Edgar Filing: Phillips 66

PSX-2015/3/31_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	March 31, 2015



		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:	001-35349

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 541,632,079 shares of common stock, $.01 par value, outstanding as of March 31, 2015.

Table of Contents

PHILLIPS 66

TABLE OF CONTENTS



	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	47

Item 4. Controls and Procedures	47

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	48

Item 6. Exhibits	49

Signatures	50

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS



Consolidated Statement of Income	Phillips 66



	Millions of Dollars
	Three Months Ended March 31
	2015		2014
Revenues and Other Income
Sales and other operating revenues*	$	22,778	40,283
Equity in earnings of affiliates	456		778
Net gain on dispositions	122		7
Other income	70		31
Total Revenues and Other Income	23,426		41,099

Costs and Expenses
Purchased crude oil and products	16,695		34,381
Operating expenses	1,094		1,090
Selling, general and administrative expenses	394		402
Depreciation and amortization	253		234
Impairments	—		1
Taxes other than income taxes*	3,462		3,638
Accretion on discounted liabilities	5		6
Interest and debt expense	86		68
Foreign currency transaction losses (gains)	49		(19	)
Total Costs and Expenses	22,038		39,801
Income from continuing operations before income taxes	1,388		1,298
Provision for income taxes	391		426
Income From Continuing Operations	997		872
Income from discontinued operations**	—		706
Net Income	997		1,578
Less: net income attributable to noncontrolling interests	10		6
Net Income Attributable to Phillips 66	$	987	1,572

Amounts Attributable to Phillips 66 Common Stockholders:
Income from continuing operations	$	987	866
Income from discontinued operations	—		706
Net Income Attributable to Phillips 66	$	987	1,572

Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
Basic
Continuing operations	$	1.80	1.48
Discontinued operations	—		1.21
Net Income Attributable to Phillips 66 Per Share of Common Stock	$	1.80	2.69
Diluted
Continuing operations	$	1.79	1.47
Discontinued operations	—		1.20
Net Income Attributable to Phillips 66 Per Share of Common Stock	$	1.79	2.67

Dividends Paid Per Share of Common Stock (dollars)	$	0.50	0.39

Average Common Shares Outstanding (in thousands)
Basic	548,200		584,053
Diluted	552,337		589,575
* Includes excise taxes on petroleum products sales:	$	3,362	3,522
** Net of provision for income taxes on discontinued operations:	$	—	5
See Notes to Consolidated Financial Statements.

Table of Contents



Consolidated Statement of Comprehensive Income	Phillips 66



	Millions of Dollars
	Three Months Ended March 31
	2015			2014

Net Income	$	997		1,578
Other comprehensive income (loss)
Defined benefit plans
Actuarial gain/loss:
Amortization to net income of net actuarial loss and settlements	30			12
Plans sponsored by equity affiliates	5			3
Income taxes on defined benefit plans	(10		)	(5	)
Defined benefit plans, net of tax	25			10
Foreign currency translation adjustments	(197		)	31
Income taxes on foreign currency translation adjustments	9			(1	)
Foreign currency translation adjustments, net of tax	(188		)	30
Other Comprehensive Income (Loss), Net of Tax	(163		)	40
Comprehensive Income	834			1,618
Less: comprehensive income attributable to noncontrolling interests	10			6
Comprehensive Income Attributable to Phillips 66	$	824		1,612

See Notes to Consolidated Financial Statements.

Table of Contents



Consolidated Balance Sheet	Phillips 66



	Millions of Dollars
	March 31 2015			December 31 2014
Assets
Cash and cash equivalents	$	5,390		5,207
Accounts and notes receivable (net of allowances of $69 million in 2015 and $71 million in 2014)	4,717			6,306
Accounts and notes receivable—related parties	1,020			949
Inventories	4,166			3,397
Prepaid expenses and other current assets	851			837
Total Current Assets	16,144			16,696
Investments and long-term receivables	10,529			10,189
Net properties, plants and equipment	17,918			17,346
Goodwill	3,274			3,274
Intangibles	882			900
Other assets	330			336
Total Assets	$	49,077		48,741

Liabilities
Accounts payable	$	6,965		7,488
Accounts payable—related parties	728			576
Short-term debt	35			842
Accrued income and other taxes	1,112			878
Employee benefit obligations	283			462
Other accruals	741			848
Total Current Liabilities	9,864			11,094
Long-term debt	8,914			7,842
Asset retirement obligations and accrued environmental costs	650			683
Deferred income taxes	5,483			5,491
Employee benefit obligations	1,292			1,305
Other liabilities and deferred credits	279			289
Total Liabilities	26,482			26,704

Equity
Common stock (2,500,000,000 shares authorized at $.01 par value) Issued (2015—637,925,189 shares; 2014—637,031,760 shares)
Par value	6			6
Capital in excess of par	19,060			19,040
Treasury stock (at cost: 2015—96,293,110 shares; 2014—90,649,984 shares)	(6,633		)	(6,234	)
Retained earnings	10,021			9,309
Accumulated other comprehensive loss	(694		)	(531	)
Total Stockholders’ Equity	21,760			21,590
Noncontrolling interests	835			447
Total Equity	22,595			22,037
Total Liabilities and Equity	$	49,077		48,741

See Notes to Consolidated Financial Statements.

