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EX-12 - EXHIBIT 12 - Phillips 66psx-2015930_ex12.htm
EX-32 - EXHIBIT 32 - Phillips 66psx-2015930_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Phillips 66psx-2015930_ex312.htm
EX-31.1 - EXHIBIT 31.1 - Phillips 66psx-2015930_ex311.htm

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.



PHILLIPS 66

TABLE OF CONTENTS
 





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.
 
 
 
 
 

1


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.

2


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.

3


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.

4


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.

5


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.

6


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.


7


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

8


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






9


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



10


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.


11


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

12


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

13


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.



14


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.

15


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.


16


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

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.



17


 
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

 
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


* 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.


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.

18


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.




19


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.



20


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.


21


Note 18—Segment Disclosures and Related Information

Our operating segments are:

1)
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.




22


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

230

 
750

870

Refining
1,003

558

 
2,145

1,254

Marketing and Specialties
338

368

 
956

667

Corporate and Other
(116
)
(91
)
 
(364
)
(293
)
Discontinued operations


 

706

Consolidated net income attributable to Phillips 66
$
1,578

1,180

 
3,577

3,615



 
Millions of Dollars
 
September 30
2015

 
December 31
2014

Total Assets
 
 
 
Midstream
$
9,251

 
7,295

Chemicals
5,168

 
5,209

Refining
22,777

 
22,808

Marketing and Specialties
6,428

 
7,051

Corporate and Other
5,791

 
6,378

Consolidated total assets
$
49,415

 
48,741




23


Note 19—Income Taxes

Our effective tax rate for the third quarter and the first nine months of 2015 was 33 percent and 31 percent, respectively, compared with 31 percent and 33 percent for the corresponding periods of 2014. The increase in the effective tax rate for the third quarter of 2015, compared with the third quarter of 2014, was primarily attributable to the recognition of a nontaxable gain associated with the sale of ICHP in 2014. The decrease in the effective tax rate for the first nine months of 2015, compared with the first nine months of 2014, was primarily attributable to a favorable tax settlement in the United Kingdom and a larger impact in 2015 from the recognition of a nontaxable gain associated with the sale of ICHP. For additional information on the nontaxable gain, see Note 5—Assets Held for Sale or Sold. The effective tax rate varies from the federal statutory tax rate of 35 percent primarily as a result of state tax expense, offset by the manufacturing deduction and foreign operations.


Note 20—Phillips 66 Partners LP

In 2013, we formed Phillips 66 Partners, a master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and NGL pipelines and terminals, as well as other transportation and midstream assets.
In March 2015, we contributed to Phillips 66 Partners our equity interests in Explorer Pipeline Company (19.5 percent), DCP Sand Hills Pipeline, LLC (33.3 percent), and DCP Southern Hills Pipeline, LLC (33.3 percent). Each of these investments is accounted for under the equity method of accounting. The total consideration for the transaction was $1,010 million, which consisted of $880 million in cash and the issuance of common units and general partner units to us with an aggregate fair value of $130 million.
In February 2015, Phillips 66 Partners completed a public offering of 5,250,000 common units representing limited partner interests, at a public offering price of $75.50 per unit. The net proceeds received at closing were $384 million. Additionally, Phillips 66 Partners closed a public offering of $1.1 billion aggregate principal amount of senior notes. For additional information about the senior notes, see Note 9—Debt.
Phillips 66 Partners used a portion of the net proceeds of both offerings to fund the acquisition transaction discussed above and repay existing borrowings from a subsidiary of Phillips 66. The remainder is being used for capital expenditures and for general partnership purposes.
At September 30, 2015, we owned a 69 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, while the public owned a 29 percent limited partner interest. We consolidate Phillips 66 Partners because we control the partnership through our general partner interest (see Note 2—Variable Interest Entities (VIEs), for additional information). The public’s ownership interest in Phillips 66 Partners was $805 million at September 30, 2015, and is reflected as a noncontrolling interest in our financial statements. The most significant assets of Phillips 66 Partners that are available to settle only its obligations were equity investments of $858 million and net PP&E of $489 million at September 30, 2015.


Note 21—New Accounting Standards

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and quarterly reporting periods of public entities beginning after December 15, 2015, applied on a retrospective basis. Early adoption is permitted for financial statements that have not been previously issued. In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements." This standard states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing these costs when they relate to a line-of-credit arrangement. We currently have debt issuance costs included as deferred charges in our balance sheet, which will be reclassified as a reduction of debt when we adopt ASU 2015-03. At September 30, 2015, this amount was $55 million.


24


In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new standard converged guidance on recognizing revenues in contracts with customers under accounting principles generally accepted in the United States and International Financial Reporting Standards. This ASU is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. 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, if any, it may have on our financial position and results of operations.


Note 22—Subsequent Event

On October 18, 2015, we entered into a definitive agreement with DCP Midstream and our co-venturer in DCP Midstream pursuant to which we will contribute $1.5 billion of cash to DCP Midstream and our co-venturer will contribute their interests in certain operating assets that are held as equity investments. The transaction closed on October 30, 2015. Upon completion of this transaction our interest in DCP Midstream will remain at 50 percent.


Note 23—Condensed Consolidating Financial Information

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

Phillips 66 and Phillips 66 Company (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
All other nonguarantor subsidiaries.
The consolidating adjustments necessary to present Phillips 66’s results on a consolidated basis.

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

25


 
Millions of Dollars
 
Three Months Ended September 30, 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
$

18,122

7,670


25,792

Equity in earnings of affiliates
1,637

946

89

(2,089
)
583

Net gain on dispositions


22


22

Other income

12

8


20

Intercompany revenues

264

2,556

(2,820
)

Total Revenues and Other Income
1,637

19,344

10,345

(4,909
)
26,417

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

14,210

7,138

(2,768
)
18,580

Operating expenses

887

203

(7
)
1,083

Selling, general and administrative expenses
2

339

107

(11
)
437

Depreciation and amortization

206

64


270

Impairments

1



1

Taxes other than income taxes

1,396

2,214


3,610

Accretion on discounted liabilities

4

1


5

Interest and debt expense
90

7

8

(34
)
71

Foreign currency transaction losses

1



1

Total Costs and Expenses
92

17,051

9,735

(2,820
)
24,058

Income from continuing operations before income taxes
1,545

2,293

610

(2,089
)
2,359

Provision (benefit) for income taxes
(33
)
656

144


767

Income From Continuing Operations
1,578

1,637

466

(2,089
)
1,592

Income from discontinued operations





Net income
1,578

1,637

466

(2,089
)
1,592

Less: net income attributable to noncontrolling interests


14


14

Net Income Attributable to Phillips 66
$
1,578

1,637

452

(2,089
)
1,578

 
 
 
 
 
 
Comprehensive Income
$
1,459

1,518

365

(1,869
)
1,473


26


 
Millions of Dollars
 
Three Months Ended September 30, 2014
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

27,700

12,717


40,417

Equity in earnings of affiliates
1,225

816

87

(1,617
)
511

Net gain on dispositions


109


109

Other income

3

8


11

Intercompany revenues

749

4,757

(5,506
)

Total Revenues and Other Income
1,225

29,268

17,678

(7,123
)
41,048

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

24,785

14,272

(5,455
)
33,602

Operating expenses

893

221

(10
)
1,104

Selling, general and administrative expenses

301

122

(22
)
401

Depreciation and amortization

189

60


249

Impairments


12


12

Taxes other than income taxes

1,405

2,470

(1
)
3,874

Accretion on discounted liabilities

5

1


6

Interest and debt expense
69

3

6

(18
)
60

Foreign currency transaction losses


13


13

Total Costs and Expenses
69

27,581

17,177

(5,506
)
39,321

Income from continuing operations before income taxes
1,156

1,687

501

(1,617
)
1,727

Provision (benefit) for income taxes
(24
)
462

100


538

Income From Continuing Operations
1,180

1,225

401

(1,617
)
1,189

Income from discontinued operations





Net income
1,180

1,225

401

(1,617
)
1,189

Less: net income attributable to noncontrolling interests


9


9

Net Income Attributable to Phillips 66
$
1,180

1,225

392

(1,617
)
1,180

 
 
