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	March 31, 2016



		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 525,581,458 shares of common stock, $.01 par value, outstanding as of March 31, 2016.

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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	30

Item 3. Quantitative and Qualitative Disclosures About Market Risk	46

Item 4. Controls and Procedures	46

Part II – Other Information

Item 1. Legal Proceedings	47

Item 1A. Risk Factors	47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 6. Exhibits	49

Signatures	50

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS



Consolidated Statement of Income	Phillips 66



	Millions of Dollars
	Three Months Ended March 31
	2016			2015
Revenues and Other Income
Sales and other operating revenues*	$	17,409		22,778
Equity in earnings of affiliates	333			456
Net gain on dispositions	—			122
Other income	18			70
Total Revenues and Other Income	17,760			23,426

Costs and Expenses
Purchased crude oil and products	11,930			16,695
Operating expenses	1,023			1,094
Selling, general and administrative expenses	386			394
Depreciation and amortization	280			253
Taxes other than income taxes*	3,461			3,462
Accretion on discounted liabilities	5			5
Interest and debt expense	86			86
Foreign currency transaction (gains) losses	(7		)	49
Total Costs and Expenses	17,164			22,038
Income before income taxes	596			1,388
Provision for income taxes	198			391
Net income	398			997
Less: net income attributable to noncontrolling interests	13			10
Net Income Attributable to Phillips 66	$	385		987

Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
Basic	$	0.72		1.80
Diluted	0.72			1.79

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

Average Common Shares Outstanding (in thousands)
Basic	531,739			548,200
Diluted	534,709			552,337
* Includes excise taxes on petroleum products sales:	$	3,360		3,362
See Notes to Consolidated Financial Statements.

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Consolidated Statement of Comprehensive Income	Phillips 66



	Millions of Dollars
	Three Months Ended March 31
	2016			2015

Net Income	$	398		997
Other comprehensive income (loss)
Defined benefit plans
Actuarial gain (loss):
Amortization to net income of net actuarial loss and settlements	23			30
Plans sponsored by equity affiliates	6			5
Income taxes on defined benefit plans	(11		)	(10	)
Defined benefit plans, net of tax	18			25
Foreign currency translation adjustments	(15		)	(197	)
Income taxes on foreign currency translation adjustments	(2		)	9
Foreign currency translation adjustments, net of tax	(17		)	(188	)
Cash flow hedges	(8		)	—
Income taxes on hedging activities	3			—
Hedging activities, net of tax	(5		)	—
Other Comprehensive Loss, Net of Tax	(4		)	(163	)
Comprehensive Income	394			834
Less: comprehensive income attributable to noncontrolling interests	13			10
Comprehensive Income Attributable to Phillips 66	$	381		824

See Notes to Consolidated Financial Statements.

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Consolidated Balance Sheet	Phillips 66



	Millions of Dollars
	March 31 2016			December 31 2015
Assets
Cash and cash equivalents	$	1,723		3,074
Accounts and notes receivable (net of allowances of $41 million in 2016 and $55 million in 2015)	3,991			4,411
Accounts and notes receivable—related parties	746			762
Inventories	4,108			3,477
Prepaid expenses and other current assets	648			532
Total Current Assets	11,216			12,256
Investments and long-term receivables	12,449			12,143
Net properties, plants and equipment	20,075			19,721
Goodwill	3,275			3,275
Intangibles	901			906
Other assets	330			279
Total Assets	$	48,246		48,580

Liabilities
Accounts payable	$	5,063		5,155
Accounts payable—related parties	704			500
Short-term debt	32			44
Accrued income and other taxes	820			878
Employee benefit obligations	306			576
Other accruals	494			378
Total Current Liabilities	7,419			7,531
Long-term debt	8,803			8,843
Asset retirement obligations and accrued environmental costs	673			665
Deferred income taxes	6,089			6,041
Employee benefit obligations	1,310			1,285
Other liabilities and deferred credits	309			277
Total Liabilities	24,603			24,642

