Edgar Filing: Phillips 66

10-Q

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	September 30, 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 533,440,280 shares of common stock, $.01 par value, outstanding as of September 30, 2015.

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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	34

Item 3. Quantitative and Qualitative Disclosures About Market Risk	53

Item 4. Controls and Procedures	53

Part II – Other Information

Item 1. Legal Proceedings	54

Item 1A. Risk Factors	54

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 6. Exhibits	56

Signatures	57

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS



Consolidated Statement of Income	Phillips 66



	Millions of Dollars
	Three Months Ended September 30			Nine Months Ended September 30
	2015		2014	2015	2014
Revenues and Other Income
Sales and other operating revenues*	$	25,792	40,417	77,082	126,249
Equity in earnings of affiliates	583		511	1,446	2,053
Net gain on dispositions	22		109	283	125
Other income	20		11	109	59
Total Revenues and Other Income	26,417		41,048	78,920	128,486

Costs and Expenses
Purchased crude oil and products	18,580		33,602	57,528	107,299
Operating expenses	1,083		1,104	3,220	3,271
Selling, general and administrative expenses	437		401	1,237	1,215
Depreciation and amortization	270		249	797	722
Impairments	1		12	3	16
Taxes other than income taxes*	3,610		3,874	10,621	11,344
Accretion on discounted liabilities	5		6	16	18
Interest and debt expense	71		60	236	194
Foreign currency transaction losses	1		13	50	23
Total Costs and Expenses	24,058		39,321	73,708	124,102
Income from continuing operations before income taxes	2,359		1,727	5,212	4,384
Provision for income taxes	767		538	1,598	1,451
Income From Continuing Operations	1,592		1,189	3,614	2,933
Income from discontinued operations**	—		—	—	706
Net Income	1,592		1,189	3,614	3,639
Less: net income attributable to noncontrolling interests	14		9	37	24
Net Income Attributable to Phillips 66	$	1,578	1,180	3,577	3,615

Amounts Attributable to Phillips 66 Common Stockholders:
Income from continuing operations	$	1,578	1,180	3,577	2,909
Income from discontinued operations	—		—	—	706
Net Income Attributable to Phillips 66	$	1,578	1,180	3,577	3,615

Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
Basic
Continuing operations	$	2.92	2.11	6.56	5.10
Discontinued operations	—		—	—	1.24
Net Income Attributable to Phillips 66 Per Share of Common Stock	$	2.92	2.11	6.56	6.34
Diluted
Continuing operations	$	2.90	2.09	6.52	5.05
Discontinued operations	—		—	—	1.23
Net Income Attributable to Phillips 66 Per Share of Common Stock	$	2.90	2.09	6.52	6.28

Dividends Paid Per Share of Common Stock (dollars)	$	0.56	0.50	1.62	1.39

Average Common Shares Outstanding (in thousands)
Basic	540,357		559,492	544,362	569,692
Diluted	544,696		564,958	549,034	575,589
* Includes excise taxes on petroleum products sales:	$	3,513	3,781	10,338	11,046
** Net of provision for income taxes on discontinued operations:	$	—	—	—	5
See Notes to Consolidated Financial Statements.

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Consolidated Statement of Comprehensive Income	Phillips 66



	Millions of Dollars
	Three Months Ended September 30					Nine Months Ended September 30
	2015			2014		2015		2014

Net Income	$	1,592		1,189		3,614		3,639
Other comprehensive income (loss)
Defined benefit plans
Actuarial gain (loss):
Actuarial loss arising during the period	(116		)	—		(116	)	—
Amortization to net income of net actuarial loss and settlements	98			15		147		41
Plans sponsored by equity affiliates	4			4		14		10
Income taxes on defined benefit plans	6			(5	)	(14	)	(16	)
Defined benefit plans, net of tax	(8		)	14		31		35
Foreign currency translation adjustments	(106		)	(233	)	(91	)	(106	)
Income taxes on foreign currency translation adjustments	(5		)	8		3		9
Foreign currency translation adjustments, net of tax	(111		)	(225	)	(88	)	(97	)
Other Comprehensive Loss, Net of Tax	(119		)	(211	)	(57	)	(62	)
Comprehensive Income	1,473			978		3,557		3,577
Less: comprehensive income attributable to noncontrolling interests	14			9		37		24
Comprehensive Income Attributable to Phillips 66	$	1,459		969		3,520		3,553

See Notes to Consolidated Financial Statements.