 
 
 
 
Comprehensive Income
$
969

1,014

178

(1,183
)
978


27


 
Millions of Dollars
 
Nine Months Ended September 30, 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
$

53,612

23,470


77,082

Equity in earnings (losses) of affiliates
3,760

2,362

(13
)
(4,663
)
1,446

Net gain (loss) on dispositions

(115
)
398


283

Other income

77

32


109

Intercompany revenues

753

7,699

(8,452
)

Total Revenues and Other Income
3,760

56,689

31,586

(13,115
)
78,920

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

42,959

22,899

(8,330
)
57,528

Operating expenses
4

2,543

704

(31
)
3,220

Selling, general and administrative expenses
5

934

311

(13
)
1,237

Depreciation and amortization

614

183


797

Impairments

3



3

Taxes other than income taxes

4,212

6,409


10,621

Accretion on discounted liabilities

12

4


16

Interest and debt expense
273

19

22

(78
)
236

Foreign currency transaction losses

1

49


50

Total Costs and Expenses
282

51,297

30,581

(8,452
)
73,708

Income from continuing operations before income taxes
3,478

5,392

1,005

(4,663
)
5,212

Provision (benefit) for income taxes
(99
)
1,632

65


1,598

Income from Continuing Operations
3,577

3,760

940

(4,663
)
3,614

Income from discontinued operations





Net income
3,577

3,760

940

(4,663
)
3,614

Less: net income attributable to noncontrolling interests


37


37

Net Income Attributable to Phillips 66
$
3,577

3,760

903

(4,663
)
3,577

 
 
 
 
 
 
Comprehensive Income
$
3,520

3,703

878

(4,544
)
3,557




28


 
Millions of Dollars
 
Nine Months Ended September 30, 2014
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

85,084

41,165


126,249

Equity in earnings of affiliates
3,055

2,269

395

(3,666
)
2,053

Net gain on dispositions


125


125

Other income

43

16


59

Intercompany revenues

2,084

15,158

(17,242
)

Total Revenues and Other Income
3,055

89,480

56,859

(20,908
)
128,486

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

76,839

47,568

(17,108
)
107,299

Operating expenses
2

2,658

638

(27
)
3,271

Selling, general and administrative expenses
5

903

377

(70
)
1,215

Depreciation and amortization

552

170


722

Impairments

2

14


16

Taxes other than income taxes

4,122

7,223

(1
)
11,344

Accretion on discounted liabilities

14

4


18

Interest and debt expense
202

13

15

(36
)
194

Foreign currency transaction losses


23


23

Total Costs and Expenses
209

85,103

56,032

(17,242
)
124,102

Income from continuing operations before income taxes
2,846

4,377

827

(3,666
)
4,384

Provision (benefit) for income taxes
(73
)
1,322

202


1,451

Income from Continuing Operations
2,919

3,055

625

(3,666
)
2,933

Income from discontinued operations*
696


10


706

Net income
3,615

3,055

635

(3,666
)
3,639

Less: net income attributable to noncontrolling interests


24


24

Net Income Attributable to Phillips 66
$
3,615

3,055

611

(3,666
)
3,615

 
 
 
 
 
 
Comprehensive Income
$
3,553

2,993

546

(3,515
)
3,577

* Net of provision for income taxes on discontinued operations:
$


5


5




29


 
Millions of Dollars
 
September 30, 2015
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

984

3,838


4,822

Accounts and notes receivable
15

3,438

2,297

(552
)
5,198

Inventories

2,698

1,690


4,388

Prepaid expenses and other current assets

395

246


641

Total Current Assets
15

7,515

8,071

(552
)
15,049

Investments and long-term receivables
32,970

22,799

5,729

(50,897
)
10,601

Net properties, plants and equipment

12,479

6,778


19,257

Goodwill

3,040

235


3,275

Intangibles

696

183


879

Other assets
62

146

150

(4
)
354

Total Assets
$
33,047

46,675

21,146

(51,453
)
49,415

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
$

4,166

3,248

(552
)
6,862

Short-term debt

25

18


43

Accrued income and other taxes

408

572


980

Employee benefit obligations

415

43


458

Other accruals
144

246

142


532

Total Current Liabilities
144

5,260

4,023

(552
)
8,875

Long-term debt
7,457

162

1,289


8,908

Asset retirement obligations and accrued environmental costs

492

189


681

Deferred income taxes

4,224

1,181

(4
)
5,401

Employee benefit obligations

1,045

204


1,249

Other liabilities and deferred credits
2,223

2,570

3,035

(7,559
)
269

Total Liabilities
9,824

13,753

9,921

(8,115
)
25,383

Common stock
11,782

25,404

9,314

(34,718
)
11,782

Retained earnings
12,029

8,106

1,128

(9,263
)
12,000

Accumulated other comprehensive income (loss)
(588
)
(588
)
(55
)
643

(588
)
Noncontrolling interests


838


838

Total Liabilities and Equity
$
33,047

46,675

21,146

(51,453
)
49,415




30


 
Millions of Dollars
 
December 31, 2014
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

2,045

3,162


5,207

Accounts and notes receivable
14

5,069

3,274

(1,102
)
7,255

Inventories

2,026

1,371


3,397

Prepaid expenses and other current assets
9

429

399


837

Total Current Assets
23

9,569

8,206

(1,102
)
16,696

Investments and long-term receivables
30,141

18,896

4,631

(43,479
)
10,189

Net properties, plants and equipment

12,267

5,079


17,346

Goodwill

3,040

234


3,274

Intangibles

694

206


900

Other assets
60

159

121

(4
)
336

Total Assets
$
30,224

44,625

18,477

(44,585
)
48,741

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
$

5,618

3,548

(1,102
)
8,064

Short-term debt
798

26

18


842

Accrued income and other taxes

356

522


878

Employee benefit obligations

409

53


462

Other accruals
65

242

541


848

Total Current Liabilities
863

6,651

4,682

(1,102
)
11,094

Long-term debt
7,457

159

226


7,842

Asset retirement obligations and accrued environmental costs

494

189


683

Deferred income taxes

4,240

1,255

(4
)
5,491

Employee benefit obligations

1,074

231


1,305

Other liabilities and deferred credits
285

1,919

2,126

(4,041
)
289

Total Liabilities
8,605

14,537

8,709

(5,147
)
26,704

Common stock
12,812

25,405

8,240

(33,645
)
12,812

Retained earnings
9,338

5,214

1,074

(6,317
)
9,309

Accumulated other comprehensive income (loss)
(531
)
(531
)
7

524

(531
)
Noncontrolling interests


447


447

Total Liabilities and Equity
$
30,224

44,625

18,477

(44,585
)
48,741




31


 
Millions of Dollars
 
Nine Months Ended September 30, 2015
Statement of Cash Flows
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Cash Flows From Operating Activities
 
 
 
 
 
Net cash provided by continuing operating activities
$
884

2,179

2,131

(978
)
4,216

Net cash provided by discontinued operations





Net Cash Provided by Operating Activities
884

2,179

2,131

(978
)
4,216

 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Capital expenditures and investments*