Equity
Common stock (2,500,000,000 shares authorized at $.01 par value) Issued (2016—640,406,569 shares; 2015—639,336,287 shares)
Par value	6			6
Capital in excess of par	19,142			19,145
Treasury stock (at cost: 2016—114,825,111 shares; 2015—109,925,907 shares)	(8,137		)	(7,746	)
Retained earnings	12,434			12,348
Accumulated other comprehensive loss	(657		)	(653	)
Total Stockholders’ Equity	22,788			23,100
Noncontrolling interests	855			838
Total Equity	23,643			23,938
Total Liabilities and Equity	$	48,246		48,580

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows	Phillips 66



	Millions of Dollars
	Three Months Ended March 31
	2016			2015
Cash Flows From Operating Activities
Net income	$	398		997
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	280			253
Accretion on discounted liabilities	5			5
Deferred taxes	154			(6	)
Undistributed equity earnings	(166		)	(337	)
Net gain on dispositions	—			(122	)
Other	51			90
Working capital adjustments
Decrease (increase) in accounts and notes receivable	524			1,684
Decrease (increase) in inventories	(620		)	(834	)
Decrease (increase) in prepaid expenses and other current assets	(310		)	(130	)
Increase (decrease) in accounts payable	98			(349	)
Increase (decrease) in taxes and other accruals	(156		)	101
Net Cash Provided by Operating Activities	258			1,352

Cash Flows From Investing Activities
Capital expenditures and investments	(750		)	(1,081	)
Proceeds from asset dispositions*	5			(9	)
Advances/loans—related parties	(75		)	(50	)
Other	(42		)	102
Net Cash Used in Investing Activities	(862		)	(1,038	)

Cash Flows From Financing Activities
Issuance of debt	50			1,169
Repayment of debt	(100		)	(895	)
Issuance of common stock	(31		)	(25	)
Repurchase of common stock	(391		)	(399	)
Dividends paid on common stock	(296		)	(272	)
Distributions to noncontrolling interests	(11		)	(6	)
Net proceeds from issuance of Phillips 66 Partners LP common units	—			384
Other	(4		)	(14	)
Net Cash Used in Financing Activities	(783		)	(58	)

Effect of Exchange Rate Changes on Cash and Cash Equivalents	36			(73	)

Net Change in Cash and Cash Equivalents	(1,351		)	183
Cash and cash equivalents at beginning of period	3,074			5,207
Cash and Cash Equivalents at End of Period	$	1,723		5,390

* 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, 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

December 31, 2015	$	6	19,145		(7,746	)	12,348		(653	)	838		23,938
Net income	—		—		—		385		—		13		398
Other comprehensive loss	—		—		—		—		(4	)	—		(4	)
Cash dividends paid on common stock	—		—		—		(296	)	—		—		(296	)
Repurchase of common stock	—		—		(391	)	—		—		—		(391	)
Benefit plan activity	—		8		—		(3	)	—		—		5
Distributions to noncontrolling interests and other	—		(11	)	—		—		—		4		(7	)
March 31, 2016	$	6	19,142		(8,137	)	12,434		(657	)	855		23,643



	Shares in Thousands
	Common Stock Issued	Treasury Stock
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

December 31, 2015	639,336	109,926
Repurchase of common stock	—	4,899
Shares issued—share-based compensation	1,071	—
March 31, 2016	640,407	114,825

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 2015 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2016, are not necessarily indicative of the results to be expected for the full year.

Note 2—Changes in Accounting Principles

Effective January 1, 2016, we early adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” The new update simplified the presentation of deferred income taxes and required deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The classification was made at the taxpaying component level of an entity, after reflecting any offset of deferred tax liabilities, deferred tax assets and any related valuation allowances. We applied the amendments prospectively to all deferred tax liabilities and assets.

In June 2014, the FASB issued ASU 2014-10, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities (VIE) Guidance in Topic 810, Consolidation.” The new standard removes the definition of a development stage entity from the Master Glossary of the Accounting Standard Codification and the related financial reporting requirements specific to development stage entities. This ASU is intended to reduce cost and complexity of financial reporting for entities that have not commenced planned principal operations. For financial reporting requirements other than the VIE guidance in ASC Topic 810, “Consolidation,” ASU 2014-10 was effective for annual and quarterly reporting periods of public entities beginning after December 15, 2014. For the financial reporting requirements related to VIEs in ASC Topic 810, “Consolidation,” ASU 2014-10 was effective for annual and quarterly reporting periods of public entities beginning after December 15, 2015. We adopted this standard and updated our disclosures about the risks and uncertainties related to our joint venture entities that have not commenced their principal operations.

