsequent Notes in their entirety, and reduced the outstanding balance on the remaining Subsequent Note to $19 million , which was subsequently repaid in June 2016. Because the Initial Note, Subsequent Notes and Merey Sweeny tax-exempt bonds and senior bonds were held by entities we acquired in common control transactions, prior period debt balances were retrospectively presented as if we had held the notes and bonds since their inception in January 2014 in the case of the notes, and February 2017 in the case of the bonds. 45 Table of Contents Index to Financial Statements 2017 Senior Notes In October 2017, we closed on a notes offering (2017 Notes Offering) of $650 million aggregate principal amount of unsecured senior notes consisting of: • $500 million of 3.750% Senior Notes due March 1, 2028. • An additional $150 million of our 4.680% Senior Notes due February 15, 2045. Interest on the Senior Notes due 2028 is payable semiannually in arrears on March 1 and September 1 of each year, commencing on March 1, 2018. The Senior Notes due 2045 are an additional issuance of our Senior Notes due 2045, and interest is payable semiannually in arrears on February 15 and August 15 of each year. Total proceeds received from the 2017 Notes Offering were $643 million , net of underwriting discounts. We utilized the net proceeds to repay the remaining balances on the promissory notes and term loan assumed in the Bakken Pipeline/Merey Sweeny Acquisition and for general partnership purposes. 2016 Senior Notes In October 2016, we closed on a notes offering (2016 Notes Offering) of $1,125 million aggregate principal amount of unsecured senior notes consisting of: • • $500 million of 3.550% Senior Notes due October 1, 2026. $625 million of 4.900% Senior Notes due October 1, 2046. Interest on the 2016 Senior Notes is payable semiannually in arrears on April 1 and October 1 of each year, commencing on April 1, 2017. Total proceeds received from the 2016 Notes Offering were $1,111 million , net of underwriting discounts. We utilized the net proceeds to fund the cash consideration for the Eagle Acquisition and for general partnership purposes. We may on any one or more occasions redeem the 2017 Senior Notes and the 2016 Senior Notes, in whole or in part, prior to their maturity. Once notice of redemption is mailed and subject to the satisfaction of any conditions we may place on any such redemption, notes called for redemption become irrevocably due and payable on the redemption date at the redemption price pursuant to the provisions of the respective indentures. 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 Dakota Access and ETCO are parties to a $2.5 billion project financing transaction entered into in August 2016 to fund the construction of the Bakken Pipeline. In July 2017, as an owner of Dakota Access and ETCO, Phillips 66 and its co-venturers each issued a guarantee intended to cover their pro rata shares of interest expense for rolling six-month periods after the calculation date. In October 2017, as part of the Bakken Pipeline/Merey Sweeny Acquisition, Phillips 66 Partners substituted its guarantee for that of Phillips 66. Each co-venturer’s guarantee has a maximum guarantee amount which changes over time. Our maximum exposure under the guarantee amounted to $17 million as of December 31, 2018 . We guaranteed the payment of our portion of certain purchase obligations of Gray Oak Pipeline, LLC (Gray Oak). At December 31, 2018 , our maximum potential amount of future payments to third parties under the guarantee was estimated to be $85 million . Payment would be required if Gray Oak defaults on these obligations. 46 Table of Contents Index to Financial Statements Capital Requirements Acquisitions During 2017 and 2016 , we completed several major acquisitions, including: • • • • The October 2017 Bakken Pipeline/Merey Sweeny Acquisition, consisting of a 25 percent interest in the Bakken Pipeline and a 100 percent interest in Merey Sweeny. The October 2016 Eagle Acquisition, consisting of various Phillips 66 pipeline and terminal assets. The May 2016 Subsequent Fractionator Acquisition, consisting of the remaining 75 percent interest in Phillips 66 Sweeny Frac LLC (Sweeny Frac LLC) and 100 percent of the Standish Pipeline. The March 2016 Initial Fractionator Acquisition, consisting of a 25 percent controlling interest in Sweeny Frac LLC. See Note 4—Acquisitions , Note 5—Equity Investments and Note 19—Cash Flow Information , in the Notes to Consolidated Financial Statements, for additional information on our acquisitions, including consideration paid and the cash and noncash elements of the transactions. Capital Expenditures and Investments Our operations are capital intensive and require investments to expand, upgrade, maintain or enhance existing operations and to meet environmental and operational requirements of our wholly owned and joint venture entities. Our capital requirements consist of maintenance and expansion capital expenditures, as well as contributions to our joint ventures. Maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or to maintain existing system volumes and related cash flows. In contrast, expansion capital expenditures are those made to expand and upgrade our systems and facilities and to construct or acquire new systems or facilities to grow our business, including contributions to joint ventures that are using the contributed funds for such purposes. Our capital expenditures and investments for the years ended December 31, 2018 , 2017 and 2016 were: Capital expenditures and investments attributable to Partnership Expansion Maintenance Total Capital expenditures attributable to Predecessors Total capital expenditures and investments Millions of Dollars 2018 2017 2016 $ $ 710 66 776 — 776 300 52 352 82 434 439 22 461 96 557 Capital expenditures attributable to Predecessors for the three-year period ended December 31, 2018 , primarily reflected construction of the Sweeny Fractionator and Clemens Caverns, as well as contributions to Dakota Access and ETCO to fund construction, completion and startup of the Bakken Pipeline. 47 Table of Contents Index to Financial Statements Our capital expenditures and investments attributable to the Partnership for the three-year period ended December 31, 2018 , included: • Development of Gray Oak Pipeline system, which will provide crude oil transportation from the Permian Basin and Eagle Ford to destinations in the Corpus Christi and Sweeny/Freeport markets on the Texas Gulf Coast. • Contributions to Bayou Bridge for the construction of a pipeline from Nederland, Texas, to Lake Charles, Louisiana, and to continue progress on its pipeline segment from Lake Charles to St. James, Louisiana. • Acquisition of certain southeast Louisiana NGL logistics assets comprising approximately 500 miles of pipelines and a storage cavern connecting multiple fractionation facilities, refineries and a petrochemical facility. • • Contributions to Sand Hills to increase capacity on its NGL system. Construction activities related to a new isomerization unit at the Phillips 66 Lake Charles Refinery. • Acquisition of our 50-percent interest in STACK joint venture and contributions for subsequent pipeline expansion activities. • • • • Contributions to Dakota Access and ETCO for post-construction spending related to Bakken Pipeline. Construction activities related to the Palermo Rail Terminal, Sacagawea Crude Pipeline, the New Town injection point, Keene CDP Terminal and Sacagawea Gas Pipeline. Construction activities related to increasing storage capacity at Clemens Caverns. Spending associated with other return, reliability and maintenance projects in our Transportation and NGL business. 2019 Budget Our approved 2019 capital budget is $1.2 billion. After the budget was approved, we decided to pursue project-level financing for a portion of the Gray Oak Pipeline system construction costs and finalized the terms of a Gray Oak co-venturer’s entry into the joint venture. As a result, we expect our 2019 capital spending will be $904 million, and $303 million of that amount will be funded by the co-venturer’s noncontrolling interest. Of the remaining $601 million, $523 million is targeted at expansion projects, including increasing storage capacity at Clemens Caverns, the isomerization unit at the Phillips 66 Lake Charles Refinery, the South Texas Gateway Terminal, the Sweeny to Pasadena Pipeline and the Gray Oak Pipeline. Our estimated maintenance capital spending of $78 million will primarily be funded with cash from operations, while the expansion capital spending will be funded with a combination of proceeds from debt financings, cash from operations and our ATM program. Cash Distributions On January 22, 2019 , the Board of Directors of our General Partner declared a quarterly cash distribution of $0.835 per common unit which, combined with distributions to our General Partner, and excluding distributions to holders of our preferred units, resulted in a total distribution of $171 million attributable to the fourth quarter of 2018 . This distribution was paid February 13, 2019 , to unitholders of record as of February 1, 2019 . Cash distributions are made to our General Partner in respect of its 2 percent general partner interest and its ownership of all incentive distribution rights (IDRs), which entitles our General Partner to receive increasing percentages, up to 50 percent, of quarterly cash distributions in excess of $0.244375 per common unit. Accordingly, based on the per-unit distribution declared on January 22, 2019 , our General Partner received 39 percent of the total fourth- quarter 2018 cash distribution, excluding preferred unit distributions, in respect of its general partner interest and its ownership of all IDRs. 48 Table of Contents Index to Financial Statements The following table summarizes our quarterly cash distributions for 2018 and 2017 to our common unitholders and our General Partner: Quarter Ended December 31, 2018 September 30, 2018 June 30, 2018 March 31, 2018 December 31, 2017 September 30, 2017 June 30, 2017 March 31, 2017 *Cash distributions declared attributable to the indicated periods. Quarterly Cash Distribution Per Common Unit* (Dollars) Total Quarterly Cash Distribution (Millions of Dollars) $ 0.835 0.792 0.752 0.714 0.678 0.646 0.615 0.586 $ 171 160 148 139 129 121 104 95 Date of Distribution February 13, 2019 November 13, 2018 August 13, 2018 April 30, 2018 February 13, 2018 November 13, 2017 August 11, 2017 May 12, 2017 The holders of the preferred units are entitled to receive cumulative quarterly distributions equal to $0.678375 per preferred unit commencing for the quarter ended December 31, 2017 , with a prorated amount from the date of issuance. Preferred unitholders received $9 million of distributions attributable to the fourth quarter of 2018 . Contractual Obligations The following table summarizes our aggregate contractual obligations as of December 31, 2018 : Debt obligations (a) Interest on debt Operating lease obligations Purchase obligations (b) Other long-term liabilities: Asset retirement obligations Accrued environmental costs Total Millions of Dollars Payments Due by Period Up to 1 Year Years 2-3 Years 4-5 After 5 Years 50 116 3 182 — 1 352 450 218 6 14 — — 688 — 212 6 5 — — 223 2,575 1,322 91 7 11 1 4,007 $ Total 3,075 1,868 106 208 11 2 $ 5,270 (a) See Note 11—Debt , in the Notes to Consolidated Financial Statements, for additional information. (b) Represents any agreement to purchase goods or services that is enforceable and legally binding and that specifies all significant terms. Includes accounts payable reflected on our consolidated balance sheet. In addition to the contractual obligations included in the table above, we are party to an amended omnibus agreement with Phillips 66. The amended omnibus agreement contractually requires us to pay a monthly operational and administrative support fee in the amount of $8 million to Phillips 66 for certain administrative and operational support services provided to us. The amended omnibus agreement generally remains in full force and effect so long as Phillips 66 controls our General Partner. Due to the indefinite nature of the agreement’s term, the fixed fee is not included in the contractual obligations table above. 49 Table of Contents Index to Financial Statements Our preferred units are contractually entitled to receive cumulative quarterly distributions. As of December 31, 2018 , distributions to our preferred unitholders are $38 million on an annual basis. However, subject to certain conditions, we or the holders of the preferred units may convert the preferred units into common units at certain anniversary dates after the issuance date. Due to the uncertain timing of any potential conversion, distributions related to the preferred units were not included in the contractual obligations table above. 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. 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 December 31, 2018 and 2017 , we did not have any material accrued contingent liabilities associated with litigation matters. 50 Table of Contents Index to Financial Statements 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. Paradis Pipeline Station Incident On February 9, 2017, a fire occurred at the Paradis Pipeline Station on the River Parish NGL System. There was one Phillips 66 employee fatality and three contractors were injured. The three contractors filed lawsuits which we have resolved. All regulatory agency investigations have been completed, except one outstanding item with the Louisiana Department of Environmental Quality. We do not currently expect claims related to this incident, individually or in the aggregate, to have a material impact on our results of operations. Indemnification and Excluded Liabilities Under our amended omnibus agreement and pursuant to the terms of various agreements under which we acquired assets from Phillips 66, Phillips 66 will indemnify us, or assume responsibility, for certain environmental liabilities, tax liabilities, litigation and any other liabilities attributable to the ownership or operation of the assets contributed to us and that arose prior to the effective date of each acquisition. These indemnifications and exclusions from liability have, in some cases, time limits and deductibles. When Phillips 66 performs under any of these indemnifications or exclusions from liability, we recognize non-cash expenses and associated non-cash capital contributions from our General Partner, as these are considered liabilities paid for by a principal unitholder. 51 Table of Contents Index to Financial Statements CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with GAAP requires management to select appropriate accounting policies and to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues and expenses. See Note 2—Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements, for descriptions of our significant accounting policies. Certain of these accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts would have been reported under different conditions, or if different assumptions had been used. The following discussions of critical accounting estimates, along with the discussion of contingencies in this report, address all important accounting areas where the nature of accounting estimates or assumptions could be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change. Depreciation We calculate depreciation expense using the straight-line method over the estimated useful lives of our properties, plants and equipment (PP&E), currently ranging from 3 years to 45 years. Changes in the estimated useful lives of our PP&E could have a material effect on our results of operations. Impairments Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate the carrying value of an asset group may not be recoverable. If the sum of the undiscounted expected future pretax cash flows of an asset group is less than the carrying value, including applicable liabilities, the carrying value is written down to estimated fair value. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets, generally at a pipeline system, terminal, processing or fractionation system level. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined using one or more of the following methods: present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants; a market multiple of earnings for similar assets; or historical market transactions of similar assets, adjusted using principal market participant assumptions when necessary. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of future volumes, commodity prices, operating costs, margins, discount rates and capital project decisions, considering all available information at the date of review. Investments in nonconsolidated entities accounted for under the equity method are reviewed for impairment when there is evidence of a loss in value. Such evidence of a loss in value might include our inability to recover the carrying amount, the lack of sustained earnings capacity which would justify the current investment amount, or a current fair value less than the investment’s carrying amount. When it is determined such a loss in value is other than temporary, an impairment charge is recognized for the difference between the investment’s carrying value and its estimated fair value. When determining whether a decline in value is other than temporary, management considers factors such as the length of time and extent of the decline, the investee’s financial condition and near-term prospects, and our ability and intention to retain our investment for a period that will be sufficient to allow for any anticipated recovery in the market value of the investment. When quoted market prices are not available, the fair value is usually based on the present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants and a market analysis of comparable assets, if appropriate. Different assumptions could affect the timing and the amount of an impairment of an investment in any period. Asset Retirement Obligations Under various contracts, permits and regulations, we have legal obligations to remove tangible equipment and restore the land at the end of operations at certain operational sites. Our largest asset removal obligations involve the abandonment or removal of pipelines. We recognize the fair value of legal obligations to remove long-lived assets in the period in which the obligation arises. Estimating the timing and cost of future asset removals is difficult and involves judgment in determining the estimated asset removal obligation. Most of these removal obligations are many years, or decades, in the future and the contracts and regulations often have vague descriptions of what removal practices and criteria must be met when the removal event actually occurs. Asset removal technologies and costs, regulatory and other compliance 52 Table of Contents Index to Financial Statements considerations, expenditure timing, and other inputs into valuation of the obligation, including discount and inflation rates, are also subject to change. Environmental Costs In addition to asset retirement obligations arising from contracts, permits and regulations, we have certain obligations to complete environmental-related projects. These obligations are primarily related to historical releases of refined petroleum products. Future environmental remediation costs are difficult to estimate because they 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 responsible parties. Goodwill At December 31, 2018 , we had $185 million of goodwill recorded in conjunction with past business combinations. The majority of our goodwill is related to acquisitions from Phillips 66. In these common control transactions, the net assets acquired are recorded at Phillips 66’s historical carrying value, including any associated goodwill. Goodwill is not amortized. Instead, goodwill is subject to at least annual tests for impairment at a reporting unit level. A reporting unit is an operating segment or a component that is one level below an operating segment and they are determined primarily based on the manner in which the business is managed. We have one reporting unit with a goodwill balance. We perform our annual goodwill impairment test using either a qualitative assessment or a quantitative assessment. As part of our qualitative assessment, we evaluate relevant events and circumstances that could affect the fair value of our reporting unit, including macroeconomic conditions, overall industry and market considerations and regulatory changes, as well as partnership-specific market metrics, performance and events. The evaluation of partnership-specific events and circumstances includes evaluating changes in our unit price and cost of capital, actual and forecasted financial performance, as well as the effect of significant asset dispositions. If our qualitative assessment indicates it is likely the fair value of our reporting unit has declined below its carrying value (including goodwill), or if we elect not to perform a qualitative assessment, a quantitative assessment is performed. When a quantitative assessment is performed, management applies judgment in determining the estimated fair value of our reporting unit because a quoted market price for this reporting unit is not available. Management uses available information to make this fair value determination, including estimated cash flows, cost of capital, observed market earnings multiples of comparable companies and partnerships, our common unit price and associated total partnership market capitalization. We completed our annual impairment test as of October 1, 2018, and concluded that the fair value of our reporting unit continued to exceed its respective carrying value (including goodwill) by a significant percentage. A decline in the estimated fair value of our reporting unit in the future could result in an impairment. As such, we continue to monitor for indicators of impairment until our next annual impairment test is performed. 53 Table of Contents Index to Financial Statements NEW ACCOUNTING STANDARDS In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will continue to be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. Similarly, lessors will be required to classify leases as sales-type, financing or operating, with classification affecting the pattern of income recognition in the income statement. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards, as well as substantive control have been transferred through a lease contract. The ASU also requires additional disclosures. Public business entities should apply the guidance in ASU No. 2016-02 for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. We will adopt ASU No. 2016-02 by recognizing a cumulative-effect adjustment to our opening consolidated balance sheet as of our January 1, 2019, adoption date. As of the adoption date, we expect to recognize ROU assets and operating lease liabilities on our consolidated balance sheet of approximately $45 million. For revenue from contracts classified as leases, we will not split the lease and service elements, but will combine and report them as lease revenue. Any deferred revenue arising from minimum volume commitments under lease contracts will be recognized once the contractual recovery period provision has expired. The adoption of this ASU is not expected to have a material impact on our consolidated statements of income and cash flows. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The new standard amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which may result in earlier recognition of losses. Public business entities should apply the guidance in ASU No. 2016-13 for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption will be permitted for annual periods beginning after December 15, 2018. We are evaluating the provisions of ASU No. 2016-13, and currently do not expect it to have a material impact on our consolidated financial statements. 54 Table of Contents Index to Financial Statements Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from adverse fluctuations in interest rates, the exchange rates of foreign currency markets, and commodity prices. Since we conduct our business in U.S. dollars, we are not exposed to foreign currency exchange-rate risk. Commodity Price Risk Since we neither take ownership of the crude oil, refined petroleum products or NGLs we transport or store for our customers nor engage in commodity trading, we have limited direct exposure to risks associated with fluctuating commodity prices. Certain of our pipeline tariffs include a contractual loss allowance, calculated as a percentage of throughput volume multiplied by the quoted market price of the commodities shipped. This loss allowance, which represented 3 percent of our total operating revenues in 2018 , 2017 and 2016 , is more volatile than tariffs and terminaling fees, as it depends on and fluctuates with commodity prices of the products we transport and store; however, we do not intend to mitigate this risk to our revenues by hedging this commodity price exposure. Interest Rate Risk Our use of fixed- or variable-rate debt directly exposes us to interest rate risk. 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. Fixed-rate debt also exposes us to the risk that we may need to refinance maturing debt with new debt at higher rates, or that we may be obligated to pay rates higher than the current market. Variable-rate debt, such as borrowings under our revolving credit facility and tax-exempt bonds, exposes us to short-term changes in market rates that impact our interest expense. The following tables provide information about our debt instruments that are sensitive to changes in U.S. interest rates. These tables present principal cash flows and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based on effective rates at the reporting date. The carrying amount of our floating-rate debt approximates its fair value. The fair value of the fixed-rate financial instruments is estimated based on observable market prices. Expected Maturity Date At December 31, 2018 2019 2020 2021 2022 2023 Thereafter Total Fair value Millions of Dollars, Except as Indicated Fixed-Rate Maturity Weighted-Average Interest Rate Floating Rate Maturity Weighted-Average Interest Rate $ $ $ — 300 — — — 2,575 2,875 2,660 55 3.7% 1.9% 3.0% $ 2.6% 4.1% $ $ 50 25 125 — — — 200 200 Table of Contents Index to Financial Statements Expected Maturity Date At December 31, 2017 2018 2019 2020 2021 2022 Thereafter Total Fair value Fixed-Rate Maturity Millions of Dollars, Except as Indicated Floating Rate Maturity Weighted-Average Interest Rate Weighted-Average Interest Rate $ $ $ — — 300 — — 2,575 2,875 2,918 56 1.9% 1.9% 1.9% $ 2.6% 4.1% $ $ 25 — 25 50 — — 100 100 Table of Contents Index to Financial Statements 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, NGL and refined petroleum products 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, NGL and refined petroleum products. 