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Consolidated Balance Sheet	Phillips 66



	Millions of Dollars
	September 30 2015			December 31 2014
Assets
Cash and cash equivalents	$	4,822		5,207
Accounts and notes receivable (net of allowances of $68 million in 2015 and $71 million in 2014)	4,315			6,306
Accounts and notes receivable—related parties	883			949
Inventories	4,388			3,397
Prepaid expenses and other current assets	641			837
Total Current Assets	15,049			16,696
Investments and long-term receivables	10,601			10,189
Net properties, plants and equipment	19,257			17,346
Goodwill	3,275			3,274
Intangibles	879			900
Other assets	354			336
Total Assets	$	49,415		48,741

Liabilities
Accounts payable	$	6,151		7,488
Accounts payable—related parties	711			576
Short-term debt	43			842
Accrued income and other taxes	980			878
Employee benefit obligations	458			462
Other accruals	532			848
Total Current Liabilities	8,875			11,094
Long-term debt	8,908			7,842
Asset retirement obligations and accrued environmental costs	681			683
Deferred income taxes	5,401			5,491
Employee benefit obligations	1,249			1,305
Other liabilities and deferred credits	269			289
Total Liabilities	25,383			26,704

Equity
Common stock (2,500,000,000 shares authorized at $.01 par value) Issued (2015—638,634,255 shares; 2014—637,031,760 shares)
Par value	6			6
Capital in excess of par	19,116			19,040
Treasury stock (at cost: 2015—105,193,975 shares; 2014—90,649,984 shares)	(7,340		)	(6,234	)
Retained earnings	12,000			9,309
Accumulated other comprehensive loss	(588		)	(531	)
Total Stockholders’ Equity	23,194			21,590
Noncontrolling interests	838			447
Total Equity	24,032			22,037
Total Liabilities and Equity	$	49,415		48,741

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows	Phillips 66



	Millions of Dollars
	Nine Months Ended September 30
	2015			2014
Cash Flows From Operating Activities
Net income	$	3,614		3,639
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	797			722
Impairments	3			16
Accretion on discounted liabilities	16			18
Deferred taxes	(125		)	(527	)
Undistributed equity earnings	17			360
Net gain on dispositions	(283		)	(125	)
Income from discontinued operations	—			(706	)
Other	70			70
Working capital adjustments
Decrease (increase) in accounts and notes receivable	2,158			810
Decrease (increase) in inventories	(1,047		)	(2,336	)
Decrease (increase) in prepaid expenses and other current assets	165			(95	)
Increase (decrease) in accounts payable	(1,136		)	299
Increase (decrease) in taxes and other accruals	(33		)	510
Net cash provided by continuing operating activities	4,216			2,655
Net cash provided by discontinued operations	—			2
Net Cash Provided by Operating Activities	4,216			2,657

Cash Flows From Investing Activities
Capital expenditures and investments	(3,286		)	(2,647	)
Proceeds from asset dispositions*	68			663
Advances/loans—related parties	(50		)	(3	)
Collection of advances/loans—related parties	50			—
Other	2			161
Net cash used in continuing investing activities	(3,216		)	(1,826	)
Net cash used in discontinued operations	—			(2	)
Net Cash Used in Investing Activities	(3,216		)	(1,828	)

Cash Flows From Financing Activities
Issuance of debt	1,169			—
Repayment of debt	(918		)	(30	)
Issuance of common stock	(27		)	1
Repurchase of common stock	(1,106		)	(1,750	)
Share exchange—PSPI transaction	—			(450	)
Dividends paid on common stock	(874		)	(787	)
Distributions to noncontrolling interests	(30		)	(18	)
Net proceeds from issuance of Phillips 66 Partners LP common units	384			—
Other	2			23
Net cash used in continuing financing activities	(1,400		)	(3,011	)
Net cash used in discontinued operations	—			—
Net Cash Used in Financing Activities	(1,400		)	(3,011	)

