Edgar Filing: Phillips 66

PSX-6/30/2013-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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



For the quarterly period ended	June 30, 2013



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



For the transition period from		to



Commission file number:	001-35349

Phillips 66

(Exact name of registrant as specified in its charter)



Delaware		45-3779385
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3010 Briarpark Drive, Houston, Texas 77042

(Address of principal executive offices) (Zip Code)

281-293-6600

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [ ]

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

Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]

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

The registrant had 611,030,536 shares of common stock, $.01 par value, outstanding as of June 30, 2013.

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PHILLIPS 66

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	Page
Part I – Financial Information

Item 1. Financial Statements
Consolidated Statement of Income	1
Consolidated Statement of Comprehensive Income	2
Consolidated Balance Sheet	3
Consolidated Statement of Cash Flows	4
Consolidated Statement of Changes in Equity	5
Notes to Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3. Quantitative and Qualitative Disclosures About Market Risk	48

Item 4. Controls and Procedures	48

Part II – Other Information

Item 1. Legal Proceedings	48

Item 1A. Risk Factors	48

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 6. Exhibits	50

Signature	51

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS



Consolidated Statement of Income	Phillips 66



	Millions of Dollars
	Three Months Ended June 30				Six Months Ended June 30
	2013			2012	2013		2012
Revenues and Other Income
Sales and other operating revenues*	$	43,240		46,747	84,503		92,530
Equity in earnings of affiliates	618			815	1,657		1,549
Net gain on dispositions	41			188	42		190
Other income	49			77	72		78
Total Revenues and Other Income	43,948			47,827	86,274		94,347

Costs and Expenses
Purchased crude oil and products	37,277			40,398	72,541		80,726
Operating expenses	1,033			984	2,011		2,076
Selling, general and administrative expenses	374			480	706		829
Depreciation and amortization	231			224	476		440
Impairments	1			275	25		318
Taxes other than income taxes*	3,502			3,475	6,826		6,895
Accretion on discounted liabilities	6			6	12		11
Interest and debt expense	69			83	139		96
Foreign currency transaction (gains) losses	(19		)	8	(17	)	(7	)
Total Costs and Expenses	42,474			45,933	82,719		91,384
Income before income taxes	1,474			1,894	3,555		2,963
Provision for income taxes	514			712	1,185		1,143
Net income	960			1,182	2,370		1,820
Less: net income attributable to noncontrolling interests	2			1	5		3
Net Income Attributable to Phillips 66	$	958		1,181	2,365		1,817

Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)**
Basic	$	1.55		1.88	3.80		2.89
Diluted	1.53			1.86	3.76		2.86

Dividends Paid Per Share of Common Stock (dollars)	$	0.3125		—	0.6250		—

Average Common Shares Outstanding (in thousands)**
Basic	619,143			628,510	622,086		628,069
Diluted	624,907			635,157	628,377		635,051
* Includes excise taxes on petroleum products sales:	$	3,428		3,389	6,686		6,710
**See Note 10—Earnings Per Share.
See Notes to Consolidated Financial Statements.

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Consolidated Statement of Comprehensive Income	Phillips 66



	Millions of Dollars
	Three Months Ended June 30					Six Months Ended June 30
	2013			2012		2013		2012

Net Income	$	960		1,182		2,370		1,820
Other comprehensive income (loss)
Defined benefit plans
Prior service cost:
Amortization to net income of prior service cost	—			1		—		1
Actuarial gain/loss:
Actuarial gain arising during the period	—			90		—		90
Amortization to net income of net actuarial loss	24			13		50		15
Plans sponsored by equity affiliates	5			5		(8	)	8
Income taxes on defined benefit plans	(11		)	(40	)	(14	)	(42	)
Defined benefit plans, net of tax	18			69		28		72
Foreign currency translation adjustments	38			(113	)	(284	)	(59	)
Income taxes on foreign currency translation adjustments	(1		)	68		3		48
Foreign currency translation adjustments, net of tax	37			(45	)	(281	)	(11	)
Hedging activities by equity affiliates	1			(1	)	1		—
Income taxes on hedging activities by equity affiliates	—			—		—		—
Hedging activities by equity affiliates, net of tax	1			(1	)	1		—
Other Comprehensive Income (Loss), Net of Tax	56			23		(252	)	61
Comprehensive Income	1,016			1,205		2,118		1,881
Less: comprehensive income attributable to noncontrolling interests	2			1		5		3
Comprehensive Income Attributable to Phillips 66	$	1,014		1,204		2,113		1,878

See Notes to Consolidated Financial Statements.

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Consolidated Balance Sheet	Phillips 66



	Millions of Dollars
	June 30 2013			December 31 2012
Assets
Cash and cash equivalents	$	4,220		3,474
Accounts and notes receivable (net of allowance of $40 million in 2013 and $50 million in 2012)	7,835			8,593
Accounts and notes receivable—related parties	1,958			1,810
Inventories	5,033			3,430
Prepaid expenses and other current assets	1,483			655
Total Current Assets	20,529			17,962
Investments and long-term receivables	10,624			10,471
Net properties, plants and equipment	14,679			15,407
Goodwill	3,228			3,344
Intangibles	716			724
Other assets	153			165
Total Assets	$	49,929		48,073

Liabilities
Accounts payable	$	11,061		9,731
Accounts payable—related parties	1,267			979
Short-term debt	14			13
Accrued income and other taxes	825			901
Employee benefit obligations	300			441
Other accruals	538			417
Total Current Liabilities	14,005			12,482
Long-term debt	6,455			6,961
Asset retirement obligations and accrued environmental costs	667			740
Deferred income taxes	5,480			5,444
Employee benefit obligations	1,328			1,325
Other liabilities and deferred credits	304			315
Total Liabilities	28,239			27,267

Equity
Common stock (2,500,000,000 shares authorized at $.01 par value) Issued (2013—633,659,181 shares; 2012—631,149,613 shares)
Par value	6			6
Capital in excess of par	18,812			18,726
Treasury stock (at cost: 2013—22,628,645 shares; 2012—7,603,896 shares)	(1,284		)	(356	)
Retained earnings	4,687			2,713
Accumulated other comprehensive loss	(566		)	(314	)
Total Stockholders’ Equity	21,655			20,775
Noncontrolling interests	35			31
Total Equity	21,690			20,806
Total Liabilities and Equity	$	49,929		48,073