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, NGL and refined petroleum products. 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, NGL and refined petroleum products. • • • • 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 this report. • • 57 Table of Contents Index to Financial Statements Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PHILLIPS 66 PARTNERS LP INDEX TO FINANCIAL STATEMENTS Report of Management Reports of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm (DCP Sand Hills Pipeline, LLC) Report of Independent Registered Public Accounting Firm (DCP Southern Hills Pipeline, LLC) Report of Independent Registered Public Accounting Firm (Dakota Access, LLC) Consolidated Financial Statements of Phillips 66 Partners LP: Consolidated Statement of Income for the years ended December 31, 2018, 2017 and 2016 Consolidated Statement of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 Consolidated Balance Sheet at December 31, 2018 and 2017 Consolidated Statement of Cash Flows for the years ended December 31, 2018, 2017 and 2016 Consolidated Statement of Changes in Equity for the years ended December 31, 2018, 2017 and 2016 Notes to Consolidated Financial Statements Supplementary Data Selected Quarterly Financial Data (Unaudited) 58 Page 59 60 62 63 64 65 66 67 68 69 71 97 Table of Contents Index to Financial Statements Report of Management The accompanying consolidated financial statements of Phillips 66 Partners LP (the Partnership) and the other information appearing in this Annual Report were prepared by, and are the responsibility of, management of the Partnership’s general partner, Phillips 66 Partners GP LLC. The consolidated financial statements present fairly the Partnership’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States. In preparing its consolidated financial statements, the Partnership includes amounts that are based on estimates and judgments management of the Partnership’s general partner believes are reasonable under the circumstances. The Partnership’s financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm appointed by the Audit Committee of the Phillips 66 Partners GP LLC Board of Directors. The management of the Partnership’s general partner has made available to Ernst & Young LLP all of the Partnership’s financial records and related data, as well as the minutes of directors’ meetings. Assessment of Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. Phillips 66 Partners’ internal control system was designed to provide reasonable assurance to the management and directors of the Partnership’s general partner regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2018 . In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on this assessment, management concluded the Partnership’s internal control over financial reporting was effective as of December 31, 2018 . Ernst & Young LLP has issued an audit report on the Partnership’s internal control over financial reporting as of December 31, 2018 , and their report is included herein. /s/ Greg C. Garland /s/ Kevin J. Mitchell Greg C. Garland Chairman of the Board of Directors and Chief Executive Officer Phillips 66 Partners GP LLC (the general partner of Phillips 66 Partners LP) Kevin J. Mitchell Director, Vice President and Chief Financial Officer Phillips 66 Partners GP LLC (the general partner of Phillips 66 Partners LP) Date: February 22, 2019 59 Table of Contents Index to Financial Statements Report of Independent Registered Public Accounting Firm To the Board of Directors of Phillips 66 Partners GP LLC and Unitholders of Phillips 66 Partners LP Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Phillips 66 Partners LP (the “Partnership”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, based on our audits and the reports of other auditors, the financial statements present fairly, in all material respects, the consolidated financial position of the Partnership at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. We did not audit the consolidated financial statements of DCP Sand Hills Pipeline, LLC and DCP Southern Hills Pipeline, LLC (the “Pipelines”) and Dakota Access, LLC (“Dakota”). The Partnership accounts for its 33.34% interest in each of the Pipelines and its 25% interest in Dakota using the equity method of accounting. In the financial statements, the Partnership’s total investment in the Pipelines is stated at $807 million and $724 million as of December 31, 2018 and 2017, respectively, and the Partnership’s total equity in net income of the Pipelines is stated at $156 million, $108 million and $88 million for the years ended December 31, 2018, 2017 and 2016, respectively. In the financial statements, the Partnership’s total investment in Dakota is stated at $473 million and $485 million as of December 31, 2018 and 2017, respectively, and the Partnership’s total equity in net income of Dakota is stated at $139 million and $52 million for the years ended December 31, 2018 and 2017, respectively. The Pipelines’ and Dakota’s consolidated financial statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the Pipelines for 2018, 2017 and 2016 and Dakota for 2018 and 2017, are based on the reports of the other auditors. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Partnership's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2019 expressed an unqualified opinion thereon . Basis for Opinion These financial statements are the responsibility of the management of the Partnership’s general partner, Phillips 66 Partners GP LLC. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. Houston, Texas February 22, 2019 We have served as the Partnership’s auditor since 2012. /s/ Ernst & Young LLP 60 Table of Contents Index to Financial Statements Report of Independent Registered Public Accounting Firm To the Board of Directors of Phillips 66 Partners GP LLC and Unitholders of Phillips 66 Partners LP Opinion on Internal Control over Financial Reporting We have audited Phillips 66 Partners LP's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Phillips 66 Partners LP (the Partnership) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Partnership as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated February 22, 2019, expressed an unqualified opinion thereon. Basis for Opinion Management of the Partnership’s general partner, Phillips 66 Partners GP LLC, is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Report of Management.” Our responsibility is to express an opinion on the Partnership's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Houston, Texas February 22, 2019 /s/ Ernst & Young LLP 61 Table of Contents Index to Financial Statements Report of Independent Registered Public Accounting Firm To the Members of DCP Sand Hills Pipeline, LLC Denver, Colorado Opinion on the Financial Statements We have audited the consolidated balance sheets of DCP Sand Hills Pipeline, LLC and subsidiary (the “Company”) as of December 31, 2018 and 2017 , the related consolidated statements of operations, changes in members’ equity, and cash flows for each of the three years in the period ended December 31, 2018 , and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 , in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 3 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to adoption of Accounting Standards Codification Topic 606 - Revenue from Contracts with Customers. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Denver, Colorado February 8, 2019 We have served as the Company’s auditor since 2013. 62 Table of Contents Index to Financial Statements Report of Independent Registered Public Accounting Firm To the Members of DCP Southern Hills Pipeline, LLC Denver, Colorado Opinion on the Financial Statements We have audited the consolidated balance sheets of DCP Southern Hills Pipeline, LLC and subsidiary (the “Company”) as of December 31, 2018 and 2017 , the related consolidated statements of operations, changes in members’ equity, and cash flows for each of the three years in the period ended December 31, 2018 , and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 , in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 3 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to adoption of Accounting Standards Codification Topic 606 - Revenue from Contracts with Customers. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Denver, Colorado February 8, 2019 We have served as the Company’s auditor since 2013. 63 Table of Contents Index to Financial Statements Report of Independent Registered Public Accounting Firm Board of Managers and Members Dakota Access, LLC Opinion on the financial statements We have audited the consolidated balance sheets of Dakota Access, LLC (a Delaware limited liability company) and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, members’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2015 Dallas, Texas February 14, 2019 64 Table of Contents Index to Financial Statements Consolidated Statement of Income Phillips 66 Partners LP Years Ended December 31 Revenues and Other Income Operating revenues—related parties Operating revenues—third parties Equity in earnings of affiliates Other income Total revenues and other income Costs and Expenses Operating and maintenance expenses Depreciation General and administrative expenses Taxes other than income taxes Interest and debt expense Other expenses Total costs and expenses Income before income taxes Income tax expense Net income Less: Net income attributable to Predecessors Net income attributable to the Partnership Less: Preferred unitholders’ interest in net income attributable to the Partnership Less: General partner’s interest in net income attributable to the Partnership Limited partners’ interest in net income attributable to the Partnership Net Income Attributable to the Partnership Per Limited Partner Unit (dollars) Common units—basic Common units—diluted Weighted-Average Limited Partner Units Outstanding ( thousands ) Common units—basic Common units—diluted See Notes to Consolidated Financial Statements. 65 $ $ $ Millions of Dollars 2017 2018 2016 1,012 33 439 2 1,486 894 40 223 12 1,169 354 117 64 35 115 1 686 800 4 796 — 796 37 240 519 321 116 69 33 101 1 641 528 4 524 63 461 9 160 292 727 31 114 1 873 216 96 65 33 52 1 463 410 2 408 107 301 — 92 209 4.22 4.00 2.60 2.59 2.20 2.20 122,769 136,588 112,045 115,339 95,240 95,240 Table of Contents Index to Financial Statements Consolidated Statement of Comprehensive Income Phillips 66 Partners LP Years Ended December 31 Net Income Defined benefit plans Plans sponsored by equity affiliates, net of income taxes Other comprehensive income Comprehensive Income See Notes to Consolidated Financial Statements. 2018 Millions of Dollars 2017 524 2016 408 1 1 409 — — 524 $ $ 796 — — 796 66 Table of Contents Index to Financial Statements Consolidated Balance Sheet Phillips 66 Partners LP At December 31 Assets Cash and cash equivalents Accounts receivable—related parties Accounts receivable—third parties Materials and supplies Prepaid expenses and other current assets Total current assets Equity investments Net properties, plants and equipment Goodwill Deferred rentals and other assets Total Assets Liabilities Accounts payable—related parties Accounts payable—third parties Accrued property and other taxes Accrued interest Short-term debt Deferred revenues Other current liabilities Total current liabilities Long-term debt Asset retirement obligations and accrued environmental costs Deferred income taxes Deferred revenues and other liabilities Total Liabilities Equity Preferred unitholders (2018 and 2017—13,819,791) Common unitholders—public (2018—55,343,918 units issued and outstanding; 2017—52,811,822 units issued and outstanding) Common unitholder—Phillips 66 (2018 and 2017—68,760,137 units issued and outstanding) General partner—Phillips 66 (2018 and 2017—2,480,051 units issued and outstanding) Accumulated other comprehensive loss Total Equity Total Liabilities and Equity See Notes to Consolidated Financial Statements. 67 Millions of Dollars 2018 1 90 5 13 20 129 2,448 3,052 185 5 5,819 22 88 9 36 50 60 5 270 2,998 12 7 23 2017 185 83 3 12 9 292 1,932 2,918 185 7 5,334 21 39 15 34 25 35 2 171 2,920 11 5 66 3,310 3,173 746 2,485 592 (1,313) (1) 2,509 5,819 746 2,274 487 (1,345) (1) 2,161 5,334 $ $ $ $ Table of Contents Index to Financial Statements Consolidated Statement of Cash Flows Phillips 66 Partners LP Years Ended December 31 Cash Flows From Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation Undistributed equity earnings Deferred revenues and other liabilities Other Working capital adjustments Accounts receivable Materials and supplies Prepaid expenses and other current assets Accounts payable Accrued interest Deferred revenues Other accruals Net Cash Provided by Operating Activities Cash Flows From Investing Activities Bakken Pipeline/Merey Sweeny acquisition Eagle acquisition Restricted cash received from combination of business Collection of loan receivable Cash capital expenditures and investments Return of investment from equity affiliates Net Cash Used in Investing Activities Cash Flows From Financing Activities Net contributions from (to) Phillips 66 to (from) Predecessors Acquisition of noncontrolling interest in Sweeny Frac LLC Issuance of debt Repayment of debt Issuance of common units Issuance of preferred units Debt issuance costs Distributions to General Partner associated with acquisitions Quarterly distributions to preferred unitholders Quarterly distributions to common unitholders—public Quarterly distributions to common unitholder—Phillips 66 Quarterly distributions to General Partner—Phillips 66 Other net cash contributions from Phillips 66 Net Cash Provided by (Used in) Financing Activities Net Change in Cash, Cash Equivalents and Restricted Cash Cash, cash equivalents and restricted cash at beginning of period Cash, Cash Equivalents and Restricted Cash at End of Period See Notes to Consolidated Financial Statements. Millions of Dollars 2018 2017 $ 796 117 (5) (42) 6 (8) — (11) 11 2 30 (4) 892 — — — — (738) 43 (695) 524 116 (1) 43 12 (4) (1) (5) 14 7 21 (2) 724 (729) — 318 8 (431) 52 (782) — — (179) — 675 (575) 128 — — — (37) (158) (202) (216) 4 (381) (184) 185 1 2,008 (2,152) 468 737 (6) (234) — (112) (157) (139) 7 241 183 2 185 $ 2016 408 96 1 9 6 (58) (2) (2) 19 4 10 1 492 — (990) — — (584) 16 (1,558) 45 (656) 2,118 (1,096) 971 — (10) (119) — (64) (119) (76) 24 1,018 (48) 50 2 68 Table of Contents Index to Financial Statements Consolidated Statement of Changes in Equity Phillips 66 Partners LP Millions of Dollars Preferred Unitholders Public Common Unitholders Public Partnership Common Unitholder Phillips 66 General Partner Phillips 66 Accum. Other Comprehensive Loss Net Investment — Predecessors December 31, 2015 $ Net income attributable to Predecessors Net contributions to Phillips 66—Predecessors Issuance of common units Allocation of net investment to unitholders Allocation of net investment—Predecessors and deemed net distributions to General Partner Net income attributable to the Partnership Other comprehensive loss Quarterly cash distributions to unitholders and General Partner* Other contributions from Phillips 66 December 31, 2016 Net income attributable to Predecessors Net contributions from Phillips 66—Predecessors Issuance of units Allocation of net investment—Predecessors and deemed net distributions to General Partner Net income attributable to the Partnership Quarterly cash distributions to unitholders and General Partner* Other contributions from Phillips 66 December 31, 2017 Cumulative effect of accounting change Issuance of common units Net income attributable to the Partnership Quarterly cash distributions to unitholders and General Partner* Other contributions from Phillips 66 December 31, 2018 $ — — — — — — — — — — — — — 737 — 9 — — 746 — — 37 (37) — 746 809 — — 971 — — 79 — (64) — 1,795 — — 467 — 124 (112) — 2,274 13 128 228 (158) — 2,485 233 — — — 232 — 130 — (119) — 476 — — — — 168 (157) — 487 16 — 291 (202) — 592 (650) — — — 34 (119) 92 — (76) 15 (704) — — — (681) 160 (139) 19 (1,345) 1 — 240 (216) 7 (1,313) * Cash distributions paid per common unit were $2.936, $2.405 and $1.975 in 2018, 2017 and 2016, respectively . See Notes to Consolidated Financial Statements. 69 (2) — — — — — — 1 — — (1) — — — — — — — (1) — — — — — (1) Total 1,444 107 95 971 — 1,054 107 95 — (266) (990) (1,109) — — — — — 63 666 — (729) — — — — — — — — — — 301 1 (259) 15 1,566 63 666 1,204 (1,410) 461 (408) 19 2,161 30 128 796 (613) 7 2,509 Table of Contents Index to Financial Statements December 31, 2015 Units issued in a public equity offering Units issued associated with acquisitions December 31, 2016 Units issued in a public equity offering Units issued in private placement Units issued associated with acquisitions December 31, 2017 Units issued in public equity offerings December 31, 2018 See Notes to Consolidated Financial Statements. Preferred Units Public Common Units Public Common Units Phillips 66 General Partner Units Phillips 66 Total Units 84,171,217 18,996,152 6,201,943 1,683,425 — 503,961 2,187,386 109,369,312 — — 292,665 3,372,716 20,123,995 5,005,778 2,480,051 137,871,801 — 2,532,096 68,760,137 2,480,051 140,403,897 58,349,042 — 5,697,982 64,047,024 — — 4,713,113 68,760,137 — 24,138,750 18,996,152 — 43,134,902 3,372,716 6,304,204 — 52,811,822 2,532,096 55,343,918 — — — — — 13,819,791 — 13,819,791 — 13,819,791 70 Table of Contents Index to Financial Statements Notes to Consolidated Financial Statements Note 1— Business and Basis of Presentation Phillips 66 Partners LP 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. Description of the Business We are a Delaware limited partnership formed in 2013 by Phillips 66 Company and Phillips 66 Partners GP LLC (our General Partner), both wholly owned subsidiaries of Phillips 66. On August 1, 2015, Phillips 66 Company transferred all of its limited partner interests in us and its 100 percent interest in our General Partner to its wholly owned subsidiary, Phillips 66 Project Development Inc. (Phillips 66 PDI). We are a growth-oriented master limited partnership formed to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum products and natural gas liquids (NGL) pipelines, terminals and other midstream assets. Our operations consist of crude oil, refined petroleum products and NGL transportation, processing, terminaling and storage assets. We conduct our operations through both wholly owned and joint venture operations. The majority of our wholly owned assets are associated with, and are integral to the operation of, nine of Phillips 66’s owned or joint venture refineries. We primarily generate revenue by providing fee-based transportation, terminaling, processing, storage and NGL fractionation services to Phillips 66 and other customers. Our equity affiliates primarily generate revenue from transporting and terminaling NGL, refined petroleum products and crude oil. Since we do not own any of the NGL, crude oil and refined petroleum products we handle and do not engage in the trading of NGL, crude oil and refined petroleum products, 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. Basis of Presentation We have acquired assets from Phillips 66 that were considered transfers of businesses between entities under common control. This required the transactions to be accounted for as if the transfers had occurred at the beginning of the period of transfer, with prior periods retrospectively adjusted to furnish comparative information. We refer to these pre-acquisition operations as those of our “Predecessors.” The combined financial statements of our Predecessors were derived from the accounting records of Phillips 66 and reflect the combined historical results of operations, financial position and cash flows of our Predecessors as if such businesses had been combined for all periods presented. All intercompany transactions and accounts within our Predecessors have been eliminated. The assets and liabilities of our Predecessors in these financial statements have been reflected on a historical cost basis because the transfer of the Predecessors to us occurred within the Phillips 66 consolidated group. The consolidated statement of income also includes expense allocations for certain functions performed by Phillips 66, including operational support services such as engineering and logistics and allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, information technology and procurement. These allocations were based primarily on the relative carrying values of properties, plants and equipment and equity-method investments, or number of terminals and pipeline miles, and secondarily on activity-based costs. Our management believes the assumptions underlying the allocation of expenses from Phillips 66 are reasonable. Nevertheless, the financial results of our Predecessors may not include all of the actual expenses that would have been incurred had our Predecessors been a stand-alone publicly traded partnership during the periods presented. 71 Table of Contents Index to Financial Statements Note 2— Summary of Significant Accounting Policies Consolidation Principles and Investments Our consolidated financial statements include the accounts of majority-owned, controlled subsidiaries. The equity method is used to account for investments in affiliates in which we have the ability to exert significant influence over the affiliates’ operating and financial policies, including any variable interest entities of which we are not the primary beneficiary. Undivided interests in pipelines are consolidated on a proportionate basis. Net Investment—Predecessors “Net Investment—Predecessors” represents Phillips 66’s historical investment in the contributed businesses, our Predecessors’ accumulated net earnings after taxes, and the net effect of transactions with, and allocations from, Phillips 66 prior to the acquisition of the businesses from Phillips 66. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Common Control Transactions Businesses acquired from Phillips 66 and its subsidiaries are accounted for as common control transactions whereby the net assets acquired are combined with ours at their carrying value. Any difference between carrying value and recognized consideration is treated as a capital transaction. To the extent that such transactions require prior-period financial information to be retrospectively adjusted to furnish comparative information, historical net equity amounts prior to the transaction date are reflected in “Net Investment—Predecessors.” Cash consideration up to the carrying value of net assets acquired is presented as an investing activity in our consolidated statement of cash flows. Cash consideration in excess of the carrying value of net assets acquired is presented as a financing activity in our consolidated statement of cash flows. Revenue Recognition Revenues are primarily recognized for pipeline transportation, terminaling, storage, processing and fractionation services generated under long-term agreements. A significant portion of our revenues are derived from Phillips 66. The majority of our agreements for transportation, terminaling, storage, processing and fractionation services with Phillips 66 are considered operating leases under GAAP. For these leases, the lease and service elements of revenue are separated with the service element recognized under the revenue standard and the lease element recognized under the lease standard. The separation of the lease and service elements is based on an analysis of service-related and lease-related costs for each contract, adjusted for representative profit margins. Revenues from fixed minimum volume commitments are recognized over the performance obligation period for stand-ready service contracts. Revenues from the variable element of these stand-ready contracts and other contracts without fixed elements are recognized based on the actual volumes transported, stored, processed and fractionated at contractual rates because the actual volumes specifically relate to our efforts to transfer the distinct services. Generally, our services are billed and payments are received on a monthly basis. Billings to Phillips 66 for shortfall volumes under its quarterly minimum volume commitments are recorded as “Deferred revenues” in our consolidated balance sheet, as Phillips 66 generally has the right to make up the shortfall volumes in the following four quarters. For the lease element of the contracts, the deferred revenue will be recognized at the earlier of when shortfall volumes are made up, when the make-up rights contractually expire or when we determine the system will not have the necessary capacity to enable a customer to make up the shortfall volumes. For the service element of the contracts, the deferred revenue will be recognized when the performance obligation is complete or it is probable that the shortfall volumes will not be made up. 72 Table of Contents Index to Financial Statements Billings for tolling services relating to maintenance turnaround activities are billed in advance of such activities. These billings are initially recorded as “Deferred revenues” in our consolidated balance sheet and are recognized when the maintenance turnaround activity commences. Deferred revenue relating to maintenance turnaround operating expenses is recognized in the period the work is performed. Deferred revenue relating to capital projects performed concurrently with a maintenance turnaround is recognized ratably over the remaining tolling services agreement once the equipment is placed into service. At the time the Clemens Caverns commenced operations, the caverns had not reached total planned working capacity contracted under the storage agreement. During the build-out of the remaining capacity, a portion of the monthly storage fees was deferred. The deferred revenue is being recognized over the remaining term of the agreement as additional storage capacity was placed into service. Cash Equivalents Cash equivalents are highly liquid, short-term investments that are readily convertible to known amounts of cash and will mature within 90 days or less from the date of acquisition. We carry these at cost plus accrued interest, which approximates fair value. Imbalances We do not purchase or produce NGL, crude oil or refined petroleum product inventories. We experience imbalances as a result of variances in meter readings and in other measurement methods, and volume fluctuations within our NGL, crude oil and refined petroleum products systems due to pressure and temperature changes. Certain of our transportation contracts provide for the shipper to pay a contractual loss allowance, which is valued using quoted market prices of the applicable commodity being shipped. These contractual loss allowances, which are received from the shipper irrespective of, and independently calculated from, actual volumetric gains or losses, are recorded as revenue. Any actual volumetric gains or losses are valued using quoted market prices of the applicable commodities and are recorded as decreases or increases to operating and maintenance expenses, respectively. Fair Value Measurements We measure assets and liabilities requiring fair value presentation or disclosure using the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price), and disclose such amounts according to the quality of valuation inputs under the following hierarchy: Level 1: Quoted prices in an active market for identical assets or liabilities. Level 2: Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities. We classify the fair value of an asset or liability based on the lowest level of input significant to its measurement. A fair value initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement, or corroborating market data becomes available. Asset and liability fair values initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable. The carrying amounts of our trade receivables and payables approximate fair value. Nonrecurring Fair Value Measurements We apply the fair value measurements criteria to determine the fair value of nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis, primarily asset retirement obligations and, when impaired, long-lived assets. Properties, Plants and Equipment (PP&E) PP&E is recorded at cost. Costs of maintenance and repairs, which are not significant improvements, are expensed when incurred. Depreciation of PP&E is determined by the individual-unit-straight-line method or the group-straight-line method (for those individual units that are highly integrated with other units). 