Note 3—Variable Interest Entities

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 (NGL) 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 19—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. In January 2016, PDVSA filed an appeal with the appellate court seeking to reverse this ruling. 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

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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 March 31, 2016, our maximum exposure to loss was the outstanding principal balance of the MSLP Senior Notes of $157 million and our investment in MSLP of $164 million.

We have a 50 percent ownership interest with a 50 percent governance interest in Excel Paralubes (Excel). Liquidity support up to $60 million was provided jointly by us and our co-venturer independently of equity ownership. In March 2016, this liquidity support was terminated when Excel converted from a general partnership to a limited liability company and entered into a new credit agreement. In our reassessment of Excel’s VIE status, we determined that Excel is no longer a VIE, as it is now exposed to all potential losses.

We have a 25 percent ownership interest in Dakota Access LLC (DAPL) and Energy Transfer Crude Oil Company, LLC (ETCOP) in which the planned principal operations of each entity have not commenced. Until the planned principal operations have commenced, these entities do not have sufficient equity at risk to fully fund the construction of all assets required for principal operations, and thus represent VIEs. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of DAPL and ETCOP that most significantly impact economic performance. We use the equity method of accounting for these investments. At March 31, 2016, our maximum exposure to loss represented the aggregate book value of our investments of $494 million.

Note 4—Inventories

Inventories consisted of the following:



	Millions of Dollars
	March 31 2016		December 31 2015

Crude oil and petroleum products	$	3,845	3,214
Materials and supplies	263		263
	$	4,108	3,477

Inventories valued on the last-in, first-out (LIFO) basis totaled $3,738 million and $3,085 million at March 31, 2016, and December 31, 2015, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $1.5 billion and $1.3 billion at March 31, 2016, and December 31, 2015, respectively.

Certain planned year-to-date reductions in inventory caused liquidations of LIFO inventory values that are not expected to be replaced by the end of the year. These liquidations decreased net income by approximately $43 million during the three month period ending March 31, 2016, and $36 million for the comparable period in 2015.

Note 5—Assets Held for Sale or Sold

In July 2013, we completed the sale of the Immingham Combined Heat and Power Plant (ICHP), which was included in our Marketing and Specialties (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 $110 million of the deferred gain in the first quarter of 2015.

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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 March 31
	2016		2015

Revenues	$	3,690	4,906
Income before income taxes	346		692
Net income	329		672

Other

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, and in September 2015, the petition was denied. In January 2016, PDVSA filed an appeal in the appellate court to vacate this 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 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 properties, plants and equipment (PP&E), with the associated accumulated depreciation and amortization (Accum. D&A), was:



	Millions of Dollars
	March 31, 2016				December 31, 2015
	Gross PP&E		Accum. D&A	Net PP&E	Gross PP&E	Accum. D&A	Net PP&E

Midstream	$	7,441	1,430	6,011	6,978	1,293	5,685
Chemicals	—		—	—	—	—	—
Refining	20,930		8,113	12,817	20,850	8,046	12,804
Marketing and Specialties	1,468		785	683	1,422	746	676
Corporate and Other	1,088		524	564	1,060	504	556
	$	30,927	10,852	20,075	30,310	10,589	19,721

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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 March 31
	2016					2015
	Basic			Diluted		Basic		Diluted
Amounts attributed to Phillips 66 Common Stockholders (millions):
Net income attributable to Phillips 66	$	385		385		987		987
Income allocated to participating securities	(1		)	(1	)	(2	)	(1	)
Net Income available to common stockholders	$	384		384		985		986

Weighted-average common shares outstanding (thousands):	527,229			531,739		543,469		548,200
Effect of stock-based compensation	4,510			2,970		4,731		4,137
Weighted-average common shares outstanding—EPS	531,739			534,709		548,200		552,337

Earnings Per Share of Common Stock (dollars):	$	0.72		0.72		1.80		1.79

Note 9—Debt

At both March 31, 2016, and December 31, 2015, 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 both March 31, 2016, and December 31, 2015, no amounts were outstanding under the $500 million revolving credit agreement of Phillips 66 Partners. Accordingly, as of March 31, 2016, an aggregate $5.4 billion of total capacity was available under these facilities.

