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Phillips 66 - Quarter Report: 2016 June (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
June 30, 2016
 

 
 
or
 
 

[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from
 
to
 
 
Commission file number:
001-35349
 
Phillips 66
(Exact name of registrant as specified in its charter)
 
Delaware
 
45-3779385
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

2331 CityWest Blvd., 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 522,849,327 shares of common stock, $.01 par value, outstanding as of June 30, 2016.


Table of Contents

PHILLIPS 66

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
 
Consolidated Statement of Income
Phillips 66
 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues*
$
21,849

28,512

 
39,258

51,290

Equity in earnings of affiliates
435

407

 
768

863

Net gain on dispositions
6

139

 
6

261

Other income
17

19

 
35

89

Total Revenues and Other Income
22,307

29,077

 
40,067

52,503

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products
16,198

22,253

 
28,128

38,948

Operating expenses
994

1,043

 
2,017

2,137

Selling, general and administrative expenses
421

406

 
807

800

Depreciation and amortization
290

274

 
570

527

Impairments
2

2

 
2

2

Taxes other than income taxes*
3,594

3,549

 
7,055

7,011

Accretion on discounted liabilities
5

6

 
10

11

Interest and debt expense
83

79

 
169

165

Foreign currency transaction (gains) losses


 
(7
)
49

Total Costs and Expenses
21,587

27,612

 
38,751

49,650

Income before income taxes
720

1,465

 
1,316

2,853

Provision for income taxes
204

440

 
402

831

Net Income
516

1,025

 
914

2,022

Less: net income attributable to noncontrolling interests
20

13

 
33

23

Net Income Attributable to Phillips 66
$
496

1,012

 
881

1,999

 
 
 
 
 
 
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
 
 
 
 
 
Basic
$
0.94

1.85

 
1.66

3.65

Diluted
0.93

1.84

 
1.65

3.63

 
 
 
 
 
 
Dividends Paid Per Share of Common Stock (dollars)
$
0.63

0.56

 
1.19

1.06

 
 
 
 
 
 
Average Common Shares Outstanding (in thousands)
 
 
 
 
 
Basic
528,247

544,617

 
529,993

546,398

Diluted
531,060

548,926

 
532,815

550,985

* Includes excise taxes on petroleum products sales:
$
3,508

3,463

 
6,868

6,825

See Notes to Consolidated Financial Statements.
 
 
 
 
 

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Table of Contents

Consolidated Statement of Comprehensive Income
Phillips 66
 
 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

 
 
 
 
 
 
Net Income
$
516

1,025

 
914

2,022

Other comprehensive income (loss)
 
 
 
 
 
Defined benefit plans
 
 
 
 
 
Actuarial gain:
 
 
 
 
 
Amortization to net income of net actuarial loss and settlements
24

19

 
47

49

Plans sponsored by equity affiliates
3

5

 
9

10

Income taxes on defined benefit plans
(9
)
(10
)
 
(20
)
(20
)
Defined benefit plans, net of tax
18

14

 
36

39

Foreign currency translation adjustments
(107
)
212

 
(122
)
15

Income taxes on foreign currency translation adjustments
(1
)
(1
)
 
(3
)
8

Foreign currency translation adjustments, net of tax
(108
)
211

 
(125
)
23

Cash flow hedges
(8
)

 
(16
)

Income taxes on hedging activities
3


 
6


Hedging activities, net of tax
(5
)

 
(10
)

Other Comprehensive Income (Loss), Net of Tax
(95
)
225

 
(99
)
62

Comprehensive Income
421

1,250

 
815

2,084

Less: comprehensive income attributable to noncontrolling interests
20

13

 
33

23

Comprehensive Income Attributable to Phillips 66
$
401

1,237

 
782

2,061

See Notes to Consolidated Financial Statements.

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Table of Contents

Consolidated Balance Sheet
Phillips 66
 
 
Millions of Dollars
 
June 30
2016

 
December 31
2015

Assets
 
 
 
Cash and cash equivalents
$
2,232

 
3,074

Accounts and notes receivable (net of allowances of $41 million in 2016 and $55 million in 2015)
4,610

 
4,411

Accounts and notes receivable—related parties
987

 
762

Inventories
3,993

 
3,477

Prepaid expenses and other current assets
821

 
532

Total Current Assets
12,643

 
12,256

Investments and long-term receivables
12,936

 
12,143

Net properties, plants and equipment
20,247

 
19,721

Goodwill
3,275

 
3,275

Intangibles
896

 
906

Other assets
364

 
279

Total Assets
$
50,361

 
48,580

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
6,319

 
5,155

Accounts payable—related parties
765

 
500

Short-term debt
1,532

 
44

Accrued income and other taxes
912

 
878

Employee benefit obligations
385

 
576

Other accruals
487

 
378

Total Current Liabilities
10,400

 
7,531

Long-term debt
7,330

 
8,843

Asset retirement obligations and accrued environmental costs
672

 
665

Deferred income taxes
6,233

 
6,041

Employee benefit obligations
1,343

 
1,285

Other liabilities and deferred credits
317

 
277

Total Liabilities
26,295

 
24,642

 
 
 
 
Equity
 
 
 
Common stock (2,500,000,000 shares authorized at $.01 par value)
Issued (2016—640,607,106 shares; 2015—639,336,287 shares)
 
 
 
Par value
6

 
6

Capital in excess of par
19,370

 
19,145

Treasury stock (at cost: 2016—117,757,779 shares; 2015—109,925,907 shares)
(8,379
)
 
(7,746
)
Retained earnings
12,597

 
12,348

Accumulated other comprehensive loss
(752
)
 
(653
)
Total Stockholders’ Equity
22,842

 
23,100

Noncontrolling interests
1,224

 
838

Total Equity
24,066

 
23,938

Total Liabilities and Equity
$
50,361

 
48,580

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows
Phillips 66
 
Millions of Dollars
 
Six Months Ended
June 30
 
2016

 
2015

Cash Flows From Operating Activities
 
 
 
Net income
$
914

 
2,022

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
570

 
527

Impairments
2

 
2

Accretion on discounted liabilities
10

 
11

Deferred taxes
191

 
(81
)
Undistributed equity earnings
(515
)
 
325

Net gain on dispositions
(6
)
 
(261
)
Other
116

 
94

Working capital adjustments
 
 
 
Decrease (increase) in accounts and notes receivable
(386
)
 
918

Decrease (increase) in inventories
(536
)
 