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows	Phillips 66



	Millions of Dollars
	Six Months Ended June 30
	2013			2012
Cash Flows From Operating Activities
Net income	$	2,370		1,820
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	476			440
Impairments	25			318
Accretion on discounted liabilities	12			11
Deferred taxes	161			178
Undistributed equity earnings	(21		)	(561	)
Net gain on dispositions	(42		)	(190	)
Other	1			(14	)
Working capital adjustments
Decrease (increase) in accounts and notes receivable	411			664
Decrease (increase) in inventories	(1,665		)	(2,046	)
Decrease (increase) in prepaid expenses and other current assets	(154		)	(161	)
Increase (decrease) in accounts payable	1,633			(33	)
Increase (decrease) in taxes and other accruals	(26		)	647
Net Cash Provided by Operating Activities	3,181			1,073

Cash Flows From Investing Activities
Capital expenditures and investments	(758		)	(488	)
Proceeds from asset dispositions	69			240
Collection of advances/loans—related parties	100			—
Net Cash Used in Investing Activities	(589		)	(248	)

Cash Flows From Financing Activities
Distributions to ConocoPhillips	—			(5,255	)
Issuance of debt	—			7,794
Repayment of debt	(505		)	(198	)
Issuance of common stock	(3		)	2
Repurchase of common stock	(928		)	—
Dividends paid on common stock	(386		)	—
Other	(4		)	(67	)
Net Cash Provided by (Used in) Financing Activities	(1,826		)	2,276

Effect of Exchange Rate Changes on Cash and Cash Equivalents	(20		)	3

Net Change in Cash and Cash Equivalents	746			3,104
Cash and cash equivalents at beginning of period	3,474			—
Cash and Cash Equivalents at End of Period	$	4,220		3,104

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Changes in Equity	Phillips 66



	Millions of Dollars
	Attributable to Phillips 66
	Common Stock
	Par Value		Capital in Excess of Par		Treasury Stock		Retained Earnings		Net Parent Company Investment		Accum. Other Comprehensive Income (Loss)		Noncontrolling Interests		Total

December 31, 2011	$	—	—		—		—		23,142		122		29		23,293
Net income	—		—		—		692		1,125		—		3		1,820
Net transfers to ConocoPhillips	—		—		—		—		(5,707	)	(541	)	—		(6,248	)
Other comprehensive income	—		—		—		—		—		61		—		61
Reclassification of net parent company
investment to capital in excess of par	—		18,560		—		—		(18,560	)	—		—		—
Issuance of common stock at the Separation	6		(6	)	—		—		—		—		—		—
Distributed under benefit plans	—		54		—		—		—		—		—		54
Distributions to noncontrolling interests and other	—		—		—		—		—		—		(1	)	(1	)
June 30, 2012	$	6	18,608		—		692		—		(358	)	31		18,979

December 31, 2012	$	6	18,726		(356	)	2,713		—		(314	)	31		20,806
Net income	—		—		—		2,365		—		—		5		2,370
Other comprehensive loss	—		—		—		—		—		(252	)	—		(252	)
Cash dividends paid on common stock	—		—		—		(386	)	—		—		—		(386	)
Repurchase of common stock	—		—		(928	)	—		—		—		—		(928	)
Benefit plan activity	—		89		—		(5	)	—		—		—		84
Distributions to noncontrolling interests and other	—		(3	)	—		—		—		—		(1	)	(4	)
June 30, 2013	$	6	18,812		(1,284	)	4,687		—		(566	)	35		21,690



	Shares in Thousands
	Common Stock Issued	Treasury Stock
December 31, 2012	631,150	7,604
Repurchase of common stock	—	15,025
Shares issued—stock-based compensation	2,509	—
June 30, 2013	633,659	22,629

See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements	Phillips 66

Note 1—Separation and Basis of Presentation

The Separation

On April 4, 2012, the ConocoPhillips Board of Directors approved the separation of its downstream businesses (as defined below) into an independent, publicly traded company named Phillips 66. In accordance with the Separation and Distribution Agreement, the two companies were separated by ConocoPhillips distributing to its stockholders all 625,272,302 shares of common stock of Phillips 66 after the market closed on April 30, 2012 (the Separation). Each ConocoPhillips stockholder received one share of Phillips 66 stock for every two shares of ConocoPhillips stock. Following the Separation, ConocoPhillips retained no ownership interest in Phillips 66, and each company has had separate public ownership, boards of directors and management.

Basis of Presentation

Prior to the Separation, our results of operations, financial position and cash flows consisted of ConocoPhillips' refining, marketing and transportation operations; its natural gas gathering, processing, transmission and marketing operations, primarily conducted through its equity investment in DCP Midstream, LLC (DCP Midstream); its petrochemical operations, conducted through its equity investment in Chevron Phillips Chemical Company LLC (CPChem); its power generation operations; and an allocable portion of its corporate costs (together, the “downstream businesses”). These financial statements have been presented as if the downstream businesses had been combined for all periods presented prior to the Separation. All intercompany transactions and accounts within the downstream businesses were eliminated. The statement of income for the period prior to the Separation includes expense allocations for certain corporate functions historically performed by ConocoPhillips and not allocated to its operating segments, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, procurement and information technology. These allocations were based primarily on specific identification of time and/or activities associated with the downstream businesses, employee headcount or capital expenditures, and our management believes the assumptions underlying the allocations were reasonable. The combined financial statements may not necessarily reflect all of the actual expenses that would have been incurred had we been a stand-alone company during the period presented prior to the Separation. All financial information presented after the Separation represents the consolidated results of operations, financial position and cash flows of Phillips 66. Accordingly:

•

Our consolidated statements of income and comprehensive income for the three and six months ended June 30, 2013, consist entirely of the consolidated results of Phillips 66. Our consolidated statements of income and comprehensive income for the three months ended June 30, 2012, consist of the consolidated results of Phillips 66 for the two months ended June 30, 2012, and the combined results of the downstream businesses for the one month ended April 30, 2012. Our consolidated statements of income and comprehensive income for the six months ended June 30, 2012, consist of the consolidated results of Phillips 66 for the two months ended June 30, 2012, and of the combined results of the downstream businesses for the four months ended April 30, 2012.