Effect of Exchange Rate Changes on Cash and Cash Equivalents	15			(110	)

Net Change in Cash and Cash Equivalents	(385		)	(2,292	)
Cash and cash equivalents at beginning of period	5,207			5,400
Cash and Cash Equivalents at End of Period	$	4,822		3,108

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

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		Accum. Other Comprehensive Income (Loss)		Noncontrolling Interests		Total

December 31, 2013	$	6	18,887	(2,602	)	5,622		37		442		22,392
Net income	—		—	—		3,615		—		24		3,639
Other comprehensive income	—		—	—		—		(62	)	—		(62	)
Cash dividends paid on common stock	—		—	—		(787	)	—		—		(787	)
Repurchase of common stock	—		—	(1,750	)	—		—		—		(1,750	)
Share exchange—PSPI transaction	—		—	(1,350	)	—		—		—		(1,350	)
Benefit plan activity	—		141	—		(11	)	—		—		130
Distributions to noncontrolling interests and other	—		—	—		—		—		(18	)	(18	)
September 30, 2014	$	6	19,028	(5,702	)	8,439		(25	)	448		22,194

December 31, 2014	$	6	19,040	(6,234	)	9,309		(531	)	447		22,037
Net income	—		—	—		3,577		—		37		3,614
Other comprehensive income	—		—	—		—		(57	)	—		(57	)
Cash dividends paid on common stock	—		—	—		(874	)	—		—		(874	)
Repurchase of common stock	—		—	(1,106	)	—		—		—		(1,106	)
Benefit plan activity	—		76	—		(12	)	—		—		64
Issuance of Phillips 66 Partners LP common units	—		—	—		—		—		384		384
Distributions to noncontrolling interests and other	—		—	—		—		—		(30	)	(30	)
September 30, 2015	$	6	19,116	(7,340	)	12,000		(588	)	838		24,032



	Shares in Thousands
	Common Stock Issued	Treasury Stock
December 31, 2013	634,286	44,106
Repurchase of common stock	—	21,898
Share exchange—PSPI transaction	—	17,423
Shares issued—share-based compensation	2,655	—
September 30, 2014	636,941	83,427

December 31, 2014	637,032	90,650
Repurchase of common stock	—	14,544
Shares issued—share-based compensation	1,602	—
September 30, 2015	638,634	105,194

See Notes to Consolidated Financial Statements.

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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 and nine months ended September 30, 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 non-consolidated 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, and in September 2015, the petition was denied. We expect PDVSA will appeal this denial. Until all legal challenges are 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 MSLP’s 8.85% senior notes (MSLP Senior Notes). 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 being vacated because, under the partnership agreement, the co-venturers jointly direct the activities of MSLP that most significantly impact economic performance. At September 30, 2015, our maximum exposure to loss represented the outstanding $173 million principal balance of the MSLP Senior Notes and our investment in MSLP of $149 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 Excel’s 7.43% senior secured bonds (Excel Senior Bonds). 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 September 30, 2015, our maximum exposure to loss represented 50 percent of the outstanding $32 million principal balance of the Excel Senior Bonds, or $16 million, half of the $60 million liquidity support, or $30 million, and our investment in Excel of $117 million.

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Note 3—Inventories

Inventories consisted of the following:



	Millions of Dollars
	September 30 2015		December 31 2014

Crude oil and petroleum products	$	4,124	3,141
Materials and supplies	264		256
	$	4,388	3,397

Inventories valued on the last-in, first-out (LIFO) basis totaled $4,021 million and $3,004 million at September 30, 2015, and December 31, 2014, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $2,300 million and $3,000 million at September 30, 2015, and December 31, 2014, respectively.

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 supplying 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 these transactions is final and there were no material adjustments to the provisional amounts recorded.

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 the reduction of 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 was 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.