(747
)
Decrease (increase) in prepaid expenses and other current assets
(504
)
 
60

Increase (decrease) in accounts payable
1,512

 
394

Increase (decrease) in taxes and other accruals
45

 
(485
)
Net Cash Provided by Operating Activities
1,413

 
2,779

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Capital expenditures and investments
(1,370
)
 
(2,294
)
Proceeds from asset dispositions*
15

 
(5
)
Advances/loans—related parties
(182
)
 
(50
)
Collection of advances/loans—related parties

 
50

Other
(75
)
 
47

Net Cash Used in Investing Activities
(1,612
)
 
(2,252
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt
150

 
1,169

Repayment of debt
(166
)
 
(904
)
Issuance of common stock
(29
)
 
(25
)
Repurchase of common stock
(633
)
 
(733
)
Dividends paid on common stock
(625
)
 
(574
)
Distributions to noncontrolling interests
(28
)
 
(20
)
Net proceeds from issuance of Phillips 66 Partners LP common units
669

 
384

Other
11

 
2

Net Cash Used in Financing Activities
(651
)
 
(701
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
8

 
56

 
 
 
 
Net Change in Cash and Cash Equivalents
(842
)
 
(118
)
Cash and cash equivalents at beginning of period
3,074

 
5,207

Cash and Cash Equivalents at End of Period
$
2,232

 
5,089

* Includes return of investments in equity affiliates and working capital true-ups on dispositions.
See Notes to Consolidated Financial Statements.

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Consolidated Statement of Changes in Equity
Phillips 66
 
 
Millions of Dollars
 
Attributable to Phillips 66
 
 
 
Common Stock
 
 
 
 
 
Par
Value

Capital in Excess of Par

Treasury Stock

Retained
Earnings

Accum. Other
Comprehensive Income (Loss)

Noncontrolling
Interests

Total

 
 
 
 
 
 
 
 
December 31, 2014
$
6

19,040

(6,234
)
9,309

(531
)
447

22,037

Net income



1,999


23

2,022

Other comprehensive income




62


62

Cash dividends paid on common stock



(574
)


(574
)
Repurchase of common stock


(733
)



(733
)
Benefit plan activity

53


(8
)


45

Issuance of Phillips 66 Partners LP common units





384

384

Distributions to noncontrolling interests and other





(20
)
(20
)
June 30, 2015
$
6

19,093

(6,967
)
10,726

(469
)
834

23,223

 
 
 
 
 
 
 
 
December 31, 2015
$
6

19,145

(7,746
)
12,348

(653
)
838

23,938

Net income



881


33

914

Other comprehensive loss




(99
)

(99
)
Cash dividends paid on common stock



(625
)


(625
)
Repurchase of common stock


(633
)



(633
)
Benefit plan activity

44


(7
)


37

Issuance of Phillips 66 Partners LP common units

181




381

562

Distributions to noncontrolling interests and other





(28
)
(28
)
June 30, 2016
$
6

19,370

(8,379
)
12,597

(752
)
1,224

24,066

 

 
Shares in Thousands
 
Common Stock Issued

Treasury Stock

December 31, 2014
637,032

90,650

Repurchase of common stock

9,839

Shares issued—share-based compensation
1,116


June 30, 2015
638,148

100,489

 
 
 
December 31, 2015
639,336

109,926

Repurchase of common stock

7,832

Shares issued—share-based compensation
1,271


June 30, 2016
640,607

117,758

See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements
Phillips 66
 
Note 1—Interim Financial Information

The interim financial information presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2015 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2016, are not necessarily indicative of the results to be expected for the full year.


Note 2—Changes in Accounting Principles

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

In June 2014, the FASB issued ASU 2014-10, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities (VIE) Guidance in Topic 810, Consolidation.” The new update removes the definition of a development stage entity from the Master Glossary of the Accounting Standard Codification (ASC) and the related financial reporting requirements specific to development stage entities. This ASU is intended to reduce cost and complexity of financial reporting for entities that have not commenced planned principal operations. For financial reporting requirements other than the VIE guidance in ASC Topic 810, “Consolidation,” ASU 2014-10 was effective for annual and quarterly reporting periods of public entities beginning after December 15, 2014. For the financial reporting requirements related to VIEs in ASC Topic 810, “Consolidation,” ASU 2014-10 was effective for annual and quarterly reporting periods of public entities beginning after December 15, 2015. We adopted the provisions of this ASU related to the financial reporting requirements other than the VIE guidance effective January 1, 2015. We adopted the remaining provisions effective January 1, 2016, and updated our disclosures about the risks and uncertainties related to our joint venture entities that have not commenced their principal operations.


Note 3—Variable Interest Entities

In 2013, we formed Phillips 66 Partners LP, a master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and natural gas liquids (NGL) pipelines and terminals, as well as other transportation and midstream assets. We consolidate Phillips 66 Partners as we determined that Phillips 66 Partners is a VIE and we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as well as the ability to direct the activities that most significantly impact its economic performance. See Note 19—Phillips 66 Partners LP, for additional information.

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

Merey Sweeny, L.P. (MSLP) is a limited partnership that owns a delayed coker and related facilities at the Sweeny Refinery. As discussed more fully in Note 6—Investments, Loans and Long-Term Receivables, in August 2009, a call right was exercised to acquire the 50 percent ownership interest in MSLP of the co-venturer, Petróleos de Venezuela S.A. (PDVSA). That exercise was challenged, and the dispute has been arbitrated. 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

6

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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 June 30, 2016, our maximum exposure to loss was the outstanding principal balance of the MSLP Senior Notes of $140 million and our investment in MSLP of $179 million.

We have a 25 percent ownership interest in Dakota Access, LLC (DAPL) and Energy Transfer Crude Oil Company, LLC (ETCOP), whose planned principal operations have not commenced. Until the planned principal operations have commenced, these entities do not have sufficient equity at risk to fully fund the construction of all assets required for principal operations, and thus represent VIEs. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of DAPL and ETCOP that most significantly impact economic performance. We use the equity method of accounting for these investments. At June 30, 2016, our maximum exposure to loss represented the aggregate book value of our equity investments of $520 million and our loans of $107 million.


Note 4—Inventories

Inventories consisted of the following:

 
Millions of Dollars
 
June 30
2016

 
December 31
2015

 
 
 
 
Crude oil and petroleum products
$
3,725

 
3,214

Materials and supplies
268

 
263

 
$
3,993

 
3,477



Inventories valued on the last-in, first-out (LIFO) basis totaled $3,600 million and $3,085 million at June 30, 2016, and December 31, 2015, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $3.0 billion and $1.3 billion at June 30, 2016, and December 31, 2015, respectively.