(925
)
(3,195
)
834

(3,286
)
Proceeds from asset dispositions

774

176

(882
)
68

Intercompany lending activities
1,938

(2,201
)
263



Advances/loans—related parties

(50
)


(50
)
Collection of advances/loans—related parties

50



50

Other

(22
)
24


2

Net cash provided by (used in) continuing investing activities
1,938

(2,374
)
(2,732
)
(48
)
(3,216
)
Net cash used in discontinued operations





Net Cash Provided by (Used in) Investing Activities
1,938

(2,374
)
(2,732
)
(48
)
(3,216
)
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Issuance of debt


1,169


1,169

Repayment of debt
(800
)
(19
)
(99
)

(918
)
Issuance of common stock
(27
)



(27
)
Repurchase of common stock
(1,106
)



(1,106
)
Dividends paid on common stock
(874
)
(874
)
(64
)
938

(874
)
Distributions to controlling interests


(186
)
186


Distributions to noncontrolling interests


(30
)

(30
)
Net proceeds from issuance of Phillips 66 Partners LP common units


384


384

Other*
(15
)
27

88

(98
)
2

Net cash provided by (used in) continuing financing activities
(2,822
)
(866
)
1,262

1,026

(1,400
)
Net cash provided by (used in) discontinued operations





Net Cash Provided by (Used in) Financing Activities
(2,822
)
(866
)
1,262

1,026

(1,400
)
 
 
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents


15


15

 
 
 
 
 
 
Net Change in Cash and Cash Equivalents

(1,061
)
676


(385
)
Cash and cash equivalents at beginning of period

2,045

3,162


5,207

Cash and Cash Equivalents at End of Period
$

984

3,838


4,822

* Includes intercompany capital contributions.


32


 
Millions of Dollars
 
Nine Months Ended September 30, 2014
Statement of Cash Flows
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Cash Flows From Operating Activities
 
 
 
 
 
Net cash provided by continuing operating activities
$
60

982

1,759

(146
)
2,655

Net cash provided by discontinued operations


2


2

Net Cash Provided by Operating Activities
60

982

1,761

(146
)
2,657

 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Capital expenditures and investments*

(1,747
)
(1,885
)
985

(2,647
)
Proceeds from asset dispositions

999

64

(400
)
663

Intercompany lending activities
2,937

(1,743
)
(1,194
)


Advances/loans—related parties


(3
)

(3
)
Other

(1
)
162


161

Net cash provided by (used in) continuing investing activities
2,937

(2,492
)
(2,856
)
585

(1,826
)
Net cash used in discontinued operations


(2
)

(2
)
Net Cash Provided by (Used in) Investing Activities
2,937

(2,492
)
(2,858
)
585

(1,828
)
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Repayment of debt

(15
)
(15
)

(30
)
Issuance of common stock
1




1

Repurchase of common stock
(1,750
)



(1,750
)
Share exchange—PSPI transaction
(450
)



(450
)
Dividends paid on common stock
(787
)

(102
)
102

(787
)
Distributions to controlling interests


(305
)
305


Distributions to noncontrolling interests


(18
)

(18
)
Other*
(11
)
33

847

(846
)
23

Net cash provided by (used in) continuing financing activities
(2,997
)
18

407

(439
)
(3,011
)
Net cash provided by (used in) discontinued operations





Net Cash Provided by (Used in) Financing Activities
(2,997
)
18

407

(439
)
(3,011
)
 
 
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents


(110
)

(110
)
 
 
 
 
 
 
Net Change in Cash and Cash Equivalents

(1,492
)
(800
)

(2,292
)
Cash and cash equivalents at beginning of period

2,162

3,238


5,400

Cash and Cash Equivalents at End of Period
$

670

2,438


3,108

* Includes intercompany capital contributions.




33


Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis is the company’s analysis of its financial performance, financial condition, and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,” beginning on page 52.

The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to net income (loss) attributable to Phillips 66.


BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW

Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. At September 30, 2015, we had total assets of $49 billion. Our common stock trades on the New York Stock Exchange under the symbol “PSX.”

Executive Overview
We reported earnings of $1,578 million in the third quarter of 2015 and generated $1,437 million in cash from operating activities. We used available cash to fund capital expenditures and investments of $992 million, pay dividends of $300 million, and repurchase $373 million of our common stock. We ended the third quarter of 2015 with $4.8 billion of cash and cash equivalents and approximately $5.4 billion of total capacity available under our liquidity facilities.

34


Business Environment
The Midstream segment includes our 50 percent equity investment in DCP Midstream, LLC (DCP Midstream). Earnings of DCP Midstream are closely linked to natural gas liquids (NGL) prices, natural gas prices and crude oil prices. Industry NGL prices decreased in the third quarter of 2015 compared with the second quarter of 2015 and third quarter of 2014. Ethane prices were slightly higher in the third quarter of 2015 compared with the second quarter of 2015, and decreased from the third quarter of 2014 primarily due to excess ethane supply and lower natural gas prices. Propane prices continued to decrease from the second quarter of 2015 and third quarter of 2014 to the third quarter of 2015, mainly due to high inventory levels. Natural gas prices decreased in the third quarter of 2015 compared with the third quarter of 2014, but remained relatively flat compared with the second quarter of 2015, as seasonal inventory draws were smaller than market expectations.

The Chemicals segment consists of our 50 percent equity investment in Chevron Phillips Chemical Company LLC (CPChem). The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on supply and demand, as well as cost factors. The petrochemicals industry continues to experience higher ethylene margins in regions of the world where production is based upon NGL versus crude-derived feedstocks. In particular, companies with North American light NGL-based crackers have benefited from lower-priced feedstocks; however, the ethylene to polyethylene chain margins have compressed in 2015 with the significant decline in crude oil prices that began in 2014.

Results for our Refining segment depend largely on refining margins, cost control, refinery throughput, and product yields. The crack spread is a measure of the difference between market prices for refined petroleum products and crude oil, and it is used within our industry as an indicator for refining margins. The U.S. 3:2:1 crack spread (three barrels of crude oil producing two barrels of gasoline and one barrel of diesel) increased in the third quarter of 2015, compared with the second quarter of 2015 and third quarter of 2014. The increase in the third quarter 2015 domestic industry crack spread was due to the average market crude oil price declining more than the average market gasoline price.

The Northwest Europe benchmark crack spread increased in the third quarter of 2015 compared with the third quarter of 2014, and was slightly lower than the second quarter of 2015. The increase from the third quarter of 2014 was mainly due to the average market crude price declining more than the average market gasoline price.

Results for our Marketing and Specialties (M&S) segment depend primarily on marketing fuel margins, base oil margins, lubricant margins and other specialty product margins. These margins are primarily based on market factors, largely determined by the relationship between demand and supply. Marketing fuel margins are influenced by crude oil pricing trends, which drive spot prices for refined products. Generally, in a period of rising crude oil prices, refined product spot prices will increase at a faster pace than the corresponding wholesale “rack” price of products sold to retailers, thereby tightening marketing margins. In a period of falling crude oil prices, the inverse occurs, and marketing margins generally benefit. Global crude oil prices trended down during the third quarter of 2015.


35


RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three- and nine-month periods ended September 30, 2015, is based on a comparison with the corresponding period of 2014.

Consolidated Results
A summary of net income (loss) attributable to Phillips 66 by business segment follows:

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

2014

 
2015

2014

 
 
 
 
 
 
Midstream
$
101

115

 
90

411

Chemicals
252

230

 
750

870

Refining
1,003

558

 
2,145

1,254

Marketing and Specialties
338

368

 
956

667

Corporate and Other
(116
)
(91
)
 
(364
)
(293
)
Income from continuing operations attributable to Phillips 66
1,578

1,180

 
3,577

2,909

Discontinued Operations


 

706

Net income attributable to Phillips 66
$
1,578

1,180

 
3,577

3,615



Earnings from continuing operations increased $398 million, or 34 percent, in the third quarter of 2015. The increase was primarily attributable to improved refining and marketing margins, partially offset by the partial recognition in the third quarter of 2014 of a deferred gain related to the sale in 2013 of the Immingham Combined Heat and Power Plant (ICHP). See Note 5—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements, for additional information.