73 Table of Contents Index to Financial Statements Capitalized Interest Interest from external borrowings is capitalized on major projects with an expected construction period of six months or longer. Capitalized interest is added to the cost of the underlying asset’s PP&E or the applicable equity investment and is amortized over the useful life of the asset. Major Maintenance Activities Costs for planned integrity management projects are expensed in the period incurred. These types of costs include inspection services, contractor repair services, materials and supplies, equipment rentals and labor costs. Impairment of PP&E PP&E used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in the future cash flows expected to be generated by an asset group. If, upon review, the sum of the undiscounted expected future pretax cash flows of an asset group is less than the carrying value of the asset group, including applicable liabilities, then the carrying value is written down to estimated fair value and the write down is reported as an impairment in the period in which the determination is made. Individual assets are grouped for impairment purposes at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets—generally at the pipeline system, terminal, or processing or fractionation system level. Since there usually is a lack of quoted market prices for our long-lived assets, the fair value of potentially impaired assets is typically determined based on the present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants or based on a multiple of operating cash flow validated with historical market transactions of similar assets where possible. The expected future cash flows used for impairment reviews and related fair value calculations are based on estimated future throughputs, tariffs and fees, operating costs and capital project decisions, considering all available evidence at the date of review. Impairment of Investments in Nonconsolidated Entities Investments in nonconsolidated entities are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred. When indicators exist, the fair value is estimated and compared to the investment carrying value. If any impairment is judgmentally determined to be other than temporary, the carrying value of the investment is written down to fair value. The fair value of the impaired investment is determined based on quoted market prices, if available, or upon the present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants and a market analysis of comparable assets, if appropriate. Goodwill Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized, but rather is tested for impairment annually and when events or changes in circumstances indicate that the fair value of the reporting unit with goodwill has been reduced below carrying value. The majority of our goodwill is related to acquisitions from Phillips 66. In these common control transactions, the net assets acquired are recorded at Phillips 66’s historical carrying value, including any associated goodwill. We have one reporting unit for goodwill impairment testing. Asset Retirement Obligations and Environmental Costs Fair values of legal obligations to abandon or remove long-lived assets are recorded in the period in which the obligation arises. When the liability is initially recorded, we capitalize this cost by increasing the carrying amount of the related PP&E. Over time, the liability is increased for the change in its present value, and the capitalized cost in PP&E is depreciated over the useful life of the related asset. Our estimate may change after initial recognition, in which case we record an adjustment to the liability and PP&E. Environmental expenditures are expensed or capitalized, depending upon their future economic benefit. Expenditures relating to an existing condition caused by past operations, and those having no future economic benefit, are expensed. Liabilities for environmental expenditures are recorded on an undiscounted basis (unless acquired in a business combination) when environmental assessments or cleanups are probable and the costs can be reasonably estimated. 74 Table of Contents Index to Financial Statements Income Taxes We follow the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of our assets and liabilities. Our operations are treated as a partnership for federal and state income tax purposes, with each partner being separately taxed on its share of taxable income. Therefore, we have excluded income taxes from these consolidated financial statements, except for the income tax provision resulting from state laws that apply to entities organized as partnerships. Our tax provision is computed as if we were a stand-alone tax paying entity. Any interest and penalties related to income taxes would be reported in interest and debt expense and operating and maintenance expenses, respectively, in our consolidated statement of income. Note 3— Changes in Accounting Principles Effective January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendment provides a screen for determining when a transaction involves an acquisition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset, or a group of similar identifiable assets, then the screen is met and the transaction is not considered an acquisition of a business. If the screen is not met, the amendment requires that to be considered a business, the operation must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output. The guidance may reduce the number of future transactions accounted for as business acquisitions. At the time of adoption, this ASU had no impact on our consolidated financial statements. Effective January 1, 2018, we adopted ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The majority of this ASU’s provisions amend only the presentation or disclosures of financial instruments; however, one provision could also affect net income. Equity investments reported under the cost method or the lower of cost or fair value method of accounting, in accordance with previous GAAP, are now reported at fair value with changes in fair value recognized in net income. For equity investments that do not have readily determinable fair values, we elected to carry such investments at cost less impairments, if any, adjusted up or down for price changes in similar financial instruments issued by the investee, when and if observed. At the time of adoption, this ASU had no material impact on our consolidated financial statements. Effective January 1, 2018, we adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” using the modified retrospective transition method applied to all contracts. Under the new revenue recognition guidance, recognition of revenue involves a multiple step approach including: (i) identifying the contract with the customer, (ii) identifying the separate performance obligations, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations and (v) recognizing the revenue as the performance obligations are satisfied. Additional disclosures are required to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On January 1, 2019, an equity-method investee adopted this ASU without a material impact. We recorded a noncash cumulative effect adjustment of $30 million to increase the opening balance of our equity as of January 1, 2018. This adjustment reflected amounts recorded by us and our equity-method investees related to the acceleration of revenue recognition on certain minimum volume commitment contracts with recovery provisions. Certain agreements for transportation, terminaling and fractionation services with Phillips 66 are considered operating leases under FASB Accounting Standards Codification (ASC) 840, “Leases.” We identified the separate lease and service elements of our revenue under these operating leases and applied ASU No. 2014-09 only to the service element, while the lease element continued to be accounted for under A SC 840 . See Note 13—Operating Revenues , for additional information. 75 Table of Contents Index to Financial Statements Note 4— Acquisitions 2018 Acquisitions Gray Oak Pipeline Project Acquisition See the “Gray Oak” section of Note 5—Equity Investments , for a discussion of our acquisition of this project and its ownership structure. 2017 Acquisitions Bakken Pipeline/Merey Sweeny Acquisition In September 2017, we entered into a Contribution, Conveyance and Assumption Agreement (CCAA) with subsidiaries of Phillips 66 to acquire a 25 percent interest in each of Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO), together referred to as the Bakken Pipeline, and a 100 percent interest in Merey Sweeny, L.P., predecessor to Merey Sweeny LLC (both referred to herein as Merey Sweeny). Collectively, the assets acquired in the acquisition are referred to as the Bakken Pipeline/Merey Sweeny Acquisition. We paid Phillips 66 total consideration of $1.65 billion , consisting of $372 million in cash, the assumption of $588 million of promissory notes payable to Phillips 66 and a $450 million term loan under which Phillips 66 was the obligor, and the issuance of 4,713,113 common units to Phillips 66 PDI and 292,665 general partner units to our General Partner to maintain its 2 percent general partner interest. The Bakken Pipeline/Merey Sweeny Acquisition closed in October 2017. Pursuant to the tolling services agreement entered into with Phillips 66 and related to Merey Sweeny operations, we received $53 million from Phillips 66 for the prepayment of services related to Merey Sweeny’s next scheduled maintenance turnaround, which was recorded as deferred revenue in our consolidated balance sheet as of the acquisition date. The Bakken Pipeline/Merey Sweeny Acquisition was considered a common control transaction. 2016 Acquisitions During 2016, we and a co-venturer formed STACK Pipeline LLC (STACK), a 50 / 50 joint venture. In addition, we acquired an additional 2.48 percent interest in Explorer Pipeline Company (Explorer). See Note 5— Equity Investments , for information regarding our equity investments. River Parish Acquisition In November 2016, we acquired the River Parish NGL System, a non-affiliated party’s NGL logistics assets, located in southeast Louisiana, consisting of pipelines and storage caverns connecting multiple third-party fractionation facilities, refineries and a petrochemical plant. At the acquisition date, we recorded $183 million of PP&E and $3 million of goodwill. Our acquisition accounting was finalized in early 2017 with no change to the provisional amounts recorded in 2016. Fractionator Acquisitions Initial Fractionator Acquisition. In February 2016, we entered into a CCAA with subsidiaries of Phillips 66 to acquire a 25 percent controlling interest in Phillips 66 Sweeny Frac LLC (Sweeny Frac LLC) for total consideration of $236 million (the Initial Fractionator Acquisition). Total consideration consisted of the assumption of a $212 million note payable to a subsidiary of Phillips 66 and the issuance of 412,823 common units to Phillips 66 PDI and 8,425 general partner units to our General Partner to maintain its 2 percent general partner interest. The Initial Fractionator Acquisition closed in March 2016. Subsequent Fractionator Acquisition. In May 2016, we entered into a CCAA with subsidiaries of Phillips 66 to acquire the remaining 75 percent interest in Sweeny Frac LLC and 100 percent of the Standish Pipeline for total consideration of $775 million (the Subsequent Fractionator Acquisition). Total consideration consisted of the assumption of $675 million of notes payable to a subsidiary of Phillips 66 and the issuance of 1,400,922 common units to Phillips 66 PDI and 286,753 general partner units to our General Partner to maintain its 2 percent general partner interest in us after also taking into account the public offering we completed in May 2016. The Subsequent Fractionator Acquisition closed in May 2016. 76 Table of Contents Index to Financial Statements Eagle Acquisition In October 2016, we entered into a CCAA with subsidiaries of Phillips 66 to acquire certain pipeline and terminal assets supporting four Phillips 66- operated refineries (the Eagle Acquisition). We paid Phillips 66 total consideration of $1,305 million , consisting of $1,109 million in cash and the issuance of 3,884,237 common units to Phillips 66 PDI and 208,783 general partner units to our General Partner to maintain its 2 percent general partner interest. The Eagle Acquisition closed in October 2016. The Fractionator Acquisitions and the Eagle Acquisition were considered common control transactions. In connection with the acquisitions from Phillips 66, we entered into commercial agreements with Phillips 66 and amended the omnibus and operational services agreements with Phillips 66. See Note 21—Related Party Transactions , for additional information on our commercial and other agreements with Phillips 66. Note 5— Equity Investments The following table summarizes our equity investments at December 31: Bakken Pipeline Bayou Bridge Pipeline, LLC (Bayou Bridge) DCP Sand Hills Pipeline, LLC (Sand Hills) DCP Southern Hills Pipeline, LLC (Southern Hills) Explorer Pipeline Company (Explorer) Gray Oak Pipeline, LLC (Gray Oak) Paradigm Pipeline LLC (Paradigm) Phillips 66 Partners Terminal LLC (Phillips 66 Partners Terminal) South Texas Gateway Terminal LLC (South Texas Gateway Terminal) STACK Pipeline LLC (STACK) Total equity investments 77 Percentage Ownership Millions of Dollars Carrying Value 2018 25.00% $ 40.00 33.34 33.34 21.94 75.00 50.00 70.00 25.00 50.00 608 277 601 206 115 288 145 71 20 117 2017 621 173 515 209 118 — 131 53 — 112 $ 2,448 1,932 Table of Contents Index to Financial Statements Earnings (losses) from our equity investments were as follows: Bakken Pipeline Bayou Bridge Sand Hills Southern Hills Explorer Gray Oak Paradigm Phillips 66 Partners Terminal South Texas Gateway Terminal STACK Total equity in earnings of affiliates Millions of Dollars 2018 2017 2016 $ $ 177 14 119 37 43 1 10 28 — 10 439 69 12 81 27 21 — (1) 8 — 6 223 — 3 62 26 23 — (2) — — 2 114 Distributions received from our equity affiliates were $477 million , $274 million , and $131 million in 2018 , 2017 and 2016 , respectively. Gray Oak In April 2018, we entered into a Purchase and Sale Agreement with Phillips 66 PDI to acquire its 100 percent interest in Gray Oak Holdings LLC (Holdings LLC), a limited liability company that, at that time, owned a 100 percent interest in Gray Oak Pipeline, LLC (Gray Oak). Gray Oak is developing and constructing the Gray Oak Pipeline system which, upon completion, will provide crude oil transportation from the Permian Basin and Eagle Ford to destinations in the Corpus Christi and Freeport markets on the Texas Gulf Coast. The pipeline system is expected to be placed in service by the end of 2019. We accounted for the acquisition of Holdings LLC as an acquisition of assets under common control accounting. Also in April 2018, a co-venturer acquired a 25 percent 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 percent interest in Holdings LLC. Because Holdings LLC’s sole asset was its 75 percent 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 of the Gray Oak Pipeline, the legal sale of the 35 percent interest did not qualify as a sale under GAAP. Rather, the third party’s cash contributions to Holdings LLC expected in 2019 to fund its share of previously incurred and future construction costs plus a premium to us will be a long-term obligation on our consolidated balance sheet, and those cash inflows to Holdings LLC will be a financing cash inflow on our consolidated statement of cash flows. After construction of the Gray Oak Pipeline is completed, these restrictions expire, and the sale will be recognized under GAAP. We will continue to control and consolidate Holdings LLC after sale recognition, and therefore the third party’s 35 percent interest will be recharacterized from a long-term obligation to a noncontrolling interest in our financial statements at that time. Also at that time, the premium paid will be recharacterized from a long-term obligation to a gain in our consolidated statement of income. During January and February of 2019, the third party contributed an aggregate of $294 million into Holdings LLC, which Holdings LLC used to fund its portion of Gray Oak’s cash calls. In February 2019, another party exercised its option to acquire a 10 percent interest in Gray Oak, which reduced Holdings LLC’s ownership interest to 65 percent . As a result of the exercised options, our effective ownership in the pipeline system is now 42.25 percent . 78 Table of Contents Index to Financial Statements Gray Oak 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 the Gray Oak Pipeline that most significantly impact economic performance. At December 31, 2018, our maximum exposure to loss was $373 million , which represented guaranteed purchase obligations of $85 million and the aggregate book value of our equity method investment in Gray Oak of $288 million . South Texas Gateway Terminal In April 2018, we acquired a 25 percent interest in the South Texas Gateway Terminal under development by a co-venturer. This marine terminal will connect to the Gray Oak Pipeline in Corpus Christi, Texas, and it will have two deepwater docks and an initial storage capacity of 6.5 to 7 million barrels. The terminal is expected to begin operations in mid-2020. South Texas Gateway Terminal is considered a VIE because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We have determined we are not the primary beneficiary because we and our co-venturers jointly direct the activities of the terminal that most significantly impact economic performance. At December 31, 2018 , our maximum exposure to loss was $20 million , which represented the aggregate book value of our equity investment in South Texas Gateway Terminal. Bakken Pipeline In October 2017, we acquired a 25 percent interest in the Bakken Pipeline system as part of the Bakken Pipeline/Merey Sweeny Acquisition. Dakota Access owns a pipeline system that delivers crude oil from the Bakken/Three Forks production area in North Dakota to Patoka, Illinois, and ETCO owns a connecting crude oil pipeline system from Patoka, Illinois, to Nederland, Texas. These two pipeline systems collectively form the Bakken Pipeline system, which is operated by a co-venturer. The Bakken Pipeline system went into service in June 2017. We have a positive basis difference of $51 million for this investment, which represents capitalized interest incurred during construction of the pipeline and a capital contribution disbursed to the co-venturer. The positive basis difference is being amortized over periods between 19 and 44 years. See Note 4—Acquisitions , for additional information. STACK STACK is a joint venture that owns and operates a crude storage terminal and a common carrier pipeline that transports crude oil from the Sooner Trend, Anadarko Basin, Canadian and Kingfisher Counties play in northwestern Oklahoma to Cushing, Oklahoma. We have a positive basis difference of $40 million for this investment, which is due to the co-venturer’s contributed assets being recorded at their historical book value. The positive basis difference is being amortized over 43 years. Bakken Joint Ventures Phillips 66 Partners Terminal and Paradigm are two joint ventures with Paradigm Midstream, LLC that own and operate midstream logistics infrastructure in North Dakota. Phillips 66 Partners Terminal owns the Palermo Terminal and Paradigm owns the Sacagawea pipeline and Keene Terminal. We account for both joint ventures under the equity method of accounting due to governance provisions that require supermajority or unanimous voting on all decisions that significantly impact the governance, management and economic performance of the joint ventures. Sand Hills Sand Hills is a joint venture with DCP Partners that owns an NGL pipeline system that extends from the Permian Basin and Eagle Ford to facilities along the Texas Gulf Coast and the Mont Belvieu market hub. The Sand Hills Pipeline system is operated by DCP Partners. Southern Hills Southern Hills is a joint venture with DCP Partners that owns an NGL pipeline system that extends from the Midcontinent region to the Mont Belvieu, Texas market hub. The Southern Hills Pipeline system is operated by DCP Partners. We have a negative basis difference of $92 million for this investment, which originated when the pipeline, formerly known as Seaway Products, was sold by Phillips 66 to a related party. The negative basis difference represents a deferred gain and is being amortized over 43 years. 79 Table of Contents Index to Financial Statements Explorer Explorer owns and operates a pipeline system that extends from the Texas Gulf Coast to Indiana. The Explorer Pipeline system transports refined petroleum products to more than 70 major cities in 16 U.S. states. We have a positive basis difference of $84 million for this investment, which represents fair value adjustments attributable to ownership increases in the pipeline. The positive basis difference is being amortized over periods between 9 and 17 years. Bayou Bridge Bayou Bridge is a joint venture that owns a pipeline that delivers crude oil from Nederland, Texas, to Lake Charles, Louisiana. The Bayou Bridge Pipeline is operated by our co-venturer. An extension of the pipeline from Lake Charles to St. James, Louisiana, is expected to be in service in March 2019. Summarized 100 percent financial information for all equity investments is presented on a combined basis below: Revenues Income before income taxes Net income Current assets Noncurrent assets Current liabilities Noncurrent liabilities From acquisition date forward. Millions of Dollars 2018 2017 $ 2,294 1,536 1,518 751 9,561 3,008 496 1,406 853 778 577 8,571 354 3,001 2016 840 494 408 243 3,437 396 231 Note 6— Major Customer and Concentration of Credit Risk Phillips 66 accounted for 96 percent, 95 percent, and 95 percent of our total operating revenues for the years ended December 31, 2018 , 2017 and 2016 , respectively. Through our wholly owned and joint venture operations, we provide crude oil, refined petroleum products and NGL pipeline transportation, terminaling and storage, and crude oil gathering, NGL fractionation, crude oil processing, and rail-unloading services to Phillips 66 and other related parties. We are potentially exposed to concentration of credit risk primarily through our accounts receivable with Phillips 66. These receivables have payment terms of 30 days or less and are settled against any existing payables we may have to Phillips 66 through Phillips 66’s interaffiliate settlement process. We monitor the credit worthiness of Phillips 66, which has an investment grade credit rating. 