Certain planned year-to-date reductions in inventory caused liquidations of LIFO inventory values that are not expected to be replaced by the end of the year. These liquidations decreased net income by approximately $15 million and $58 million during the three- and six-month periods ending June 30, 2016, and $1 million and $37 million for the comparable periods of 2015.


Note 5—Assets Held for Sale or Sold

In July 2013, we completed the sale of the Immingham Combined Heat and Power Plant (ICHP), which was included in our Marketing and Specialties (M&S) segment. A gain on this disposal was deferred at the time of sale due to an indemnity provided to the buyer. We recognized the deferred gain in earnings as our exposure under the indemnity declined, beginning in the third quarter of 2014 and ending in the second quarter of 2015 when the indemnity expired. We recognized $132 million and $242 million of the deferred gain in the three-month and six-month periods ended June 30, 2015, respectively, and these amounts are included in the “Net gain on dispositions” line of our consolidated statement of income.





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Note 6—Investments, Loans and Long-Term Receivables

Equity Investments
Summarized 100 percent financial information for WRB Refining LP (WRB) and Chevron Phillips Chemical Company LLC (CPChem) was as follows:
 
 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

 
 
 
 
 
 
Revenues
$
4,778

5,920

 
8,468

10,826

Income before income taxes
598

1,038

 
944

1,730

Net income
575

1,024

 
904

1,696



Dakota Access, LLC/Energy Transfer Crude Oil Company, LLC
DAPL and ETCOP are two 25 percent owned joint ventures with Energy Transfer Equity L.P. and Energy Transfer Partners L.P.  In May 2016, we and our co-venturer executed agreements to loan DAPL up to $2,256 million and ETCOP up to $227 million through 2018. As of June 30, 2016, DAPL and ETCOP have borrowed $382 million and $46 million, respectively. Our 25 percent share of those loans was $95 million and $12 million, respectively. At June 30, 2016, the book values of our investments in DAPL and ETCOP were $391 million and $129 million, respectively.

Other
MSLP owns a delayed coker and related facilities at the Sweeny Refinery. MSLP processes long residue, which is produced from heavy sour crude oil, for a processing fee. Fuel-grade petroleum coke is produced as a by-product and becomes the property of MSLP. Prior to August 28, 2009, MSLP was owned 50/50 by ConocoPhillips and PDVSA. Under the agreements that govern the relationships between the partners, certain defaults by PDVSA with respect to supply of crude oil to the Sweeny Refinery triggered the right to acquire PDVSA’s 50 percent ownership interest in MSLP, which was exercised on August 28, 2009. PDVSA initiated arbitration with the International Chamber of Commerce challenging the exercise of the call right and claiming it was invalid. The arbitral tribunal held hearings on the merits of the dispute in December 2012, and post-hearing briefs were exchanged in March 2013. The arbitral tribunal issued its ruling in April 2014, which upheld the exercise of the call right and the acquisition of the 50 percent ownership interest. In July 2014, PDVSA filed a petition in U.S. district court to vacate the tribunal’s ruling, and in September 2015, the petition was denied. In January 2016, PDVSA filed an appeal in the appellate court to vacate this ruling. Following the Separation, Phillips 66 generally indemnifies ConocoPhillips for liabilities, if any, arising out of the exercise of the call right or otherwise with respect to the joint venture or the refinery. Until all legal challenges are resolved, we will continue to use the equity method of accounting for our investment in MSLP.



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Note 7—Properties, Plants and Equipment

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

 
Millions of Dollars
 
June 30, 2016
 
December 31, 2015
 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
 
 
 
 
 
 
 
 
 
 
 
Midstream
$
7,651

 
1,477

 
6,174

 
6,978

 
1,293

 
5,685

Chemicals

 

 

 

 

 

Refining
21,075

 
8,256

 
12,819

 
20,850

 
8,046

 
12,804

Marketing and Specialties
1,455

 
788

 
667

 
1,422

 
746

 
676

Corporate and Other
1,129

 
542

 
587

 
1,060

 
504

 
556

 
$
31,310

 
11,063

 
20,247

 
30,310

 
10,589

 
19,721



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
June 30
 
Six Months Ended
June 30
 
2016
 
2015
 
2016
 
2015
 
Basic

Diluted

 
Basic

Diluted

 
Basic

Diluted

 
Basic

Diluted

Amounts attributed to Phillips 66 Common Stockholders (millions):
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Phillips 66
$
496

496

 
1,012

1,012

 
881

881

 
1,999

1,999

Income allocated to participating securities
(2
)
(1
)
 
(2
)

 
(3
)
(3
)
 
(3
)

Net Income available to common stockholders
$
494

495


1,010

1,012

 
878

878


1,996

1,999

 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (thousands):
524,080

528,247

 
539,848

544,617

 
525,654

529,993

 
541,649

546,398

Effect of stock-based compensation
4,167

2,813

 
4,769

4,309

 
4,339

2,822

 
4,749

4,587

Weighted-average common shares outstanding—EPS
528,247

531,060

 
544,617

548,926

 
529,993

532,815

 
546,398

550,985

 
 
 
 
 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock (dollars)
$
0.94

0.93

 
1.85

1.84

 
1.66

1.65

 
3.65

3.63




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Note 9—Debt

At both June 30, 2016, and December 31, 2015, we had no direct outstanding borrowings under our $5 billion revolving credit agreement, while $51 million in letters of credit had been issued that were supported by it. At June 30, 2016, $40 million was outstanding under the $500 million revolving credit agreement of Phillips 66 Partners, compared with no borrowings outstanding under the facility at December 31, 2015. Accordingly, as of June 30, 2016, an aggregate $5.4 billion of total capacity was available under these facilities.

During the second quarter of 2016, we reclassified $1.5 billion of 2.95% Senior Notes due 2017 from long-term debt to short-term debt on our consolidated balance sheet, due to the maturity of the notes within the next twelve months.


Note 10—Guarantees

At June 30, 2016, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence.

Guarantees of Joint Venture Debt
In 2012, in connection with the Separation, we issued a guarantee for 100 percent of the MSLP Senior Notes issued in July 1999. At June 30, 2016, the maximum potential amount of future payments to third parties under the guarantee was estimated to be $140 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
In June 2016, the operating lease commenced on our new headquarters facility in Houston, Texas, after construction was deemed substantially complete. Under this lease agreement, we have a residual value guarantee with a maximum future exposure of $554 million. 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 lessor in marketing it for resale.