Earnings from continuing operations increased $668 million, or 23 percent, in the nine-month period of 2015. The increase was primarily attributable to improved refining and marketing margins, as well as the recognition of the remaining ICHP deferred gain in the first half of 2015. These items were partially offset by lower equity earnings from DCP Midstream and CPChem.

See the “Segment Results” section for additional information on our segment results.

Statement of Income Analysis

Sales and other operating revenues for the third quarter and nine-month period of 2015 decreased 36 percent and 39 percent, respectively, and purchased crude oil and products decreased 45 percent and 46 percent, respectively. These decreases were primarily due to lower prices for petroleum products, crude oil and NGL.

Equity in earnings of affiliates increased 14 percent in the third quarter of 2015 and decreased 30 percent in the nine-month period of 2015. The increase in the third quarter of 2015 was mainly due to increased earnings from CPChem and WRB Refining LP (WRB), partially offset by decreased earnings from DCP Midstream. Equity in earnings of WRB increased 15 percent during the third quarter of 2015 as a result of improved realized margins primarily due to higher market crack spreads and secondary product margins. The decrease in the nine-month period of 2015 primarily resulted from lower earnings from DCP Midstream, CPChem and WRB. Equity in earnings of WRB decreased 16 percent during the nine-month period of 2015 mainly due to lower realized refining margins in the Central Corridor region as a result of a lower feedstock advantage. See the “Segment Results” section for additional information on DCP Midstream and CPChem earnings.


36


Net gain on dispositions for the third quarter and nine-month period of 2015 was $22 million and $283 million, respectively, compared with $109 million and $125 million for the corresponding periods of 2014. The changes in both periods primarily resulted from the recognition of the previously deferred gain related to the sale of ICHP in 2013. We recognized $242 million of this gain in the first half of 2015, compared with $109 million in the third quarter of 2014. See Note 5—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements, for additional information.

See Note 19—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our provision for income taxes and effective tax rates.

37


Segment Results

Midstream

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2015

2014

 
2015

2014

 
Millions of Dollars
Net Income (Loss) Attributable to Phillips 66
 
 
 
 
 
Transportation
$
77

58

 
207

180

DCP Midstream
(2
)
31

 
(165
)
147

NGL
26

26

 
48

84

Total Midstream
$
101

115

 
90

411


 
Dollars Per Unit
Weighted Average NGL Price*
 
 
 
 
 
DCP Midstream (per gallon)
$
0.42

0.90

 
0.46

0.96

* Based on index prices from the Mont Belvieu and Conway market hubs that are weighted by NGL component and location mix.

 
Thousands of Barrels Daily
Transportation Volumes
 
 
 
 
 
Pipelines*
3,239

3,142

 
3,225

3,162

Terminals
2,021

1,780

 
1,991

1,623

Operating Statistics
 
 
 
 
 
NGL extracted**
421

471

 
409

456

NGL fractionated***
110

110

 
109

113

* Pipelines represent the sum of volumes transported through each separately tariffed pipeline segment, including our share of equity volumes from Yellowstone Pipe Line Company and Lake Charles Pipe Line Company.
** Includes 100 percent of DCP Midstream’s volumes.
*** Excludes DCP Midstream.


The Midstream segment purchases raw natural gas from producers and gathers natural gas through an extensive network of pipeline gathering systems. The natural gas is then processed to extract NGL from the raw gas stream. The remaining “residue” gas is marketed to electric utilities, industrial users and gas marketing companies. Most of the NGLs are fractionated—separated into individual components such as ethane, propane and butane—and marketed as chemical feedstock, fuel or blendstock. In addition, the Midstream segment includes U.S. transportation, pipeline, terminaling, and refining logistics services associated with the movement of crude oil, refined and specialty products, natural gas and NGL, as well as NGL fractionation, trading and marketing businesses in the United States. The Midstream segment includes our 50 percent equity investment in DCP Midstream and the consolidated results of Phillips 66 Partners LP.

Earnings from the Midstream segment decreased $14 million, or 12 percent, in the third quarter of 2015 and decreased $321 million, or 78 percent, in the nine-month period.

Transportation earnings increased $19 million in the third quarter of 2015. The increase mainly resulted from increased railrack and railcar activities, improved earnings from equity affiliates and lower operating costs. Transportation earnings increased $27 million in the nine-month period. The increase reflected the startup of our Bayway and Ferndale rail unloading facilities in the second half of 2014, increased railcar fleet activities, higher throughput volumes, and improved earnings from equity affiliates. These items were partially offset by higher operating costs and higher earnings attributable to noncontrolling interests.


38


Earnings associated with our investment in DCP Midstream decreased $33 million in the third quarter of 2015 and $312 million in the nine-month period. The decrease in the third quarter of 2015 was primarily due to lower NGL, crude oil, and natural gas prices, partially offset by asset growth, a gain recognized on the sale of an asset, and favorable results from gas and NGL trading and marketing.

The decrease in the nine-month period of 2015 was primarily due to decreases in NGL, crude oil and natural gas prices, and goodwill impairment recorded by DCP Midstream. Due to the significant downturn in commodity prices since mid-2014, DCP Midstream performed a preliminary goodwill impairment assessment in the second quarter of 2015, and finalized the assessment in the third quarter of 2015. This resulted in a recognition of $460 million in goodwill impairments, which reduced our equity earnings from DCP Midstream by $128 million after-tax. Of this amount, $126 million was recorded in the second quarter of 2015 and $2 million was recorded in the third quarter. These decreases were partially offset by asset growth and cost savings initiatives. See the “Business Environment and Executive Overview” section for information on market factors impacting this quarter’s results.

DCP Partners, a master limited partnership formed by DCP Midstream, periodically issues limited partner units to the public. These issuances benefited our equity in earnings from DCP Midstream, on an after-tax basis, by $1 million in the nine-month period ended September 30, 2015, compared with $41 million in the corresponding period of 2014. There were no issuances of these limited partner units during the three-month period ended September 30, 2015, while issuances during the corresponding period of 2014 benefited our equity in earnings by $6 million, on an after-tax basis.

The earnings of our NGL business were flat in the third quarter of 2015, and decreased $36 million in the nine-month period of 2015. The earnings for the third quarter of 2015 benefited from improved realized margins offset by higher operating costs. The decrease in the nine-month period reflected lower realized margins and increased costs associated with growth projects, partially offset by the improved equity earnings from our investment in DCP Sand Hills Pipeline, LLC.

39


Chemicals

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2015

2014

 
2015

2014

 
 
 
 
 
 
 
Millions of Dollars
 
 
 
 
 
 
Net Income Attributable to Phillips 66
$
252

230

 
750

870

 
 
Millions of Pounds
CPChem Externally Marketed Sales Volumes*
 
 
 
 
 
Olefins and Polyolefins (O&P)
4,446

4,067

 
12,723

12,764

Specialties, Aromatics and Styrenics (SA&S)
1,259

1,571

 
4,097

4,670

 
5,705

5,638

 
16,820

17,434

* Includes 100 percent of CPChem’s outside sales of produced petrochemical products, as well as commission sales from equity affiliates.