80 Table of Contents Index to Financial Statements Note 7— Properties, Plants and Equipment Our investment in PP&E, with the associated accumulated depreciation, at December 31 was: Land Buildings and improvements Pipelines and related assets* Terminals and related assets* Rail racks and related assets* Processing and related assets* Caverns and related assets* Construction-in-progress Gross PP&E Less: accumulated depreciation Net PP&E *Assets for which we are the lessor. See Note 15—Leases . Note 8— Goodwill The carrying amount of goodwill was as follows: Beginning balance January 1 Activity during the year Ending balance December 31 Note 9— Asset Retirement Obligations and Accrued Environmental Costs Asset retirement obligations and accrued environmental costs at December 31 were: Asset retirement obligations Accrued environmental costs Total asset retirement obligations and accrued environmental costs Less: Asset retirement obligations and accrued environmental costs due within one year Long-term asset retirement obligations and accrued environmental costs 81 Estimated Useful Lives Millions of Dollars 2018 2017 $ 3 to 30 years 10 to 45 years 25 to 45 years 33 years 25 years 25 to 45 years $ 19 89 1,398 710 137 842 584 216 3,995 943 3,052 19 88 1,372 671 137 837 583 47 3,754 836 2,918 Millions of Dollars 2018 2017 $ $ 185 — 185 185 — 185 Millions of Dollars 2018 2017 $ $ 11 2 13 1 12 10 1 11 — 11 Table of Contents Index to Financial Statements Asset Retirement Obligations We have asset retirement obligations we are required to perform under law or contract once an asset is permanently taken out of service. These obligations primarily relate to the abandonment or removal of certain pipelines. Most of these obligations are not expected to be paid until many years in the future. During 2018 and 2017 , our asset retirement obligations changed as follows: Balance at January 1 Accretion of discount New obligations Changes in estimates of existing obligations Balance at December 31 Note 10— Net Income Per Limited Partner Unit Millions of Dollars 2018 2017 $ $ 10 1 — — 11 9 1 — — 10 Net income per limited partner unit applicable to common units is computed by dividing the limited partners’ interest in net income attributable to the Partnership by the weighted-average number of common units outstanding for the period. Because we have more than one class of participating securities, we use the two-class method to calculate the net income per unit applicable to the limited partners. As of December 31, 2018 and 2017, the classes of participating securities included common units, general partner units and incentive distribution rights (IDRs). For the year ended December 31, 2016, basic and diluted net income per unit were the same because we did not have potentially dilutive common or subordinated units outstanding. For the years ended December 31, 2018 and 2017, respectively, our preferred units are potentially dilutive securities and were dilutive to net income per limited partner unit. See Note 12—Equity , for additional information related to our preferred units. Net income earned by the Partnership is allocated between the limited partners and the General Partner (including the General Partner’s IDRs) 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. To the extent net income attributable to the Partnership exceeds or is less than cash distributions, 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. When our financial statements are retrospectively adjusted after a dropdown transaction, the earnings of the acquired business, prior to the closing of the transaction, are allocated entirely to our General Partner and presented as net income (loss) attributable to Predecessors. The earnings per unit of our limited partners prior to the close of the transaction do not change as a result of a dropdown transaction. After the closing of a dropdown transaction, the earnings of the acquired business are allocated in accordance with our partnership agreement as previously described. 82 Table of Contents Index to Financial Statements Millions of Dollars 2018 2017 2016 Net income attributable to the Partnership Less: General partner’s distributions declared (including IDRs)* Limited partners’ distributions declared on preferred units* Limited partners’ distributions declared on common units* Distributions less than net income attributable to the Partnership *Distributions declared are attributable to the indicated periods. $ $ 796 236 37 382 141 461 158 9 291 3 2018 Limited Partners’ Common Units General Partner (including IDRs) Limited Partners’ Preferred Units Net income attributable to the Partnership (millions): Distributions declared Distributions less than net income attributable to the Partnership Net income attributable to the Partnership (basic) Dilutive effect of preferred units (1) Net income attributable to the Partnership (diluted) Weighted-average units outstanding—basic Dilutive effect of preferred units (1) Weighted-average units outstanding—diluted Net income attributable to the Partnership per limited partner unit—basic (dollars) Net income attributable to the Partnership per limited partner unit—diluted (dollars) $ $ $ 382 137 519 28 547 122,768,582 13,819,791 136,588,373 4.22 4.00 236 4 240 37 — 37 301 91 — 205 5 Total 655 141 796 (1) The dilutive effect of the 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. 83 Table of Contents Index to Financial Statements 2017 Limited Partners’ Common Units General Partner (including IDRs) Limited Partners’ Preferred Units 158 2 160 9 — 9 Net income attributable to the Partnership (millions): Distributions declared Distributions less than net income attributable to the Partnership Net income attributable to the Partnership (basic) Dilutive effect of preferred units (1) Net income attributable to the Partnership (diluted) Weighted-average units outstanding—basic Dilutive effect of preferred units (1) Weighted-average units outstanding—diluted Net income attributable to the Partnership per limited partner unit—basic (dollars) Net income attributable to the Partnership per limited partner unit—diluted (dollars) $ $ $ 291 1 292 7 299 112,044,824 3,294,032 115,338,856 2.60 2.59 Total 458 3 461 (1) The dilutive effect of the 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. Net income attributable to the Partnership (millions): Distributions declared Distributions less than net income attributable to the Partnership Net income attributable to the Partnership Limited Partners’ Common Units $ $ 205 4 209 2016 General Partner (including IDRs) 91 1 92 Total 296 5 301 Weighted-average units outstanding—basic and diluted 95,239,901 Net income attributable to the Partnership per limited partner unit—basic and diluted (dollars) $ 2.20 On January 22, 2019 , the Board of Directors of our General Partner declared a quarterly cash distribution of $0.835 per common unit attributable to the fourth quarter of 2018 . This distribution was paid February 13, 2019 , to unitholders of record as of February 1, 2019 . 84 Table of Contents Index to Financial Statements Note 11— Debt Debt at December 31 was: 2.646% Senior Notes due February 2020 3.605% Senior Notes due February 2025 3.550% Senior Notes due October 2026 3.750% Senior Notes due March 2028 4.680% Senior Notes due February 2045 4.900% Senior Notes due October 2046 Tax-exempt bonds due April 2020 and April 2021, at 1.885% and 1.935% at December 31, 2018, and 2017, respectively Revolving credit facility due January 2019 and October 2021 at weighted-average rate of 3.669% at year-end 2018 Debt at face value Net unamortized discounts and debt issuance costs Total debt Less: Short-term debt Long-term debt Millions of Dollars 2018 2017 $ $ 300 500 500 500 450 625 75 125 3,075 (27) 3,048 50 2,998 300 500 500 500 450 625 100 — 2,975 (30) 2,945 25 2,920 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 $2,660 million and $2,918 million at December 31, 2018 and 2017 , respectively. The fair value of our floating-rate debt approximated carrying value of $200 million and $100 million at December 31, 2018 and 2017 , respectively. Maturities of borrowings outstanding at December 31, 2018 , inclusive of net unamortized discounts and debt issuance costs, for the five-year period ending 2023 were $50 million in 2019, $324 million in 2020 and $125 million in 2021. 2017 Senior Notes In October 2017, we closed on a notes offering (2017 Notes Offering) of $650 million aggregate principal amount of unsecured senior notes consisting of: • $500 million of 3.750% Senior Notes due March 1, 2028. • An additional $150 million of our 4.680% Senior Notes due February 15, 2045. Interest on the Senior Notes due 2028 is payable semiannually in arrears on March 1 and September 1 of each year, commencing on March 1, 2018. The Senior Notes due 2045 are an additional issuance of our Senior Notes due 2045, and interest is payable semiannually in arrears on February 15 and August 15 of each year. Total proceeds received from the 2017 Notes Offering were $643 million , net of underwriting discounts. We utilized the net proceeds to repay the remaining balances on the promissory notes and term loan assumed in the Bakken Pipeline/Merey Sweeny Acquisition and for general partnership purposes. Revolving Credit Facility At December 31, 2018 , we had borrowings of $125 million outstanding under our $750 million revolving credit facility established by our Credit Agreement dated June 7, 2013, as amended (the Credit Agreement). No amounts were outstanding as of December 31, 2017. 85 Table of Contents Index to Financial Statements We have the option to increase the overall capacity of the Credit Agreement by up to an additional $250 million for a total of $1 billion , subject to, among other things, the consent of the existing lenders whose commitments will be increased or any additional lenders providing such additional capacity. We also have the option to extend the Credit Agreement for two additional one -year terms after its October 3, 2021, maturity date, subject to, among other things, the consent of the lenders holding the majority of the commitments and of each lender extending its commitment. Outstanding borrowings under the Credit Agreement bear interest, at our option, at either: (a) the Eurodollar rate in effect from time to time plus the applicable margin; or (b) the base rate (as described in the Credit Agreement) plus the applicable margin. The pricing levels for the commitment fee and interest-rate margins are determined based on our credit ratings in effect from time to time. Outstanding borrowings bearing interest at the Eurodollar rate become due and payable on the revolving credit facility’s termination date. Outstanding borrowings bearing interest at the base rate plus the applicable margin become due and payable on the earlier of the revolving credit facility’s termination date or the fourteenth business day after such borrowings were made. We may at any time and from time to time prepay outstanding borrowings under the Credit Agreement, in whole or in part, without premium or penalty. The Credit Agreement requires that the Partnership’s ratio of total debt to EBITDA for the prior four fiscal quarters must be no greater than 5.0 :1.0 as of the last day of each fiscal quarter (and 5.5 :1.0 during the period following certain specified acquisitions). Tax-Exempt Bonds In connection with the Bakken Pipeline/Merey Sweeny Acquisition, we assumed four $25 million tranches of tax-exempt bonds issued by the Brazos River Harbor Navigation District. We repaid one tranche in 2018, with another maturing in 2020 and two in 2021. The tranches accrue interest monthly based on a daily rate derived by the remarketing agent for the bonds. The interest rates are designed to represent the lowest rate acceptable by the tax-exempt, variable-rate bond market and approximate the tax-exempt bonds trading at par. Senior Bonds In May 2017 and prior to their maturity, we repaid Merey Sweeny senior bonds assumed in the Bakken Pipeline/Merey Sweeny Acquisition with a carrying value of $136 million on the repayment date, which resulted in an immaterial gain. Note 12— 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 year ended December 31, 2018, on a settlement date basis, we had issued an aggregate of 2,532,096 common units under our ATM programs, generating net proceeds of $128 million . During the year ended December 31, 2017 , on a settlement-date basis, we issued an aggregate of 3,372,716 common units under our ATM Program, generating net proceeds of $173 million . Since inception through December 31, 2018, we had issued an aggregate of 6,250,964 common units under our ATM programs, generating net proceeds of $320 million , after broker commissions 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. Issuances of common units under our ATM programs can reduce our General Partner’s interest below 2 percent. We expect the General Partner’s interest to be periodically restored to 2 percent in connection with dropdown transactions or through direct equity contributions. However, these future contributions from our General Partner cannot be assured. At December 31, 2018 , our General Partner’s interest was slightly less than 2 percent. Common Unit Offerings In October 2017, we completed a private placement of 6,304,204 common units representing limited partner interests at a price of $47.59 per common unit, for total proceeds of $295 million , net of underwriting discounts and commissions. The net proceeds were used in part to fund the cash portion of the Bakken Pipeline/Merey Sweeny Acquisition. See Note 4— Acquisitions , for additional information. 86 Table of Contents Index to Financial Statements In August 2016, we completed a public offering of 6,000,000 common units representing limited partner interests at a price of $50.22 per common unit. We received proceeds of $299 million from the offering, net of underwriting discounts and commissions. We utilized the net proceeds to repay the Initial Note assumed as part of the Initial Fractionator Acquisition and to repay other short-term borrowings incurred to fund our acquisition of an additional interest in Explorer and our contribution to form STACK. See Note 4— Acquisitions and Note 11— Debt , for additional information. In May 2016, we completed a public offering, consisting of an aggregate of 12,650,000 common units representing limited partner interests at a price of $52.40 per common unit. We received proceeds of $656 million from the offering, net of underwriting discounts and commissions. We utilized the net proceeds to partially repay debt assumed as part of the Subsequent Fractionator Acquisition. See Note 4— Acquisitions and Note 11— Debt , for additional information. Preferred Unit Offering In October 2017, we completed the private placement of 13,819,791 perpetual convertible preferred units (preferred units) representing limited partner interests at a price of $54.27 per preferred unit. We received proceeds of $737 million from the offering, net of offering and transaction expenses. The net proceeds were used in part to fund the cash portion of the Bakken Pipeline/Merey Sweeny Acquisition. The preferred units rank senior to all common units with respect to distributions and rights upon liquidation. The holders of the preferred units are entitled to receive cumulative quarterly distributions equal to $0.678375 per unit, beginning for the quarter ended December 31, 2017, with a prorated amount from the date of issuance. Following the third anniversary of the issuance of the preferred units, the holders of the preferred units will receive as a quarterly distribution the greater of $0.678375 per unit or the amount of per-unit distributions paid to common unitholders as if such preferred units had converted into common units immediately prior to the record date. The holders of the preferred units may convert their preferred units into common units, on a one-for-one basis, at any time after the second anniversary of the issuance date, in full or in part, subject to minimum conversion amounts and conditions. After the third anniversary of the issuance date, we may convert the preferred units into common units at any time, in whole or in part, subject to certain minimum conversion amounts and conditions, if the arithmetic average of the volume-weighted trading price of our common units is greater than $73.2645 per unit for the 20 day trading period immediately preceding the conversion notice date and the average trading volume of the common units is at least 100,000 for the preceding 20 trading days. The conversion rate for the preferred units shall be the quotient of (a) the sum of (i) $54.27 , plus (ii) any unpaid cash distributions on the applicable preferred unit, divided by (b) $54.27 . The holders of the preferred units are entitled to vote on an as-converted basis with the common unitholders and have certain other class voting rights with respect to any amendment to our partnership agreement that would adversely affect any rights, preferences or privileges of the preferred units. In addition, upon certain events involving a change in control, the holders of preferred units may elect, among other potential elections, to convert their preferred units to common units at the then change of control conversion rate. 87 Table of Contents Index to Financial Statements Note 13— Operating Revenues Disaggregated Revenues Total operating revenues disaggregated by type of service were as follows: Pipelines Terminals Storage, processing and other revenues Total operating revenues Millions of Dollars 2017* 2018 $ $ 454 157 434 1,045 424 152 358 934 2016* 408 160 190 758 *Sales and other operating revenues for the years ended December 31, 2017 and 2016 are presented in accordance with accounting standards in effect prior to our adoption of ASU No. 2014- 09 as of January 1, 2018. See Note 3—Changes in Accounting Principles , for further discussion regarding our adoption of ASU No. 2014-09. For the year ended December 31, 2018 , lease revenues were $599 million and service revenues were $446 million . Lease and service revenues were recorded in the “Operating revenues—related parties” and “Operating revenues—third parties” lines on our consolidated statement of income. Contract-Related Assets and Liabilities Our contract assets primarily represent amounts owed to us by our customers, mainly Phillips 66. At December 31, 2018 and January 1, 2018, lease receivables were $53 million and $49 million , respectively, and service receivables were $41 million and $37 million , respectively. Our contract liabilities primarily represent payments from our customers, mainly Phillips 66, for volume throughput less than the contractually required minimum throughput volumes. These deficiency payments are deferred and recognized at the earlier of the period in which our customers make up the shortfall volumes or when it is probable our customers will not make up the shortfall volumes prior to the expiration of the contractual make-up period. Our contract liabilities are included in the “Deferred revenues” and “Deferred revenues and other liabilities” lines on our consolidated balance sheet. At December 31, 2018 , and January 1, 2018, total deferred revenues were $79 million and $93 million , respectively, of which $6 million and $13 million , respectively, are contract liabilities related to the service element. Service-related revenues recognized during the year ended December 31, 2018 , that were included in the contract liability balance at January 1, 2018, were $11 million . For the twelve months ended December 31, 2018 , there were no material differences between the amount that we recognized as revenues relating to minimum throughput deficiency payments compared to the amount that would have been recognized prior to the adoption of the new revenue recognition standard. 88 Table of Contents Index to Financial Statements Remaining Performance Obligations We typically have long-term contracts with our customers, most of which have original durations of up to 15 years. The average remaining duration of these contracts is nine years. At December 31, 2018 , future revenues expected to be recognized for the fixed component of the transaction price of our remaining performance obligations from contracts with our customers with an original expected duration of greater than one year were: 2019 2020 2021 2022 2023 Remaining years Total future operating revenues* Millions of Dollars 778 777 765 753 711 2,287 6,071 $ $ *Includes $3.3 billion of future lease revenues from agreements with Phillips 66. See Note 15 — Leases, for additional information on future minimum payments to be received related to these agreements. For the remaining performance obligation, we applied the exemption for variable prices allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer distinct goods or service as part of a performance obligation. Note 14— 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. 89 Table of Contents Index to Financial Statements 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. See Note 9— Asset Retirement Obligations and Accrued Environmental Costs , for a summary of our accrued environmental liabilities. 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. At December 31, 2018 and 2017 , 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 non-cash expenses and associated non-cash capital contributions from our General Partner, as these are considered liabilities paid for by a principal unitholder. 90 Table of Contents Index to Financial Statements Note 15— Leases Lessor We have certain services agreements with Phillips 66 that are considered operating leases under GAAP. These agreements include escalation clauses to adjust transportation tariffs and terminaling and storage fees to reflect changes in price indices. Revenues from these agreements are recorded within “Operating revenues—related parties” on our consolidated statement of income. As of December 31, 2018 , future minimum payments to be received related to these agreements were estimated to be: 2019 2020 2021 2022 2023 Thereafter Total* Millions of Dollars 712 713 709 697 655 2,188 5,674 $ $ *Includes $2.4 billion of future service revenues from agreements with Phillips 66 that are considered as operating leases. Lessee We have operating lease agreements with Phillips 66 for the land underlying or associated with certain assets. Due to the economic infeasibility of canceling these leases, we consider them non-cancellable. For the year ended December 31, 2018, total operating lease rental expense was $3 million . As of December 31, 2018 , the future minimum lease payments for our operating lease obligations were: 2019 2020 2021 2022 2023 Thereafter Total minimum lease payments Note 16— Employee Benefit Plans Millions of Dollars 3 3 3 3 3 91 106 $ $ Pension and Retirement Savings Plans Neither we nor our subsidiaries have any employees. Our General Partner has the sole responsibility for providing the employees and other personnel necessary to conduct our operations. All of the employees that conduct our wholly owned businesses are employed by Phillips 66. Those employees participate in the pension, postretirement health insurance and defined contribution benefit plans sponsored by Phillips 66. Most employees of Phillips 66 who provide direct support to our operations do so under the provisions of the amended and restated operational services agreement, which fees include a burden for benefit costs. 91 Table of Contents Index to Financial Statements Note 17— Unit-Based Compensation In 2013, the Board of Directors of our General Partner adopted the Phillips 66 Partners LP 2013 Incentive Compensation Plan (the ICP). Awards under the ICP are available for officers, directors and employees of our General Partner or its affiliates, and any consultants or other individuals who perform services for the Partnership. The ICP allows for the grant of unit awards, restricted units, phantom units, unit options, unit appreciation rights, distribution equivalent rights, profits interest units and other unit-based awards. The ICP limits the number of common units that may be delivered pursuant to awards to 2,500,000 , subject to proportionate adjustment in the event of unit splits and similar events. From the closing of our initial public offering through December 31, 2018 , we have only issued phantom units to non-employee directors under the ICP. A phantom unit entitles the recipient to receive cash equal to the fair market value of a common unit on the date the phantom unit is settled after the vesting period (settlement date), and to also receive a distribution equivalent each quarter between the grant date and the settlement date in an amount equal to any cash distributions paid on a common unit during that time. During the year ended December 31, 2018 , we granted a total of 4,326 , phantom units to three non-employee directors of the Partnership. For the years ended December 31, 2017 and 2016 , we granted a total of 4,794 and 4,880 phantom units, respectively. On the grant date, phantom units awarded to non-employee directors become non-forfeitable; therefore, we immediately recognize expense equal to the grant-date fair value of the award. Phantom units awarded under the ICP do not have voting rights. Note 18— Income Taxes We are not a taxable entity for U.S. federal income tax purposes or for the majority of states that impose an income tax. Taxes on our net income are borne generally by our partners through the allocation of taxable income. Our income tax provision results from state laws that apply to entities organized as partnerships. For us, this is primarily Texas. At December 31, 2018 and 2017 , we had a deferred tax liability of $7 million and $5 million , respectively. The net deferred tax liability was primarily associated with PP&E and equity investments. Our effective tax rate was less than one percent for the years ended December 31, 2018 , 2017 and 2016 . As of December 31, 2018 and 2017 , we had no liability reported for uncertain tax positions. We also did not have any interest or penalties related to income taxes for the years ended December 31, 2018 , 2017 and 2016 . Texas tax returns for the years 2013 and forward are subject to examination. Note 19— Cash Flow Information The acquisitions discussed below had cash and noncash elements. The common and general partner units issued to Phillips 66 in the Bakken Pipeline/Merey Sweeny and Eagle acquisitions were assigned no value, because the cash consideration and any debt assumed exceeded the historical net book value of the acquired assets for each acquisition. Accordingly, the units issued for these acquisitions had no impact on partner capital balances, other than changing ownership percentages. See Note 4—Acquisitions , for additional information. Bakken Pipeline/Merey Sweeny Acquisition The historical book value of the net assets acquired in the Bakken Pipeline/Merey Sweeny Acquisition in 2017 was $729 million . Total cash consideration and assumed debt immediately repaid to Phillips 66 at acquisition totaled $963 million . Of this total, $729 million was an investing cash outflow, and the remaining $234 million was deemed a cash distribution to our General Partner (a financing cash outflow). The remaining balance of debt assumed in the acquisition of $447 million was a noncash financing activity that increased debt and decreased our General Partner’s capital account. Eagle Acquisition We attributed $990 million of the total $1,109 million cash consideration paid in 2016 to the historical book value of the assets acquired (an investing cash outflow). The remaining $119 million of excess cash consideration was deemed a distribution to our General Partner (a financing cash outflow). 