Note 10—Guarantees

At March 31, 2016, 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 March 31, 2016, the maximum potential amount of future payments to third parties under the guarantee was estimated to be $157 million, which could become payable if MSLP fails to meet its obligations under the senior notes agreement. The MSLP Senior Notes mature in 2019.

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Other Guarantees

We have residual value guarantees associated with leases with maximum future potential payments totaling $382 million. We have other guarantees with maximum future potential payment amounts totaling $114 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 8 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 March 31, 2016, was $195 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 $98 million of environmental accruals for known contamination that were primarily included in “Asset retirement obligations and accrued environmental costs” at March 31, 2016. 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 financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include 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.

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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, 2016, our total environmental accrual was $488 million, compared with $485 million at December 31, 2015. 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 and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, 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, 2016, we had performance obligations secured by letters of credit and bank guarantees of $375 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.

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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, interest rates and commodity prices or to capture market opportunities. Because we have not used cash-flow hedge accounting for commodity derivative contracts, all gains and losses, realized or unrealized, from these 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, 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 sell into or receive supply from the worldwide crude oil, refined products, natural gas, NGL, and electric power markets, exposing our revenues, purchases, cost of operating activities, and cash flows to fluctuations in the prices for these commodities. 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, all of which may reduce our exposure to fluctuations in market prices. 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.

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 2016		December 31 2015
Assets
Prepaid expenses and other current assets	$	1,112	2,607
Other assets	4		5
Liabilities
Other accruals	1,089		2,425
Other liabilities and deferred credits	5		5

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

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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
	2016			2015

Sales and other operating revenues	$	(86	)	(31	)
Other income	9			43
Purchased crude oil and products	(36		)	20

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. The percentage of our derivative contract volumes expiring within the next 12 months was approximately 99 percent at both March 31, 2016 and December 31, 2015.



	Open Position Long/(Short)
	March 31 2016		December 31 2015
Commodity
Crude oil, refined products and NGL (millions of barrels)	(36	)	(17	)

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.

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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, 2016, or December 31, 2015.

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 and forward purchases and sales: 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 three-month period ended March 31, 2016, derivative assets with an aggregate value of $106 million and derivative liabilities with an aggregate value of $81 million were transferred into Level 1 from Level 2, 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

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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.

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
	March 31, 2016
	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	$	668	409	—	1,077	(1,019	)	(7	)	—		51	—
OTC instruments	—		4	—	4	(2	)	—		—		2	—
Physical forward contracts*	—		35	—	35	—		—		—		35	—
Rabbi trust assets	92		—	—	92	N/A		N/A		—		92	N/A
	$	760	448	—	1,208	(1,021	)	(7	)	—		180

Commodity Derivative Liabilities
Exchange-cleared instruments	$	684	387	—	1,071	(1,019	)	(52	)	—		—	—
OTC instruments	—		3	—	3	(2	)	—		—		1	—
Physical forward contracts*	—		20	—	20	—		—		—		20	—
Floating-rate debt	50		—	—	50	N/A		N/A		—		50	N/A
Fixed-rate debt, excluding capital leases**	—		8,866	—	8,866	N/A		N/A		(280	)	8,586	N/A
	$	734	9,276	—	10,010	(1,021	)	(52	)	(280	)	8,657

* 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, 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	$	1,851	703	—	2,554	(2,389	)	(100	)	—	65	—
OTC instruments	—		13	—	13	(12	)	—		—	1	—
Physical forward contracts*	3		40	2	45	—		—		—	45	—
Rabbi trust assets	83		—	—	83	N/A		N/A		—	83	N/A
	$	1,937	756	2	2,695	(2,401	)	(100	)	—	194