Olefins and Polyolefins Capacity Utilization (percent)
94
%
83
 
91
90


The Chemicals segment consists of our 50 percent interest in CPChem, which we account for under the equity method. CPChem uses NGL and other feedstocks to produce petrochemicals. These products are then marketed and sold or used as feedstocks to produce plastics and other chemicals.

Earnings from the Chemicals segment increased $22 million, or 10 percent, in the third quarter of 2015. The increase was mainly due to higher O&P sales volumes resulting from a full quarter of Port Arthur operations. CPChem’s Port Arthur facility experienced a localized fire in the olefins unit in July 2014, shutting down ethylene production. The Port Arthur ethylene unit restarted in November 2014. Lower controllable costs and lower impairment charges in the third quarter of 2015 also contributed to the increase in earnings, which was partially offset by lower ethylene margins, lower SA&S volumes, and lower equity earnings from CPChem’s equity affiliates.

Earnings from the Chemicals segment decreased $120 million, or 14 percent, in the nine-month period. The decrease was primarily driven by lower ethylene margins, lower equity earnings from CPChem’s O&P equity affiliates, and higher turnaround activities. These decreases were partially offset by reduced utility costs due to lower natural gas prices, lower impairment charges and insurance recoveries related to the Port Arthur fire. See the “Business Environment and Executive Overview” section for information on market factors impacting this quarter’s results.



40


Refining

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2015

2014

 
2015

2014

 
 
 
 
 
 
 
Millions of Dollars
Net Income Attributable to Phillips 66
 
 
 
 
 
Atlantic Basin/Europe
$
180

140

 
383

141

Gulf Coast
269

66

 
423

263

Central Corridor
360

328

 
771

785

Western/Pacific
194

24

 
568

65

Worldwide
$
1,003

558

 
2,145

1,254

 
 
 
 
 
 
 
Dollars Per Barrel
Refining Margins*
 
 
 
 
 
Atlantic Basin/Europe
$
10.27

10.60

 
10.22

8.21

Gulf Coast
10.72

7.35

 
9.54

8.09

Central Corridor
20.97

17.84

 
16.02

16.16

Western/Pacific
18.29

9.87

 
18.24

9.55

Worldwide
13.96

10.89

 
12.68

10.15

* Based on total processed inputs and includes proportional share of refining margins contributed by certain equity affiliates.
 
 
 
 
 
 
 
Thousands of Barrels Daily
Operating Statistics
 
 
 
 
 
Refining operations*
 
 
 
 
 
Atlantic Basin/Europe
 
 
 
 
 
Crude oil capacity
588

588

 
588

588

Crude oil processed
570

538

 
520

550

Capacity utilization (percent)
97
%
92

 
88

94

Refinery production
614

593

 
571

599

Gulf Coast
 
 
 


Crude oil capacity
738

733

 
738

733

Crude oil processed
735

710

 
642

666

Capacity utilization (percent)
100
%
97

 
87

91

Refinery production
826

798

 
724

766

Central Corridor
 
 
 


Crude oil capacity
492

485

 
492

485

Crude oil processed
448

476

 
468

478

Capacity utilization (percent)
91
%
98

 
95

99

Refinery production
465

494

 
488

497

Western/Pacific
 
 
 


Crude oil capacity
360

440

 
360

440

Crude oil processed
346

390

 
337

403

Capacity utilization (percent)
96
%
89

 
94

92

Refinery production
375

425

 
364

436

Worldwide
 
 
 


Crude oil capacity
2,178

2,246

 
2,178

2,246

Crude oil processed
2,099

2,114

 
1,967

2,097

Capacity utilization (percent)
96
%
94

 
90

93

Refinery production
2,280

2,310

 
2,147

2,298

* Includes our share of equity affiliates.
 
 
 
 
 


41


The Refining segment buys, sells and refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 14 refineries, mainly in the United States and Europe.

Earnings for the Refining segment increased $445 million, or 80 percent, in the third quarter of 2015. The increase was primarily due to higher realized refining margins resulting from improved secondary product margins and increased market crack spreads, partially offset by lower feedstock advantage. Improved secondary product margins reflect the significant decline in crude oil costs in the 2015 period. See the “Business Environment and Executive Overview” section for information on market factors impacting this quarter’s results.

Earnings for the Refining segment increased $891 million, or 71 percent, in the nine-month period of 2015. The increase was primarily due to higher realized refining margins resulting from improved secondary product margins and increased market crack spreads. These improvements were partially offset by lower feedstock advantage, lower clean product differentials, and lower volumes mainly due to higher unplanned downtime and turnaround activities.

Our worldwide refining crude oil capacity utilization rate increased 2 percent, to 96 percent, in the third quarter of 2015 as a result of improved market conditions. Our worldwide refining crude oil capacity utilization rate was 90 percent for the nine-month period of 2015 compared with 93 percent for the nine-month period of 2014. The decrease was primarily due to higher unplanned downtime and turnaround activities.

Effective January 1, 2015, we aligned the results of the activities previously included in “Other Refining” into the Atlantic Basin/Europe, Gulf Coast, Central Corridor, and Western/Pacific refining regions. There were no changes to the consolidated Refining operating segment as a result of this alignment. The new alignment is presented for the three-month and nine-month periods ended September 30, 2015, with the prior periods recast for comparability.


42


Marketing and Specialties

 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2015

2014

 
2015

2014

 
 
 
 
 
 
 
Millions of Dollars
Net Income Attributable to Phillips 66
 
 
 
 
 
Marketing and Other
$
285

325

 
805

537

Specialties
53

43

 
151

130

Total Marketing and Specialties
$
338

368

 
956

667


 
Dollars Per Barrel
Realized Marketing Fuel Margin*
 
 
 
 
 
U.S.
$
2.26

1.78

 
1.74

1.38

International
5.94

6.10

 
4.28

4.79

* On third-party petroleum products sales.

 
Dollars Per Gallon
U.S. Average Wholesale Prices*
 
 
 
 
 
Gasoline
$
2.11

2.90

 
2.01

2.92

Distillates
1.76

3.02

 
1.85

3.08

* Excludes excise taxes.
 
 
 
 
 

 
Thousands of Barrels Daily
Marketing Petroleum Products Sales Volumes
 
 
 
 
 
Gasoline
1,253

1,188

 
1,195

1,181

Distillates
985

940

 
943

952

Other products
15

17

 
15

17

Total
2,253

2,145

 
2,153

2,150



The M&S segment purchases for resale and markets refined petroleum products (such as gasoline, distillates and aviation fuels), 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.

The M&S segment earnings decreased $30 million, or 8 percent, in the third quarter of 2015. The decrease was primarily due to the partial recognition of the deferred gain related to the 2013 sale of ICHP recorded in the third quarter of 2014. See Note 5—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements, for additional information. The decrease was partially offset by improved domestic marketing margins due to higher consignment fuel sales, higher clean product trading margins, and a gain from the sale of retail sites located in Missouri and Kansas in the third quarter of 2015. The earnings from specialty products increased $10 million in the third quarter of 2015, mainly due to higher margins resulting from lower feedstock prices.

Earnings for the nine-month period of 2015 increased $289 million, or 43 percent. The increase was primarily due to the recognition of the remaining ICHP deferred gain. We recognized $242 million of previously deferred gains in the nine-month period of 2015, compared with $109 million of deferred gains recognized in the nine-month period of 2014. In addition, the earnings benefited from higher lubricants margins, higher clean product trading margins, higher volumes, and improved marketing margins due to higher renewable fuels blending activities and consignment fuel sales. See the “Business Environment and Executive Overview” section for information on marketing fuel margins and other market factors impacting this quarter’s results.