92 Table of Contents Index to Financial Statements Subsequent Fractionator Acquisition The historical book value of the net assets acquired in the Subsequent Fractionator Acquisition in 2016 was $871 million . Of this amount, $656 million was a financing cash outflow, representing the acquisition of the noncontrolling interest in Sweeny Frac LLC, through the repayment of a portion of the debt assumed in the transaction. The remaining debt financing balance of $19 million represented a noncash investing and financing activity. The remaining $196 million of book value was attributed to the common and general partner units issued (a noncash investing and financing activity). Initial Fractionator Acquisition The Initial Fractionator Acquisition in 2016 was a noncash transaction. The historical book value of the net assets of our 25 percent interest acquired was $283 million . Of this amount, $212 million was attributed to the note payable assumed (a noncash investing and financing activity). The remaining $71 million was attributed to the common and general partner units issued (a noncash investing and financing activity). Our capital expenditures and investments consisted of: Capital Expenditures and Investments Cash capital expenditures and investments Change in capital expenditure accruals Total capital expenditures and investments Capital Expenditures and Investments Capital expenditures attributable to Predecessors Capital expenditures and investments attributable to the Partnership Total capital expenditures and investments Other Noncash Investing and Financing Activities Dividend of loan receivable to Phillips 66 by Predecessor Certain liabilities of acquired assets retained by Phillips 66 (1) Millions of Dollars 2017 2018 738 38 776 431 3 434 2016 584 (27) 557 Millions of Dollars 2018 2017 2016 — 776 776 82 352 434 96 461 557 Millions of Dollars 2018 2017 2016 — — 51 — — 50 $ $ $ $ $ Cash Payments Interest and debt expense 40 (1) Certain liabilities of acquisitions were retained by Phillips 66, pursuant to the terms of various agreements under which we acquired assets from Phillips 66 since our initial public offering. 109 96 $ See Note 14— Contingencies , for additional information on these excluded liabilities associated with acquisitions. Restricted Cash At December 31, 2018 , the Partnership did not have any restricted cash. The restrictions on the cash received in February 2017, as a result of the retrospective adjustment for the Bakken Pipeline/Merey Sweeny Acquisition, were fully removed in the second quarter of 2017 when Merey Sweeny’s outstanding debt that contained lender restrictions on the use of cash was paid in full. 93 Table of Contents Index to Financial Statements Note 20— Other Financial Information Interest and Debt Expense Incurred Debt Other Capitalized Expensed Other Income Co-venturer contractual make-whole payments Interest income Other Total other income Note 21— Related Party Transactions Millions of Dollars 2017 2018 2016 $ $ $ $ 119 3 122 (7) 115 — 1 1 2 100 2 102 (1) 101 7 3 2 12 56 1 57 (5) 52 — — 1 1 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, 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 providing certain operational services to us 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. 94 Table of Contents Index to Financial Statements Related Party Transactions Significant related party transactions included in our total costs and expenses were: Operating and maintenance expenses General and administrative expenses Interest and debt expense Total Millions of Dollars 2018 2017 2016 $ $ 214 60 — 274 189 64 — 253 104 56 3 163 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 . In prior periods, the monthly fee paid to Phillips 66 was $1 million from July 26, 2013 through February 28, 2014, $2 million from March 1, 2014, to March 1, 2015, $3 million from March 2, 2015, to October 13, 2016, and $7 million from October 14, 2016 to October 6, 2017. The increases over time reflect the growth in our operations. 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 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 to us in support of our pipeline, rail rack, processing, terminaling, and storage facilities. 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. Other related party balances in our consolidated balance sheet at December 31 consisted of the following, all of which were related to Phillips 66: Deferred rentals and other assets Deferred revenues Deferred revenues and other liabilities Millions of Dollars 2018 $ 4 60 18 2017 5 33 61 Equity Affiliate Guarantees Dakota Access and ETCO are parties to a $2.5 billion project financing transaction entered into in August 2016 to fund the construction of the Bakken Pipeline. In July 2017, as owners of Dakota Access and ETCO, Phillips 66 and its co-venturers each issued a guarantee intended to cover their pro rata shares of interest expense for rolling six-month periods after the calculation date. In October 2017, as part of the Bakken Pipeline/Merey Sweeny Acquisition, Phillips 66 Partners substituted its guarantee for that of Phillips 66. Each co-venturer’s guarantee has a maximum guarantee amount which changes over time. Our maximum exposure under the guarantee amounted to $17 million at December 31, 2018 . 95 Table of Contents Index to Financial Statements We guaranteed the payment of our portion of certain purchase obligations of Gray Oak . At December 31, 2018 , our maximum potential amount of future payments to third parties under the guarantee was estimated to be $85 million . Payment would be required if Gray Oak defaults on these obligations. Note 22— New Accounting Standards In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will continue to be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. Similarly, lessors will be required to classify leases as sales-type, financing or operating, with classification affecting the pattern of income recognition in the income statement. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards, as well as substantive control have been transferred through a lease contract. The ASU also requires additional disclosures. Public business entities should apply the guidance in ASU No. 2016-02 for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. We will adopt ASU No. 2016-02 by recognizing a cumulative-effect adjustment to our opening consolidated balance sheet as of our January 1, 2019, adoption date. As of the adoption date, we expect to recognize ROU assets and operating lease liabilities on our consolidated balance sheet of approximately $45 million . For revenue from contracts classified as leases, we will not split the lease and service elements, but will combine and report them as lease revenue. Any deferred revenue arising from minimum volume commitments under lease contracts will be recognized once the contractual recovery period provision has expired. The adoption of this ASU is not expected to have a material impact on our consolidated statements of income and cash flows. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The new standard amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which may result in earlier recognition of losses. Public business entities should apply the guidance in ASU No. 2016-13 for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption will be permitted for annual periods beginning after December 15, 2018. We are evaluating the provisions of ASU No. 2016-13, and currently do not expect it to have a material impact on our consolidated financial statements. 96 Table of Contents Index to Financial Statements Selected Quarterly Financial Data (Unaudited) Millions of Dollars Total Revenues and Other Income Income Before Income Taxes Net Income Net Income Attributable to the Partnership Limited Partners’ Interest in Net Income Attributable to the Partnership Per Common Unit Net Income Attributable to the Partnership Basic Diluted $ $ 2018 First Second Third Fourth 2017 First Second Third Fourth 355 354 384 393 262 277 299 331 174 186 217 223 110 120 132 166 172 186 217 221 110 119 131 164 97 172 186 217 221 97 103 99 162 110 121 144 144 65 66 56 105 0.91 0.99 1.17 1.16 0.60 0.61 0.51 0.86 0.87 0.94 1.10 1.09 0.60 0.61 0.51 0.83 Table of Contents Index to Financial Statements Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Item 9A. 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 the U.S. Securities and Exchange Commission (the SEC) 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 December 31, 2018 , 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 December 31, 2018 . 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 December 31, 2018 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Annual Report on Internal Control Over Financial Reporting This report is included in Item 8. Financial Statements and Supplementary Data and is incorporated herein by reference. Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting This report is included in Item 8. Financial Statements and Supplementary Data and is incorporated herein by reference. Item 9B. OTHER INFORMATION None. 98 Table of Contents Index to Financial Statements Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE PART III Management of Phillips 66 Partners LP We are managed by the directors and executive officers of our General Partner, Phillips 66 Partners GP LLC. Our General Partner is not elected by our unitholders and will not be subject to re-election by our unitholders in the future. Phillips 66 indirectly owns all of the membership interests in our General Partner. Our General Partner has a Board of Directors, and our unitholders are not entitled to elect the directors or directly or indirectly participate in our management or operations. The Board of Directors of our General Partner currently has seven members, three of whom are independent as defined under the independence standards established by the New York Stock Exchange (NYSE). The NYSE does not require a listed limited partnership to have a majority of independent directors on its general partner’s board of directors or to establish a compensation committee or a nominating committee. However, the Board of Directors of our General Partner has established an Audit Committee, as well as a Conflicts Committee to address conflict situations. Phillips 66 appoints all members to the Board of Directors of our General Partner. The Board of Directors of our General Partner has determined that Joseph W. O’Toole, Mark A. Haney and P.D. (David) Bairrington are independent directors under the independence standards of the NYSE. Mr. Haney has been appointed as the Lead Director to preside at executive sessions of the non-management and independent Board of Directors. The officers of our General Partner manage the day-to-day affairs of our business. Neither we nor our subsidiaries have any employees. Our General Partner has the sole responsibility for providing the employees and other personnel necessary to conduct our operations. All of the employees that conduct our business are employed by affiliates of our General Partner, but we sometimes refer to these individuals in this Annual Report on Form 10-K as our employees for ease of reference. Directors and Executive Officers of Phillips 66 Partners GP LLC Directors are elected by the sole member of our General Partner and hold office until their successors have been elected or qualified or until the earlier of death, resignation, removal or disqualification. Executive officers are appointed by, and serve at the discretion of, the Board of Directors. J.T. (Tom) Liberti served as Vice President and Chief Operating Officer of our General Partner until his retirement effective December 31, 2018 . The following table shows information for the directors and executive officers of Phillips 66 Partners GP LLC. Name Greg C. Garland Robert A. Herman Timothy D. Roberts Kevin J. Mitchell Rosy Zuklic Chukwuemeka A. Oyolu Joseph W. O’Toole Mark A. Haney P.D. (David) Bairrington *On February 22, 2019 . Position with Phillips 66 Partners GP LLC Chairman of the Board of Directors and Chief Executive Officer Director and Vice President Director and Vice President, Operations Director and Vice President and Chief Financial Officer Vice President and Chief Operating Officer Vice President and Controller Director Director Director Age* 61 59 57 52 45 49 80 64 63 Greg C. Garland has served as Chief Executive Officer and Chairman of the Board of Directors of our General Partner since March 2013. Mr. Garland became Chairman of the Board of Directors, President and Chief Executive Officer of Phillips 66 in April 2012, and has been Chairman and Chief Executive Officer of Phillips 66 since June 2014. Mr. Garland devotes the majority of his time to his roles at Phillips 66 and also spends time, as needed, directly managing our business and affairs. Mr. Garland was appointed Senior Vice President, Exploration and Production—Americas for ConocoPhillips in October 2010, having previously served as President and Chief Executive Officer of Chevron Phillips 99 Table of Contents Index to Financial Statements Chemical Company LLC (CPChem) since 2008. Mr. Garland is currently a member of the Board of Directors of Amgen Inc. We believe that Mr. Garland’s extensive experience in the energy industry, including his 35-year career with Phillips Petroleum Company, CPChem and ConocoPhillips, and as Chief Executive Officer of Phillips 66, makes him well qualified to serve both as a director and as Chairman of the Board of Directors of our General Partner. In addition to his other skills and qualifications, we believe that Mr. Garland’s role as both Chairman and Chief Executive Officer provides a vital link between management and the Board of Directors and allows the Board of Directors to perform its oversight role with the benefit of management’s perspective on business and strategy. Robert A. Herman has served as a member of the Board of Directors of our General Partner since June 2014 and as Vice President since August 2018, having previously served as Senior Vice President, Operations. Mr. Herman became Executive Vice President, Refining of Phillips 66 in September 2017. Before assuming his current role, Mr. Herman served Phillips 66 as Executive Vice President, Midstream, from June 2014 to September 2017, Senior Vice President, Health, Safety, and Environment, Projects and Procurement, from February 2014 to June 2014, and Senior Vice President, Health, Safety, and Environment, from April 2012 to February 2014. Before joining Phillips 66, Mr. Herman worked for ConocoPhillips as Vice President, Health, Safety, and Environment, from 2010 to 2012. Mr. Herman is currently a member of the Board of Directors of CPChem. We believe that Mr. Herman is a suitable member of the Board of Directors due to the significant industry experience he has gained through his employment with Phillips 66 and ConocoPhillips. Timothy D. Roberts has served as a member of the Board of Directors of our General Partner since April 2016, and as Vice President, Operations, since August 2018. Mr. Roberts has been the Executive Vice President, Midstream for Phillips 66 since August 2018. He previously served as the Executive Vice President, Marketing and Commercial from January 2017 to August 2018 and the Executive Vice President, Strategy and Business Development for Phillips 66 from April 2016 through January 2017. Before joining Phillips 66, Mr. Roberts was an executive at LyondellBasell Industries NV (“Lyondell”) from June 2011 through March 2016. He joined Lyondell as Senior Vice President, Olefins and Polyolefins for the Americas in June 2011, was Executive Vice President - O&P Americas from October 2013 through January 2015, and served as Executive Vice President - Global O&P from January 2015 until March 2016. Prior to joining Lyondell, Mr. Roberts was Vice President of Strategic and Corporate Planning for CPChem from February 2011 until May 2011, and Chief Executive Officer of Americas Styrenics LLC, a joint venture between The Dow Chemical Company and CPChem, from May 2008 until January 2011. We believe that Mr. Roberts is a suitable member of the Board of Directors because of his extensive industry experience. Kevin J. Mitchell has served as Vice President and Chief Financial Officer and a member of the Board of Directors of our General Partner since January 2016. Mr. Mitchell previously served as the Vice President, Investor Relations, for Phillips 66 upon joining Phillips 66 in September 2014 and became Executive Vice President, Finance and Chief Financial Officer in January 2016. Mr. Mitchell devotes the majority of his time to his roles at Phillips 66 and also spends time, as needed, on our business and affairs. Prior to joining Phillips 66, he served as the General Auditor of ConocoPhillips from May 2010 until September 2014. Mr. Mitchell joined Conoco in 1991 and held a variety of finance and accounting positions with Conoco and ConocoPhillips, including General Manager of Upstream Finance, Strategy and Planning; Vice President, Finance and Administration for ConocoPhillips Alaska; and Manager of Treasury Services. Mr. Mitchell is a Certified Internal Auditor and a fellow with the Chartered Institute of Management Accountants. We believe that Mr. Mitchell is a suitable member of the Board of Directors because of his industry experience and knowledge of industry accounting and financial practices. Rosy Zuklic has served as Vice President and Chief Operating Officer of our General Partner since January 2019. Ms. Zuklic also became General Manager, Master Limited Partnership of Phillips 66 in January 2019. Prior to her current role at Phillips 66, Ms. Zuklic served as General Manager, Investor Relations of Phillips 66, a position she held for over five years. Chukwuemeka A. Oyolu became the Vice President and Controller of our General Partner in December 2014. Mr. Oyolu also became the Vice President and Controller of Phillips 66 in December 2014. Mr. Oyolu devotes the majority of his time to his roles at Phillips 66 and also spends time, as needed, on our business and affairs. Prior to his current role at Phillips 66, Mr. Oyolu served as General Manager, Finance for Refining, Marketing and Transportation from May 2012 until February 2014, when he became General Manager, Planning and Optimization. 100 Table of Contents Index to Financial Statements Joseph W. O’Toole has served as a member of the Board of Directors of our General Partner since July 2013 and serves as the chair of the Audit Committee. Mr. O’Toole is currently the managing partner of Maeve Investment Company, LP, a private investment company. Mr. O’Toole retired as Vice President, General Tax Officer and General Tax Counsel of Phillips Petroleum Company in 1999, a position he held since 1977. Mr. O’Toole served as chairman of the American Petroleum Institute’s General Tax Committee in 1983 and represented the industry and Phillips Petroleum Company before government bodies in the U.S. and foreign countries on numerous occasions. We believe that Mr. O’Toole is a suitable member of the Board of Directors because of his lengthy tenure and extensive experience in the energy industry and knowledge of industry accounting, tax and financial practices he procured while serving in senior tax and financial positions with Phillips Petroleum Company. Mark A. Haney has served as a member of the Board of Directors of our General Partner since July 2013 and serves on the Audit Committee and as chair of the Conflicts Committee. Mr. Haney retired as Executive Vice President of Olefins and Polyolefins of CPChem in December 2011. Prior to that time, Mr. Haney served as Senior Vice President, Specialties, Aromatics and Styrenics of CPChem from 2008 to 2011, and Vice President, Polyethylene of CPChem from 2001 to 2008. Prior to joining CPChem in 2001, he held several senior positions with Phillips Petroleum Company, where he began his career in 1977. He also serves as a director for Advanced Drainage Systems, Inc. We believe that Mr. Haney is a suitable member of the Board of Directors because of his lengthy tenure and extensive experience in the energy industry, particularly his leadership experience with operating responsibilities. P.D. (David) Bairrington has served as a member of the Board of Directors of our General Partner since August 2016 and serves on both the Audit Committee and the Conflicts Committee. Mr. Bairrington is the managing partner of a family owned real estate development company, JDMD Development, LLC. Prior to taking on that role, he spent 33 years in the energy industry with Phillips Petroleum Company and ConocoPhillips, from which he retired in June 2011. During his career, he held a number of executive positions with Phillips Petroleum Company and ConocoPhillips, including Senior Vice President of ConocoPhillips Canada, President and Managing Director of the Russia and Caspian Region, and Senior Vice President of Marketing and Transportation. Mr. Bairrington is a former board member of Syncrude Canada Ltd, and the former Chairman of the Board of the Polar Lights Company and NaryanMarNefteGas Company. Currently, Mr. Bairrington serves on the Texas Municipal Power Agency Board, Bryan Texas Utilities Board, Wells Fargo Community Board and the Blinn College Brazos County Advisory Committee. We believe that Mr. Bairrington is a suitable member of the Board of Directors because of his lengthy tenure and extensive experience in the energy industry, particularly his leadership experience with operating responsibilities. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 (the Act) requires directors and executive officers of our General Partner, and persons who own more than 10 percent of a registered class of our equity securities, to file reports of ownership and changes in ownership of our common units with the U.S. Securities and Exchange Commission (SEC) and the NYSE, and to furnish us with copies of the forms they file. To our knowledge, based solely upon a review of the copies of such reports furnished to us and written representations of our officers and directors, during the year ended December 31, 2018, all Section 16(a) reports applicable to our officers and directors were filed on a timely basis. Committees of the Board of Directors The Board of Directors of our General Partner has an Audit Committee and a Conflicts Committee. Each of the standing committees of the Board of Directors has the composition and responsibilities described below. Audit Committee Our General Partner has an Audit Committee consisting of three directors, each of whom meets the independence and experience standards established by the NYSE and the Act. The members of the Audit Committee are Messrs. Bairrington, Haney, and O’Toole. Mr. O’Toole serves as the chair of the Audit Committee, and the Board of Directors of our General Partner has determined that Mr. O’Toole is an audit committee financial expert (as defined in the Act). The Audit Committee assists the Board of Directors in its oversight of the integrity of our financial statements and our compliance with legal and regulatory requirements and corporate policies and controls. The Audit Committee has the sole authority to retain and terminate our independent registered public accounting firm, pre-approve all auditing services and related fees and the terms thereof, and pre-approve any non-audit services to be rendered by our independent registered public accounting firm. The Audit Committee is also responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our independent registered public accounting firm has unrestricted access to the Audit Committee. The Audit Committee has a written charter adopted by the Board of 101 Table of Contents Index to Financial Statements Directors of our General Partner, which is available on our website at http://www.phillips66partners.com by selecting “Investors,” then “Corporate Governance,” then “Documents and Charters,” and selecting “Audit Committee Charter.” Conflicts Committee Two members of the Board of Directors of our General Partner serve on our General Partner’s Conflicts Committee to review specific matters that may involve conflicts of interest in accordance with the terms of our partnership agreement. The members of the Conflicts Committee are Messrs. Bairrington and Haney, with Mr. Haney serving as the chair. The Board of Directors of our General Partner determines whether to refer a matter to the Conflicts Committee on a case-by-case basis. The members of our Conflicts Committee may not be officers or employees of our General Partner or directors, officers, or employees of its affiliates, and must meet the independence and experience standards established by the NYSE and the Act to serve on an audit committee of a board of directors. In addition, the members of our Conflicts Committee may not own any interest in our General Partner or any interest in us or our subsidiaries other than common units or awards under our incentive compensation plan. If our General Partner seeks approval from the Conflicts Committee, then it will be presumed that, in making its decision, the Conflicts Committee acted in good faith, and in any proceeding brought by or on behalf of any limited partner or Phillips 66 Partners LP (the Partnership) challenging such determination, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Code of Business Ethics and Conduct Our General Partner has adopted a Code of Business Ethics and Conduct for directors and employees designed to help directors and employees resolve ethical issues in an increasingly complex global business environment. Our Code of Business Ethics and Conduct applies to all directors and employees. Our Code of Business Ethics and Conduct covers topics including, but not limited to, conflicts of interest, insider trading, competition and fair dealing, discrimination and harassment, confidentiality, payments to government personnel, anti-boycott laws, U.S. embargoes and sanctions, compliance procedures and employee complaint procedures. We also have a Code of Ethics for the Principal Executive Officer and Senior Financial Officers. This code supplements the Code of Business Ethics and Conduct and is applicable to our Chief Executive Officer, Chief Financial Officer and Controller. Any amendments to or waivers from this Code will be posted on our website. Both codes are available on our website under the “Corporate Governance” caption. Unitholders may also request printed copies of our Code of Business Ethics and Conduct by following the instructions located under the section “Website Access to SEC Reports” in Items 1 and 2. Business and Properties. 