•	Our consolidated balance sheet at June 30, 2013, and December 31, 2012, consists of the consolidated balances of Phillips 66.

•

Our consolidated statement of cash flows for the six months ended June 30, 2013, consists entirely of the consolidated results of Phillips 66. Our consolidated statement of cash flows for the six months ended June 30, 2012, consists of the consolidated results of Phillips 66 for the two months ended June 30, 2012, and the combined results of the downstream businesses for the four months ended April 30, 2012.

•

Our consolidated statement of changes in equity for the six months ended June 30, 2013, consists entirely of the consolidated results of Phillips 66. Our consolidated statement of changes in equity for the six months ended June 30, 2012, consists of both the combined activity for the downstream businesses prior to April 30, 2012, and the consolidated activity for Phillips 66 completed at and subsequent to the Separation on April 30, 2012.

Effective January 1, 2013, we changed the organizational structure of the internal financial information reviewed by our chief executive officer, and determined this resulted in a change in the composition of our operating segments. The primary effects of this reporting reorganization were:


•	We disaggregated the former Refining and Marketing (R&M) segment into two separate operating segments titled "Refining" and "Marketing and Specialties."

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•	We moved our Transportation and power businesses from the former R&M segment to the Midstream and Marketing and Specialties (M&S) segments, respectively.

The new segment alignment is presented for the three- and six-month periods ended June 30, 2013, with the prior periods recast for comparability.

Note 2—Interim Financial Information

The interim financial information presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2012 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2013, are not necessarily indicative of the results to be expected for the full year.

Note 3—Variable Interest Entities (VIEs)

We hold significant variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. Information on these VIEs follows:

Merey Sweeny, L.P. (MSLP) is a limited partnership that owns a delayed coker and related facilities at the Sweeny Refinery. As discussed more fully in Note 6—Investments, Loans and Long-Term Receivables, in August 2009 a call right was exercised to acquire the 50 percent ownership interest in MSLP of the co-venturer, Petróleos de Venezuela S.A. (PDVSA). That exercise has been challenged, and the dispute is being arbitrated. Because the exercise has been challenged by PDVSA, we continue to use the equity method of accounting for MSLP, and the VIE analysis below is based on the ownership and governance structure in place prior to the exercise of the call right. MSLP is a VIE because, in securing lender consents in connection with the Separation, we provided a 100 percent debt guarantee to the lender of the 8.85% senior notes issued by MSLP. PDVSA did not participate in the debt guarantee. In our VIE assessment, this disproportionate debt guarantee, plus other liquidity support provided jointly by us and PDVSA independently of equity ownership, results in MSLP not being exposed to all potential losses. We have determined we are not the primary beneficiary while our call exercise is in dispute because under the partnership agreement the co-venturers jointly direct the activities of MSLP that most significantly impact economic performance. At June 30, 2013, our maximum exposure represented the outstanding principal debt balance of $224 million. The book value of our investment in MSLP at June 30, 2013, was $57 million.

We have a 50 percent ownership interest with a 50 percent governance interest in Excel Paralubes (Excel). Excel is a VIE because, in securing lender consents in connection with the Separation, ConocoPhillips provided a 50 percent debt guarantee to the lender of the 7.43% senior secured bonds issued by Excel. We provided a full indemnity to ConocoPhillips for this debt guarantee. Our co-venturer did not participate in the debt guarantee. In our assessment of the VIE, this debt guarantee, plus other liquidity support up to $60 million provided jointly by us and our co-venturer independently of equity ownership, results in Excel not being exposed to all potential losses. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of Excel that most significantly impact economic performance. We continue to use equity method accounting for this investment. At June 30, 2013, our maximum exposure represented 50 percent of the outstanding principal debt balance of $140 million, or $70 million, plus half of the $60 million liquidity support, or $30 million. The book value of our investment in Excel at June 30, 2013, was $134 million.

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Note 4—Inventories

Inventories consisted of the following:



	Millions of Dollars
	June 30 2013		December 31 2012

Crude oil and petroleum products	$	4,735	3,138
Materials and supplies	298		292
	$	5,033	3,430

Inventories valued on the last-in, first-out (LIFO) basis totaled $4,617 million and $2,987 million at June 30, 2013, and December 31, 2012, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $7,500 million and $7,700 million at June 30, 2013, and December 31, 2012, respectively.

Our planned year-to-date reductions in inventory caused liquidations of LIFO inventory values. These liquidations increased net income by approximately $17 million during both of the three- and six-month periods ended June 30, 2013, and $71 million and $85 million, respectively, for the comparable periods of 2012.

Note 5—Assets Held for Sale or Sold

In May 2013, we entered into an agreement to sell the Immingham Combined Heat and Power Plant (ICHP), which is included in our M&S segment. The sale closed in July 2013. As of June 30, 2013, the plant and related assets were classified as held for sale; accordingly, we reclassified long-term assets to the “Prepaid expenses and other current assets” line of our consolidated balance sheet. These assets primarily consist of $719 million of net properties, plants and equipment (PP&E) and $110 million of allocated goodwill. We also reclassified $120 million of deferred tax liabilities to the “Prepaid expenses and other current assets” line of our consolidated balance sheet. This reclassification was to current assets instead of current liabilities due to the netting of deferred tax balances in our United Kingdom group tax reporting structure. In addition, we reclassified other long-term liabilities to the “Other accruals” line of our consolidated balance sheet.

In May 2013, we sold our E-Gas™ Technology business. The business was included in our M&S segment and at the time of disposition had a net carrying value of approximately $13 million, including a goodwill allocation. The $40 million before-tax gain is included in the "Net gain on dispositions" line of our consolidated income statement.

In March 2013, corporate property with a carrying amount of $50 million was classified as held for sale and included in the "Prepaid expenses and other current assets" line of our consolidated balance sheet. In June 2013, this property was reclassified as held for use as our initial efforts to market the property led us to conclude a sale was not probable within the next twelve months. As of June 30, 2013, the property was included in the “Net properties, plants and equipment” line of our consolidated balance sheet.

In June 2012, we sold our refinery located on the Delaware River in Trainer, Pennsylvania with a net carrying value of $38 million, including a goodwill allocation. The refinery and associated terminal and pipeline assets were included in our Refining segment. The $189 million before-tax gain on this disposition was included in the “Net gain on dispositions” line of our consolidated income statement.