43


Corporate and Other

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

2014

 
2015

2014

Net Income (Loss) Attributable to Phillips 66
 
 
 
 
 
Net interest
$
(43
)
(36
)
 
(142
)
(116
)
Corporate general and administrative expenses
(37
)
(32
)
 
(118
)
(116
)
Technology
(15
)
(14
)
 
(44
)
(41
)
Other
(21
)
(9
)
 
(60
)
(20
)
Total Corporate and Other
$
(116
)
(91
)
 
(364
)
(293
)


Net interest consists of interest and financing expense, net of interest income and capitalized interest. Net interest increased $7 million and $26 million, respectively, in the three- and nine-month periods ended September 30, 2015, primarily due to a higher average debt principal balance, partially offset by increased capitalized interest. See Note 9—Debt, in the Notes to Consolidated Financial Statements, for information on debt issuances during 2015.

The category “Other” includes certain income tax expenses, environmental costs associated with sites no longer in operation, foreign currency transaction gains and losses and other costs not directly associated with an operating segment. The increase in costs for the three- and nine-month periods of 2015 was mainly due to foreign tax credit carryforwards that were utilized in 2014 and other tax adjustments made in 2015.


Discontinued Operations

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

2014

 
2015

2014

Net Income Attributable to Phillips 66
 
 
 
 
 
Discontinued operations
$


 

706



In February 2014, we completed the Phillips Specialty Products Inc. (PSPI) share exchange, resulting 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 noncash gain of $696 million. See Note 5—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements, for additional information on this transaction.

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CAPITAL RESOURCES AND LIQUIDITY

Financial Indicators

 
Millions of Dollars
Except as Indicated
 
September 30
2015

December 31
2014

 
 
 
Short-term debt
$
43

842

Total debt
8,951

8,684

Total equity
24,032

22,037

Percent of total debt to capital*
27
%
28

Percent of floating-rate debt to total debt
1
%
1

* Capital includes total debt and total equity.


To meet our short- and long-term liquidity requirements, we look to a variety of funding sources but rely primarily on cash generated from operating activities. During the first nine months of 2015, we generated $4,216 million in cash from operations, received $1,169 million from Phillips 66 Partners’ issuance of debt, and received $384 million from the issuance of Phillips 66 Partners’ common units to the public. Available cash was primarily used for capital expenditures and investments ($3,286 million), debt repayments ($918 million), repurchases of our common stock ($1,106 million) and dividend payments on our common stock ($874 million). During the first nine months of 2015, cash and cash equivalents decreased by $385 million, to $4,822 million.

In addition to cash flows from operating activities, we rely on our commercial paper and credit facility programs, asset sales and our ability to issue securities using our shelf registration statement to support our short- and long-term liquidity requirements. We believe current cash and cash equivalents and cash generated by operations, together with access to external sources of funds as described below under “Significant Sources of Capital,” will be sufficient to meet our funding requirements in the near and long term, including our capital spending, dividend payments, defined benefit plan contributions, debt repayment and share repurchases.

Significant Sources of Capital

Operating Activities
During the first nine months of 2015, cash provided by operating activities was $4,216 million, compared with $2,657 million for the first nine months of 2014. Although net income was slightly lower during the first nine months of 2015, compared with the first nine months of 2014, there were large noncash items in both periods, including the gain on the PSPI exchange in 2014, recognition in 2015 and 2014 of a deferred gain from a 2013 asset disposition, and a goodwill impairment by DCP Midstream. After consideration of these items, earnings for the first nine months of 2015 were higher than the comparable period of 2014, primarily reflecting improved refining and marketing margins. Increased positive working capital impacts during the first nine months of 2015, as compared with the same period of 2014, were driven mainly by decreased receivables and inventory builds at reduced commodity prices relative to the prior year, partially offset by decreased payables attributable to reduced commodity prices. These positive impacts were partially offset by decreased distributions during the first nine months of 2015 from equity affiliates, including DCP Midstream and WRB, compared with the same period of 2014. We are currently forecasting inventory reductions in the fourth quarter of 2015 that are estimated to increase cash from operating activities by $700 million.

Our short- and long-term operating cash flows are highly dependent upon refining and marketing margins, NGL prices and chemicals margins. Prices and margins in our industry are typically volatile and are driven by market conditions over which we have little or no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows.



45


The level and quality of output from our refineries impacts our cash flows. The output at our refineries is impacted by such factors as operating efficiency, maintenance turnarounds, market conditions, feedstock availability and weather conditions. We actively manage the operations of our refineries and, typically, any variability in their operations has not been as significant to cash flows as that caused by margins and prices.

Our operating cash flows are also impacted by distribution decisions made by our equity affiliates, including DCP Midstream, CPChem and WRB. During the first nine months of 2015, cash from operations included distributions of $1,463 million from our equity affiliates, compared with $2,413 million during the same period of 2014.

During the second quarter of 2015, CPChem made a special distribution to its owners, with our share totaling $696 million. CPChem funded the distribution by issuing $1.4 billion of senior notes with maturities ranging from three to five years, with a combination of fixed and variable interest rates. This cash inflow from CPChem was included in operating cash flows, as we had cumulative undistributed equity earnings attributable to CPChem in excess of the amount distributed. Operating cash flows for the first nine months of 2014 included a special distribution from WRB of $760 million. For additional information about the WRB special distribution, see Note 6—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements.

We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these companies are not assured.

Contributions to Phillips 66 Partners LP
Effective March 2, 2015, we contributed to Phillips 66 Partners our equity interests in Explorer Pipeline Company (19.5 percent), DCP Sand Hills Pipeline, LLC (33.3 percent), and DCP Southern Hills Pipeline, LLC (33.3 percent) for total consideration of $1,010 million. Each of these investments is accounted for under the equity method of accounting. Phillips 66 Partners financed the acquisition with $880 million in cash, partially funded by a public offering of common units representing limited partner interests and debt financing, and the issuance to us of 1,587,376 and 139,538 additional common units and general partner units, respectively, with an aggregate fair value of $130 million. See Note 9—Debt and Note 20—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information.

Credit Facilities and Commercial Paper
As of September 30, 2015, no amount had been drawn under our $5 billion credit facility; however, $51 million in letters of credit had been issued that were supported by this facility. As of September 30, 2015, no amount was outstanding under the $500 million revolving credit agreement of Phillips 66 Partners.

We have a $5 billion commercial paper program for short-term working capital needs. Commercial paper maturities are generally limited to 90 days. As of September 30, 2015, we had no borrowings under our commercial paper program.

Phillips 66 Partners LP Debt and Equity Financing
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.

Interest on each series of the senior notes is payable semi-annually in arrears.

In February 2015, Phillips 66 Partners completed a public offering of 5,250,000 common units representing limited partner interests. The net proceeds received at closing were $384 million.

Phillips 66 Partners used a portion of the net proceeds of both the debt and equity offerings to fund its acquisition transaction described above. See Note 20—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information on this acquisition.

46


Shelf Registration
We have a universal shelf registration statement on file with the U.S. Securities and Exchange Commission (SEC) under which we, as a well-known seasoned issuer, have the ability to issue and sell an indeterminate amount of various types of debt and equity securities.

Off-Balance Sheet Arrangements
In April 2012, in connection with our separation from ConocoPhillips, we entered into an agreement to guarantee 100 percent of certain outstanding debt obligations of Merey Sweeny, L.P. (MSLP). At September 30, 2015, the aggregate principal amount of MSLP debt guaranteed by us was $173 million.

For additional information about guarantees, see Note 10—Guarantees, in the Notes to Consolidated Financial Statements.

Capital Requirements
For information about our capital expenditures and investments, see the “Capital Spending” section.