We have residual value guarantees associated with railcar and airplane leases with maximum future exposures totaling $376 million. We have other guarantees with maximum future exposures totaling $112 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 eight years or the 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 June 30, 2016, was $193 million.

We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the recorded carrying amount were $98 million of environmental accruals for known contamination that were primarily included in “Asset retirement obligations and accrued environmental costs” at June 30, 2016. For additional information about environmental liabilities, see Note 11—Contingencies and Commitments.


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Indemnification and Release Agreement
In 2012, we entered into the Indemnification and Release Agreement with ConocoPhillips. This agreement governs the treatment between ConocoPhillips and us of matters relating to indemnification, insurance, litigation responsibility and management, and litigation document sharing and cooperation arising in connection with the Separation. Generally, the agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of ConocoPhillips’ business with ConocoPhillips. The agreement also establishes procedures for handling claims subject to indemnification and related matters.


Note 11—Contingencies and Commitments

A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

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 contingent liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring contingent environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.

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


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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 June 30, 2016, our total environmental accrual was $486 million, compared with $485 million at December 31, 2015. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

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

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

At June 30, 2016, we had performance obligations secured by letters of credit and bank guarantees of $481 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, interest rates and commodity prices or to capture market opportunities. Because we have not used cash-flow hedge accounting for commodity derivative contracts, all gains and losses, realized or unrealized, from these contracts have been recognized in the consolidated statement of income. Gains and losses from derivative contracts held for trading not directly related to our physical business, whether realized or unrealized, have been reported net in “Other income” on our consolidated statement of income. Cash flows from all our derivative activity for the periods presented appear in the operating section of the consolidated statement of cash flows.

Purchase and sales contracts with fixed minimum notional volumes for commodities that are readily convertible to cash (e.g., crude oil and gasoline) are recorded on the balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception (i.e., contracts to purchase or sell quantities we expect to use or sell over a reasonable period in the normal course of business). We generally apply this normal purchases and normal sales exception to eligible crude oil, refined product, NGL, natural gas and power commodity purchase and sales contracts; however, we may elect not to apply this exception (e.g., when another derivative instrument will be used to mitigate the risk of the purchase or sales contract but hedge accounting will not be applied, in which case both the purchase or sales contract and the derivative contract mitigating the resulting risk will be recorded on the balance sheet at fair value). Our derivative instruments are held at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 13—Fair Value Measurements.

Commodity Derivative Contracts—We sell into or receive supply from the worldwide crude oil, refined products, natural gas, NGL, and electric power markets, exposing our revenues, purchases, cost of operating activities, and cash flows to fluctuations in the prices for these commodities. Generally, our policy is to remain exposed to the market prices of commodities; however, we use futures, forwards, swaps and options in various markets to balance physical systems, meet customer needs, manage price exposures on specific transactions, and do a limited, immaterial amount of trading

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not directly related to our physical business, all of which may reduce our exposure to fluctuations in market prices. We also use the market knowledge gained from these activities to capture market opportunities such as moving physical commodities to more profitable locations, storing commodities to capture seasonal or time premiums, and blending commodities to capture quality upgrades.

The following table indicates the balance sheet line items that include the fair values of commodity derivative assets and liabilities presented net (i.e., commodity derivative assets and liabilities with the same counterparty are netted where the right of setoff exists); however, the balances in the following table are presented gross. For information on the impact of counterparty netting and collateral netting, see Note 13—Fair Value Measurements.

 
Millions of Dollars
 
June 30
2016

 
December 31
2015

Assets
 
 
 
Prepaid expenses and other current assets
$
612

 
2,607

Other assets
20

 
5

Liabilities
 
 
 
Other accruals
637

 
2,425

Other liabilities and deferred credits
17

 
5

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


The recognized 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
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

 
 
 
 
 
 
Sales and other operating revenues
$
(182
)
(143
)
 
(268
)
(174
)
Other income
7

4

 
16

47

Purchased crude oil and products
(89
)
(71
)
 
(125
)
(51
)
Hedge accounting has not been used for any item in the table.


The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from non-derivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was approximately 99 percent at both June 30, 2016 and December 31, 2015.

 
Open Position
Long/(Short)
 
June 30
2016

 
December 31
2015

Commodity
 
 
 
Crude oil, refined products and NGL (millions of barrels)
(35
)
 
(17
)



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

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

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

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

The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were not material at June 30, 2016, or December 31, 2015.


Note 13—Fair Value Measurements

Fair Values of Financial Instruments
We used the following methods and assumptions to estimate the fair value of financial instruments:

Cash and cash equivalents: The carrying amount reported on the consolidated balance sheet approximates fair value.
Accounts and notes receivable: The carrying amount reported on the consolidated balance sheet approximates fair value.
Debt: The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on quoted market prices.
Commodity swaps and forward purchases and sales: Fair value is estimated based on forward market prices and approximates the exit price at period end. When forward market prices are not available, we estimate fair value using the forward price of a similar commodity, adjusted for the difference in quality or location.
Futures: Fair values are based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange, or other traded exchanges.
Forward-exchange contracts: Fair value is estimated by comparing the contract rate to the forward rate in effect at the end of the reporting period, which approximates the exit price at that date.


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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 six-month period ended June 30, 2016, derivative assets with an aggregate value of $151 million and derivative liabilities with an aggregate value of $117 million were transferred into Level 1 from Level 2, as measured from the beginning of the reporting period. The measurements were reclassified within the fair value hierarchy due to the availability of unadjusted quoted prices from an active market.

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

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

We have master netting agreements for all of our exchange-cleared derivative instruments, the majority of our OTC derivative instruments, and certain physical commodity forward contracts (primarily pipeline crude oil deliveries). The following tables show the fair value of these contracts on a net basis in the column “Effect of Counterparty Netting,” which is how these also appear on the consolidated balance sheet.