Table of Contents



Consolidated Statement of Cash Flows	Phillips 66



	Millions of Dollars
	Three Months Ended March 31
	2015			2014
Cash Flows From Operating Activities
Net income	$	997		1,578
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	253			234
Impairments	—			1
Accretion on discounted liabilities	5			6
Deferred taxes	(6		)	(444	)
Undistributed equity earnings	(337		)	632
Net gain on dispositions	(122		)	(7	)
Income from discontinued operations	—			(706	)
Other	90			(21	)
Working capital adjustments
Decrease (increase) in accounts and notes receivable	1,684			619
Decrease (increase) in inventories	(834		)	(2,567	)
Decrease (increase) in prepaid expenses and other current assets	(130		)	(132	)
Increase (decrease) in accounts payable	(349		)	1,505
Increase (decrease) in taxes and other accruals	101			698
Net cash provided by continuing operating activities	1,352			1,396
Net cash provided by discontinued operations	—			2
Net Cash Provided by Operating Activities	1,352			1,398

Cash Flows From Investing Activities
Capital expenditures and investments	(1,081		)	(572	)
Proceeds from asset dispositions*	(9		)	507
Advances/loans—related parties	(50		)	—
Other	102			13
Net cash used in continuing investing activities	(1,038		)	(52	)
Net cash used in discontinued operations	—			(34	)
Net Cash Used in Investing Activities	(1,038		)	(86	)

Cash Flows From Financing Activities
Issuance of debt	1,169			—
Repayment of debt	(895		)	(8	)
Issuance of common stock	(25		)	(20	)
Repurchase of common stock	(399		)	(640	)
Share exchange—PSPI transaction	—			(450	)
Dividends paid on common stock	(272		)	(229	)
Distributions to noncontrolling interests	(6		)	(4	)
Net proceeds from issuance of Phillips 66 Partners LP common units	384			—
Other	(14		)	(4	)
Net cash used in continuing financing activities	(58		)	(1,355	)
Net cash used in discontinued operations	—			—
Net Cash Used in Financing Activities	(58		)	(1,355	)

Effect of Exchange Rate Changes on Cash and Cash Equivalents	(73		)	(31	)

Net Change in Cash and Cash Equivalents	183			(74	)
Cash and cash equivalents at beginning of period	5,207			5,400
Cash and Cash Equivalents at End of Period	$	5,390		5,326

* Includes return of investments in equity affiliates and working capital true-ups on dispositions.

See Notes to Consolidated Financial Statements.

Table of Contents



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		Accum. Other Comprehensive Income (Loss)		Noncontrolling Interests		Total

December 31, 2013	$	6	18,887	(2,602	)	5,622		37		442		22,392
Net income	—		—	—		1,572		—		6		1,578
Other comprehensive income	—		—	—		—		40		—		40
Cash dividends paid on common stock	—		—	—		(229	)	—		—		(229	)
Repurchase of common stock	—		—	(640	)	—		—		—		(640	)
Share exchange—PSPI transaction	—		—	(1,350	)	—		—		—		(1,350	)
Benefit plan activity	—		45	—		(3	)	—		—		42
Distributions to noncontrolling interests and other	—		—	—		—		—		(4	)	(4	)
March 31, 2014	$	6	18,932	(4,592	)	6,962		77		444		21,829

December 31, 2014	$	6	19,040	(6,234	)	9,309		(531	)	447		22,037
Net income	—		—	—		987		—		10		997
Other comprehensive loss	—		—	—		—		(163	)	—		(163	)
Cash dividends paid on common stock	—		—	—		(272	)	—		—		(272	)
Repurchase of common stock	—		—	(399	)	—		—		—		(399	)
Benefit plan activity	—		20	—		(3	)	—		—		17
Issuance of Phillips 66 Partners LP common units	—		—	—		—		—		384		384
Distributions to noncontrolling interests and other	—		—	—		—		—		(6	)	(6	)
March 31, 2015	$	6	19,060	(6,633	)	10,021		(694	)	835		22,595



	Shares in Thousands
	Common Stock Issued	Treasury Stock
December 31, 2013	634,286	44,106
Repurchase of common stock	—	8,410
Share exchange—PSPI transaction	—	17,423
Shares issued—share-based compensation	1,499	—
March 31, 2014	635,785	69,939

December 31, 2014	637,032	90,650
Repurchase of common stock	—	5,643
Shares issued—share-based compensation	893	—
March 31, 2015	637,925	96,293

See Notes to Consolidated Financial Statements.

Table of Contents



Notes to Consolidated Financial Statements	Phillips 66

Note 1—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 2014 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2015, are not necessarily indicative of the results to be expected for the full year.

Note 2—Variable Interest Entities (VIEs)

In 2013, we formed Phillips 66 Partners LP, a master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and natural gas liquids pipelines and terminals, as well as other transportation and midstream assets. We consolidate Phillips 66 Partners as we determined that Phillips 66 Partners is a VIE and we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as well as the ability to direct the activities of Phillips 66 Partners that most significantly impact its economic performance. See Note 20—Phillips 66 Partners LP, for additional information.