Our debt balance at September 30, 2015, and December 31, 2014, was $9.0 billion and $8.7 billion, respectively. Our debt-to-capital ratio was 27 percent and 28 percent at September 30, 2015, and December 31, 2014, respectively. Excluding Phillips 66 Partners’ debt of $1.1 billion and noncontrolling interest in our total equity of $805 million at September 30, 2015, our adjusted debt-to-capital ratio at September 30, 2015, was 25 percent. Our target adjusted debt-to-capital ratio excluding the impact of Phillips 66 Partners is 20-to-30 percent.

On July 8, 2015, our Board of Directors declared a quarterly cash dividend of $0.56 per common share. The dividend was paid on September 1, 2015, to shareholders of record at the close of business on August 17, 2015. On October 9, 2015, our Board of Directors declared a quarterly cash dividend of $0.56 per common share. The dividend is payable on December 1, 2015, to shareholders of record at the close of business on November 13, 2015. We are forecasting a further double-digit dividend rate increase in 2016.

During the second half of 2013, we entered into a construction agency agreement and an operating lease agreement with a financial institution for the construction of our new headquarters facility in Houston, Texas. Under the construction agency agreement, we act as construction agent for the financial institution over a construction period of up to three years and eight months, during which time we request cash draws from the financial institution to fund construction costs. Through September 30, 2015, approximately $416 million had been drawn to fund construction costs, of which approximately $377 million is recourse to us should certain events of default occur. The operating lease becomes effective after construction is substantially complete and we are able to occupy the facility. The operating lease has a term of five years and provides us the option, at the end of the lease term, to request to renew the lease, purchase the facility, or assist the financial institution in marketing it for resale.

On October 9, 2015, our Board of Directors authorized $2 billion of additional share repurchases. Since July 2012, our Board of Directors has authorized repurchases of our outstanding common stock totaling up to $9 billion. The share repurchases have been and are expected to be funded primarily through available cash. During the third quarter of 2015, we repurchased 4,705,226 shares at a cost of $373 million. Since the inception of our share repurchases in 2012, through September 30, 2015, we have repurchased a total of 87,771,360 shares at a cost of $5,990 million. Shares of stock repurchased are held as treasury shares.

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.

On May 1, 2015, the U.S. Department of Transportation issued a final rule focused on the safe transportation of flammable liquids by rail. The final rule, which is being challenged, subjects new and existing railcars transporting crude oil in high volumes to heightened design standards, including thicker tank walls and heat shields, improved pressure relief valves, and enhanced braking systems. We are currently evaluating the impact of the new regulations on our owned and leased crude oil railcar fleet.


47


On October 18, 2015, we entered into a definitive agreement with DCP Midstream and our co-venturer in DCP Midstream pursuant to which we will contribute $1.5 billion of cash to DCP Midstream and our co-venturer will contribute their interests in certain operating assets that are held as equity investments. The transaction closed on October 30, 2015. As a result of this transaction, we are forecasting total capital expenditures and investments in 2015 of approximately $5.8 billion. Upon completion of this transaction our interest in DCP Midstream will remain at 50 percent.


Capital Spending
 
 
Millions of Dollars
 
Nine Months Ended
September 30
 
2015

 
2014

Capital Expenditures and Investments
 
 
 
Midstream
$
2,368

 
1,532

Chemicals

 

Refining
775

 
679

Marketing and Specialties
86

 
358

Corporate and Other
57

 
78

Total consolidated from continuing operations
$
3,286

 
2,647

 
 
 
 
Selected Equity Affiliates*
 
 
 
DCP Midstream
$
377

 
561

CPChem**
839

 
616

WRB
118

 
96

 
$
1,334

 
1,273

* Our share of capital spending.
** 2014 amount restated.


Midstream
During the first nine months of 2015, DCP Midstream had a self-funded capital program, and thus had no new capital infusions from us or our co-venturer. During this period, on a 100 percent basis, DCP Midstream’s capital expenditures and investments were approximately $754 million, primarily for construction activities related to the Keathley Canyon Connector gas gathering pipeline system, which was placed into service in February 2015; the Lucerne 2 and Zia II plants, which were placed into service in the second and third quarters of 2015, respectively; the National Helium plant, scheduled to go into service in the fourth quarter of 2015; and additional investments in the Sand Hills Pipeline joint venture.

During the first nine months of 2015, capital spending in our Midstream segment included construction activities related to our Sweeny Fractionator One and Freeport Liquid Petroleum Gas Export Terminal projects and spending associated with return, reliability and maintenance projects in our Transportation and NGL businesses. In addition to our Sweeny Fractionator One and Freeport Liquid Petroleum Gas Export Terminal projects, our major construction activities in progress include the development by two of our joint ventures of the Dakota Access Pipeline (DAPL) and Energy Transfer Crude Oil Pipeline (ETCOP). We own a 25 percent interest in each joint venture, with our co-venturer holding the remaining 75 percent interest and acting as operator of both the DAPL and ETCOP systems.

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.


48


Chemicals
During the first nine months of 2015, CPChem had a self-funded capital program, and thus required no new capital infusions from us or our co-venturer. During this period, on a 100 percent basis, CPChem’s capital expenditures and investments were $1,677 million, primarily for its U.S. Gulf Coast Petrochemicals Project. We currently expect CPChem’s capital program to remain self-funding through 2015.

Refining
Capital spending for the Refining segment during the first nine months of 2015 was primarily for air emission reduction projects to meet new environmental standards, refinery upgrade projects to increase accessibility of advantaged crudes and improve product yields, improvements to the operating integrity of key processing units and safety-related projects.

Major construction activities in progress include installation of a crude tank to increase accessibility of waterborne crude at the Los Angeles Refinery and installation of facilities to comply with U.S. Environmental Protection Agency (EPA) Tier 3 Gasoline regulations at the Sweeny, Alliance, Bayway and Lake Charles refineries.

Generally, our equity affiliates in the Refining segment are intended to have self-funding capital programs.

Marketing and Specialties
Capital spending for the M&S segment during the first nine months of 2015 was primarily for reliability and maintenance projects and projects targeted at growing our international marketing business.

2016 Budget
In October 2015, we announced our 2016 capital spending budget of $3.6 billion and Phillips 66 Partners announced its 2016 capital spending budget of $0.3 billion, totaling $3.9 billion in aggregate. The Midstream capital budget of $2.3 billion is focused on growth projects, such as continued construction of the Freeport LPG Export Terminal, the new DAPL and ETCOP pipeline projects, expansion of the Beaumont Terminal, and the Bayou Bridge pipeline project. Refining’s capital budget of $1.2 billion is directed toward reliability, safety and environmental projects, as well as projects designed to improve product yields and lower feedstock costs. A more detailed review of our 2016 capital spending plans will be included in our 2015 Annual Report on Form 10-K.


Contingencies

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 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.


49


Legal and Tax Matters
Our legal and tax matters are handled by our legal and tax organizations. These organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions. We employ 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. In the case of income-tax-related contingencies, we monitor tax legislation and court decisions, the status of tax audits and the statute of limitations within which a taxing authority can assert a liability.

Environmental
We are subject to the same numerous international, federal, state and local environmental laws and regulations as other companies in our industry. For a discussion of the most significant of these environmental laws and regulations, including those with associated remediation obligations, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 55, 56, 57 and 58 of our 2014 Annual Report on Form 10-K.

From time to time, we receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging that we are a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. As of December 31, 2014, we reported that we had been notified of potential liability under CERCLA and comparable state laws at 34 sites within the United States. During the first nine months of 2015, we were notified of three new sites and settled and closed one site, leaving 36 unresolved sites with potential liability at September 30, 2015.