102 Table of Contents Index to Financial Statements Item 11. EXECUTIVE COMPENSATION Neither we nor our General Partner employ the individuals who serve as executive officers of our General Partner and are responsible for managing our business. We are managed by our General Partner, the executive officers of which are employees of Phillips 66. We and our General Partner have entered into an omnibus agreement, as amended, with Phillips 66 pursuant to which, among other matters: • Phillips 66 makes available to our General Partner the services of the Phillips 66 employees who serve as the executive officers of our General Partner. • Our General Partner is obligated to reimburse Phillips 66 for an allocated portion of the costs that Phillips 66 incurs in providing compensation and benefits to certain Phillips 66 employees, including the executive officers of our General Partner who devote at least a majority of their working time to our business (but not the executive officers of our General Partner who devote less than a majority of their working time to our business). • Our General Partner pays an operational and administrative support fee to Phillips 66 to cover, among other things, the services provided to us by the executive officers of our General Partner who devote less than a majority of their working time to our business. Pursuant to the applicable provisions of our partnership agreement, we reimburse our General Partner for the costs it incurs in relation to the Phillips 66 employees, including executive officers, who provide services to operate our business. Our named executive officers (NEOs) consist of our General Partner’s chief executive officer, chief financial officer and the next two most highly compensated executive officers. Tim G. Taylor, who previously served as our General Partner’s President, retired at the end of 2017 and as a result, we had only four executive officers in 2018. Our NEOs for 2018 were: • Greg C. Garland, Chairman of the Board of Directors and Chief Executive Officer. • Kevin J. Mitchell, Vice President and Chief Financial Officer. • • Chukwuemeka A. Oyolu, Vice President and Controller. J. T. (Tom) Liberti, Vice President and Chief Operating Officer. Effective December 31, 2018 , Mr. Liberti retired as the Vice President and Chief Operating Officer of our General Partner and Rosy Zuklic was named as his replacement, effective January 1, 2019. Compensation Discussion and Analysis Messrs. Garland, Mitchell and Oyolu, who were also executive officers of Phillips 66 during 2018 , devoted the majority of their time to their respective roles at Phillips 66 and also spent time, as needed, directly managing our business and affairs. Pursuant to the terms of the amended omnibus agreement, we pay a fixed operational and administrative support fee to Phillips 66, which covers, among other things, the services provided to us by Messrs. Garland, Mitchell and Oyolu. Messrs. Garland, Mitchell and Oyolu do not receive any separate amounts of compensation for their services to our business or as executive officers of our General Partner and, except for the fixed operational and administrative support fee we pay to Phillips 66, we did not otherwise pay or reimburse any compensation amounts to or for Messrs. Garland, Mitchell and Oyolu during 2018 . Mr. Liberti devoted substantially all of his working time to our business and, pursuant to the terms of the amended omnibus agreement, we reimbursed Phillips 66 for all the compensation and benefits paid to him with respect to time spent managing our business. 103 Table of Contents Index to Financial Statements Neither we nor our General Partner has a compensation committee. The Human Resources and Compensation Committee of the Board of Directors of Phillips 66 (the Compensation Committee) has ultimate decision-making authority with respect to the compensation of Phillips 66’s senior officers. The elements of compensation discussed below, and Phillips 66’s decisions with respect to determinations on payments, were approved by the Compensation Committee, and were not subject to approvals by the Board of Directors of our General Partner. See Note 21—Related Party Transactions —Amended Omnibus Agreement, in the Notes to Consolidated Financial Statements, for additional information. Elements of Compensation Phillips 66 provides compensation to its executives in the form of base salaries, annual cash incentive awards, long-term equity incentive awards and participation in various employee benefits plans and arrangements, including broad-based and supplemental defined contribution plans, defined benefit retirement plans and executive life insurance arrangements. Phillips 66 also provides additional benefits to approved senior officers, such as executive physicals, executive financial planning, and physical security. In addition, although our NEOs have not entered into employment agreements with Phillips 66, our NEOs are eligible to participate in Phillips 66’s executive severance and change in control plans, pursuant to which they would receive severance payments and benefits from Phillips 66 in the event of an involuntary termination of employment (with an enhanced level of payment if such termination occurs in connection with a change in control of Phillips 66). In the future, Phillips 66 and/or our General Partner may provide different and/or additional compensation components, benefits and/or perquisites to our NEOs, to ensure that they are provided with a comprehensive and competitive compensation structure. As explained above, Messrs. Garland, Mitchell and Oyolu devoted a small portion of their overall working time to our business during 2018 and the compensation our NEOs received from Phillips 66 in relation to their services for us did not comprise a material amount of their total compensation. In addition, except for a fixed operational and administrative support fee that we pay to Phillips 66 pursuant to the terms of the amended omnibus agreement, and any awards that may be granted in the future to Messrs. Garland, Mitchell and Oyolu under the Incentive Compensation Plan (ICP), we will not pay or reimburse any compensation amounts to or for Messrs. Garland, Mitchell and Oyolu. For a detailed discussion of the compensation and benefits that Phillips 66 provides to its NEOs, and its philosophy, objectives and policies related to executive compensation, please refer to the Compensation Discussion and Analysis section of Phillips 66’s 2019 Proxy Statement, which will be available upon its filing on the SEC’s website at http://www.sec.gov . The following sets forth a more detailed explanation of the elements of Phillips 66’s executive compensation program for Mr. Liberti. Base Salary. Base salary is designed to provide a competitive fixed rate of pay recognizing employees’ different levels of responsibility and performance. In setting an executive’s base salary, Phillips 66 considers factors including, but not limited to, the responsibility level for the position held, market data for its relevant peer group, experience and expertise, individual performance and business results. Annual Cash Bonus. Phillips 66’s annual cash incentive program provides participants with an opportunity to earn annual cash bonus awards generally based on company, business unit and individual performance. Target annual bonus levels are established at the beginning of each year and are based on a percentage of the executive’s eligible earnings. For 2018 , Mr. Liberti had an annualized target bonus of 50 percent of his eligible earnings. For 2018 , Phillips 66 used the following metrics in relation to the corporate performance of Phillips 66 as a whole for annual bonus program purposes, with the weightings specified as follows: Adjusted EBITDA Operating Excellence Adjusted Controllable Cost High-Performing Organization 40 percent 35 percent 15 percent 10 percent 104 Table of Contents Index to Financial Statements The Compensation Committee used its judgment in assessing results in relation to the foregoing categories of criteria to award between zero and 200 percent of each NEO’s target bonus. There are multiple award units within Phillips 66 designed to measure performance and reward employees according to business unit performance. Performance criteria include quantitative and qualitative metrics specific to each business unit, such as income, cost control, safety and operational excellence, and resource and talent management. Finally, an individual performance adjustment may be applied for its executives and key employees. For 2018 , Phillips 66 paid a cash bonus to Mr. Liberti at a level of approximately 190 percent of his target award to recognize the overall performance of Phillips 66, the performance of his business unit and his individual contributions. Long-Term Equity-Based Compensation Awards. Phillips 66 maintains a long-term incentive program pursuant to which it grants equity-based awards in Phillips 66 stock to its executives and key employees. Awards are paid out from zero to 200 percent of target depending on Phillips 66’s performance relative to the applicable targets. For the performance periods presented, payout levels for the Performance Share Program (PSP) awards were based on Phillips 66’s Total Shareholder Return (TSR) (50 percent), as compared to a group of Phillips 66’s peer companies, and Return on Capital Employed (ROCE) (50 percent), as compared to both its weighted average cost of capital and a group of Phillips 66’s peer companies. Generally, performance at the 50th percentile of the peer group would result in a target payout subject to any adjustments made by the Compensation Committee. For performance periods that ended in 2018 , payouts for the PSP were made in cash at the end of the performance period, with no escrow period. We apply individual performance adjustments to targets at the beginning of the period. The Compensation Committee believes in applying performance adjustments at the beginning of the performance period, rather than the end, so that performance adjusted compensation is subject to company performance and market volatility throughout the performance period, aligning executive compensation with shareholder interests. For 2018 , Phillips 66’s long-term incentive program delivered 50 percent of long-term target value in the form of performance share units through the PSP, 25 percent in the form of stock options and 25 percent in the form of restricted stock units. This reflects the cyclical nature of its business, promotes retention of high-performing talent and supports succession planning. Retirement, Health, Welfare and Additional Benefits. Our NEOs are eligible to participate in the employee benefit plans and programs that Phillips 66 may from time to time offer to its employees, subject to the terms and eligibility requirements of those plans. Our NEOs are also eligible to participate in tax-qualified defined contribution and defined benefit retirement plans to the same extent as all other Phillips 66 employees. Phillips 66 also maintains three supplemental retirement plans in which its executives and key employees participate. Its voluntary deferred compensation plan (the Phillips 66 Key Employee Deferred Compensation Plan) allows executives to defer both the receipt and taxation of a portion of their base salary until separation and annual bonus until a specific date or when they separate from employment. Its defined contribution restoration plan (the Phillips 66 Defined Contribution Make-Up Plan) restores benefits capped under Phillips 66’s qualified defined contribution plan due to Internal Revenue Code limits. Finally, its defined benefit restoration plans (the Phillips 66 Key Employee Supplemental Retirement Plan and the Phillips 66 Supplemental Executive Retirement Plan) restore company sponsored benefits capped under the qualified defined benefit pension plan due to Internal Revenue Code limits and provide additional nonqualified pension benefits to executives who were hired in mid-career to partially compensate for the loss of retirement benefits from a previous employer. Our NEOs, including Mr. Liberti, participate in these programs and Phillips 66 remains responsible for providing 100 percent of the benefits thereunder. However, with respect to the executives for whom we are obligated to reimburse Phillips 66 for an allocated portion of compensation and benefits costs, we will pay periodic amounts to Phillips 66 pursuant to the terms of the amended omnibus agreement representing Phillips 66’s estimated costs for providing these benefits. Beginning in 2017, Phillips 66 provided executive health and financial planning benefits to our NEOs, subject to certain eligibility requirements. Severance and Change in Control Programs. Phillips 66 does not maintain individual severance or change in control agreements with its executives. Rather, Phillips 66 maintains an Executive Severance Plan (ESP) and a Key Employee Change in Control Severance Plan (CICSP) to provide and preserve an economic motivation for participating executives to consider a business combination that might result in an executive’s job loss and to compete effectively in attracting and retaining executives in an industry that features frequent acquisitions and divestitures. 105 Table of Contents Index to Financial Statements Executive Severance Plan. The ESP provides that if Phillips 66 terminates the employment of an executive other than for cause, the executive will receive the following benefits, which may vary depending on salary grade level: • An amount equal to one and one-half or two times (one and one-half times in the case of Mr. Liberti) the sum of the executive’s base salary and current target annual bonus. • An amount equal to the present value of the increase in pension benefits that would result from crediting the executive with an additional one and one-half or two years of age and service under the pension plan (one and one-half years in the case of Mr. Liberti). • An amount equal to the cost of certain welfare benefits for an additional one and one-half or two years (one and one-half years in the case of Mr. Liberti). • • Continued eligibility for a pro rata portion of the annual bonus paid with respect to the year of termination. Layoff treatment under compensation plans that generally allows the executive to retain grants of Phillips 66 restricted stock and restricted stock units, and maintain eligibility for Phillips 66 PSP awards for ongoing periods in which the NEO had participated for at least one year. Change in Control Severance Plan. The CICSP provides that if, within two years of a change in control of Phillips 66, an executive’s employment is terminated by the employer other than for cause, or by the executive for good reason, the executive will receive the following benefits, which may vary depending on salary grade level: • An amount equal to two or three times (two times in the case of Mr. Liberti) the sum of the executive’s base salary and the higher of current target annual bonus or the average of the two most recent bonus payments. • An amount equal to the present value of the increase in pension benefits that would result from crediting the executive with an additional two or three years of age and service under the pension plan (two years in the case of Mr. Liberti). • An amount equal to Phillips 66’s cost of certain welfare benefits for an additional two or three years (two years in the case of Mr. Liberti). • Continued eligibility for a pro rata portion of the annual bonus paid with respect to the year of termination. In addition, upon severance following a change in control, an executive becomes eligible for vesting in all Phillips 66 equity awards and lapsing of any restrictions, with continued ability to exercise any stock options for their remaining terms. Stock options shall be exercisable at the original times set forth in the applicable award documents. After a change in control, the CICSP may not be amended or terminated if the amendment would be adverse to the interests of any eligible participant without the participant’s written consent. Amounts payable under the CICSP are offset by any payments or benefits payable under any of Phillips 66’s other plans. Our Incentive Compensation Plan Our General Partner adopted the ICP for officers, directors and employees of our General Partner or its affiliates, and any consultants, affiliates of our General Partner or other individuals who perform services for us. Our General Partner may issue our executive officers and other service providers long-term equity-based awards under the ICP. These awards are intended to compensate the recipients thereof based on the performance of our common units and their continued employment during the vesting period, as well as align their long-term interests with those of our unitholders. We will be responsible for the cost of awards granted under the ICP, and all determinations with respect to awards to be made under the ICP will be made by the Board of Directors of our General Partner or any committee thereof that may be established for such purpose or by any delegate of the Board of Directors or such committee, subject to applicable law, which we refer to as the plan administrator. The Board of Directors of our General Partner is currently designated as the plan administrator. The following description reflects the principal terms of the ICP. 106 Table of Contents Index to Financial Statements General. The ICP provides for the grant, from time to time at the discretion of the Board of Directors of our General Partner or any applicable committee or delegate thereof, subject to applicable law, of unit awards, restricted units, phantom units, unit options, unit appreciation rights, distribution equivalent rights, profits interest units and other unit-based awards. The purpose of awards under the ICP is to provide additional incentive compensation to individuals providing services to us, and to align the economic interests of such individuals with the interests of our unitholders. The ICP limits the number of units that may be delivered pursuant to vested awards to 2,500,000 common units, subject to proportionate adjustment in the event of unit splits and similar events. Common units subject to awards that are canceled, forfeited, or otherwise terminated without delivery of the common units will be available for delivery pursuant to other awards. Common units canceled for payment of taxes will not be available for delivery pursuant to other awards. Restricted Units and Phantom Units. A restricted unit is a common unit that is subject to forfeiture if the terms of vesting are not met. Upon vesting, the forfeiture restrictions lapse and the recipient holds a common unit that is not subject to forfeiture. A phantom unit is a notional unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit or on a deferred basis upon specified future dates or events or, in the discretion of the plan administrator, cash equal to the fair market value of a common unit. The plan administrator may make grants of restricted and phantom units under the ICP that contain such terms, consistent with the ICP, as the administrator may determine are appropriate, including the period over which restricted or phantom units will vest. The plan administrator may, in its discretion, base vesting on the grantee’s completion of a period of service or upon the achievement of specified financial objectives or other criteria or upon a change of control (as defined in the ICP) or as otherwise described in an award agreement. Distributions made by us with respect to awards of restricted units may be subject to the same vesting requirements as the restricted units. Distribution Equivalent Rights. The plan administrator, in its discretion, may also grant distribution equivalent rights, either as stand-alone awards or in tandem with other awards. Distribution equivalent rights are rights to receive an amount in cash, restricted units or phantom units equal to all or a portion of the cash distributions made on units during the period in which an award remains outstanding. Unit Options and Unit Appreciation Rights. The ICP also permits the grant of options covering common units. Unit options represent the right to purchase a number of common units at a specified exercise price. Unit appreciation rights represent the right to receive the appreciation in the value of a number of common units over a specified exercise price, either in cash or in common units. Unit options and unit appreciation rights may be granted to such eligible individuals and with such terms as the plan administrator may determine, consistent with the ICP; however, a unit option or unit appreciation right must have an exercise price equal to at least the fair market value of a common unit on the date of grant. Unit Awards. Awards covering common units may be granted under the ICP with such terms and conditions, including restrictions on transferability, as the plan administrator may establish. Profits Interest Units. Awards granted to grantees who are partners, or granted to grantees in anticipation of the grantee becoming a partner or granted as otherwise determined by the plan administrator, may consist of profits interest units. The plan administrator will determine the applicable vesting dates, conditions to vesting and restrictions on transferability and any other restrictions for profits interest awards. Other Unit-Based Awards. The ICP may also permit the grant of “other unit-based awards,” which are awards that, in whole or in part, are valued or based on or related to the value of a common unit. The vesting of another unit-based award may be based on a participant’s continued service, the achievement of performance criteria or other measures. On vesting or on a deferred basis upon specified future dates or events, other unit-based awards may be paid in cash and/or in units (including restricted units), or any combination thereof as the plan administrator may determine. Source of Common Units. Common units to be delivered with respect to awards may be newly issued units, common units acquired by us or our General Partner in the open market, common units already owned by our General Partner or us, common units acquired by our General Partner directly from us or any other person or any combination of the foregoing. 107 Table of Contents Index to Financial Statements Anti-Dilution Adjustments and Change in Control. If an “equity restructuring” event occurs, and any adjustments to awards under the ICP with respect to such event were discretionary, the plan administrator will equitably adjust the number and type of units covered by each outstanding award and the terms and conditions of such award to equitably reflect the restructuring event, and the plan administrator will adjust the number and type of units with respect to which future awards may be granted under the ICP. With respect to other similar events, including, for example, a combination or exchange of units, a merger or consolidation or an extraordinary distribution of our assets to unitholders, that would not result in an accounting charge if adjustment to awards were discretionary, the plan administrator will have discretion to adjust awards in the manner it deems appropriate and to make equitable adjustments, if any, with respect to the number of units available under the ICP and the kind of units or other securities available for grant under the ICP. Furthermore, upon any such event, including a change in control of us or our General Partner, or a change in any law or regulation affecting the ICP or outstanding awards or any relevant change in accounting principles, the plan administrator will generally have discretion to (1) accelerate the time of exercisability or vesting or payment of an award, (2) require awards to be surrendered in exchange for a cash payment or substitute other rights or property for the award, (3) provide for the award to be assumed by a successor or one of its affiliates, with appropriate adjustments thereto, (4) cancel unvested awards without payment or (5) make other adjustments to awards as the plan administrator deems appropriate to reflect the applicable transaction or event. Termination of Employment. The consequences of the termination of a grantee’s employment, membership on our General Partner’s Board of Directors or other service arrangement will generally be determined by the Compensation Committee in the terms of the relevant award agreement. Amendment or Termination of ICP. The plan administrator, at its discretion, may terminate the ICP at any time with respect to the common units for which a grant has not previously been made. The ICP automatically terminates in July 2023. The plan administrator also has the right to alter or amend the ICP or any part of it from time to time or to amend any outstanding award made under the ICP, provided that no change in any outstanding award may be made that would materially impair the vested rights of the participant without the consent of the affected participant or result in taxation to the participant under Section 409A of the Internal Revenue Code. Compensation Consultants Our General Partner does not have a compensation committee, and its Board of Directors did not retain a compensation consultant in 2018 . Unit Ownership Requirements Our General Partner does not have established unit ownership requirements. Guidelines for Trading by Insiders We maintain policies that govern trading in our units by the officers and directors of our General Partner who are required to report under Section 16 of the Exchange Act, as well as certain other employees who may have regular access to material non-public information about us. These policies include pre-approval requirements for all trades and periodic trading “black-out” periods designed with reference to our quarterly financial reporting schedule. We also require pre-approval of all trading plans adopted pursuant to Rule 10b5-1 promulgated under the Exchange Act. These policies also prohibit speculative transactions in our units that are designed to hedge the economic risks of unit ownership, as well as pledging our units. Compensation Risk Assessment The Compensation Committee oversees the risk assessment performed by Phillips 66 management of all elements of its compensation programs, policies and practices for all employees. A discussion of this risk assessment will be included in the Compensation Discussion and Analysis section of Phillips 66’s 2019 Proxy Statement, which will be available upon its filing on the SEC’s website at http://www.sec.gov . 