Commodity Derivative Liabilities
Exchange-cleared instruments	$	1,745	646	—	2,391	(2,389	)	—		—	2	—
OTC instruments	—		17	—	17	(12	)	—		—	5	—
Physical forward contracts*	—		22	—	22	—		—		—	22	—
Floating-rate debt	50		—	—	50	N/A		N/A		—	50	N/A
Fixed-rate debt, excluding capital leases**	—		8,434	—	8,434	N/A		N/A		195	8,629	N/A
	$	1,795	9,119	—	10,914	(2,401	)	—		195	8,708

** 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.

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Note 14—Employee Benefit Plans

Pension and Postretirement Plans

The components of net periodic benefit cost for the three months ended March 31, 2016 and 2015, were as follows:



	Millions of Dollars
	Pension Benefits									Other Benefits
	2016					2015				2016	2015
	U.S.			Int’l.		U.S.		Int’l.
Components of Net Periodic Benefit Cost
Three Months Ended March 31
Service cost	$	32		9		31		10		2	2
Interest cost	29			7		27		7		2	2
Expected return on plan assets	(32		)	(10	)	(35	)	(10	)	—	—
Amortization of prior service cost	1			—		1		—		—	—
Recognized net actuarial loss	18			4		19		4		—	—
Settlements	3			—		1		—		—	—
Net periodic benefit cost	$	51		10		44		11		4	4

During the first three months of 2016, we contributed $8 million to our U.S. benefit plans and $12 million to our international benefit plans. We currently expect to make additional contributions of approximately $20 million to our U.S. benefit plans and $30 million to our international benefit plans during the remainder of 2016.

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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, 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	)

December 31, 2015	$	(662	)	11		(2	)	(653	)
Other comprehensive income (loss) before reclassifications	4			(17	)	(5	)	(18	)
Amounts reclassified from accumulated other comprehensive income (loss)*
Amortization of defined benefit plan items**
Actuarial losses and settlements	14			—		—		14
Net current period other comprehensive income (loss)	18			(17	)	(5	)	(4	)
March 31, 2016	$	(644	)	(6	)	(7	)	(657	)

* 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).

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Note 16—Related Party Transactions

Significant transactions with related parties were:



	Millions of Dollars
	Three Months Ended March 31
	2016		2015

Operating revenues and other income (a)	$	407	617
Purchases (b)	1,503		1,948
Operating expenses and selling, general and administrative expenses (c)	33		31
Interest expense (d)	1		2

(a)

We sold NGL and other petrochemical feedstocks, along with solvents to CPChem, and we sold gas oil and hydrogen feedstocks to Excel. We sold certain feedstocks and intermediate products to WRB and also acted as agent for WRB in supplying crude oil and other feedstocks for a fee. 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. We purchased natural gas and NGL from DCP Midstream and CPChem, as well as other feedstocks from various affiliates, for use in our refinery and fractionation processes. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline equity companies for transporting finished refined products and NGL. 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 17—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 terminaling and storage services for crude oil and petroleum products. The Midstream segment includes our master limited partnership, Phillips 66 Partners LP, as well as our 50 percent equity investment in DCP Midstream.


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


3)	Refining—Buys, sells and refines crude oil and other feedstocks at 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 March 31
	2016			2015
Sales and Other Operating Revenues
Midstream
Total sales	$	931		969
Intersegment eliminations	(292		)	(254	)
Total Midstream	639			715
Chemicals	1			2
Refining
Total sales	10,238			14,271
Intersegment eliminations	(6,559		)	(8,756	)
Total Refining	3,679			5,515
Marketing and Specialties
Total sales	13,348			16,748
Intersegment eliminations	(266		)	(211	)
Total Marketing and Specialties	13,082			16,537
Corporate and Other	8			9
Consolidated sales and other operating revenues	$	17,409		22,778

Net Income (Loss) Attributable to Phillips 66
Midstream	$	65		67
Chemicals	156			203
Refining	86			538
Marketing and Specialties	205			304
Corporate and Other	(127		)	(125	)
Consolidated net income attributable to Phillips 66	$	385		987



	Millions of Dollars
	March 31 2016		December 31 2015
Total Assets
Midstream	$	11,383	11,043
Chemicals	5,410		5,237
Refining	22,790		21,993
Marketing and Specialties	6,031		5,631
Corporate and Other	2,632		4,676
Consolidated total assets	$	48,246	48,580