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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 nine-month period ended September 30, 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 on this disposal was deferred at the time of sale due to an indemnity provided to the buyer. We recognized the deferred gain in earnings as our exposure under the indemnity declined, beginning in the third quarter of 2014 and ending in the second quarter of 2015 when the indemnity expired. We recognized $242 million and $109 million of the deferred gain during the nine-month periods ended September 30, 2015 and 2014, respectively. These amounts are included in the “Net gain on dispositions” line of our consolidated statement of income.

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) was as follows:



	Millions of Dollars
	Three Months Ended September 30			Nine Months Ended September 30
	2015		2014	2015	2014

Revenues	$	5,266	7,896	16,092	24,579
Income before income taxes	881		784	2,611	3,094
Net income	860		758	2,556	3,021

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 September 30, 2015, the book value of our investment in WRB was $2,049 million and our basis difference was $3,235 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

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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, and in September 2015, the petition was denied. We expect PDVSA will appeal this denial. 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 all legal challenges are 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
	September 30, 2015				December 31, 2014
	Gross PP&E		Accum. D&A	Net PP&E	Gross PP&E	Accum. D&A	Net PP&E

Midstream	$	6,571	1,257	5,314	4,726	1,185	3,541
Chemicals	—		—	—	—	—	—
Refining	20,656		7,898	12,758	19,951	7,424	12,527
Marketing and Specialties	1,445		745	700	1,490	738	752
Corporate and Other	966		481	485	978	452	526
	$	29,638	10,381	19,257	27,145	9,799	17,346

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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 September 30							Nine Months Ended September 30
	2015				2014			2015			2014
	Basic			Diluted	Basic		Diluted	Basic		Diluted	Basic		Diluted
Amounts attributed to Phillips 66 Common Stockholders (millions):
Income from continuing operations attributable to Phillips 66	$	1,578		1,578	1,180		1,180	3,577		3,577	2,909		2,909
Income allocated to participating securities	(1		)	—	(2	)	—	(5	)	—	(5	)	—
Income from continuing operations available to common stockholders	1,577			1,578	1,178		1,180	3,572		3,577	2,904		2,909
Discontinued operations	—			—	—		—	—		—	706		706
Net Income available to common stockholders	$	1,577		1,578	1,178		1,180	3,572		3,577	3,610		3,615

Weighted-average common shares outstanding (thousands):	535,618			540,357	555,677		559,492	539,616		544,362	565,831		569,692
Effect of stock-based compensation	4,739			4,339	3,815		5,466	4,746		4,672	3,861		5,897
Weighted-average common shares outstanding—EPS	540,357			544,696	559,492		564,958	544,362		549,034	569,692		575,589

Earnings Per Share of Common Stock (dollars):
Income from continuing operations attributable to Phillips 66	$	2.92		2.90	2.11		2.09	6.56		6.52	5.10		5.05
Discontinued operations	—			—	—		—	—		—	1.24		1.23
Earnings Per Share	$	2.92		2.90	2.11		2.09	6.56		6.52	6.34		6.28

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Note 9—Debt

Debt Repayment

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

Debt Issuance

In 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 of 2.646% Senior Notes due 2020.


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


•	$300 million 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 September 30, 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 September 30, 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 September 30, 2015, an aggregate $5.4 billion of total capacity was available under these facilities.

Note 10—Guarantees

At September 30, 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 MSLP Senior Notes issued in July 1999. At September 30, 2015, the maximum potential amount of future payments to third parties under the guarantee was estimated to be $173 million, which could become payable if MSLP fails to meet its obligations under the senior notes agreement. The MSLP Senior Notes mature in 2019.

Other Guarantees

We have residual value guarantees associated with leases with maximum future potential payments totaling $395 million. We have other guarantees with maximum future potential payment amounts totaling $117 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.

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 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 September 30, 2015, was $210 million.

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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 $105 million of environmental accruals for known contamination that were primarily included in “Asset retirement obligations and accrued environmental costs” at September 30, 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.

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

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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 September 30, 2015, our total environmental accrual was $490 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 September 30, 2015, we had performance obligations secured by letters of credit and bank guarantees of $473 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.