108 Table of Contents Index to Financial Statements Chief Executive Officer Pay Ratio Neither we nor our General Partner has any employees. As a result, we have no basis for disclosing the annual compensation and corresponding ratio as required under Item 402(u) of Regulation S-K. Compensation Committee Interlocks and Insider Participation As discussed above, the listing rules of the New York Stock Exchange (NYSE) do not require us to maintain, and we do not maintain, a compensation committee. Compensation Committee Report The independent directors of our General Partner (the Independent Directors) have reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Independent Directors recommended to the Board of Directors of our General Partner that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K. The Independent Directors have submitted this Report to the Board of Directors as of February 22, 2019 : P.D. (David) Bairrington • • Mark A. Haney • Joseph W. O’Toole The following table summarizes the compensation for our NEOs for fiscal years 2018 , 2017 and 2016 . Summary Compensation Table Name and Principal Position Year Salary (2) ($) Stock Awards (3) ($) Stock Options (4) ($) Change in Pension Value and Nonqualified Deferred Compensation Earnings (6) ($) Non-Equity Incentive Compensation Plan (5) ($) All Other Compensation (7) ($) Total($) Greg C. Garland, Chief Executive Officer (1) Kevin J. Mitchell, Vice President and Chief Financial Officer (1) Chukwuemeka A. Oyolu, Vice President and Controller (1) J.T. (Tom) Liberti, Vice President and Chief Operating Officer 2018 2017 2016 2018 2017 2016 2018 2017 2016 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2018 2017 2016 378,460 364,604 354,136 495,781 424,707 451,672 146,899 144,160 138,498 359,537 236,993 239,042 — 297,439 354,369 33,053 25,522 26,440 1,413,730 1,493,425 1,564,157 (1) Messrs. Garland, Mitchell and Oyolu devote a small portion of their overall working time to our business. The compensation these NEOs receive from Phillips 66 in relation to their services for us does not represent a material amount of their total compensation. 109 Table of Contents Index to Financial Statements (2) Includes any amounts that were voluntarily deferred under Phillips 66’s Key Employee Deferred Compensation Plan. (3) Amounts shown represent the aggregate grant date fair value of awards determined in accordance with generally accepted accounting principles in the United States (GAAP) and reflect awards granted under Phillips 66’s PSP and Phillips 66’s Restricted Stock Program. These include awards that are expected to be finalized as late as 2020. The amounts shown for awards from the PSP relate to performance periods that began in 2016 , 2017 and 2018 and that end in 2018 , 2019 and 2020, respectively. Amounts shown relating to PSP are targets because target is the probable outcome for the applicable performance period, consistent with the accounting treatment under GAAP. If the maximum payout were used for the PSP awards the amounts shown relating to PSP would double, although the value of the actual payout would depend on the stock price at the time of the payout. If the minimum payout were used, the amounts for PSP awards would be reduced to zero. Actual payouts with regard to the targets set for the performance period that ended in 2018 were approved by the Compensation Committee at its February 2019 meeting. Earned payouts under the PSP 2016 - 2018 have been, and under the PSP 2017 -2019 and PSP 2018 -2020 are expected to be, made in cash at the end of the applicable performance period and will be forfeited if the NEO terminates prior to the end of the performance period (other than for death or following disability or after a change in control). If the NEO retires after age 55 and with five years of service, the NEO is entitled to a prorated award for any ongoing program in which he or she participated for at least 12 months. (4) Amounts shown represent the aggregate grant date fair value of awards determined in accordance with GAAP and reflect awards granted under the Phillips 66 Stock Option Program. (5) These are amounts paid under Phillips 66’s annual bonus program (VCIP), including bonus amounts that were voluntarily deferred under the Key Employee Deferred Compensation Plan. These amounts were paid in February following the performance year. (6) Reflects the actuarial increase in the present value of the benefits under Phillips 66’s pension plans determined using interest rate and mortality rate assumptions consistent with those used in its financial statements. For 2018, the Change in Pension Value resulted in a negative amount for the following NEOs: Mr. Liberti: ($45,624). There are no Deferred Compensation Earnings reported in this column, as the nonqualified deferred compensation plans do not provide above-market or preferential earnings. (7) Amounts shown represent company contributions under the Phillips 66 Matching Gift Program, company contributions made under our tax-qualified savings plan and non-qualified deferred compensation plan, and occasionally small gifts with associated tax protection. The following table provides additional information about plan-based compensation disclosed in the Summary Compensation Table. The table only includes awards to Mr. Liberti because he is the only NEO for whom we directly reimbursed Phillips 66 for compensation expenses. Grants of Plan-Based Awards Estimated Future Payouts Under Non-Equity Incentive Plan Awards (2) Estimated Future Payouts Under Equity Incentive Plan Awards (3) Name Grant Date (1) Threshold ($) Target ($) Maximum ($) Threshold (#) Target (#) Maximum (#) All Other Stock Awards: Number of Shares of Stock or Units (#) All Other Option Awards: Number of Securities Underlying Options (#) Exercise or Base Price of Option Awards ($/sh) Grant Date Fair Value of Stock and Option Awards (4) ($) 473,075 189,230 Mr. Liberti — — — — 2/6/2018 2/6/2018 2/6/2018 — — — — (1) The grant date shown is the date on which the Compensation Committee approved the target awards. (2) Threshold and maximum awards are based on the provisions in the VCIP. Actual awards earned can range from 0 to 200 percent of the target awards, with a further possible adjustment of +/- 50 percent of the target award depending on individual performance. The Compensation Committee retains the authority to make awards under the program and to use its judgment in adjusting awards, including making awards greater than the amounts shown in the table above, provided the award does not exceed amounts permitted under the 2013 Omnibus Stock and Performance Incentive Plan of Phillips 66. Actual payouts under the annual bonus program for 2018 are calculated using base salary earned in 2018 and reflected in the “Non-Equity Incentive Compensation Plan” column of the “Summary Compensation Table”. — — — 94.850 — — 3,528 — — — 7,056 — — 1,699 — — — — — 7,100 — — — — — — 146,899 334,631 161,150 — (3) Threshold and maximum awards are based on the provisions of the PSP. Actual awards earned can range from 0 to 200 percent of the target awards. Performance periods under the PSP cover a three-year period, and since a new three-year period commences each year, there could be three overlapping performance periods ongoing at any time. In 2018 , targets were set for Mr. Liberti with respect to an award for the three-year performance period beginning in 2018 and ending in 2020. The Compensation Committee retains the authority to make awards under the PSP using its judgment, including making awards greater than the maximum payout shown in the table above, provided the award does not exceed amounts permitted under the 2013 Omnibus Stock and Performance Incentive Plan of Phillips 66. (4) For equity incentive plan awards, these amounts represent the grant date fair value at target level under the PSP as determined pursuant to GAAP. For Stock Option awards, these amounts represent the grant date fair value of the option awards using a Black-Scholes-Merton-based methodology. Actual value realized upon option exercise depends on market prices at the time of exercise. For other stock awards, these amounts represent the grant date fair value of the restricted stock unit awards determined pursuant to GAAP. 110 Table of Contents Index to Financial Statements Outstanding Equity Awards at Fiscal Year End We have not granted, and none of our NEOs have received any grants of, unit or unit-based awards and no such awards were outstanding as of December 31, 2018 . We may make grants of unit and unit-based awards to our NEOs and other key employees under the ICP. See “Our Incentive Compensation Plan,” for additional information. Our NEOs have received and may continue to receive equity or equity-based awards in Phillips 66 under Phillips 66’s equity compensation programs. The following table provides additional information about only Mr. Liberti’s outstanding equity awards in Phillips 66 as of December 31, 2018 , because he is the only NEO for whom we reimbursed Phillips 66 for his compensation. Name Grant Date (1) Option Awards (2) Stock Awards Number of Securities Underlying Unexercised Options Exercisable (3) (#) Number of Securities Underlying Unexercised Options Unexercisable (#) Number of Shares or Units of Stock That Have Not Vested (4) (#) Market Value of Shares or Units of Stock That Have Not Vested($) Option Exercise Price($) Option Expiration Date Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (5) (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested($) Mr. Liberti 2/2/2016 2/7/2017 2/6/2018 5,466 2,833 — 2,734 5,667 7,100 78.620 78.475 94.850 2/2/2026 2/7/2027 2/6/2028 37,943 3,268,789 14,246 1,227,293 (1) The dates presented in this column represent the respective dates on which the awards were granted by Phillips 66. (2) All options shown in the table have a maximum term for exercise of ten years from the grant date. Under certain circumstances, the terms for exercise may be shorter, and in certain circumstances, the options may be forfeited and canceled. All awards shown in the table have associated restrictions upon transferability. (3) The options shown in this column vested and became exercisable in 2018 or prior years (although under certain termination circumstances, the options may still be forfeited). Options become exercisable in one-third increments on the first, second and third anniversaries of the grant date. (4) These amounts include unvested restricted stock and restricted stock units awarded under the PSP for performance periods ending prior to December 31, 2014, and awarded as annual awards. All awards for performance periods ending on or before December 31, 2014, continue to have restrictions upon transferability. Restrictions on PSP awards for performance periods ending on or before December 31, 2010, lapse upon separation from service. Restrictions on PSP awards for later performance periods lapse five years from the grant date unless the NEO elected prior to the beginning of the performance period to defer lapsing of the restrictions until separation from service. Awards are subject to forfeiture if, prior to lapsing, the NEO separates from service for a reason other than death, disability, layoff, retirement after reaching age 55 with five years of service, or after a change of control, although the Compensation Committee has the authority to waive forfeiture. The awards have no voting rights, but do entitle the holder to receive dividend equivalents in cash. The value of the awards reflects the closing price of our stock, as reported on the NYSE, on December 31, 2018 ($86.15) . (5) Reflects potential awards from ongoing performance periods under the PSP for performance periods ending December 31, 2019, and December 31, 2020. These awards are shown at maximum; however, there is no assurance that awards will be granted at, below or above target after the end of the relevant performance periods, as the determination to make a grant and the amount of any grant is within the judgment of Phillips 66’s Compensation Committee. Until an actual grant is made, these unearned awards pay no dividend equivalents. The value of these unearned awards reflects the closing price of Phillips 66’s stock, as reported on the NYSE, on December 31, 2018 ($86.15) . 111 Table of Contents Index to Financial Statements The following table summarizes the value received from stock option exercises and stock grants vested during 2018 for Mr. Liberti only because he is the only NEO for whom we reimbursed Phillips 66 for his compensation. Option Exercises and Stock Vested Name Number of Shares Acquired on Exercise(#) Value Realized on Exercise($) Number of Shares Acquired on Vesting(#) Value Realized on Vesting($) Option Awards Stock Awards (1) 474,949 Mr. Liberti (1) Stock awards include restricted stock units that vested during the year, as well as the PSP 2016-2018 award that vested on December 31, 2018 , and was paid out in cash in early 2019. The 920,114 18,100 5,156 PSP award for Mr. Liberti was 3,122 units valued at $272,917. Pension Benefits The following table lists the pension program participation and actuarial present value of only Mr. Liberti’s defined benefit pension as of December 31, 2018 , because he is the only NEO for whom we reimbursed Phillips 66 for his compensation. Name Plan Name Number of Years Credited Service (1) (#) Present Value of Accumulated Benefit (2) ($) Payments During Last Fiscal Year($) Mr. Liberti Phillips 66 Retirement Plan—Title 1 Phillips 66 Key Employee Supplemental Retirement Plan (3) Phillips 66 Supplemental Executive Retirement Plan 18 — — 913,735 1,432,419 1,234,186 — — — (1) Years of credited service include service recognized under the predecessor ConocoPhillips plans from which these plans were spun off effective May 1, 2012. (2) Because Mr. Liberti is already retirement eligible, the amounts shown represent his actual benefit. (3) The Phillips 66 Key Employee Supplemental Retirement Plan restores Company-sponsored benefits capped under the qualified defined benefit pension plan to Internal Revenue Code limits. All employees, including Mr. Liberti, are eligible to participate in the plan. The following table provides information on nonqualified deferred compensation of only Mr. Liberti’s defined benefit pension as of December 31, 2018 , because he is the only NEO for whom we reimbursed Phillips 66 for his compensation. Nonqualified Deferred Compensation Beginning Balance($) Executive Contribution in Last Fiscal Year($) Registrant Contribution in Last Fiscal Year (2) ($) Aggregate Earnings in Last Fiscal Year (3) ($) Aggregate Withdrawals/Distributions($) Aggregate Balance at Last Fiscal Year- End (4) ($) Name Mr. Liberti (1) 58,693 (1) Mr. Liberti participates in the Phillips 66 Defined Contribution Make-Up Plan (DCMP). As of December 31, 2018 , participants in this plan had 91 investment options. 27 of the options were 56,931 (2,617) 4,379 — — the same as those available in Phillips 66’s 401(k) plan and the remaining options were other mutual funds approved by the plan administrator. (2) These amounts represent Phillips 66’s contributions under the DCMP. These amounts are also included in the “All Other Compensation” column of the “Summary Compensation Table”. (3) These amounts represent earnings on plan balances from January 1 to December 31, 2018 . These amounts are not included in the “Summary Compensation Table”. (4) The total reflects contributions by Mr. Liberti, contributions by us, and earnings on balances prior to 2018; plus contributions by Mr. Liberti and earnings from January 1, 2018, through December 31, 2018 (shown in the appropriate columns of this table, with amounts that are included in the “Summary Compensation Table” shown in footnote 2 above). 112 Table of Contents Index to Financial Statements The following table provides information about potential payments only to Mr. Liberti upon termination or change-in-control assuming the occurrence of a triggering event on December 31, 2018 , because he is the only NEO for whom we reimbursed Phillips 66 for his compensation. Potential Payments upon Termination or Change-in-Control Executive Benefits and Payments Upon Termination Severance payment Accelerated equity (1) Life insurance Involuntary Not- for-Cause Termination (Not CIC)($) Involuntary or Good Reason for Termination (CIC) ($) Death($) Disability($) 1,188,270 1,679,491 — — — — 1,188,270 1,679,491 — — 380,904 380,904 — — — — (1) For the PSP, amounts for PSP 2016 - 2018 are shown based on the cash amount received in February 2019, while amounts for other periods are prorated to reflect the portion of the performance period completed by the end of 2018 and shown at target payout levels. These amounts reflect the closing price of Phillips 66 stock as reported on the NYSE on December 31, 2018 ($86.15) . Restricted Stock and RSU amounts reflect the closing price of Phillips 66 stock as reported on the NYSE on December 31, 2018 ($86.15) . For Stock Options with an exercise price lower than Phillips 66 stock's closing price on December 31, 2018 , amounts reflect the intrinsic value as if the options had been exercised on December 31, 2018 , but only for options the NEO would have retained for the specific termination event. Compensation of Our Directors The officers or employees of our General Partner or of Phillips 66 who also serve as directors of our General Partner do not receive additional compensation for their service as a director of our General Partner. Directors of our General Partner who are not officers or employees of our General Partner or of Phillips 66, or independent directors, receive compensation as described below. In addition, independent directors are reimbursed for out- of-pocket expenses in connection with attending meetings of the Board of Directors or its committees. Each director will be indemnified for his actions associated with being a director to the fullest extent permitted under Delaware law. Each of our General Partner’s independent directors receives an annual compensation package, which consists of $70,000 in annual cash compensation and $80,000 in annual equity based compensation. In addition, the chairman of the Audit Committee and the chairman of the Conflicts Committee each receives an additional $15,000 in annual cash compensation and each member of the Conflicts Committee other than the Chairman receives a cash retainer of $10,000. Our Board of Directors periodically benchmarks our independent director compensation with a group of peer partnerships. The equity portion of the independent directors’ compensation consists of phantom units granted under the ICP, which are subject to a three-year restriction period. The phantom units are expected to be granted in tandem with distribution equivalent rights and will be settled upon the expiration of the three-year restriction period. No deferral elections are expected to be permitted with respect to the equity-based portion of the annual compensation package. The cash portion of the annual compensation package is paid monthly, unless a timely election is made by the independent director to defer payment. 113 Table of Contents Index to Financial Statements The following table summarizes the compensation for our non-employee directors for 2018 . Non-Employee Director Compensation Table Fees Earned or Paid in Cash (1) ($) Unit Awards (2) ($) Option Awards($) Non-Equity Incentive Plan Compensation ($) Change in Pension Value and Nonqualified Deferred Compensation Earnings($) All Other Compensation (3) ($) Total($) 80,000 85,000 80,024 80,024 — — — — — — 15,000 1,018 175,024 166,042 Name P.D. (David) Bairrington Mark A. Haney Joseph W. O’Toole (1) Reflects 2018 base cash compensation of $70,000 payable to each non-employee director and the applicable committee retainers. In 2018 , non-employee directors serving in specified 80,024 85,000 13,500 — — — 178,524 committee positions also received the additional cash compensation described above. Compensation amounts reflect adjustments related to various changes in committee assignments by board members through the year, if any. Amounts shown in the “Fees Earned or Paid in Cash” column include any amounts that were voluntarily deferred. No directors elected to defer their cash compensation in 2018 . (2) Amounts represent the grant date fair value of unit awards. In 2018 , non-employee directors received a grant of phantom units valued at $80,000 on the date of grant based on the average of the high and low prices for Phillips 66 Partners LP units on the grant date. These grants are made in whole units with fractional units rounded up, resulting in units with a value of $80,024 being granted on January 16, 2018. (3) All Other Compensation is made up primarily of certain gifts by directors to charities and educational institutions (excluding certain religious, political, fraternal, or athletic organizations) that are tax-exempt under Section 501(c)(3) of the IRC or meet similar requirements under the applicable law of other countries that we match under our Matching Gifts Program (Mr. Bairrington $15,000; Mr. Haney $1,000; and Mr. O’Toole $13,500). For active directors, the program matches up to $15,000 with regard to each program year. The amounts shown reflect the actual payments made by us in 2018. All Other Compensation also includes any smaller gifts (such as books, ornaments, and jackets) as well as associated tax protection (Mr. Haney $18). 114 Table of Contents Index to Financial Statements Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Equity Compensation Plan Information The following table sets forth information about Phillips 66 Partners LP common units that may be issued under all existing equity compensation plans as of December 31, 2018 . Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) (a) 12,582 (2) $ — 12,582 $ Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (3) (b) — — — Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) 2,477,325 — 2,477,325 (1) Includes awards issued under the Incentive Compensation Plan (ICP). (2) Includes 12,582 phantom units issued to non-employee directors that will be settled in cash upon lapsing of restrictions; however, the Partnership reserves the right to settle the phantom units with common units representing limited partner interests. (3) There were no options outstanding under the ICP as of December 31, 2018 . The following table sets forth information regarding persons who we know to be the beneficial owners of more than five percent of our issued and outstanding common units and Series A preferred units as of February 15, 2019. Security Ownership of Certain Beneficial Owners Name and Address Common Units Beneficially Owned Percentage of Common Units Beneficially Owned Series A Preferred Units Beneficially Owned Percentage of Series A Preferred Units Beneficially Owned Phillips 66 Project Development Inc. (1) 2331 CityWest Blvd. Houston, TX 77042 Tortoise Capital Advisors, L.L.C. (2) 11550 Ash Street Suite 300 Leawood, KS 66211 Stonepeak Screwdriver SPV LLC (3) 717 5th Avenue New York, NY 10022 (1) Phillips 66 is the parent company of Phillips 66 Company, which is the parent company of Phillips 66 Project Development Inc., the sole owner of the member interests of our General 11,083,615 68,760,137 11,608,624 55.4% 8.9% — — — — — — 84.0% Partner. Phillips 66 and Phillips 66 Company may, therefore, be deemed to beneficially own the units held by Phillips 66 Project Development Inc. (2) Based solely on an amendment to Schedule 13G filed with the SEC on February 12, 2019, by Tortoise Capital Advisors, L.L.C. (3) Stonepeak Screwdriver Holdings, LLC is the managing member of Stonepeak Screwdriver SPV LLC. Stonepeak Infrastructure Fund II (AIV) LP is the managing member of Stonepeak Screwdriver Holdings, LLC. Stonepeak Associates II LLC is the general partner of Stonepeak Infrastructure Fund II (AIV) LP. Stonepeak GP Holdings II LP is the sole member of Stonepeak Associates II LLC. Stonepeak GP Investors II LLC is the general partner of Stonepeak GP Holdings II LP. Stonepeak GP Investors Manager LLC is the managing member of Stonepeak GP Investors II LLC. Each of Michael Dorrell and Trent Vichie serve as a managing member of Stonepeak GP Investors Manager LLC. 115 Table of Contents Index to Financial Statements Security Ownership of Directors and Executive Officers The following table sets forth the beneficial ownership of common units of Phillips 66 Partners LP held by each director and named executive officer (NEO) of Phillips 66 Partners GP LLC, our General Partner, and by all directors and executive officers of our General Partner as a group as of February 15, 2019. Name of Beneficial Owner * Common Units Beneficially Owned Percentage of Common Units Beneficially Owned NEOs and Directors Greg C. Garland Kevin J. Mitchell J.T. (Tom) Liberti (1) Robert A. Herman Timothy D. Roberts Chukwuemeka A. Oyolu Joseph W. O’Toole Mark A. Haney P.D. (David) Bairrington All Directors and Executive Officers as a Group (9 Persons) (1) Mr. Liberti retired as Vice President and Chief Operating Officer of our General Partner at the end of 2018 . *Unless otherwise indicated, the address for all beneficial owners in this table is 2331 CityWest Blvd., Houston, Texas 77042. **The beneficial ownership does not exceed one percent of the common units outstanding. 35,000 — 37,496 25,000 — 5,000 35,000 29,418 10,000 176,914 ** ** ** ** ** ** ** ** ** ** The following table sets forth the number of shares of Phillips 66 common stock beneficially owned as of February 15, 2019, except as otherwise noted, by each director and NEO of our General Partner and by all directors and executive officers of our General Partner as a group. Name of Beneficial Owner Total Common Stock Beneficially Owned Restricted/Deferred Stock Units (1) Options Exercisable Within 60 Days (2) Percentage of Total Outstanding NEOs and Directors Greg C. Garland Kevin J. Mitchell J.T. (Tom) Liberti (3) Robert A. Herman Timothy D. Roberts Chukwuemeka A. Oyolu Joseph W. O’Toole Mark A. Haney P.D. (David) Bairrington 363,775 38,613 22,504 31,132 3,642 7,815 — — — 298,615 28,115 29,235 67,362 19,232 20,497 — — — 808,628 76,366 16,232 152,565 48,032 20,932 — — — All Directors and Executive Officers as a Group (9 Persons) 467,481 463,056 1,122,755 (1) Includes restricted or deferred stock units that may be voted or sold only upon passage of time. (2) Includes beneficial ownership of shares of common stock that may be acquired within 60 days of February 15, 2019, through stock options awarded under compensation plans. (3) Mr. Liberti retired as Vice President and Chief Operating Officer of our General Partner effective December 31, 2018 . ** The beneficial ownership does not exceed one percent of the common stock outstanding. 