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Note 6—Investments, Loans and Long-Term Receivables

Equity Investments

Summarized 100 percent financial information for WRB Refining LP and CPChem were as follows:



	Millions of Dollars
	Three Months Ended June 30			Six Months Ended June 30
	2013		2012	2013	2012

Revenues	$	8,075	8,527	16,212	17,062
Income before income taxes	998		1,477	2,766	2,576
Net income	975		1,451	2,725	2,533

Loans and Long-Term Receivables

In 2012, we entered into a market-based shareholder financing agreement for up to $100 million with the Malaysian Refining Company Sdn. Bhd. (MRC). At December 31, 2012, MRC had drawn the total $100 million facility. The advance was recorded as a short-term related party advance with interest income recorded in equity earnings to offset the corresponding interest expense by MRC. As of June 30, 2013, the loan had been repaid.

Other

On July 1, 2013, we increased our ownership interest in WRB to 50 percent by purchasing ConocoPhillips' 0.4 percent interest.

MSLP owns a delayed coker and related facilities at the Sweeny Refinery. MSLP processes long residue, which is produced from heavy sour crude oil, for a processing fee. Fuel-grade petroleum coke is produced as a by-product and becomes the property of MSLP. Prior to August 28, 2009, MSLP was owned 50/50 by ConocoPhillips and PDVSA. Under the agreements that govern the relationships between the partners, certain defaults by PDVSA with respect to supply of crude oil to the Sweeny Refinery triggered the right to acquire PDVSA’s 50 percent ownership interest in MSLP, which was exercised on August 28, 2009. PDVSA has initiated arbitration with the International Chamber of Commerce challenging the exercise of the call right and claiming it was invalid. The arbitral tribunal held hearings on the merits of the dispute in December 2012, and post-hearing briefs were exchanged in March 2013. We expect a final ruling in the second half of 2013. We continue to use the equity method of accounting for our investment in MSLP.

Note 7—Properties, Plants and Equipment

Our investment in PP&E, with the associated accumulated depreciation and amortization (Accum. D&A), was:



	Millions of Dollars
	June 30, 2013				December 31, 2012
	Gross PP&E		Accum. D&A	Net PP&E	Gross PP&E	Accum. D&A	Net PP&E

Midstream	$	2,580	1,063	1,517	2,460	1,016	1,444
Chemicals	—		—	—	—	—	—
Refining	18,394		6,380	12,014	17,989	5,913	12,076
Marketing and Specialties	1,359		708	651	2,500	1,078	1,422
Corporate and Other	913		416	497	880	415	465
	$	23,246	8,567	14,679	23,829	8,422	15,407

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Note 8—Goodwill

Effective January 1, 2013, we realigned our operating segments and determined that goodwill (which, prior to the realignment, had been assigned 100 percent to our former R&M segment) should now be assigned to three of the realigned operating segments—Midstream, Refining and M&S. We further determined that, for the Midstream segment, Transportation constituted a reporting unit. For the Refining and M&S segments, we determined the goodwill reporting unit was at the operating segment level, due to the economic similarities of the components of those segments.

Goodwill was reassigned to the realigned reporting units using a relative fair value approach. Goodwill impairment testing was completed and no impairment recognition was required.

In May 2013, we reclassified $110 million of goodwill within the M&S segment to “Prepaid expenses and other current assets” to reflect the held-for-sale classification for the ICHP disposition. See Note 5—Assets Held for Sale or Sold for additional information.

The carrying amount of goodwill was as follows:



	Millions of Dollars
	June 30 2013		December 31 2012

Midstream	$	518	518
Refining	1,933		1,934
Marketing and Specialties	777		892
	$	3,228	3,344

Note 9—Impairments

The three- and six-month periods ended June 30, 2013 and 2012, included the following before-tax impairment charges:



	Millions of Dollars
	Three Months Ended June 30			Six Months Ended June 30
	2013		2012	2013	2012

Midstream	$	—	275	—	276
Refining	1		—	1	42
Marketing and Specialties	—		—	15	—
Corporate and Other	—		—	9	—
	$	1	275	25	318

During the six-month period of 2013, we recorded a $15 million held-for-use impairment in our M&S segment, primarily related to PP&E associated with our planned exit from the composite graphite business.

During the second quarter of 2012, we recorded a $275 million impairment of our investment in Rockies Express Pipeline LLC. In addition, during the six-month period of 2012, we recorded a $42 million held-for-sale impairment in our Refining segment related to equipment formerly associated with the canceled Wilhelmshaven Refinery upgrade project.

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Note 10—Earnings Per Share

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

On April 30, 2012, 625.3 million shares of our common stock were distributed to ConocoPhillips stockholders in conjunction with the Separation. For comparative purposes, and to provide a more meaningful calculation of weighted-average shares outstanding, we have assumed this amount to be outstanding as of the beginning of each period prior to the Separation presented in the calculation of weighted-average shares. In addition, we have assumed the fully vested stock and unit awards outstanding at April 30, 2012, were also outstanding for each of the periods presented prior to the Separation; and we have assumed the dilutive securities outstanding at April 30, 2012, were also outstanding for each period prior to the Separation.



	Three Months Ended June 30				Six Months Ended June 30
	2013			2012	2013		2012
Basic EPS Calculation
Allocation of earnings (millions):
Net income attributable to Phillips 66	$	958		1,181	2,365		1,817
Income allocated to participating securities	(1		)	—	(2	)	—
Income available to common stockholders	$	957		1,181	2,363		1,817

Weighted-average common shares outstanding (thousands): Basic	619,143			628,510	622,086		628,069

Basic EPS (dollars)	$	1.55		1.88	3.80		2.89

Diluted EPS Calculation
Allocation of earnings (millions):
Net income attributable to Phillips 66	$	958		1,181	2,365		1,817
Income allocated to participating securities	—			—	—		—
Income available to common stockholders	$	958		1,181	2,365		1,817

Weighted-average common shares outstanding (thousands): Basic	619,143			628,510	622,086		628,069
Dilutive effect of stock-based compensation	5,764			6,647	6,291		6,982
Weighted-average diluted common shares outstanding	624,907			635,157	628,377		635,051

Diluted EPS (dollars)	$	1.53		1.86	3.76		2.86

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Note 11—Debt

During the second quarter of 2013, we amended our revolving credit agreement by entering into the First Amendment to Credit Agreement (Amendment). The Amendment increased the borrowing capacity from $4.0 billion to $4.5 billion, extended the maturity from February 2017 to June 2018, reduced the margin applied to interest and fees accruing on and after the Amendment effective date, and made certain amendments with respect to Phillips 66 Partners LP.