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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
 
June 30, 2016
 
Fair Value Hierarchy
 
Total Fair Value of Gross Assets & Liabilities

Effect of Counterparty Netting

Effect of Collateral Netting

Difference in Carrying Value and Fair Value

Net Carrying Value Presented on the Balance Sheet

Cash Collateral Received or Paid, Not Offset on Balance Sheet

 
Level 1

 
Level 2

 
Level 3

Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
258

 
316

 

 
574

(568
)


6


OTC instruments

 
7

 

 
7

(2
)


5


Physical forward contracts*

 
50

 
1

 
51




51


Rabbi trust assets
94

 

 

 
94

N/A

N/A


94

N/A

 
$
352

 
373

 
1

 
726

(570
)


156

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
277

 
359

 

 
636

(568
)
(68
)



OTC instruments

 
4

 

 
4

(2
)


2


Physical forward contracts*

 
13

 
1

 
14




14


Interest-rate derivatives


16




16




16


Floating-rate debt
90

 

 

 
90

N/A

N/A


90

N/A

Fixed-rate debt, excluding capital leases**

 
9,493

 

 
9,493

N/A

N/A

(909
)
8,584

N/A

 
$
367

 
9,885

 
1

 
10,253

(570
)
(68
)
(909
)
8,706


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



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Table of Contents

 
Millions of Dollars
 
December 31, 2015
 
Fair Value Hierarchy
 
Total Fair Value of Gross Assets & Liabilities

Effect of Counterparty Netting

Effect of Collateral Netting

Difference in Carrying Value and Fair Value

Net Carrying Value Presented on the Balance Sheet

Cash Collateral Received or Paid, Not Offset on Balance Sheet

 
Level 1

 
Level 2

 
Level 3

 
Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
1,851

 
703

 

 
2,554

(2,389
)
(100
)

65


OTC instruments

 
13

 

 
13

(12
)


1


Physical forward contracts*
3

 
40

 
2

 
45




45


Rabbi trust assets
83

 

 

 
83

N/A

N/A


83

N/A

 
$
1,937

 
756

 
2

 
2,695

(2,401
)
(100
)

194



 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
1,745

 
646

 

 
2,391

(2,389
)


2


OTC instruments

 
17

 

 
17

(12
)


5


Physical forward contracts*

 
22

 

 
22




22


Floating-rate debt
50

 

 

 
50

N/A

N/A


50

N/A

Fixed-rate debt, excluding capital leases**

 
8,434

 

 
8,434

N/A

N/A

195

8,629

N/A

 
$
1,795

 
9,119

 

 
10,914

(2,401
)

195

8,708


* 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.



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Note 14—Employee Benefit Plans

Pension and Postretirement Plans
The components of net periodic benefit cost for the three and six months ended June 30, 2016 and 2015, were as follows:
 
Millions of Dollars
 
Pension Benefits
 
Other Benefits
 
2016
 
2015
 
2016

 
2015

 
U.S.

 
Int’l.

 
U.S.

 
Int’l.

 
 
 
 
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
32

 
9

 
31

 
10

 
2

 
2

Interest cost
29

 
8

 
27

 
7

 
2

 
2

Expected return on plan assets
(32
)
 
(10
)
 
(35
)
 
(9
)
 

 

Amortization of prior service cost (credit)

 
(1
)
 
1

 
(1
)
 
(1
)
 
(1
)
Recognized net actuarial loss (gain)
18

 
3

 
18

 
4

 

 
(1
)
Settlements

 

 

 

 

 

Net periodic benefit cost
$
47


9


42


11


3


2

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
64

 
18

 
62

 
20

 
4

 
4

Interest cost
58

 
15

 
54

 
14

 
4

 
4

Expected return on plan assets
(64
)
 
(20
)
 
(70
)
 
(19
)
 

 

Amortization of prior service cost (credit)
1

 
(1
)
 
2

 
(1
)
 
(1
)
 
(1
)
Recognized net actuarial loss (gain)
36

 
7

 
37

 
8

 

 
(1
)
Settlements
3

 

 
1

 

 

 

Net periodic benefit cost
$
98

 
19

 
86

 
22

 
7

 
6



During the first half of 2016, we contributed $11 million to our U.S. benefit plans and $22 million to our international benefit plans. We currently expect to make additional contributions of approximately $325 million to our U.S. benefit plans and $20 million to our international benefit plans during the remainder of 2016. The majority of the additional contributions is discretionary and intended to improve the funded status of our U.S. pension plans.



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Note 15—Accumulated Other Comprehensive Income (Loss)

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

 
Millions of Dollars
 
Defined Benefit Plans

 
Foreign Currency Translation

 
Hedging

 
Accumulated Other Comprehensive Income (Loss)

 
 
 
 
 
 
 
 
December 31, 2014
$
(696
)
 
167

 
(2
)
 
(531
)
Other comprehensive income before reclassifications
6

 
23

 

 
29

Amounts reclassified from accumulated other comprehensive income (loss)*
 
 
 
 
 
 
 
Amortization of defined benefit plan items**
 
 
 
 
 
 
 
Actuarial losses and settlements
33

 

 

 
33

Net current period other comprehensive income
39

 
23

 

 
62

June 30, 2015
$
(657
)
 
190

 
(2
)
 
(469
)
 
 
 
 
 
 
 
 
December 31, 2015
$
(662
)
 
11

 
(2
)
 
(653
)
Other comprehensive income (loss) before reclassifications
6

 
(125
)
 
(10
)
 
(129
)
Amounts reclassified from accumulated other comprehensive income (loss)*
 
 
 
 
 
 


Amortization of defined benefit plan items**
 
 
 
 
 
 
 
Actuarial losses and settlements
30

 

 

 
30

Net current period other comprehensive income (loss)
36

 
(125
)
 
(10
)
 
(99
)
June 30, 2016
$
(626
)
 
(114
)
 
(12
)
 
(752
)
* There were no significant reclassifications related to foreign currency translation or hedging.
** These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost (see Note 14—Employee Benefit Plans, for additional information).



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Note 16—Related Party Transactions

Significant transactions with related parties were:

 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

 
 
 
 
 
 
Operating revenues and other income (a)
$
549

674

 
956

1,291

Purchases (b)
2,148

2,406

 
3,651

4,354

Operating expenses and selling, general and administrative expenses (c)
28

31

 
61

62

Interest expense (d)
2

1

 
3

3



(a)
We sold NGL and other petrochemical feedstocks, along with solvents, to CPChem, and we sold gas oil and hydrogen feedstocks to Excel Paralubes. We sold certain feedstocks and intermediate products to WRB and also acted as agent for WRB in supplying crude oil and other feedstocks for a fee. We also sold refined products to our OnCue Holdings, LLC joint venture. In addition, we charged several of our affiliates, including CPChem, for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities.