116 ** ** ** ** ** ** — — — ** Table of Contents Index to Financial Statements Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE At December 31, 2018, our General Partner, Phillips 66 Partners GP LLC, and its affiliates owned 68,760,137 common units, representing a 54 percent limited partner interest in us. In addition, our General Partner owned 2,480,051 general partner units representing a 2 percent general partner interest in us. Distributions and Payments to Our General Partner and Its Affiliates The following table summarizes the distributions and payments to be made by us to our General Partner and its affiliates in connection with the ongoing operations and liquidation of Phillips 66 Partners LP. These distributions and payments were determined by and among affiliated entities and, consequently, are not the result of arm’s-length negotiations. Operational Stage Distributions of available cash to our General Partner and its affiliates Payments to our General Partner and its affiliates We generally make cash distributions of 98 percent to the unitholders pro rata, including Phillips 66 Project Development Inc., as a holder of 68,760,137 common units, and 2 percent to our General Partner, assuming it makes any capital contributions necessary to maintain its 2 percent general partner interest in us. In addition, if distributions exceed the minimum quarterly distribution and target distribution levels, the incentive distribution rights held by our General Partner will entitle our General Partner to increasing percentages of the distributions, up to 48 percent of the distributions above the highest target distribution level. Under our partnership agreement, we are required to reimburse our General Partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our amended omnibus agreement, amended and restated operational services agreement and tax sharing agreement, our General Partner determines the amount of these expenses and such determinations must be made in good faith under the terms of our partnership agreement. Under our amended omnibus agreement, we reimburse Phillips 66 for expenses incurred by Phillips 66 and its affiliates in providing certain operational support and general and administrative services to us, including the provision of executive management services by certain officers of our General Partner. The expenses of other employees are allocated to us based on the amount of time actually spent by those employees on our business. These reimbursable expenses also include an allocable portion of the compensation and benefits of employees and executive officers of other affiliates of our General Partner who provide services to us. We also reimburse Phillips 66 for any additional out-of-pocket costs and expenses incurred by Phillips 66 and its affiliates in providing general and administrative services to us. The costs and expenses for which we are required to reimburse our General Partner and its affiliates are not subject to any caps or other limits. Under our amended and restated operational services agreement, we pay Phillips 66 for any direct costs actually incurred by Phillips 66 in providing our pipelines, terminals, processing and storage facilities with certain maintenance, operational, administrative and construction services. Under our tax sharing agreement, we reimburse Phillips 66 for our share of state and local income and other taxes incurred by Phillips 66 as a result of our results of operations being included in a combined or consolidated tax return filed by Phillips 66 with respect to taxable periods on or after the completion of the initial public offering (the Offering). Withdrawal or removal of our General Partner If our General Partner withdraws or is removed, its general partner interest and its incentive distribution rights will either be sold to the new general partner for cash or converted into common units, in each case for an amount equal to the fair market value of those interests. Liquidation Stage Liquidation Upon our liquidation, the partners, including our General Partner, will be entitled to receive liquidating distributions according to their respective capital account balances. 117 Table of Contents Index to Financial Statements Transactions and Commercial and Other Agreements with Phillips 66 and Related Parties See “2018 Developments” in Items 1 and 2. Business and Properties, for a description of our transactions and related agreements with Phillips 66 in 2018. See the “Commercial Agreements,” “Amended and Restated Operational Services Agreement,” “Amended Omnibus Agreement” and “Tax Sharing Agreement” sections of Note 21—Related Party Transactions , in the Notes to Consolidated Financial Statements, for summaries of the terms of these and other agreements with Phillips 66. Procedures for Review, Approval and Ratification of Related Person Transactions The Board of Directors of our General Partner adopted a related person transactions policy that provides that the Board of Directors of our General Partner or its authorized committee will review on at least a quarterly basis all related person transactions that are required to be disclosed under the SEC rules and, when appropriate, initially authorize or ratify all such transactions. In the event that the Board of Directors of our General Partner or its authorized committee considers ratification of a related person transaction and determines not to so ratify, the code of business conduct and ethics provides that our management will make all reasonable efforts to cancel or annul the transaction. The related person transactions policy provides that, in determining whether or not to recommend the initial approval or ratification of a related person transaction, the Board of Directors of our General Partner or its authorized committee should consider all of the relevant facts and circumstances available, including (if applicable) but not limited to: (1) whether there is an appropriate business justification for the transaction; (2) the benefits that accrue to us as a result of the transaction; (3) the terms available to unrelated third parties entering into similar transactions; (4) the impact of the transaction on a director’s independence (in the event the related person is a director, an immediate family member of a director or an entity in which a director or an immediate family member of a director is a partner, shareholder, member or executive officer); (5) the availability of other sources for comparable products or services; (6) whether it is a single transaction or a series of ongoing, related transactions; and (7) whether entering into the transaction would be consistent with the code of business conduct and ethics. Director Independence See Item 10. Directors, Executive Officers and Corporate Governance, for information on director independence required by Item 407(a) of Regulation S-K. 118 Table of Contents Index to Financial Statements Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following table presents fees for the years ended December 31, 2018 and 2017 , for professional services performed by our independent registered public accounting firm, Ernst & Young LLP (EY). Fees Audit fees (1) Audit-related fees Tax fees All other fees Total (1) Fees for audit services related to the fiscal year consolidated audit, quarterly reviews and registration statements. Millions of Dollars 2018 2017 $ $ 1.3 — — — 1.3 1.7 — — — 1.7 The Audit Committee has adopted a pre-approval policy that provides guidelines for the audit, audit-related, tax and other non-audit services that may be provided by EY to the Partnership. All of the fees in the table above were approved in accordance with this policy. The policy (a) identifies the guiding principles that must be considered by the Audit Committee in approving services to ensure that EY’s independence is not impaired; (b) describes the audit, audit-related, tax and other services that may be provided and the non-audit services that are prohibited; and (c) sets forth pre- approval requirements for all permitted services. Under the policy, all services to be provided by EY must be pre-approved by the Audit Committee. The Audit Committee has delegated authority to approve permitted services to the Audit Committee’s Chair. Such approval must be reported to the entire Audit Committee at the next scheduled Audit Committee meeting. 119 Table of Contents Index to Financial Statements Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES PART IV (a) 1. Financial Statements and Supplementary Data The financial statements and supplementary data listed in the Index to Financial Statements, which appears on page 58, are filed as part of this Annual Report on Form 10-K. 2. 3. Financial Statement Schedules Financial statement schedules are omitted because they are not required, not significant, not applicable or the information is shown in the Financial Statements or the Notes to Consolidated Financial Statements. Exhibits The exhibits listed in the Index to Exhibits, which appears on pages 121 to 125, are filed as part of this Annual Report on Form 10-K. Item 16. FORM 10-K SUMMARY None. 120 Table of Contents Index to Financial Statements PHILLIPS 66 PARTNERS LP INDEX TO EXHIBITS Exhibit Number Exhibit Description 3.1 Certificate of Limited Partnership of Phillips 66 Partners LP. 3.2 Amendment to Certificate of Limited Partnership, dated October 5, 2017. 3.3 Second Amended and Restated Agreement of Limited Partnership of Phillips 66 Partners LP, dated as of October 6, 2017. 4.1 4.2 Indenture, dated as of February 23, 2015, between Phillips 66 Partners LP and The Bank of New York Mellon Trust Company, N.A., as trustee, in respect of senior debt securities of Phillips 66 Partners LP. Fifth Supplemental Indenture, dated as of October 14, 2016, between Phillips 66 Partners LP and The Bank of New York Mellon Trust Company, N.A., as trustee, in respect of the 2046 Notes. Incorporated by Reference Form Exhibit Number Filing Date SEC File No. S-1 8-K 8-K 3.1 3.1 3.2 3/27/2013 333-187582 10/10/2017 001-36011 10/10/2017 001-36011 8-K 4.1 2/23/2015 001-36011 8-K 4.3 10/17/2016 001-36011 4.3 Form of the 2046 Notes (included in Exhibit 4.3 as Exhibit A to the Appendix thereto). 8-K 4.5 10/17/2016 001-36011 4.4 Registration Rights Agreement dated as of October 6, 2017 by and among Phillips 66 Partners LP and the Purchasers party thereto. 8-K 4.1 10/10/2017 001-36011 As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the partnership has not filed with this Annual Report on Form 10-K 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 Credit Agreement, dated as of June 7, 2013, among Phillips 66 Partners LP, Phillips 66 Partners Holdings LLC, JPMorgan Chase Bank, N.A., as administrative agent, The Royal Bank of Scotland PLC and DNB Bank ASA, New York Branch, as co-syndication agents, Mizuho Corporate Bank, Ltd., The Bank of Tokyo-Mitsubishi UFJ, Ltd. and PNC Bank, National Association, as co-documentation agents, and each of RBS Securities Inc., DNB Markets, Inc., Mizuho Corporate Bank, The Bank of Tokyo-Mitsubishi UFJ, Ltd. and PNC Capital Markets LLC, as joint lead arrangers and book runners, and the other commercial lending institutions parties thereto. S-1/A 10.1 6/27/2013 333-187582 10.2 First Amendment to the Credit Agreement, dated November 21, 2014. 8-K 10.1 11/21/2014 001-36011 121 Table of Contents Index to Financial Statements Exhibit Number Exhibit Description 10.3 Second Amendment to Credit Agreement, dated October 3, 2016. 10.4 10.5 10.6 10.7 10.8 10.9 Series A Preferred Unit and Common Unit Purchase Agreement, dated as of September 21, 2017, by and among Phillips 66 Partners LP and the Purchasers party thereto. Contribution, Conveyance and Assumption Agreement, dated as of February 13, 2015, by and among Phillips 66 Company, Phillips 66 Partners GP LLC, Phillips 66 Pipeline LLC and Phillips 66 Partners LP. Contribution, Conveyance and Assumption Agreement dated as of October 29, 2015, by and among Phillips 66 Partners LP, Phillips 66 Gulf Coast Pipeline LLC, Phillips 66 Project Development Inc., Phillips 66 Company, and Phillips 66 Partners GP LLC. Contribution, Conveyance and Assumption Agreement, dated as of February 17, 2016, by and among Phillips 66 Partners LP, Phillips 66 Partners GP LLC, Phillips 66 Company and Phillips 66 Project Development Inc. Contribution, Conveyance and Assumption Agreement, dated as of May 4, 2016, by and among Phillips 66 Partners LP, Phillips 66 Partners GP LLC, Phillips 66 Company and Phillips 66 Project Development Inc. Contribution, Conveyance and Assumption Agreement, dated as of October 11, 2016, by and among Phillips 66 Partners LP, Phillips 66 Partners GP LLC, Phillips 66 Company and Phillips 66 Project Development Inc. Incorporated by Reference Exhibit Number Filing Date SEC File No. 10.1 10/5/2016 001-36011 10.1 9/25/2017 001-36011 Form 8-K 8-K 8-K 2.1 2/17/2015 001-36011 10-K 10.7 2/12/2016 001-36011 8-K 2.1 2/18/2016 001-36011 8-K 2.1 5/4/2016 001-36011 8-K 2.1 10/11/2016 001-36011 10.10 Contribution, Conveyance and Assumption Agreement, dated as of September 19, 2017, by and among Phillips 66 Partners LP, Phillips 66 Partners GP LLC, Phillips 66 Company and Phillips 66 Project Development Inc. 8-K 2.1 9/25/2017 001-36011 10.11 Omnibus Agreement dated as of July 26, 2013, by and among Phillips 66 Company, Phillips 66 Pipeline LLC, Phillips 66 Partners LP, Phillips 66 Partners Holdings LLC, Phillips 66 Carrier LLC, and Phillips 66 Partners GP LLC. 8-K 10.2 7/30/2013 001-36011 10.12 10.13 First Amendment to the Omnibus Agreement, dated as of February 28, 2014, by and among Phillips 66 Company, on behalf of itself and the other Phillips 66 Entities (as defined in the Omnibus Agreement), Phillips 66 Pipeline LLC, Phillips 66 Partners LP, Phillips 66 Partners Holdings LLC, Phillips 66 Carrier LLC and Phillips 66 Partners GP LLC. Second Amendment to the Omnibus Agreement, dated as of December 1, 2014, by and among Phillips 66 Company, on behalf of itself and the other Phillips 66 Entities (as defined in the Omnibus Agreement), Phillips 66 Pipeline LLC, Phillips 66 Partners LP, Phillips 66 Partners Holdings LLC, Phillips 66 Carrier LLC and Phillips 66 Partners GP LLC. 122 8-K 10.1 3/3/2014 001-36011 8-K 10.1 12/2/2014 001-36011 Table of Contents Index to Financial Statements Exhibit Number 10.14 10.15 10.16 10.17 10.18 Exhibit Description Third Amendment to the Omnibus Agreement, dated as of March 2, 2015, by and among Phillips 66 Company, on behalf of itself and the other Phillips 66 Entities (as defined in the Omnibus Agreement), Phillips 66 Pipeline LLC, Phillips 66 Partners LP, Phillips 66 Partners Holdings LLC, Phillips 66 Carrier LLC and Phillips 66 Partners GP LLC. Fourth Amendment to the Omnibus Agreement, dated as of March 1, 2016, by and among Phillips 66 Company, on behalf of itself and the other Phillips 66 Entities (as defined in the Omnibus Agreement), Phillips 66 Pipeline LLC, Phillips 66 Partners LP, Phillips 66 Partners Holdings LLC, Phillips 66 Carrier LLC and Phillips 66 Partners GP LLC. Fifth Amendment to the Omnibus Agreement, dated as of October 14, 2016, 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. Sixth Amendment to the Omnibus Agreement, dated as of January 11, 2017, 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. Seventh Amendment to the Omnibus Agreement, dated as of October 1, 2017, 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. Incorporated by Reference Form Exhibit Number Filing Date SEC File No. 8-K 10.1 3/2/2015 001-36011 8-K 10.1 3/1/2016 001-36011 8-K 10.1 10/17/2016 001-36011 10-K 10.19 2/17/2017 001-36011 8-K 10.1 10/10/2017 001-36011 10.19 Amended and Restated Operational Services Agreement, dated as of October 1, 2017, by and among Phillips 66 Carrier LLC, Phillips 66 Partners Holdings LLC, and Phillips 66 Pipeline LLC. 8-K 10.2 10/10/2017 001-36011 10.20 First Amendment to the Amended and Restated Operational Services Agreement, dated as of May 30, 2018, by and among Phillips 66 Carrier LLC, Phillips 66 Partners Holdings LLC, and Phillips 66 Pipeline LLC. 10-Q 10.1 07/27/2018 001-35349 10.21 Tax Sharing Agreement dated as of July 26, 2013, between Phillips 66 and Phillips 66 Partners LP. 8-K 10.9 7/30/2013 001-36011 10.22 Natural Gas Liquids Storage Agreement (Clemens Facility), dated March 1, 2016, by and between Phillips 66 Sweeny Frac LLC and Phillips 66 Company . 8-K 10.4 3/1/2016 001-36011 10.23 Fractionation Agreement, dated March 1, 2016, by and between Phillips 66 Sweeny Frac LLC and Phillips 66 Company. 8-K 10.3 3/1/2016 001-36011 10.24 Second Amended and Restated Limited Liability Company Agreement of DCP Sand Hills Pipeline, LLC by and among DCP Midstream, LP, Spectra Energy Sand Hills Holding, LLC and Phillips 66 Sand Hills LLC dated as of September 3, 2013. 123 10-Q 10.3 5/1/2015 001-36011 Table of Contents Index to Financial Statements Exhibit Number Exhibit Description Incorporated by Reference Form Exhibit Number Filing Date SEC File No. 10.25 First Amendment to the Second Amended and Restated Limited Liability Company Agreement of DCP Sand Hills Pipeline, LLC. 10-Q 10.4 5/1/2015 001-36011 10.26 Second Amended and Restated Limited Liability Company Agreement of DCP Southern Hills Pipeline, LLC by and among DCP LP Holdings, LLC, Spectra Energy Southern Hills Holding, LLC and Phillips 66 Southern Hills LLC dated as of September 3, 2013. 10-Q 10.5 5/1/2015 001-36011 10.27 First Amendment to the Second Amended and Restated Limited Liability Company Agreement of DCP Southern Hills Pipeline, LLC. 10-Q 10.6 5/1/2015 001-36011 10.28† Amended and Restated Limited Liability Company Agreement of Bayou Bridge Pipeline, LLC, dated July 9, 2015. 10-K 10.37 2/12/2016 001-36011 10.29 Addendum Agreement dated December 1, 2015, by and between Phillips 66 Partners Holdings LLC and Bayou Bridge Pipeline, LLC. 10-K 10.38 2/12/2016 001-36011 10.30 Equity Distribution Agreement, dated as of June 6, 2016, by and among Phillips 66 Partners LP, Phillips 66 Partners GP LLC, and RBC Capital Markets, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Mizuho Securities USA Inc. and Morgan Stanley & Co. LLC. 8-K 1.1 6/6/2016 001-36011 10.31†† Amended and Restated Tolling Services Agreement, dated as of October 1, 2017, by and between Merey Sweeny, L.P. and Phillips 66 Company. 8-K 10.3 10/10/2017 001-36011 10.32** Phillips 66 Partners LP 2013 Incentive Compensation Plan. 8-K 10.1 7/26/2013 001-36011 10.33** Phillips 66 Partners GP LLC Deferred Compensation Plan for Non-Employee Directors. 10-Q 10.12 8/20/2013 001-36011 10.34** Form of Phantom Unit Award Agreement for Non-Employee Directors under the Phillips 66 Partners LP 2013 Incentive Compensation Plan. 10-Q 10.13 8/20/2013 001-36011 21* List of Subsidiaries of Phillips 66 Partners LP. 23.1* Consent of Ernst & Young LLP, independent registered public accounting firm. 23.2* Consent of Deloitte & Touche LLP, independent registered public accounting firm. 23.3* Consent of Grant Thornton, independent registered public accounting firm. 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 124 Table of Contents Index to Financial Statements Exhibit Number Exhibit Description Incorporated by Reference Form Exhibit Number Filing Date SEC File No. 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* XBRL Instance Document. 101.SCH* XBRL Taxonomy Extension Schema Document. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* XBRL Taxonomy Extension Labels Linkbase Document. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. * Filed herewith. ** Compensatory plan or arrangement. † Confidential treatment has been requested for certain portions of this Exhibit pursuant to a confidential treatment request filed with the Securities and Exchange Commission on February 16, 2016. Such portions have been omitted and filed separately with the Securities and Exchange Commission. †† Confidential treatment has been requested for certain portions of this Exhibit pursuant to a confidential treatment request filed with the Securities and Exchange Commission on October 10, 2017. Such portions have been omitted and filed separately with the Securities and Exchange Commission. 125 Table of Contents Index to Financial Statements Pursuant to the requirements of Section 13 or 15(d) 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. SIGNATURES Date: February 22, 2019 PHILLIPS 66 PARTNERS LP By: Phillips 66 Partners GP LLC, its general partner /s/ Greg C. Garland Greg C. Garland Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, as of February 22, 2019 , by the following persons on behalf of the registrant and in the capacities indicated. Signature Title /s/ Greg C. Garland Greg C. Garland /s/ Kevin J. Mitchell Kevin J. Mitchell /s/ Chukwuemeka A. Oyolu Chukwuemeka A. Oyolu Chairman of the Board of Directors and Chief Executive Officer (Principal executive officer) Phillips 66 Partners GP LLC Director, Vice President and Chief Financial Officer (Principal financial officer) Phillips 66 Partners GP LLC Vice President and Controller (Principal accounting officer) Phillips 66 Partners GP LLC 126 Table of Contents Index to Financial Statements /s/ P.D. Bairrington P.D. (David) Bairrington /s/ Mark A. Haney Mark A. Haney /s/ Robert A. Herman Robert A. Herman /s/ Joseph W. O’Toole Joseph W. O’Toole /s/ Timothy D. Roberts Timothy D. Roberts Director Phillips 66 Partners GP LLC Director Phillips 66 Partners GP LLC Director Phillips 66 Partners GP LLC Director Phillips 66 Partners GP LLC Director Phillips 66 Partners GP LLC 127 SUBSIDIARY LISTING OF PHILLIPS 66 PARTNERS LP At December 31, 2018 Exhibit 21 Company Name Incorporation Location ACE Pipeline Holdings LLC ACE Pipeline LLC Gray Oak Holdings LLC Merey Sweeny LLC Phillips 66 Alliance Hydrogen Pipeline LLC Phillips 66 Carrier LLC Phillips 66 DAPL Holdings LLC Phillips 66 ETCO Holdings LLC Phillips 66 Partners Finance Corporation Phillips 66 Partners Holdings LLC Phillips 66 Sand Hills LLC Phillips 66 Southern Hills LLC Phillips 66 Sweeny Frac LLC Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the following Registration Statements: (1) Registration Statement (Form S-3 No. 333-222178) of Phillips 66 Partners LP, (2) Amendment No. 1 to the Registration Statement (Form S-3 No. 333-221353) of Phillips 66 Partners LP, (3) Registration Statement (Form S-3 No. 333-217734) of Phillips 66 Partners LP, and (4) Registration Statement (Form S-8 No. 333-190195) of Phillips 66 Partners LP; of our reports dated February 22, 2019, with respect to the consolidated financial statements of Phillips 66 Partners LP and the effectiveness of internal control over financial reporting of Phillips 66 Partners LP included in this Annual Report (Form 10-K) of Phillips 66 Partners LP for the year ended December 31, 2018. Houston, Texas February 22, 2019 /s/ Ernst & Young LLP Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the following Registration Statements of our reports dated February 8, 2019, relating to the consolidated financial statements of DCP Sand Hills Pipeline, LLC and subsidiary as of December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018, and the consolidated financial statements of DCP Southern Hills Pipeline, LLC and subsidiary as of December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018 (collectively, "the Companies") (which reports each express an unqualified opinion and include an explanatory paragraph regarding the Companies' change in method of accounting for revenue from contracts with customers in 2018, due to the adoption of Accounting Standards Codification Topic 606 - Revenue from Contracts with Customers ), each appearing in this Annual Report on Form 10-K of Phillips 66 Partners LP for the year ended December 31, 2018: • Registration Statement No. 333-190195 on Form S-8 of Phillips 66 Partners LP, • Amendment No. 1 to Registration Statement No. 333-221353 on Form S-3 of Phillips 66 Partners LP, and • Registration Statement Nos. 333-217734 and 333-222178 on Form S-3 of Phillips 66 Partners LP. /s/ Deloitte & Touche LLP Denver, Colorado February 22, 2019 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated February 14, 2019, with respect to the consolidated financial statements of Dakota Access, LLC, included in the Annual Report on Form 10-K of Phillips 66 Partners LP for the year ended December 31, 2018. We consent to the incorporation by reference of said report in the Registration Statements of Phillips 66 Partners LP on Forms S-3 (File Nos. 333-222178, 333-221353 and 333- 217734) and Form S-8 (File No. 333-190195). Exhibit 23.3 /s/ GRANT THORNTON LLP Dallas, Texas February 22, 2019 Exhibit 31.1 I, Greg C. Garland, certify that: 1. I have reviewed this Annual Report on Form 10-K of Phillips 66 Partners LP; CERTIFICATION 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 22, 2019 /s/ Greg C. Garland Greg C. Garland Chairman of the Board of Directors and Chief Executive Officer Phillips 66 Partners GP LLC (the general partner of Phillips 66 Partners LP) Exhibit 31.2 I, Kevin J. Mitchell, certify that: 1. I have reviewed this Annual Report on Form 10-K of Phillips 66 Partners LP; CERTIFICATION 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 22, 2019 /s/ Kevin J. Mitchell Kevin J. Mitchell Director, Vice President and Chief Financial Officer Phillips 66 Partners GP LLC (the general partner of Phillips 66 Partners LP) Exhibit 32 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Annual Report of Phillips 66 Partners LP (the Partnership) on Form 10-K for the year ended December 31, 2018 , as filed with the U.S. Securities and Exchange Commission on the date hereof (the Report), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to their knowledge: (1) The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. Date: February 22, 2019 /s/ Greg C. Garland Greg C. Garland Chairman of the Board of Directors and Chief Executive Officer Phillips 66 Partners GP LLC (the general partner of Phillips 66 Partners LP) /s/ Kevin J. Mitchell Kevin J. Mitchell Director, Vice President and Chief Financial Officer Phillips 66 Partners GP LLC (the general partner of Phillips 66 Partners LP) 

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