Also during the second quarter of 2013, we amended our trade receivables securitization facility by entering into the First Amendment to Receivables Purchase Agreement (Securitization Amendment). The Securitization Amendment decreased the borrowing capacity from $1.2 billion to $696 million and made certain amendments with respect to Phillips 66 Partners.

On June 7, 2013, Phillips 66 Partners entered into a senior unsecured $250 million revolving credit agreement (Revolver) with a syndicate of financial institutions. On July 26, 2013, Phillips 66 Partners, in connection with its initial public offering of common units, closed on the facility. Phillips 66 Partners has the option to increase the overall capacity of the Revolver by up to an additional $250 million, subject to certain conditions. The Revolver is for an initial term of five years. As of June 30, 2013, no amount had been drawn under this facility.

We have no material scheduled debt maturities in 2013; however, in June 2013, we made a $500 million prepayment on our term loan.

At both June 30, 2013, and December 31, 2012, we had no direct outstanding borrowings under our revolving credit agreement or our trade receivables securitization facility. However, as of both June 30, 2013, and December 31, 2012, $51 million in letters of credit had been issued that were supported by our revolving credit agreement. As of June 30, 2013, and December 31, 2012, $106 million and $166 million, respectively, in letters of credit had been issued that were collateralized by trade receivables held by a subsidiary under our trade receivables securitization facility. Accordingly, as of June 30, 2013, we had an aggregate $5.0 billion of total capacity available under these facilities.

Note 12—Guarantees

At June 30, 2013, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence.

Guarantees of Joint Venture Debt

In April 2012, in connection with the Separation, we issued a guarantee for 100 percent of the 8.85% senior notes issued by MSLP in July 1999. At June 30, 2013, the maximum potential amount of future payments to third parties under the guarantee is estimated to be $224 million, which could become payable if MSLP fails to meet its obligations under the senior notes agreement. The senior notes mature in 2019.

At June 30, 2013, we had other guarantees outstanding for our portion of certain joint venture debt obligations, which have terms of up to 12 years. The maximum potential amount of future payments under the guarantees is approximately $108 million. Payment would be required if a joint venture defaults on its debt obligations.

Other Guarantees

We have residual value guarantees associated with leases with maximum future potential payments totaling approximately $246 million. We have other guarantees with maximum future potential payment amounts totaling $294 million, which consist primarily of guarantees to fund the short-term cash liquidity deficits of certain joint ventures, guarantees of third parties related to prior asset dispositions, and guarantees of the lease payment obligations of a joint venture. These guarantees generally extend up to 11 years or life of the venture.

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Indemnifications

Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses, and employee claims; and real estate indemnity against tenant defaults. The terms of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, the term is generally indefinite, and the maximum amount of future payments is generally unlimited. The carrying amount recorded for indemnifications at June 30, 2013, was $265 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the recorded carrying amount were $122 million of environmental accruals for known contamination that are included in asset retirement obligations and accrued environmental costs at June 30, 2013. For additional information about environmental liabilities, see Note 13—Contingencies and Commitments.

Indemnification and Release Agreement

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

Note 13—Contingencies and Commitments

A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for 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 record 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 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 responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

Environmental

We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using all information 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 (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.

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

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At June 30, 2013, our consolidated balance sheet included a total environmental accrual of $504 million, compared with $530 million at December 31, 2012. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

Legal Proceedings

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

Other Contingencies

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

At June 30, 2013, we had performance obligations secured by letters of credit of $1,860 million (of which $106 million were issued under the trade receivables securitization facility, $51 million were issued under the provisions of our revolving credit facility, and the remainder were issued as direct bank letters of credit) related to various purchase and other commitments incident to the ordinary conduct of business.

Note 14—Derivatives and Financial Instruments

Derivative Instruments

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

Purchase and sales contracts with fixed minimum notional volumes for commodities that are readily convertible to cash (e.g., crude oil and gasoline) are recorded on the balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception (i.e., contracts to purchase or sell quantities we expect to use or sell over a reasonable period in the normal course of business). We generally apply this normal purchases and normal sales exception to eligible crude oil, refined product, natural gas and power commodity purchase and sales contracts; however, we may elect not to apply this exception (e.g., when another derivative instrument will be used to mitigate the risk of the purchase or sales

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contract but hedge accounting will not be applied, in which case both the purchase or sales contract and the derivative contract mitigating the resulting risk will be recorded on the balance sheet at fair value).

Our derivative instruments are held at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 15—Fair Value Measurements.

Commodity Derivative Contracts—We operate in the worldwide crude oil, refined products, natural gas liquids (NGL), natural gas and electric power markets and are exposed to fluctuations in the prices for these commodities. These fluctuations can affect our revenues, as well as the cost of operating, investing and financing activities. Generally, our policy is to remain exposed to the market prices of commodities; however, we use futures, forwards, swaps and options in various markets to balance physical systems, meet customer needs, manage price exposures on specific transactions, and do a limited, immaterial amount of trading not directly related to our physical business. We also use the market knowledge gained from these activities to capture market opportunities such as moving physical commodities to more profitable locations, storing commodities to capture seasonal or time premiums, and blending commodities to capture quality upgrades. Derivatives may be used to optimize these activities, which may move our risk profile away from market average prices.

The following table indicates the balance sheet line items that include the fair values of commodity derivative assets and liabilities presented net (i.e., commodity derivative assets and liabilities with the same counterparty are netted where the right of setoff exists); however, the balances in the following table are presented gross. For information on the impact of counterparty netting and collateral netting, see Note 15—Fair Value Measurements.



	Millions of Dollars
	June 30 2013		December 31 2012
Assets
Prepaid expenses and other current assets	$	807	767
Other assets	13		3
Liabilities
Other accruals	764		766
Other liabilities and deferred credits	13		3

Hedge accounting has not been used for any items in the table.