(b)
We purchased crude oil and refined products from WRB. We also acted as agent for WRB in distributing asphalt and solvents. We purchased natural gas and NGL from DCP Midstream, LLC (DCP Midstream) and CPChem, as well as other feedstocks from various affiliates, for use in our refinery and fractionation processes. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline equity companies for transporting finished refined products and NGL. 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.


20

Table of Contents

Note 17—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 terminaling and storage services for crude oil and petroleum products. The Midstream segment includes our master limited partnership, Phillips 66 Partners LP, as well as our 50 percent equity investment in DCP Midstream.

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

3)
Refining—Buys, sells and refines crude oil and other feedstocks at 14 refineries, mainly in the United States and Europe.

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

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

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




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Analysis of Results by Operating Segment

 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

Sales and Other Operating Revenues
 
 
 
 
 
Midstream
 
 
 
 
 
Total sales
$
919

913

 
1,850

1,882

Intersegment eliminations
(278
)
(243
)
 
(570
)
(497
)
Total Midstream
641

670

 
1,280

1,385

Chemicals
1

1

 
2

3

Refining
 
 
 
 
 
Total sales
13,539

18,955

 
23,777

33,226

Intersegment eliminations
(9,246
)
(11,920
)
 
(15,805
)
(20,676
)
Total Refining
4,293

7,035

 
7,972

12,550

Marketing and Specialties
 
 
 
 
 
Total sales
17,180

21,343

 
30,528

38,091

Intersegment eliminations
(274
)
(549
)
 
(540
)
(760
)
Total Marketing and Specialties
16,906

20,794

 
29,988

37,331

Corporate and Other
8

12

 
16

21

Consolidated sales and other operating revenues
$
21,849

28,512

 
39,258

51,290

 
 
 
 
 
 
Net Income (Loss) Attributable to Phillips 66
 
 
 
 
 
Midstream
$
39

(78
)
 
104

(11
)
Chemicals
190

295

 
346

498

Refining
149

604

 
235

1,142

Marketing and Specialties
229

314

 
434

618

Corporate and Other
(111
)
(123
)
 
(238
)
(248
)
Consolidated net income attributable to Phillips 66
$
496

1,012

 
881

1,999



 
Millions of Dollars
 
June 30
2016

 
December 31
2015

Total Assets
 
 
 
Midstream
$
11,896

 
11,043

Chemicals
5,644

 
5,237

Refining
23,214

 
21,993

Marketing and Specialties
6,397

 
5,631

Corporate and Other
3,210

 
4,676

Consolidated total assets
$
50,361

 
48,580




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Note 18—Income Taxes

Our effective tax rates for the second quarter and the first six months of 2016 were 28 percent and 31 percent, respectively, compared with 30 percent and 29 percent for the corresponding periods of 2015.

The effective tax rate varies from the federal statutory tax rate of 35 percent primarily as a result of state tax expense, partially offset by the manufacturing deduction and foreign operations.

The decrease in the effective tax rate for the second quarter of 2016, compared with the second quarter of 2015, was primarily attributable to a favorable tax ruling in the United Kingdom and the relative impact of foreign earnings that are subject to a lower tax rate, partially offset by a decrease in the manufacturing deduction and recognition of a nontaxable gain in 2015 associated with the sale of ICHP.

The increase in the effective tax rate for the first six months of 2016, compared with the first six months of 2015, was primarily attributable to a decrease in the manufacturing deduction in the first six months of 2016 and recognition of a nontaxable gain in 2015 associated with the sale of ICHP, partially offset by the relative impact of foreign earnings that are subject to a lower tax rate. For additional information on the nontaxable gain, see Note 5—Assets Held for Sale or Sold.


Note 19—Phillips 66 Partners LP

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

In March 2016, we contributed to Phillips 66 Partners a 25 percent interest in our then wholly owned subsidiary, Phillips 66 Sweeny Frac LLC, which owns the Sweeny Fractionator One, an NGL fractionator located within our Sweeny Refinery complex in Old Ocean, Texas, and the Clemens Caverns, an NGL salt dome storage facility located near Brazoria, Texas. Total consideration for the transaction was $236 million, which consisted of Phillips 66 Partners’ assumption of a $212 million note payable to us and the issuance of common units and general partner units to us with an aggregate fair value of $24 million.

In May 2016, we contributed to Phillips 66 Partners the remaining 75 percent interest in Phillips 66 Sweeny Frac LLC and a 100 percent interest in our wholly owned subsidiary, Phillips 66 Plymouth LLC, which owns the Standish Pipeline, a refined petroleum product pipeline system extending from the Ponca City Refinery in Ponca City, Oklahoma, and terminating at the North Wichita Terminal in Wichita, Kansas. Total consideration for the transaction was $775 million, consisting of Phillips 66 Partners’ assumption of $675 million of notes payable to us and the issuance of common units and general units to us with an aggregate fair value of $100 million.

On May 10, 2016, Phillips 66 Partners completed a public offering of 12,650,000 common units representing limited partner interests, at a public offering price of $52.40 per unit. The net proceeds at closing were $656 million. Phillips 66 Partners used these net proceeds to repay a portion of the assumed notes discussed above.

In June 2016, Phillips 66 Partners began issuing common units under a continuous offering program, which allows for the issuance of up to an aggregate of $250 million of Phillips 66 Partners’ common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the time of the offerings. We refer to this as an at-the-market, or ATM, program. During the three months ended June 30, 2016, on a settlement-date basis, Phillips 66 Partners issued an aggregate of 262,858 common units under the ATM program, generating net proceeds of approximately $14 million.

At June 30, 2016, we owned a 61 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, while the public owned a 37 percent limited partner interest. We consolidate Phillips 66 Partners because we control the partnership through our general partner interest (see Note 3—Variable Interest Entities, for additional information). The public’s ownership interest in Phillips 66 Partners is reflected as a noncontrolling interest in our

23

Table of Contents

financial statements. The most significant assets of Phillips 66 Partners that are available to settle only its obligations at June 30, 2016, were equity investments of $1,008 million and net PP&E of $1,673 million.


Note 20—New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The new standard amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. Public business entities should apply the guidance in ASU 2016-13 for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption will be permitted for annual periods beginning after December 15, 2018. We are currently evaluating the provisions of ASU 2016-13 and assessing the impact on our financial statements.

In March 2016, the FASB issued ASU No. 2016-07, “Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The new standard eliminates the requirement that an investor retroactively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. Public business entities should apply the guidance in ASU 2016-07 for annual periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. We are currently evaluating the provisions of ASU 2016-07, but do not expect any significant impact on our financial statements.