We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. Information on our significant 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 was challenged, and the dispute has been arbitrated. In April 2014, the arbitral tribunal upheld the exercise of the call right and the acquisition of the 50 percent ownership interest. In July 2014, PDVSA filed a petition to vacate the tribunal’s award. Until this matter is resolved, we will 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 our separation from ConocoPhillips in 2012 (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 award is subject to vacatur because under the partnership agreement the co-venturers jointly direct the activities of MSLP that most significantly impact economic performance. At March 31, 2015, our maximum exposure to loss represented the outstanding debt principal balance of $189 million and our investment of $135 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 use the equity method of accounting for this investment. At March 31, 2015, our maximum exposure to loss represented 50 percent of the outstanding debt principal balance of $58 million, or $29 million, plus half of the $60 million liquidity support, or $30 million. The book value of our investment in Excel at March 31, 2015, was $143 million.

Table of Contents

In 2013, we entered into a multi-year consignment fuels agreement with a marketer that we supported with debt guarantees. Pursuant to the consignment fuels agreement, we own the fuels inventory, control the fuel marketing at each site, and pay a fixed monthly fee to the marketer. In November 2014, the marketer refinanced its debt which allowed us to remove the debt guarantees in exchange for an extended term on the consignment fuels agreement. We determined the consignment fuels agreement creates a variable interest in the marketer, with the marketer not being exposed to all potential losses as the consignment fuels agreement provides liquidity to the marketer for its debt service costs. We determined we are not the primary beneficiary because we do not have an ownership interest in the marketer or have the power to direct the activities that most significantly impact the economic performance of the marketer. At March 31, 2015, our maximum exposure to loss represented the fixed annual contractual payments under the consignment fuels agreement of approximately $90 million.

Note 3—Inventories

Inventories consisted of the following:



	Millions of Dollars
	March 31 2015		December 31 2014

Crude oil and petroleum products	$	3,911	3,141
Materials and supplies	255		256
	$	4,166	3,397

Inventories valued on the last-in, first-out (LIFO) basis totaled $3,798 million and $3,004 million at March 31, 2015, and December 31, 2014, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $3,200 million and $3,000 million at March 31, 2015, and December 31, 2014, respectively.

Certain planned year-to-date reductions in inventory caused liquidations of LIFO inventory values. These liquidations decreased net income by approximately $36 million during the three-month period ended March 31, 2015, while the impact to net income during the three-month period ended March 31, 2014, was not material.

Note 4—Business Combinations

We completed the following acquisitions in 2014:


•	In August 2014, we acquired a 7.1 million-barrel-storage-capacity crude oil and petroleum products terminal located near Beaumont, Texas, to promote growth plans in our Midstream segment.


•	In July 2014, we acquired Spectrum Corporation, a private label and specialty lubricants business headquartered in Memphis, Tennessee. The acquisition supports our plans to selectively grow stable-return businesses in our Marketing and Specialties (M&S) segment.


•	In March 2014, we acquired our co-venturer’s interest in an entity that operates a power and steam generation plant located in Texas that is included in our M&S segment. This acquisition provided us with full operational control over a key facility providing utilities and other services to one of our refineries.

We funded each of these acquisitions with cash on hand. Total cash consideration paid in 2014 was $741 million, net of cash acquired. Cash consideration paid for acquisitions is included in the “Capital expenditures and investments” line of our consolidated statement of cash flows. In the aggregate, as of December 31, 2014, we provisionally recorded $471 million of properties, plants and equipment (PP&E), $232 million of goodwill, $196 million of intangible assets, $70 million of net working capital and $109 million of long-term liabilities. Our acquisition accounting for the transactions completed in March 2014 and August 2014 is final. The completion of our acquisition accounting for the July 2014

Table of Contents

transaction is expected to be finalized in the second quarter of 2015. There were no material measurement period adjustments recorded in the first quarter of 2015.

Note 5—Assets Held for Sale or Sold

In July 2014, we entered into an agreement to sell the Bantry Bay terminal in Ireland, which was included in our Refining segment. Accordingly, the net assets of the terminal were classified as held for sale, which resulted in a before-tax impairment of $12 million from reducing the carrying value of the long-lived assets to estimated fair value less costs to sell. As of December 31, 2014, long-lived assets of $77 million were recorded in the “Prepaid expenses and other current assets” line of our consolidated balance sheet. In addition, an immaterial amount of long-term liabilities were recorded in the “Other accruals” line of our consolidated balance sheet. In February 2015, we completed the sale of the terminal. At the time of the disposition, the terminal had a net carrying value of $68 million, which primarily related to net PP&E. An immaterial gain was recognized on this disposition.

In February 2014, we exchanged the stock of Phillips Specialty Products Inc. (PSPI), a flow improver business, which was included in our M&S segment, for shares of Phillips 66 common stock owned by another party. The PSPI share exchange resulted in the receipt of approximately 17.4 million shares of Phillips 66 common stock, which are held as treasury shares, and the recognition of a before-tax gain of $696 million. At the time of the disposition, PSPI had a net carrying value of $685 million, which primarily included $481 million of cash and cash equivalents, $60 million of net PP&E and $117 million of allocated goodwill. Cash and cash equivalents of $450 million included in PSPI’s net carrying value is reflected as a financing cash outflow in the “Share exchange—PSPI transaction” line of our consolidated statement of cash flows. Revenues, income before-tax and net income from discontinued operations, excluding the recognized before-tax gain of $696 million, were not material for the three-month period ended March 31, 2014.