The gains (losses) from commodity derivatives incurred, and the line items where they appear on our consolidated statement of income, were:



	Millions of Dollars
	Three Months Ended June 30			Six Months Ended June 30
	2013		2012	2013		2012

Sales and other operating revenues	$	124	380	118		214
Equity in earnings of affiliates	2		—	(1	)	—
Other income	24		45	27		52
Purchased crude oil and products	74		25	163		46

Hedge accounting has not been used for any item in the table.

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The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from non-derivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward sales contracts. As of June 30, 2013, and December 31, 2012, the percentage of our derivative contract volume expiring within the next 12 months was 99 percent for both periods.



	Open Position Long/(Short)
	June 30 2013		December 31 2012
Commodity
Crude oil, refined products and NGL (millions of barrels)	(28	)	(8	)

Credit Risk

Financial instruments potentially exposed to concentrations of credit risk consist primarily of over-the-counter (OTC) derivative contracts and trade receivables.

The credit risk from our OTC derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements until settled; however, we are exposed to the credit risk of those exchange brokers for receivables arising from daily margin cash calls, as well as for cash deposited to meet initial margin requirements.

Our trade receivables result primarily from the sale of products from, or related to, our refinery operations and reflect a broad national and international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of 30 days or less. We continually monitor this exposure and the creditworthiness of the counterparties and recognize bad debt expense based on historical write-off experience or specific counterparty collectability. Generally, we do not require collateral to limit the exposure to loss; however, we will sometimes use letters of credit, prepayments and master netting arrangements to mitigate credit risk with counterparties that both buy from and sell to us, as these agreements permit the amounts owed by us or owed to others to be offset against amounts due us.

Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if our credit ratings fall below investment grade. Cash is the primary collateral in all contracts; however, many contracts also permit us to post letters of credit as collateral.

The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were not material at June 30, 2013, or December 31, 2012.

Note 15—Fair Value Measurements

Fair Values of Financial Instruments

We used the following methods and assumptions to estimate the fair value of financial instruments:


•	Cash and cash equivalents: The carrying amount reported on the balance sheet approximates fair value.


•	Accounts and notes receivable: The carrying amount reported on the balance sheet approximates fair value.


•	Debt: The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on quoted market prices.


•	Commodity swaps: Fair value is estimated based on forward market prices and approximates the exit price at period end. When forward market prices are not available, fair value is estimated using the forward prices of a similar commodity with adjustments for differences in quality or location.

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•	Futures: Fair values are based on quoted market prices obtained from the New York Mercantile Exchange, the InterContinental Exchange Futures or other traded exchanges.


•	Forward-exchange contracts: Fair values are estimated by comparing the contract rate to the forward rate in effect at the end of the respective reporting periods and approximating the exit price at those dates.

We carry certain assets and liabilities at fair value, which we measure at the reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability), and disclose the quality of these fair values based on the valuation inputs used in these measurements under the following hierarchy:


•	Level 1: Fair value measured with unadjusted quoted prices from an active market for identical assets or liabilities.


•	Level 2: Fair value measured with: 1) adjusted quoted prices from an active market for similar assets; or 2) other valuation inputs that are directly or indirectly observable.


•	Level 3: Fair value measured with unobservable inputs that are significant to the measurement.

We classify the fair value of an asset or liability based on the lowest level of input significant to its measurement; however, the fair value of an asset or liability 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. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable. We made no material transfers in or out of Level 1 during the six-month periods ending June 30, 2013 and 2012.

Recurring Fair Value Measurements

Financial assets and liabilities recorded at fair value on a recurring basis consist primarily of investments to support nonqualified deferred compensation plans and derivative instruments. The deferred compensation investments are measured at fair value using unadjusted prices available from national securities exchanges; therefore, these assets are categorized as Level 1 in the fair value hierarchy. We value our exchange-traded commodity derivatives using closing prices provided by the exchange as of the balance sheet date, and these are classified as Level 1 in the fair value hierarchy. Where exchange-provided prices are adjusted, non-exchange quotes are used, or when the instrument lacks sufficient liquidity, we generally classify those exchange-cleared contracts as Level 2. OTC financial swaps and physical commodity forward purchase and sales contracts are generally valued using quotations provided by brokers and price index developers such as Platts and Oil Price Information Service. These quotes are corroborated with market data and are classified as Level 2. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, OTC swaps and physical commodity purchase and sales contracts are valued using internally developed methodologies that consider historical relationships among various commodities that result in management’s best estimate of fair value. These contracts are classified as Level 3. Financial OTC and physical commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines whether the options are classified as Level 2 or 3. We use a mid-market pricing convention (the mid-point between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.

The following tables display the fair value hierarchy for our material financial assets and liabilities either accounted for or disclosed at fair value on a recurring basis. These values are determined by treating each contract as the fundamental unit of account; therefore, derivative assets and liabilities with the same counterparty are shown gross (i.e., without the effect of netting where the legal right of setoff exists) in the hierarchy sections of these tables. These tables also show that our Level 3 activity was not material.

We have master netting arrangements for all of our exchange-cleared derivative instruments, the majority of our OTC derivative instruments, and certain physical commodity forward contracts (primarily pipeline crude oil deliveries). The following tables show these contracts on a net basis in the column “Effect of Counterparty Netting.” We have no contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.

The carrying values and fair values by hierarchy of our material financial instruments, either carried or disclosed at fair value, and derivative assets and liabilities, including any effects of master netting agreements or collateral, were:

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	Millions of Dollars
	June 30, 2013
	Fair Value Hierarchy				Total Fair Value of Gross Assets & Liabilities	Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value		Net Carrying Value Presented on the Balance Sheet	Cash Collateral Received or Paid, Not Offset on Balance Sheet
	Level 1		Level 2	Level 3	Total Fair Value of Gross Assets & Liabilities	Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value		Net Carrying Value Presented on the Balance Sheet
Commodity Derivative Assets
Exchange-cleared instruments	$	493	251	—	744	(712	)	—		—		32	1
OTC instruments	—		25	—	25	(12	)	—		—		13	—
Physical forward contracts*	—		46	5	51	(3	)	—		—		48	—
Rabbi trust assets	58		—	—	58	N/A		N/A		—		58	N/A
	$	551	322	5	878	(727	)	—		—		151

Commodity Derivative Liabilities
Exchange-cleared instruments	$	490	238	—	728	(712	)	(16	)	—		—	—
OTC instruments	—		24	—	24	(12	)	—		—		12	—
Physical forward contracts*	—		24	1	25	(3	)	—		—		22	—
Floating-rate debt	550		—	—	550	N/A		N/A		—		550	N/A
Fixed-rate debt, excluding capital leases**	—		6,221	—	6,221	N/A		N/A		(308	)	5,913	N/A
	$	1,040	6,507	1	7,548	(727	)	(16	)	(308	)	6,497

*Physical forward contracts may have a larger value on the balance sheet than disclosed in the fair value hierarchy when the remaining contract term at the reporting date is greater than 12 months and the short-term portion is an asset while the long-term portion is a liability, or vice versa.