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. Because we do not use 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

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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
	September 30 2015			December 31 2014
Assets
Accounts and notes receivable	$	(1	)	(1	)
Prepaid expenses and other current assets	1,770			3,839
Other assets	25			29
Liabilities
Other accruals	1,657			3,472
Other liabilities and deferred credits	21			1

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

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 September 30				Nine Months Ended September 30
	2015		2014		2015	2014

Sales and other operating revenues	$	195	179		21	208
Equity in earnings of affiliates	—		6		—	4
Other income	12		(3	)	59	12
Purchased crude oil and products	117		71		66	28

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

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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 September 30, 2015, and December 31, 2014, the percentages of our derivative contract volumes expiring within the next 12 months were approximately 98 percent and 99 percent, respectively.



	Open Position Long/(Short)
	September 30 2015		December 31 2014
Commodity
Crude oil, refined products and NGL (millions of barrels)	(29	)	(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.

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 September 30, 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.

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•	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. For the nine-month period ended September 30, 2015, derivative assets with an aggregate value of $316 million and derivative liabilities with an aggregate value of $324 million were transferred into Level 1, as measured from the beginning of the reporting period. The measurements were reclassified within the fair value hierarchy due to the availability of unadjusted quoted prices from an active market.

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 quotes 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 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.

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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 agreements 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
	September 30, 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	$	979	738	—	1,717	(1,588	)	(10	)	—		119	1
OTC instruments	—		12	—	12	(5	)	—		—		7	—
Physical forward contracts*	—		63	2	65	(4	)	—		—		61	—
Rabbi trust assets	80		—	—	80	N/A		N/A		—		80	N/A
	$	1,059	813	2	1,874	(1,597	)	(10	)	—		267

Commodity Derivative Liabilities
Exchange-cleared instruments	$	979	660	—	1,639	(1,588	)	(50	)	—		1	1
OTC instruments	—		9	—	9	(5	)	—		—		4	—
Physical forward contracts*	—		30	—	30	(4	)	—		—		26	—
Floating-rate debt	50		—	—	50	N/A		N/A		—		50	N/A
Fixed-rate debt, excluding capital leases**	—		8,793	—	8,793	N/A		N/A		(106	)	8,687	N/A
	$	1,029	9,492	—	10,521	(1,597	)	(50	)	(106	)	8,768

* 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.

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	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 rabbi trust assets appear on our consolidated balance sheet in the “Investments and long-term receivables” line, while the floating-rate and fixed-rate debt appear in the “Short-term debt” and “Long-term debt” lines. For information regarding where our commodity derivative assets and liabilities appear on the balance sheet, see the first table in Note 12—Derivatives and Financial Instruments.

Nonrecurring Fair Value Remeasurements

During the nine-month period ended September 30, 2015, there were no significant nonrecurring fair value remeasurements of assets subsequent to their initial recognition.

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 nine-month period ended September 30, 2014:



	Millions of Dollars
			Fair Value Measurements Using
	Fair Value*		Level 1 Inputs	Level 2 Inputs	Level 3 Inputs	Before- Tax Loss
September 30, 2014
Net asset disposal group (held for sale)	$	72	72	—	—	12

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

During the nine-month period ended September 30, 2014, net assets related to the Bantry Bay terminal in our Refining segment, with a carrying amount of $84 million, primarily consisting of net PP&E, were written down to fair value less costs to sell, resulting in a before-tax loss of $12 million. This impairment was attributed to the long-lived assets in the disposal group. The fair value was determined by a negotiated selling price with a third party. See Note 5—Assets Held for Sale or Sold, for additional information.