In July 2013, we completed the sale of the Immingham Combined Heat and Power Plant (ICHP), which was included in our M&S segment. A gain was deferred due to an indemnity provided to the buyer, which expired in April 2015. A portion of the deferred gain is denominated in a foreign currency; accordingly, the amount of the deferred gain translated into U.S. dollars is subject to change based on currency fluctuations. Absent claims under the indemnity, the deferred gain will be recognized into earnings as our exposure under this indemnity declines. As of December 31, 2014, the deferred gain was $243 million. In the first quarter of 2015, we recognized $110 million of the previously deferred gain, which is recorded in the “Net gain on dispositions” line of our consolidated statement of income. As of March 31, 2015, the remaining deferred gain was $132 million, all of which we expect to recognize in the second quarter of 2015.

Note 6—Investments, Loans and Long-Term Receivables

Equity Investments

Summarized 100 percent financial information for WRB Refining LP (WRB) and Chevron Phillips Chemical Company LLC (CPChem) were as follows:



	Millions of Dollars
	Three Months Ended March 31
	2015		2014

Revenues	$	4,906	7,998
Income before income taxes	692		1,124
Net income	672		1,101

Table of Contents

WRB

WRB is a 50-percent-owned business venture with Cenovus Energy Inc. (Cenovus). Cenovus was obligated to contribute $7.5 billion, plus accrued interest, to WRB over a 10-year period that began in 2007. In the first quarter of 2014, Cenovus prepaid its remaining balance under this obligation. As a result, WRB declared a special dividend, which was distributed to the co-venturers in March 2014. Of the $1,232 million that we received, $760 million was considered a return on our investment in WRB (an operating cash inflow), and $472 million was considered a return of our investment in WRB (an investing cash inflow). The return of investment portion of the dividend was included in the “Proceeds from asset dispositions” line in our consolidated statement of cash flows. At March 31, 2015, the book value of our investment in WRB was $1,898 million and our basis difference was $3,326 million.

Other

In April 2015, Rockies Express Pipeline LLC (REX) repaid $450 million of its debt, reducing its long-term debt to approximately $2.6 billion. REX funded the repayment through member cash contributions. Our 25 percent share was approximately $112 million, which we contributed to REX in April 2015.

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 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. The arbitral tribunal issued its ruling in April 2014, which upheld the exercise of the call right and the acquisition of the 50 percent ownership interest. In July 2014, PDVSA filed a petition in U.S. district court to vacate the tribunal’s ruling. Following the Separation, Phillips 66 generally indemnifies ConocoPhillips for liabilities, if any, arising out of the exercise of the call right or otherwise with respect to the joint venture or the refinery. Until this matter is resolved, we will 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
	March 31, 2015				December 31, 2014
	Gross PP&E		Accum. D&A	Net PP&E	Gross PP&E	Accum. D&A	Net PP&E

Midstream	$	5,337	1,209	4,128	4,726	1,185	3,541
Chemicals	—		—	—	—	—	—
Refining	20,126		7,558	12,568	19,951	7,424	12,527
Marketing and Specialties	1,410		702	708	1,490	738	752
Corporate and Other	983		469	514	978	452	526
	$	27,856	9,938	17,918	27,145	9,799	17,346

Table of Contents

Note 8—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.



	Three Months Ended March 31
	2015					2014
	Basic			Diluted		Basic		Diluted
Amounts attributed to Phillips 66 Common Stockholders (millions):
Income from continuing operations attributable to Phillips 66	$	987		987		866		866
Income allocated to participating securities	(2		)	(1	)	(1	)	—
Income from continuing operations available to common stockholders	985			986		865		866
Discontinued operations	—			—		706		706
Net Income available to common stockholders	$	985		986		1,571		1,572

Weighted-average common shares outstanding (thousands):	543,469			548,200		580,027		584,053
Effect of stock-based compensation	4,731			4,137		4,026		5,522
Weighted-average common shares outstanding—EPS	548,200			552,337		584,053		589,575

Earnings Per Share of Common Stock (dollars):
Income from continuing operations attributable to Phillips 66	$	1.80		1.79		1.48		1.47
Discontinued operations	—			—		1.21		1.20
Earnings Per Share	$	1.80		1.79		2.69		2.67

Table of Contents

Note 9—Debt

In March 2015, we repaid $800 million of 1.95% Senior Notes upon maturity.

Debt Issuance

During February 2015, Phillips 66 Partners closed on a public offering of $1.1 billion aggregate principal amount of unsecured senior notes, consisting of:


•	$300 million aggregate principal amount of 2.646% Senior Notes due 2020.


•	$500 million aggregate principal amount of 3.605% Senior Notes due 2025.


•	$300 million aggregate principal amount of 4.680% Senior Notes due 2045.