**We carry fixed-rate debt on the balance sheet at amortized cost.



	Millions of Dollars
	December 31, 2012
	Fair Value Hierarchy				Total Fair Value of Gross Assets & Liabilities	Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value		Net Carrying Value Presented on the Balance Sheet	Cash Collateral Received or Paid, Not Offset on Balance Sheet
	Level 1		Level 2	Level 3	Total Fair Value of Gross Assets & Liabilities	Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value		Net Carrying Value Presented on the Balance Sheet
Commodity Derivative Assets
Exchange-cleared instruments	$	380	309	—	689	(672	)	(8	)	—		9	—
OTC instruments	—		15	—	15	(7	)	—		—		8	—
Physical forward contracts*	—		61	2	63	4		—		—		67	—
Rabbi trust assets	50		—	—	50	N/A		N/A		—		50	N/A
	$	430	385	2	817	(675	)	(8	)	—		134

Commodity Derivative Liabilities
Exchange-cleared instruments	$	393	328	—	721	(672	)	(42	)	—		7	(7	)
OTC instruments	—		13	—	13	(7	)	—		—		6	—
Physical forward contracts*	—		31	1	32	4		—		—		36	—
Floating-rate debt	1,050		—	—	1,050	N/A		N/A		—		1,050	N/A
Fixed-rate debt, excluding capital leases**	—		6,508	—	6,508	N/A		N/A		(590	)	5,918	N/A
	$	1,443	6,880	1	8,324	(675	)	(42	)	(590	)	7,017

**We carry fixed-rate debt on the balance sheet at amortized cost.

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Nonrecurring Fair Value Remeasurements

The following table shows the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition during the six-month periods ended June 30, 2013 and 2012:



	Millions of Dollars
			Fair Value Measurements Using
	Fair Value*		Level 1 Inputs	Level 2 Inputs	Level 3 Inputs	Before- Tax Loss
June 30, 2013
Net properties, plants and equipment (held for use)	$	22	22	—	—	27

June 30, 2012
Net properties, plants and equipment (held for sale)	$	32	32	—	—	42
Equity method investment	495		—	—	495	275

*Represents the fair value at the time of the impairment.

During the six-month period ended June 30, 2013, net PP&E held for use related to our composite graphite business in our M&S segment, with a carrying amount of $18 million, was written down to its fair value, resulting in a before-tax loss of $18 million. Fair value was based on an internal assessment of expected discounted future cash flows. During this same period, Corporate net PP&E with a carrying amount of $31 million was written down to its fair value of $22 million, resulting in a before-tax loss of $9 million. The fair value was primarily determined by a third-party valuation.

During the six-month period ended June 30, 2012, our investment in a natural gas transmission pipeline was written down to a fair value of $495 million, resulting in a before-tax loss of $275 million. The fair value was determined principally by the application of an internal discounted cash flow model using estimates of future production, prices, costs and a discount rate believed to be consistent with those used by principal market participants. The decline in the fair value was considered to be other than temporary. During this same period, net PP&E held for sale related to equipment formerly associated with a canceled refinery upgrade project, with a carrying amount of $74 million, was written down to its fair value of $32 million, resulting in a before-tax loss of $42 million. The fair value was primarily determined by a negotiated selling price with a third party.

Note 16—Employee Benefit Plans

Pension and Postretirement Plans

Prior to the Separation, certain of our U.S. and U.K. employees participated in defined benefit pension plans and postretirement benefit plans (Shared Plans) sponsored by ConocoPhillips, which included participants of other ConocoPhillips subsidiaries. Prior to the Separation, we accounted for such Shared Plans as multiemployer benefit plans. Accordingly, we did not record an asset or liability to recognize the funded status of the Shared Plans on our consolidated balance sheet until the Separation, at which time, the assets and liabilities of the Shared Plans which were allocable to our employees were transferred to us and we became the sponsor of the plans.

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The allocated benefit cost from Shared Plans, as well as the components of net periodic benefit cost associated with plans sponsored by us for the three and six months ended June 30, 2013 and 2012, is shown in the table below:



	Millions of Dollars
	Pension Benefits									Other Benefits
	2013					2012				2013		2012
	U.S.			Int’l.		U.S.		Int’l.
Components of Net Periodic Benefit Cost
Three Months Ended June 30
Service cost	$	31		9		21		6		2		1
Interest cost	23			8		16		6		1		1
Expected return on plan assets	(30		)	(8	)	(20	)	(5	)	—		—
Amortization of prior service cost (credit)	1			(1	)	1		—		(1	)	—
Recognized net actuarial loss	21			3		12		1		—		—
Subtotal net periodic benefit cost	46			11		30		8		2		2
Allocated benefit cost from ConocoPhillips	—			—		18		3		—		2
Total net periodic benefit cost	$	46		11		48		11		2		4

Six Months Ended June 30
Service cost	$	62		18		21		7		4		1
Interest cost	46			16		16		9		3		1
Expected return on plan assets	(60		)	(15	)	(20	)	(7	)	—		—
Amortization of prior service cost (credit)	1			(1	)	1		—		(1	)	—
Recognized net actuarial loss	42			8		12		3		—		—
Subtotal net periodic benefit cost	91			26		30		12		6		2
Allocated benefit cost from ConocoPhillips	—			—		71		13		—		7
Total net periodic benefit cost	$	91		26		101		25		6		9

During the first half of 2013, we contributed $55 million to our U.S. plans and $24 million to our international plans.