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Note 18—Income Taxes

Our effective tax rate for the first quarter of 2016 was 33 percent, compared with 28 percent for the corresponding period of 2015. The increase in the effective tax rate was primarily attributable to a decrease in the manufacturing deduction in the first quarter of 2016, and a favorable tax settlement in the United Kingdom and recognition of a nontaxable gain associated with the sale of ICHP in the first quarter of 2015. 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 19—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 1, 2016, we contributed to Phillips 66 Partners a 25 percent interest in our wholly owned subsidiary, Phillips 66 Sweeny Frac LLC, which owns the Sweeny Fractionator One, an NGL fractionator located within our Sweeny Refinery complex in Old Ocean, Texas, and the Clemens Caverns, an NGL salt dome storage facility located near Brazoria, Texas. Total consideration for the transaction was $236 million, which consisted of Phillips 66 Partners’ assumption of a $212 million note payable to us, and the issuance of common units and general partner units to us with an aggregate fair value of $24 million.

At March 31, 2016, 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 3—Variable Interest Entities, for additional information). The public’s ownership interest in Phillips 66 Partners was $809 million at March 31, 2016, 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 at March 31, 2016, were equity investments of $967 million and net PP&E of $778 million, excluding the noncontrolling interest of Phillips 66 Sweeny Frac LLC.

Note 20—New Accounting Standards

In March 2016, the FASB issued ASU No. 2016-07, “Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The new standard eliminates the requirement that an investor retroactively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. Public business entities should apply the guidance in ASU 2016-07 for annual periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. We are currently evaluating the provisions of ASU 2016-07 and assessing the impact on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” In the new standard, the FASB modified its determination of whether a contract is a lease rather than whether a lease is a capital or operating lease under the previous accounting principles generally accepted in the United States (GAAP). A contract represents a lease if a transfer of control occurs over an identified property, plant and equipment for a period of time in exchange for consideration. Control over the use of the identified asset includes the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct its use. The FASB continued to maintain two classifications of leases - financing and operating - which are substantially similar to capital and operating leases in the previous lease guidance. Under the new standard, recognition of assets and liabilities arising from operating leases will require recognition on the balance sheet. The effect of all leases in the statement of comprehensive income and the statement of cash flows will be largely unchanged. Lessor accounting will also be largely unchanged. Additional disclosures will be required for financing and operating leases for both lessors and lessees. Public business entities should apply the guidance in ASU 2016-02 for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the provisions of ASU 2016-02 and assessing its impact on our financial statements.

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In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” to meet its objective of providing more decision-useful information about financial instruments. The majority of this ASU’s provisions amend only the presentation or disclosures of financial instruments; however, one provision will also affect net income. Equity investments carried under the cost method or lower of cost or fair value method of accounting, in accordance with current GAAP, will have to be carried at fair value upon adoption of ASU 2016-01, with changes in fair value recorded in net income. For equity investments that do not have readily determinable fair values, a company may elect to carry such investments at cost less impairments, if any, adjusted up or down for price changes in similar financial instruments issued by the investee, when and if observed. Public business entities should apply the guidance in ASU 2016-01 for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption prohibited. We are currently evaluating the provisions of ASU 2016-01 and assessing the impact on our financial statements.

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 GAAP and International Financial Reporting Standards. This ASU is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” The amendment in this ASU defers the effective date of ASU 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. Retrospective or modified retrospective application of the accounting standard is required. We are currently evaluating the provisions of ASU 2014-09 and assessing the impact on our financial statements. As part of our assessment work to-date, we have formed an implementation work team, completed training of the new ASU’s revenue recognition model and begun contract review and documentation.

Note 21—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.