Phillips 66 Partners utilized a portion of the net proceeds to fund part of the purchase price for its acquisition of our equity interests in Explorer Pipeline Company, DCP Sand Hills Pipeline, LLC, and DCP Southern Hills Pipeline, LLC. The remaining proceeds were used to repay existing borrowings from a subsidiary of Phillips 66, fund capital expenditures and for general partnership purposes. See Note 20—Phillips 66 Partners LP, for additional information.

Credit Facilities

At both March 31, 2015, and December 31, 2014, we had no direct outstanding borrowings under our $5 billion revolving credit agreement, while $51 million in letters of credit had been issued that were supported by it. At March 31, 2015, and December 31, 2014, no amount and $18 million, respectively, were outstanding under the $500 million revolving credit agreement of Phillips 66 Partners. Accordingly, as of March 31, 2015, an aggregate $5.4 billion of total capacity was available under these facilities.

Note 10—Guarantees

At March 31, 2015, 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 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 March 31, 2015, the maximum potential amount of future payments to third parties under the guarantee was estimated to be $189 million, which could become payable if MSLP fails to meet its obligations under the senior notes agreement. The senior notes mature in 2019.

Other Guarantees

We have residual value guarantees associated with leases with maximum future potential payments totaling $361 million. We have other guarantees with maximum future potential payment amounts totaling $123 million, which consist primarily of guarantees to fund the short-term cash liquidity deficits of certain joint ventures and guarantees of the lease payment obligations of a joint venture. These guarantees generally extend up to 9 years or life of the venture.

Table of Contents

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, supply arrangements, and employee claims; and real estate indemnity against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues with generally indefinite terms, and the maximum amount of future payments is generally unlimited. The carrying amount recorded for indemnifications at March 31, 2015, was $216 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 $102 million of environmental accruals for known contamination that were included in asset retirement obligations and accrued environmental costs at March 31, 2015. For additional information about environmental liabilities, see Note 11—Contingencies and Commitments.

Indemnification and Release Agreement

In 2012, we entered into the Indemnification and Release Agreement with ConocoPhillips. This agreement governs the treatment between ConocoPhillips and us of matters 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 11—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 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.

Table of Contents

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.

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 such 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 pertaining to sites 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 March 31, 2015, our total environmental accrual was $480 million, compared with $496 million at December 31, 2014. 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 March 31, 2015, we had performance obligations secured by letters of credit and bank guarantees of $665 million (of which $51 million was issued under the provisions of our revolving credit facility, and the remainder was issued as direct bank letters of credit and bank guarantees) related to various purchase and other commitments incident to the ordinary conduct of business.

Table of Contents

Note 12—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 liquids (NGL), 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 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 13—Fair Value Measurements.

Commodity Derivative Contracts—We operate in the worldwide crude oil, refined products, 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 13—Fair Value Measurements.



	Millions of Dollars
	March 31 2015		December 31 2014
Assets
Accounts and notes receivable	$	—	(1	)
Prepaid expenses and other current assets	1,989		3,839
Other assets	36		29
Liabilities
Other accruals	1,776		3,472
Other liabilities and deferred credits	11		1

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

Table of Contents

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



	Millions of Dollars
	Three Months Ended March 31
	2015			2014

Sales and other operating revenues	$	(31	)	57
Other income	43			14
Purchased crude oil and products	20			2

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

The following table 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 March 31, 2015, and December 31, 2014, the percentages of our derivative contract volume expiring within the next 12 months were approximately 98 percent and 99 percent, respectively.



	Open Position Long/(Short)
	March 31 2015		December 31 2014
Commodity
Crude oil, refined products and NGL (millions of barrels)	(23	)	(11	)

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.

Table of Contents

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 March 31, 2015, or December 31, 2014.

Note 13—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 consolidated balance sheet approximates fair value.


•	Accounts and notes receivable: The carrying amount reported on the consolidated 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, we estimate fair value using the forward price of a similar commodity, adjusted for the difference in quality or location.


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


•	Forward-exchange contracts: Fair value is estimated by comparing the contract rate to the forward rate in effect at the end of the reporting period, which approximates the exit price at that date.

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 either with: 1) adjusted quoted prices from an active market for similar assets or liabilities; 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 three-month periods ended March 31, 2015 and 2014.

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 also classified as Level 1 in the fair value hierarchy. When exchange-cleared contracts lack sufficient liquidity or are valued using either adjusted exchange-provided prices or non-exchange quotes, we classify those 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. We corroborate these quotes with market data and classify the resulting fair values 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

Table of Contents

result in management’s best estimate of fair value. We classify these contracts 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 the fair value of these contracts on a net basis in the column “Effect of Counterparty Netting,” which is how these also appear on the consolidated balance sheet.

