Your PHP document needs to be hosted on the server in order to output the HTML. If you are reading it like .Create("C:\MyXMLoutput.php"), it's not going to work because it is being accessed directly, therefore it is just like any other text file.
However, if you are accessing your PHP like .Create("http://urltophp.com/MyXMLoutput.php") it will work. It means you are asking the Webserver to parse the PHP code for you and return the output (which will be xml).
To validate the output, try opening the URL to the PHP in your browser and see it's output.