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. Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in our operations and products, and there can be no assurance that material costs and liabilities will not be incurred. However, we currently do not expect any material adverse effect on our results of operations or financial position as a result of compliance with current environmental laws and regulations.

Climate Change
There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (GHG) emissions reduction, including various regulations proposed or issued by the EPA. These proposed or promulgated laws apply or could apply in states and/or countries where we have interests or may have interests in the future. We consider and take into account future GHG emissions in designing and developing major facilities and projects, and implement energy efficiency initiatives to reduce such emissions. Laws in this field continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws, if enacted, potentially could have a material impact on our results of operations and financial condition as a result of increasing costs of compliance, lengthening project implementation and agency review times, or reducing demand for certain hydrocarbon products. We continue to monitor legislative and regulatory actions and legal proceedings globally relating to GHG emissions for potential impacts on our operations.

For examples of legislation and regulation or precursors for possible regulation that do or could affect our operations, see the “Climate Change” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 58 and 59 of our 2014 Annual Report on Form 10-K.




50


NEW ACCOUNTING STANDARDS

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and quarterly reporting periods of public entities beginning after December 15, 2015, applied on a retrospective basis. Early adoption is permitted for financial statements that have not been previously issued. In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements." This standard states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing these costs when they relate to a line-of-credit arrangement. We currently have debt issuance costs included as deferred charges in our balance sheet, which will be reclassified as a reduction of debt when we adopt ASU 2015-03. At September 30, 2015, this amount was $55 million.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new standard converged guidance on recognizing revenues in contracts with customers under accounting principles generally accepted in the United States and International Financial Reporting Standards. This ASU is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. 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, if any, it may have on our financial position and results of operations.





51


CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.

We based the forward-looking statements on our current expectations, estimates and projections about us and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:

Fluctuations in NGL, crude oil, petroleum products and natural gas prices and refining, marketing and petrochemical margins.
Failure of new products and services to achieve market acceptance.
Unexpected changes in costs or technical requirements for constructing, modifying or operating our facilities or transporting our products.
Unexpected technological or commercial difficulties in manufacturing, refining or transporting our products, including chemicals products.
Lack of, or disruptions in, adequate and reliable transportation for our NGL, crude oil, natural gas and refined products.
The level and success of drilling and quality of production volumes around DCP Midstream’s assets and its ability to connect supplies to its gathering and processing systems, residue gas and NGL infrastructure.
Inability to timely obtain or maintain permits, including those necessary for capital projects; comply with government regulations; or make capital expenditures required to maintain compliance.
Failure to complete definitive agreements and feasibility studies for, and to timely complete construction of, announced and future capital projects.
Potential disruption or interruption of our operations due to accidents, weather events, civil unrest, political events, terrorism or cyber attacks.
International monetary conditions and exchange controls.
Substantial investment or reduced demand for products as a result of existing or future environmental rules and regulations.
Liability resulting from litigation or for remedial actions, including removal and reclamation obligations under environmental regulations.
General domestic and international economic and political developments including: armed hostilities; expropriation of assets; changes in governmental policies relating to NGL, crude oil, natural gas or refined product pricing, regulation or taxation; and other political, economic or diplomatic developments.
Changes in tax, environmental and other laws and regulations (including alternative energy mandates) applicable to our business.
Limited access to capital or significantly higher cost of capital related to changes to our credit profile or illiquidity or uncertainty in the domestic or international financial markets.
The operation, financing and distribution decisions of our joint ventures.
Domestic and foreign supplies of crude oil and other feedstocks.
Domestic and foreign supplies of petrochemicals and refined products, such as gasoline, diesel, aviation fuel and home heating oil.
Governmental policies relating to exports of crude oil and natural gas.
Overcapacity or undercapacity in the midstream, chemicals and refining industries.
Fluctuations in consumer demand for refined products.
The factors generally described in Item 1A.—Risk Factors in our 2014 Annual Report on Form 10-K.



52


Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks at September 30, 2015, do not differ materially from the risks discussed under Item 7A in our 2014 Annual Report on Form 10-K.


Item 4.   CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2015, with the participation of management, our Chairman and Chief Executive Officer and our Executive Vice President and Chief Financial Officer carried out an evaluation, pursuant to Rule 13a-15(b) of the Act, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our Chairman and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of September 30, 2015.

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the quarterly period ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



53


PART II. OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS

The following is a description of reportable legal proceedings, including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment, for this reporting period. There were no new matters that arose during the third quarter of 2015. In addition, no material developments occurred with respect to matters previously reported in our 2014 Annual Report on Form 10-K or our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2015, and June 30, 2015. While it is not possible to accurately predict the final outcome of these pending proceedings, if any one or more of such proceedings were decided adversely to Phillips 66, we expect there would be no material effect on our consolidated financial position. Nevertheless, such proceedings are reported pursuant to the SEC regulations.

Our U.S. refineries are implementing two separate consent decrees, regarding alleged violations of the Federal Clean Air Act, with the EPA, six states and one local air pollution agency. Some of the requirements and limitations contained in the decrees provide for stipulated penalties for violations. Stipulated penalties under the decrees are not automatic, but must be requested by one of the agency signatories. As part of periodic reports under the decrees or other reports required by permits or regulations, we occasionally report matters that could be subject to a request for stipulated penalties. If a specific request for stipulated penalties meeting the reporting threshold set forth in SEC rules is made pursuant to these decrees based on a given reported exceedance, we will separately report that matter and the amount of the proposed penalty.


Item 1A.   RISK FACTORS

There have been no material changes from the risk factors disclosed in Item 1A of our 2014 Annual Report on
Form 10-K.



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Item 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities

 
 
 
 
 
 
Millions of Dollars

Period
Total Number of Shares Purchased*
 
Average Price Paid per Share

Total Number of Shares Purchased
as Part of Publicly Announced Plans
or Programs**
 
Approximate Dollar Value of Shares
that May Yet Be Purchased Under the Plans or Programs

July 1-31, 2015
1,593,532
 
$
80.97

1,593,532
 
$
1,254

August 1-31, 2015
1,481,893
 
78.97

1,481,893
 
1,137

September 1-30, 2015
1,629,801
 
78.56

1,629,801
 
1,010

Total
4,705,226
 
$
79.51

4,705,226
 

* Includes repurchase of shares of common stock from company employees in connection with the company’s broad-based employee incentive plans, when applicable.
** From July 2012 through September 2015, our Board of Directors has authorized repurchases totaling up to $7 billion of our outstanding common stock. In October 2015, our Board of Directors authorized additional repurchases of $2 billion. The share repurchases have been and are expected to be funded primarily through available cash. Under these authorizations, the shares will be repurchased from time to time in the open market at the company’s discretion, subject to market conditions and other factors, and in accordance with applicable regulatory requirements. We are not obligated to acquire any particular amount of common stock and may commence, suspend or discontinue purchases at any time or from time to time without prior notice. Shares of stock repurchased are held as treasury shares.

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Item 6. EXHIBITS
 
Exhibit
Number
 
Exhibit Description
 
 
 
12
 
Computation of Ratio of Earnings to Fixed Charges.
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
 
32
 
Certifications pursuant to 18 U.S.C. Section 1350.
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Schema Document.
 
 
 
101.CAL
 
XBRL Calculation Linkbase Document.
 
 
 
101.LAB
 
XBRL Labels Linkbase Document.
 
 
 
101.PRE
 
XBRL Presentation Linkbase Document.
 
 
 
101.DEF
 
XBRL Definition Linkbase Document.
 
 
 
 
    

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
PHILLIPS 66
 
 
 
/s/ Chukwuemeka A. Oyolu
 
Chukwuemeka A. Oyolu
Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
 
 
October 30, 2015
 



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