The carrying values and fair values by hierarchy of our material financial instruments and commodity forward contracts, either carried or disclosed at fair value, including any effects of netting derivative assets with liabilities and netting collateral due to right of setoff or master netting agreements, were:



	Millions of Dollars
	March 31, 2015
	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	$	1,146	796	—	1,942	(1,734	)	(101	)	—		107	—
OTC instruments	—		10	—	10	(6	)	—		—		4	—
Physical forward contracts*	—		72	1	73	—		—		—		73	—
Rabbi trust assets	83		—	—	83	N/A		N/A		—		83	N/A
	$	1,229	878	1	2,108	(1,740	)	(101	)	—		267

Commodity Derivative Liabilities
Exchange-cleared instruments	$	1,159	575	—	1,734	(1,734	)	—		—		—	—
OTC instruments	—		12	—	12	(6	)	—		—		6	—
Physical forward contracts*	—		41	—	41	—		—		—		41	—
Floating-rate debt	50		—	—	50	N/A		N/A		—		50	N/A
Fixed-rate debt, excluding capital leases**	—		9,410	—	9,410	N/A		N/A		(711	)	8,699	N/A
	$	1,209	10,038	—	11,247	(1,740	)	—		(711	)	8,796

* 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.

Table of Contents



	Millions of Dollars
	December 31, 2014
	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	$	2,058	1,525	—	3,583	(3,255	)	(225	)	—		103	—
OTC instruments	—		24	—	24	(14	)	—		—		10	—
Physical forward contracts*	—		253	7	260	(38	)	—		—		222	—
Rabbi trust assets	76		—	—	76	N/A		N/A		—		76	N/A
	$	2,134	1,802	7	3,943	(3,307	)	(225	)	—		411

Commodity Derivative Liabilities
Exchange-cleared instruments	$	1,833	1,422	—	3,255	(3,255	)	—		—		—	—
OTC instruments	—		29	—	29	(14	)	—		—		15	—
Physical forward contracts*	—		189	—	189	(38	)	—		—		151	—
Floating-rate debt	68		—	—	68	N/A		N/A		—		68	N/A
Fixed-rate debt, excluding capital leases**	—		8,806	—	8,806	N/A		N/A		(400	)	8,406	N/A
	$	1,901	10,446	—	12,347	(3,307	)	—		(400	)	8,640

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

The values presented in the preceding tables appear on our balance sheet as follows: for commodity derivative assets and liabilities, see the first table in Note 12—Derivatives and Financial Instruments; rabbi trust assets appear in the “Investments and long-term receivables” line; and floating-rate and fixed-rate debt appear in the “Short-term debt” and “Long-term debt” lines.

Note 14—Employee Benefit Plans

Pension and Postretirement Plans

The components of net periodic benefit cost for the three months ended March 31, 2015 and 2014, were as follows:



	Millions of Dollars
	Pension Benefits									Other Benefits
	2015					2014				2015	2014
	U.S.			Int’l.		U.S.		Int’l.
Components of Net Periodic Benefit Cost
Three Months Ended March 31
Service cost	$	31		10		30		10		2	2
Interest cost	27			7		27		9		2	2
Expected return on plan assets	(35		)	(10	)	(36	)	(9	)	—	—
Amortization of prior service cost (credit)	1			—		1		(1	)	—	—
Recognized net actuarial loss (gain)	19			4		10		3		—	(1	)
Settlements	1			—		—		—		—	—
Net periodic benefit cost	$	44		11		32		12		4	3

Table of Contents

During the first three months of 2015, we contributed $3 million to our U.S. plans and $14 million to our international plans. We currently expect to make additional contributions of approximately $60 million to our U.S. plans and $45 million to our international plans during the remainder of 2015.

Note 15—Accumulated Other Comprehensive Income (Loss)

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



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

December 31, 2013	$	(404	)	443		(2	)	37
Other comprehensive income before reclassifications	2			30		—		32
Amounts reclassified from accumulated other comprehensive income (loss)*
Amortization of defined benefit plan items**
Actuarial losses	8			—		—		8
Net current period other comprehensive income	10			30		—		40
March 31, 2014	$	(394	)	473		(2	)	77

December 31, 2014	$	(696	)	167		(2	)	(531	)
Other comprehensive income (loss) before reclassifications	3			(188	)	—		(185	)
Amounts reclassified from accumulated other comprehensive income (loss)*
Amortization of defined benefit plan items**
Actuarial losses and settlements	22			—		—		22
Net current period other comprehensive income (loss)	25			(188	)	—		(163	)
March 31, 2015	$	(671	)	(21	)	(2	)	(694	)

* 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 14—Employee Benefit Plans, for additional information).

Note 16—Cash Flow Information

PSPI Noncash Stock Exchange

As discussed more fully in Note 5—Assets Held for Sale or Sold, in February 2014 we completed the exchange of the stock of PSPI for shares of Phillips 66 common stock owned by the other party to the transaction. The noncash portion of the net assets surrendered by us in the exchange was $204 million, and we received approximately 17.4 million shares of our common stock, with a fair value at the time of the exchange of $1.35 billion.

Table of Contents

Note 17—Related Party Transactions

Significant transactions with related parties were:



	Millions of Dollars
	Three Months Ended March 31
	2015		2014

Operating revenues and other income (a)	$	617	2,067
Purchases (b)	1,948		3,991
Operating expenses and selling, general and administrative expenses (c)	31		35
Interest expense (d)	2		2

In December 2014, we completed the sale of our interest in the Malaysian Refining Company Sdn. Bdh. (MRC). Accordingly, sales of crude oil to MRC and purchases of refined products from MRC are only included in the 2014 period in the table above.