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

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

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new standard converged guidance on recognizing revenues in contracts with customers under GAAP and International Financial Reporting Standards. This ASU is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” The amendment in this ASU defers the effective date of ASU 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU 2014-09 to

24

Table of Contents

annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. Retrospective or modified retrospective application of the accounting standard is required. We are currently evaluating the provisions of ASU 2014-09 and assessing the impact on our financial statements. As part of our assessment work to-date, we have formed an implementation work team, completed training on the new ASU’s revenue recognition model and are continuing our contract review and documentation.


Note 21—Condensed Consolidating Financial Information

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

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

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.

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Table of Contents

 
Millions of Dollars
 
Three Months Ended June 30, 2016
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

15,237

6,612


21,849

Equity in earnings of affiliates
556

487

74

(682
)
435

Net gain on dispositions


6


6

Other income

9

8


17

Intercompany revenues

219

2,126

(2,345
)

Total Revenues and Other Income
556

15,952

8,826

(3,027
)
22,307

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

12,473

6,014

(2,289
)
16,198

Operating expenses

781

223

(10
)
994

Selling, general and administrative expenses
1

313

109

(2
)
421

Depreciation and amortization

203

87


290

Impairments


2


2

Taxes other than income taxes

1,397

2,197


3,594

Accretion on discounted liabilities

4

1


5

Interest and debt expense
91

9

27

(44
)
83

Foreign currency transaction (gains) losses





Total Costs and Expenses
92

15,180

8,660

(2,345
)
21,587

Income before income taxes
464

772

166

(682
)
720

Provision (benefit) for income taxes
(32
)
216

20


204

Net Income
496

556

146

(682
)
516

Less: net income attributable to noncontrolling interests


20


20

Net Income Attributable to Phillips 66
$
496

556

126

(682
)
496

 
 
 
 
 
 
Comprehensive Income
$
401

461

39

(480
)
421


26

Table of Contents

 
Millions of Dollars
 
Three Months Ended June 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
$

19,903

8,609


28,512

Equity in earnings (losses) of affiliates
1,071

694

(151
)
(1,207
)
407

Net gain (loss) on dispositions

(110
)
249


139

Other income

6

13


19

Intercompany revenues

349

2,994

(3,343
)

Total Revenues and Other Income
1,071

20,842

11,714

(4,550
)
29,077

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

16,472

9,088

(3,307
)
22,253

Operating expenses

782

271

(10
)
1,043

Selling, general and administrative expenses
1

303

103

(1
)
406

Depreciation and amortization

214

60


274

Impairments

2



2

Taxes other than income taxes

1,435

2,114


3,549

Accretion on discounted liabilities

4

2


6

Interest and debt expense
90

6

8

(25
)
79

Foreign currency transaction (gains) losses





Total Costs and Expenses
91

19,218

11,646

(3,343
)
27,612

Income before income taxes
980

1,624

68

(1,207
)
1,465

Provision (benefit) for income taxes
(32
)
553

(81
)

440

Net Income
1,012

1,071

149

(1,207
)
1,025

Less: net income attributable to noncontrolling interests


13


13

Net Income Attributable to Phillips 66
$
1,012

1,071

136

(1,207
)
1,012

 
 
 
 
 
 
Comprehensive Income
$
1,237

1,296

364

(1,647
)
1,250




27

Table of Contents

 
Millions of Dollars
 
Six Months Ended June 30, 2016
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

26,935

12,323


39,258

Equity in earnings of affiliates
1,003

885

160

(1,280
)
768

Net gain on dispositions


6


6

Other income

24

11


35

Intercompany revenues

397

3,713

(4,110
)

Total Revenues and Other Income
1,003

28,241

16,213

(5,390
)
40,067

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

21,467

10,659

(3,998
)
28,128

Operating expenses

1,613

422

(18
)
2,017

Selling, general and administrative expenses
4

600

208

(5
)
807

Depreciation and amortization

403

167


570

Impairments


2


2

Taxes other than income taxes

2,741

4,314


7,055

Accretion on discounted liabilities

8

2


10

Interest and debt expense
184

17

57

(89
)
169

Foreign currency transaction (gains) losses


(7
)

(7
)
Total Costs and Expenses
188

26,849

15,824

(4,110
)
38,751

Income before income taxes
815

1,392

389

(1,280
)
1,316

Provision (benefit) for income taxes
(66
)
389

79


402

Net Income
881

1,003

310

(1,280
)
914

Less: net income attributable to noncontrolling interests


33


33

Net Income Attributable to Phillips 66
$
881

1,003

277

(1,280
)
881

 
 
 
 
 
 
Comprehensive Income
$
782

904

191

(1,062
)
815




28

Table of Contents

 
Millions of Dollars
 
Six Months Ended June 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
$

35,490

15,800


51,290

Equity in earnings (losses) of affiliates
2,123

1,416

(102
)
(2,574
)
863

Net gain (loss) on dispositions

(115
)
376


261

Other income

65

24


89

Intercompany revenues

489

5,143

(5,632
)

Total Revenues and Other Income
2,123

37,345

21,241

(8,206
)
52,503

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

28,749

15,761

(5,562
)
38,948

Operating expenses
4

1,656

501

(24
)
2,137

Selling, general and administrative expenses
3

595

204

(2
)
800

Depreciation and amortization

408

119


527

Impairments

2



2

Taxes other than income taxes

2,816

4,195


7,011

Accretion on discounted liabilities

8

3


11

Interest and debt expense
183

12

14

(44
)
165

Foreign currency transaction losses


49


49

Total Costs and Expenses
190

34,246

20,846

(5,632
)
49,650

Income before income taxes
1,933

3,099

395

(2,574
)
2,853

Provision (benefit) for income taxes
(66
)
976

(79
)

831

Net Income
1,999

2,123

474

(2,574
)
2,022

Less: net income attributable to noncontrolling interests


23


23

Net Income Attributable to Phillips 66
$
1,999

2,123

451

(2,574
)
1,999

 
 
 
 
 
 