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Note 17—Accumulated Other Comprehensive Income (Loss)

The following table depicts changes in accumulated other comprehensive loss by component, as well as detail on reclassifications out of accumulated other comprehensive loss:



	Millions of Dollars
	Defined Benefit Plans			Foreign Currency Translation		Hedging		Accumulated Other Comprehensive Loss

December 31, 2012	$	(778	)	466		(2	)	(314	)
Other comprehensive income (loss) before reclassifications	(5		)	(281	)	1		(285	)
Amounts reclassified from accumulated other comprehensive income (loss)*
Amortization of defined benefit plan items**
Actuarial losses	33			—		—		33
Net current period other comprehensive income (loss)	28			(281	)	1		(252	)
June 30, 2013	$	(750	)	185		(1	)	(566	)

*There were no significant reclassifications related to foreign currency translation or hedging.

**These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost (see Note 16—Employee Benefit Plans, for additional information).

Note 18—Cash Flow Information



	Millions of Dollars
	Six Months Ended
	June 30
	2013		2012
Noncash Investing and Financing Activities
Transfer of PP&E in accordance with the Separation and Distribution Agreement with ConocoPhillips	$	—	374
Transfer of employee benefit obligations in accordance with the Separation and Distribution Agreement with ConocoPhillips	—		1,201
Increase in deferred tax assets associated with the employee benefit liabilities transferred in accordance with the Separation and Distribution Agreement with ConocoPhillips	—		329

Cash Payments
Interest	$	132	6
Income taxes*	896		107

*Excludes our share of cash tax payments made directly by ConocoPhillips prior to the Separation.

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Note 19—Related Party Transactions

Significant transactions with related parties were:



	Millions of Dollars
	Three Months Ended June 30			Six Months Ended June 30
	2013		2012	2013	2012

Operating revenues and other income (a)	$	2,053	2,099	3,802	4,236
Purchases (b)	4,476		5,778	8,764	14,808
Operating expenses and selling, general and administrative expenses (c)	28		44	52	143
Interest expense (d)	2		2	4	4

(a)

We sold crude oil to MRC. NGL and other petrochemical feedstocks, along with solvents, were sold to CPChem, and gas oil and hydrogen feedstocks were sold to Excel. Certain feedstocks and intermediate products were sold to WRB. We also acted as agent for WRB in supplying other crude oil and feedstocks, wherein the transactional costs did not impact operating revenues. In addition, we charged several of our affiliates, including CPChem and MSLP, for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities.

(b)

We purchased refined products from WRB. We also acted as agent for WRB in distributing asphalt and solvents, wherein the transactional costs did not impact purchases. We purchased natural gas and NGL from DCP Midstream and CPChem for use in our refinery processes and other feedstocks from various affiliates. We purchased refined products from MRC. We also paid fees to various pipeline equity companies for transporting finished refined products. In addition, we paid a price upgrade to MSLP for heavy crude processing. We purchased base oils and fuel products from Excel for use in our refining and specialty businesses.


(c)	We paid utility and processing fees to various affiliates.


(d)	We incurred interest expense on a note payable to MSLP. See Note 6—Investments, Loans and Long-Term Receivables, for additional information on loans to affiliated companies.

Also included in the table above are transactions with ConocoPhillips through April 30, 2012, prior to the Separation. These transactions include crude oil purchased from ConocoPhillips as feedstock for our refineries and power sold to ConocoPhillips from our power generation facilities. Sales to and purchases from ConocoPhillips, while it was a related party, were $85 million and $1,112 million, respectively, for the second quarter of 2012. For the six months ended June 30, 2012, sales to and purchases from ConocoPhillips were $381 million and $5,328 million, respectively.

For the period prior to the Separation, the consolidated statement of income includes expense allocations for certain corporate functions historically performed by ConocoPhillips and not allocated to its operating segments, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, procurement and information technology. Net charges from ConocoPhillips for these services, reflected in selling, general and administrative expenses, were $9 million and $70 million for the three and six months ended June 30, 2012, respectively.

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Note 20—Segment Disclosures and Related Information


•	We disaggregated the former R&M segment into two separate operating segments titled "Refining" and "Marketing and Specialties."


•	We moved our Transportation and power businesses from the former R&M segment to the Midstream and Marketing and Specialties segments, respectively.

This realignment resulted in the following operating segments:

Midstream—Gathers, processes, transports and markets natural gas; and transports, fractionates and markets NGL in the United States. In addition, this segment transports crude oil and other feedstocks to our refineries and other locations, and delivers refined and specialty products to market. The Midstream segment includes, among other businesses, our 50 percent equity investment in DCP Midstream.


2)	Chemicals—Manufactures and markets petrochemicals and plastics on a worldwide basis. The Chemicals segment consists of our 50 percent equity investment in CPChem.


3)	Refining—Buys, sells and refines crude oil and other feedstocks at 15 refineries, mainly in the United States, Europe and Asia.


4)	Marketing and Specialties—Purchases for resale and markets refined products, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products (such as lubricants and flow improvers), as well as power generation operations.

Corporate and Other includes general corporate overhead, interest expense, our investments in new technologies and various other corporate activities. Corporate assets include all cash and cash equivalents.

We evaluate performance and allocate resources based on net income attributable to Phillips 66. Intersegment sales are at prices that approximate market.

The new segment alignment is presented for the three- and six-month periods ended June 30, 2013, with the prior periods recast for comparability.

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Analysis of Results by Operating Segment



	Millions of Dollars
	Three Months Ended June 30					Six Months Ended June 30
	2013			2012		2013		2012
Sales and Other Operating Revenues
Midstream
Total sales	$	1,427		1,680		3,010		3,761
Intersegment eliminations	(210		)	(193	)	(442	)	(464	)
Total Midstream	1,217			1,487		2,568		3,297
Chemicals	3			3		5		6
Refining
Total sales	31,048			33,953		60,855		67,685
Intersegment eliminations	(18,510		)	(18,527	)	(36,367	)	(36,584	)
Total Refining	12,538			15,426		24,488		31,101
Marketing and Specialties
Total sales	29,768			30,352		57,991		58,966
Intersegment eliminations	(295		)	(524	)	(564	)	(843	)
Total Marketing and Specialties	29,473			29,828		57,427