(a)

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 crude oil and other feedstocks, wherein the transactional amounts 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 amounts did not impact purchases. We purchased natural gas and NGL from DCP Midstream, LLC (DCP Midstream) and CPChem for use in our refinery processes and other feedstocks from various affiliates. 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.

Table of Contents

Note 18—Segment Disclosures and Related Information

Our operating segments are:

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, delivers refined and specialty products to market, and provides storage services for crude oil and petroleum products. The Midstream segment includes, among other businesses, our 50 percent equity investment in DCP Midstream and our investment in Phillips 66 Partners.


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 14 refineries, mainly in the United States and Europe.


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 base oils and lubricants), 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.

Table of Contents

Analysis of Results by Operating Segment



	Millions of Dollars
	Three Months Ended March 31
	2015			2014
Sales and Other Operating Revenues
Midstream
Total sales	$	969		2,155
Intersegment eliminations	(254		)	(292	)
Total Midstream	715			1,863
Chemicals	2			2
Refining
Total sales	14,271			29,215
Intersegment eliminations	(8,756		)	(17,558	)
Total Refining	5,515			11,657
Marketing and Specialties
Total sales	16,748			27,046
Intersegment eliminations	(211		)	(292	)
Total Marketing and Specialties	16,537			26,754
Corporate and Other	9			7
Consolidated sales and other operating revenues	$	22,778		40,283

Net Income (Loss) Attributable to Phillips 66
Midstream	$	67		188
Chemicals	203			316
Refining	538			306
Marketing and Specialties	304			137
Corporate and Other	(125		)	(81	)
Discontinued operations	—			706
Consolidated net income attributable to Phillips 66	$	987		1,572



	Millions of Dollars
	March 31 2015		December 31 2014
Total Assets
Midstream	$	7,847	7,295
Chemicals	5,469		5,209
Refining	23,040		22,808
Marketing and Specialties	6,461		7,051
Corporate and Other	6,260		6,378
Consolidated total assets	$	49,077	48,741

Table of Contents

Note 19—Income Taxes

Our effective tax rate for the first quarter of 2015 was 28 percent, compared with 33 percent for the corresponding period of 2014. The decrease in the effective tax rate for the first quarter of 2015, compared with the first quarter of 2014, was primarily attributable to a favorable tax settlement in the United Kingdom and the recognition of a nontaxable gain associated with the sale of ICHP. For additional information on the nontaxable gain, see Note 5—Assets Held for Sale or Sold. The effective tax rate varies from the federal statutory tax rate of 35 percent primarily as a result of state tax expense, offset by the manufacturing deduction and foreign operations.

Note 20—Phillips 66 Partners LP

In 2013, we formed Phillips 66 Partners, a master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and NGL pipelines and terminals, as well as other transportation and midstream assets.

On March 2, 2015, we contributed to Phillips 66 Partners our equity interests in Explorer Pipeline Company (19.5 percent), DCP Sand Hills Pipeline, LLC (33.3 percent), and DCP Southern Hills Pipeline, LLC (33.3 percent). We account for each of these investments under the equity method of accounting. The total consideration for the transaction was $1,010 million, which consisted of $880 million in cash and the issuance of common units and general partner units to us with an aggregate fair value of $130 million.

On February 23, 2015, Phillips 66 Partners completed a public offering of 5,250,000 common units representing limited partner interests, at a public offering price of $75.50 per unit. The net proceeds at closing were $384 million. Additionally, Phillips 66 Partners closed a public offering of $1.1 billion aggregate principal amount of senior notes. For additional information about the senior notes, see Note 9—Debt.

Phillips 66 Partners used the net proceeds of both offerings to fund the acquisition transaction discussed above and repay existing borrowings from a subsidiary of Phillips 66. The remainder is expected to be used for capital expenditures and for general partnership purposes.

At March 31, 2015, we owned a 69 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, while the public owned a 29 percent limited partner interest. We consolidate Phillips 66 Partners because we control the partnership through our general partner interest (see Note 2—Variable Interest Entities (VIEs), for additional information). The public’s ownership interest in Phillip’s 66 Partners was $801 million at March 31, 2015, and is reflected as a noncontrolling interest in our financial statements. The most significant assets of Phillips 66 Partners that are available to settle only its obligations were equity investments of $801 million and net PP&E of $465 million at March 31, 2015.

Note 21—New Accounting Standards

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and quarterly reporting periods of public entities beginning after December 15, 2015, applied on a retrospective basis. Early adoption is permitted for financial statements that have not been previously issued. We currently have debt issuance costs included as deferred charges in our balance sheet, which will be reclassified as a reduction of debt when we adopt ASU 2015-03.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new standard converged guidance on recognizing revenues in contracts with customers under accounting principles generally accepted in the United States and International Financial Reporting Standards. This ASU is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. ASU 2014-09 is effective for annual and quarterly reporting periods of public entities beginning after December 15, 2016. Early application for public entities is not permitted. In April 2015, the FASB issued for comment an exposure draft, “Revenue

Table of Contents

Recognition - Deferral of the Effective Date of ASU 2014-09,” which will delay implementation for one year. We are currently evaluating the provisions of ASU 2014-09 and assessing the impact, if any, it may have on our financial position and results of operations.