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	Millions of Dollars
	Three Months Ended March 31, 2016
Statement of Income	Phillips 66			Phillips 66 Company	All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—		11,698	5,711		—		17,409
Equity in earnings of affiliates	447			398	86		(598	)	333
Net gain on dispositions	—			—	—		—		—
Other income	—			15	3		—		18
Intercompany revenues	—			178	1,587		(1,765	)	—
Total Revenues and Other Income	447			12,289	7,387		(2,363	)	17,760

Costs and Expenses
Purchased crude oil and products	—			8,994	4,645		(1,709	)	11,930
Operating expenses	—			832	199		(8	)	1,023
Selling, general and administrative expenses	3			287	99		(3	)	386
Depreciation and amortization	—			200	80		—		280
Taxes other than income taxes	—			1,344	2,117		—		3,461
Accretion on discounted liabilities	—			4	1		—		5
Interest and debt expense	93			8	30		(45	)	86
Foreign currency transaction (gains) losses	—			—	(7	)	—		(7	)
Total Costs and Expenses	96			11,669	7,164		(1,765	)	17,164
Income before income taxes	351			620	223		(598	)	596
Provision (benefit) for income taxes	(34		)	173	59		—		198
Net income	385			447	164		(598	)	398
Less: net income attributable to noncontrolling interests	—			—	13		—		13
Net Income Attributable to Phillips 66	$	385		447	151		(598	)	385

Comprehensive Income	$	381		443	152		(582	)	394

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	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 (loss) 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
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 (gains) losses	—			—		49	—		49
Total Costs and Expenses	99			15,028		9,200	(2,289	)	22,038
Income before income taxes	953			1,475		327	(1,367	)	1,388
Provision (benefit) for income taxes	(34		)	423		2	—		391
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

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	Millions of Dollars
	March 31, 2016
Balance Sheet	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Assets
Cash and cash equivalents	$	—		310		1,413		—		1,723
Accounts and notes receivable	22			2,995		2,719		(999	)	4,737
Inventories	—			2,561		1,547		—		4,108
Prepaid expenses and other current assets	1			360		287		—		648
Total Current Assets	23			6,226		5,966		(999	)	11,216
Investments and long-term receivables	31,952			22,839		7,504		(49,846	)	12,449
Net properties, plants and equipment	—			12,723		7,352		—		20,075
Goodwill	—			3,040		235		—		3,275
Intangibles	—			724		177		—		901
Other assets	13			166		153		(2	)	330
Total Assets	$	31,988		45,718		21,387		(50,847	)	48,246

Liabilities and Equity
Accounts payable	$	—		3,949		2,817		(999	)	5,767
Short-term debt	—			26		6		—		32
Accrued income and other taxes	—			317		503		—		820
Employee benefit obligations	—			279		27		—		306
Other accruals	143			267		84		—		494
Total Current Liabilities	143			4,838		3,437		(999	)	7,419
Long-term debt	7,415			151		1,237		—		8,803
Asset retirement obligations and accrued environmental costs	—			500		173		—		673
Deferred income taxes	—			4,416		1,675		(2	)	6,089
Employee benefit obligations	—			1,109		201		—		1,310
Other liabilities and deferred credits	1,613			2,795		3,909		(8,008	)	309
Total Liabilities	9,171			13,809		10,632		(9,009	)	24,603
Common stock	11,011			25,404		10,764		(36,168	)	11,011
Retained earnings	12,463			7,162		(733	)	(6,458	)	12,434
Accumulated other comprehensive income (loss)	(657		)	(657	)	(131	)	788		(657	)
Noncontrolling interests	—			—		855		—		855
Total Liabilities and Equity	$	31,988		45,718		21,387		(50,847	)	48,246

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	Millions of Dollars
	December 31, 2015
Balance Sheet	Phillips 66		Phillips 66 Company	All Other Subsidiaries	Consolidating Adjustments		Total Consolidated
Assets
Cash and cash equivalents	$	—	575	2,499	—		3,074
Accounts and notes receivable	14		3,643	2,217	(701	)	5,173
Inventories	—		2,171	1,306	—		3,477
Prepaid expenses and other current assets	2		382	148	—		532
Total Current Assets	16		6,771	6,170	(701	)	12,256
Investments and long-term receivables	33,315		24,068	7,395	(52,635	)	12,143
Net properties, plants and equipment	—		12,651	7,070	—		19,721
Goodwill	—		3,040	235	—		3,275
Intangibles	—		726	180	—		906
Other assets	16		154