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Note 14—Employee Benefit Plans

Pension and Postretirement Plans

The components of net periodic benefit cost for the three and nine months ended September 30, 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 September 30
Service cost	$	32		9		30		9		1		1
Interest cost	27			7		27		9		2		2
Expected return on plan assets	(35		)	(9	)	(35	)	(9	)	—		—
Amortization of prior service cost	—			—		1		—		—		—
Recognized net actuarial loss	19			4		10		3		—		—
Settlements	75			—		—		—		—		—
Net periodic benefit cost	$	118		11		33		12		3		3

Nine Months Ended September 30
Service cost	$	94		29		91		29		5		5
Interest cost	81			21		81		27		6		6
Expected return on plan assets	(105		)	(28	)	(106	)	(28	)	—		—
Amortization of prior service cost (credit)	2			(1	)	2		(1	)	(1	)	(1	)
Recognized net actuarial loss (gain)	56			12		30		9		(1	)	(1	)
Settlements	76			—		—		—		—		—
Net periodic benefit cost	$	204		33		98		36		9		9

During the first nine months of 2015, we contributed $225 million to our U.S. benefit plans and $52 million to our international benefit plans. We currently expect to make additional contributions of approximately $5 million to our U.S. benefit plans and $10 million to our international benefit plans during the remainder of 2015.

During the three months ended September 30, 2015, lump-sum benefit payments exceeded the sum of service and interest costs for the plan year for the U.S. qualified pension plan. As a result, we recognized a proportionate share of prior actuarial losses, or pension settlement expense, of $73 million. We have also recognized year-to-date pension settlement expense of $3 million related to our U.S. non-qualified supplemental retirement plan. In conjunction with the recognition of pension settlement expense, the plan assets and pension benefit obligation of the U.S. qualified pension plan were remeasured as of September 30, 2015. At the measurement date, the net pension liability increased $116 million resulting in a corresponding decrease to other comprehensive income. The increase in the net pension liability was primarily due to a decline in plan asset fair value.

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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 (loss) before reclassifications	6			(97	)	—		(91	)
Amounts reclassified from accumulated other comprehensive income (loss)*
Amortization of defined benefit plan items**
Actuarial losses	29			—		—		29
Net current period other comprehensive income (loss)	35			(97	)	—		(62	)
September 30, 2014	$	(369	)	346		(2	)	(25	)

December 31, 2014	$	(696	)	167		(2	)	(531	)
Other comprehensive loss before reclassifications	(63		)	(88	)	—		(151	)
Amounts reclassified from accumulated other comprehensive income (loss)*
Amortization of defined benefit plan items**
Actuarial losses and settlements	94			—		—		94
Net current period other comprehensive income (loss)	31			(88	)	—		(57	)
September 30, 2015	$	(665	)	79		(2	)	(588	)

* 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.

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Note 17—Related Party Transactions

Significant transactions with related parties were:



	Millions of Dollars
	Three Months Ended September 30			Nine Months Ended September 30
	2015		2014	2015	2014

Operating revenues and other income (a)	$	581	1,653	1,872	5,306
Purchases (b)	1,927		3,772	6,281	12,298
Operating expenses and selling, general and administrative expenses (c)	29		33	91	109
Interest expense (d)	2		2	5	6

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 crude oil and 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 paid NGL fractionation fees to CPChem. 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.

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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.

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Analysis of Results by Operating Segment



	Millions of Dollars
	Three Months Ended September 30					Nine Months Ended September 30
	2015			2014		2015		2014
Sales and Other Operating Revenues
Midstream
Total sales	$	821		1,323		2,703		4,633
Intersegment eliminations	(250		)	(255	)	(747	)	(821	)
Total Midstream	571			1,068		1,956		3,812
Chemicals	1			2		4		6
Refining
Total sales	16,511			28,910		49,737		91,753
Intersegment eliminations	(10,758		)	(17,768	)	(31,434	)	(54,119	)
Total Refining	5,753			11,142		18,303		37,634
Marketing and Specialties
Total sales	19,852			28,663		57,943		86,198
Intersegment eliminations	(386		)	(466	)	(1,146	)	(1,424	)
Total Marketing and Specialties	19,466			28,197		56,797		84,774
Corporate and Other	1			8		22		23
Consolidated sales and other operating revenues	$	25,792		40,417		77,082		126,249

Net Income (Loss) Attributable to Phillips 66
Midstream	$	101		115		90		411
Chemicals	252