Note 22—Condensed Consolidating Financial Information

$7.5 billion of our senior notes were issued by Phillips 66, and are guaranteed by Phillips 66 Company, a 100-percent-owned subsidiary. Phillips 66 Company has fully and unconditionally guaranteed the payment obligations of Phillips 66 with respect to these debt securities. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:


•	Phillips 66 and Phillips 66 Company (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).


•	All other nonguarantor subsidiaries.


•	The consolidating adjustments necessary to present Phillips 66’s results on a consolidated basis.

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes. The 2014 quarterly condensed consolidating financial information was revised to eliminate intra-column lending transactions, to realign interest revenue from certain inter-column lending activities to the appropriate column, and to make the associated adjustments required to equity earnings and investments. These changes did not impact the total consolidated amounts.

Table of Contents



	Millions of Dollars
	Three Months Ended March 31, 2015
Statement of Income	Phillips 66			Phillips 66 Company		All Other Subsidiaries	Consolidating Adjustments		Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—		15,587		7,191	—		22,778
Equity in earnings of affiliates	1,052			722		49	(1,367	)	456
Net gain on dispositions	—			(5	)	127	—		122
Other income	—			59		11	—		70
Intercompany revenues	—			140		2,149	(2,289	)	—
Total Revenues and Other Income	1,052			16,503		9,527	(3,656	)	23,426

Costs and Expenses
Purchased crude oil and products	—			12,277		6,673	(2,255	)	16,695
Operating expenses	4			874		230	(14	)	1,094
Selling, general and administrative expenses	2			292		101	(1	)	394
Depreciation and amortization	—			194		59	—		253
Impairments	—			—		—	—		—
Taxes other than income taxes	—			1,381		2,081	—		3,462
Accretion on discounted liabilities	—			4		1	—		5
Interest and debt expense	93			6		6	(19	)	86
Foreign currency transaction losses	—			—		49	—		49
Total Costs and Expenses	99			15,028		9,200	(2,289	)	22,038
Income from continuing operations before income taxes	953			1,475		327	(1,367	)	1,388
Provision (benefit) for income taxes	(34		)	423		2	—		391
Income from Continuing Operations	987			1,052		325	(1,367	)	997
Income from discontinued operations	—			—		—	—		—
Net income	987			1,052		325	(1,367	)	997
Less: net income attributable to noncontrolling interests	—			—		10	—		10
Net Income Attributable to Phillips 66	$	987		1,052		315	(1,367	)	987

Comprehensive Income	$	824		889		149	(1,028	)	834

Table of Contents



	Millions of Dollars
	Three Months Ended March 31, 2014
Statement of Income	Phillips 66			Phillips 66 Company	All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—		27,239	13,044		—		40,283
Equity in earnings of affiliates	922			738	178		(1,060	)	778
Net gain on dispositions	—			—	7		—		7
Other income	—			22	9		—		31
Intercompany revenues	—			376	4,603		(4,979	)	—
Total Revenues and Other Income	922			28,375	17,841		(6,039	)	41,099

Costs and Expenses
Purchased crude oil and products	—			24,384	14,938		(4,941	)	34,381
Operating expenses	2			893	201		(6	)	1,090
Selling, general and administrative expenses	3			286	138		(25	)	402
Depreciation and amortization	—			180	54		—		234
Impairments	—			1	—		—		1
Taxes other than income taxes	—			1,301	2,337		—		3,638
Accretion on discounted liabilities	—			5	1		—		6
Interest and debt expense	66			4	5		(7	)	68
Foreign currency transaction losses (gains)	—			—	(19	)	—		(19	)
Total Costs and Expenses	71			27,054	17,655		(4,979	)	39,801
Income from continuing operations before income taxes	851			1,321	186		(1,060	)	1,298
Provision (benefit) for income taxes	(25		)	399	52		—		426
Income from Continuing Operations	876			922	134		(1,060	)	872
Income from discontinued operations*	696			—	10		—		706
Net income	1,572			922	144		(1,060	)	1,578
Less: net income attributable to noncontrolling interests	—			—	6		—		6
Net Income Attributable to Phillips 66	$	1,572		922	138		(1,060	)	1,572

Comprehensive Income	$	1,612		962	176		(1,132	)	1,618
* Net of provision for income taxes on discontinued operations:	$	—		—	5		—		5

Table of Contents



	Millions of Dollars
	March 31, 2015
Balance Sheet	Phillips 66		Phillips 66 Company	All Other Subsidiaries	Consolidating Adjustments		Total Consolidated
Assets
Cash and cash equivalents	$	—	1,686	3,704	—		5,390
Accounts and notes receivable	26		3,761	2,424	(474	)	5,737
Inventories	—		2,637	1,529	—		4,166
Prepaid expenses and other current assets	9		499	343	—		851
Total Current Assets	35		8,583	8,000	(474	)	16,144
Investments and long-term receivables	31,029		20,428	5,332	(46,260	)	10,529
Net properties, plants and equipment