Comprehensive Income
$
2,061

2,185

513

(2,675
)
2,084




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Table of Contents

 
Millions of Dollars
 
June 30, 2016
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

864

1,368


2,232

Accounts and notes receivable
13

3,614

3,334

(1,364
)
5,597

Inventories

2,657

1,336


3,993

Prepaid expenses and other current assets
1

488

332


821

Total Current Assets
14

7,623

6,370

(1,364
)
12,643

Investments and long-term receivables
31,691

22,722

7,775

(49,252
)
12,936

Net properties, plants and equipment

12,867

7,380


20,247

Goodwill

3,040

235


3,275

Intangibles

722

174


896

Other assets
12

205

149

(2
)
364

Total Assets
$
31,717

47,179

22,083

(50,618
)
50,361

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
$

5,333

3,115

(1,364
)
7,084

Short-term debt
1,498

28

6


1,532

Accrued income and other taxes

378

534


912

Employee benefit obligations

347

38


385

Other accruals
59

339

89


487

Total Current Liabilities
1,557

6,425

3,782

(1,364
)
10,400

Long-term debt
5,917

146

1,267


7,330

Asset retirement obligations and accrued environmental costs

499

173


672

Deferred income taxes

4,420

1,815

(2
)
6,233

Employee benefit obligations

1,146

197


1,343

Other liabilities and deferred credits
1,372

2,895

3,705

(7,655
)
317

Total Liabilities
8,846

15,531

10,939

(9,021
)
26,295

Common stock
10,997

25,403

10,782

(36,185
)
10,997

Retained earnings
12,626

6,997

(624
)
(6,402
)
12,597

Accumulated other comprehensive income (loss)
(752
)
(752
)
(238
)
990

(752
)
Noncontrolling interests


1,224


1,224

Total Liabilities and Equity
$
31,717

47,179

22,083

(50,618
)
50,361




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Table of Contents

 
Millions of Dollars
 
December 31, 2015
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

575

2,499


3,074

Accounts and notes receivable
14

3,643

2,217

(701
)
5,173

Inventories

2,171

1,306


3,477

Prepaid expenses and other current assets
2

382

148


532

Total Current Assets
16

6,771

6,170

(701
)
12,256

Investments and long-term receivables
33,315

24,068

7,395

(52,635
)
12,143

Net properties, plants and equipment

12,651

7,070


19,721

Goodwill

3,040

235


3,275

Intangibles

726

180


906

Other assets
16

154

113

(4
)
279

Total Assets
$
33,347

47,410

21,163

(53,340
)
48,580

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
$

4,015

2,341

(701
)
5,655

Short-term debt

25

19


44

Accrued income and other taxes

320

558


878

Employee benefit obligations

528

48


576

Other accruals
59

240

79


378

Total Current Liabilities
59

5,128

3,045

(701
)
7,531

Long-term debt
7,413

158

1,272


8,843

Asset retirement obligations and accrued environmental costs

496

169


665

Deferred income taxes

4,500

1,545

(4
)
6,041

Employee benefit obligations

1,094

191


1,285

Other liabilities and deferred credits
2,746

2,765

3,734

(8,968
)
277

Total Liabilities
10,218

14,141

9,956

(9,673
)
24,642

Common stock
11,405

25,404

10,688

(36,092
)
11,405

Retained earnings
12,377

8,518

(200
)
(8,347
)
12,348

Accumulated other comprehensive income (loss)
(653
)
(653
)
(119
)
772

(653
)
Noncontrolling interests


838


838

Total Liabilities and Equity
$
33,347

47,410

21,163

(53,340
)
48,580




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Table of Contents

 
Millions of Dollars
 
Six Months Ended June 30, 2016
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 Operating Activities
$
2,486

1,259

876

(3,208
)
1,413

 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Capital expenditures and investments*

(685
)
(723
)
38

(1,370
)
Proceeds from asset dispositions

3

12


15

Intercompany lending activities
(1,190
)
2,295

(1,105
)


Advances/loans—related parties

(75
)
(107
)

(182
)
Other

13

(88
)

(75
)
Net Cash Provided by (Used in) Investing Activities
(1,190
)
1,551

(2,011
)
38

(1,612
)
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Issuance of debt


150


150

Repayment of debt

(11
)
(155
)

(166
)
Issuance of common stock
(29
)



(29
)
Repurchase of common stock
(633
)



(633
)
Dividends paid on common stock
(625
)
(2,528
)
(680
)
3,208

(625
)
Distributions to noncontrolling interests


(28
)

(28
)
Net proceeds from issuance of Phillips 66 Partners LP common units


669


669

Other*
(9
)
18

40

(38
)
11

Net Cash Used in Financing Activities
(1,296
)
(2,521
)
(4
)
3,170

(651
)
 
 
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents


8


8

 
 
 
 
 
 
Net Change in Cash and Cash Equivalents

289

(1,131
)

(842
)
Cash and cash equivalents at beginning of period

575

2,499


3,074

Cash and Cash Equivalents at End of Period
$

864

1,368


2,232

* Includes intercompany capital contributions.


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Table of Contents

 
Millions of Dollars
 
Six Months Ended June 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 Operating Activities
$
531

1,386

1,524

(662
)
2,779

 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Capital expenditures and investments*

(663
)
(2,465
)
834

(2,294
)
Proceeds from asset dispositions**

773

104

(882
)
(5
)
Intercompany lending activities
1,611

(1,357
)
(254
)


Advances/loans—related parties

(50
)


(50
)
Collection of advances/loans—related parties

50



50

Other

(28
)
75


47

Net Cash Provided by (Used in) Investing Activities
1,611

(1,275
)
(2,540
)
(48
)
(2,252
)
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Issuance of debt


1,169


1,169

Repayment of debt
(800
)
(9
)
(95
)

(904
)
Issuance of common stock
(25
)



(25
)
Repurchase of common stock
(733
)



(733
)
Dividends paid on common stock
(574
)
(574
)
(48
)
622

(574
)
Distributions to controlling interests


(186
)
186


Distributions to noncontrolling interests


(20
)

(20
)
Net proceeds from issuance of Phillips 66 Partners LP common units


384


384

Other*
(10
)
22

88

(98
)
2

Net Cash Provided by (Used in) Financing Activities
(2,142
)
(561
)
1,292

710

(701
)
 
 
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents


56


56

 
 
 
 
 
 
Net Change in Cash and Cash Equivalents

(450
)
332


(118
)
Cash and cash equivalents at beginning of period

2,045

3,162


5,207

Cash and Cash Equivalents at End of Period
$

1,595

3,494


5,089

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




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Table of Contents

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.”

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 June 30, 2016, we had total assets of $50 billion. Our common stock trades on the New York Stock Exchange under the symbol “PSX.”

Executive Overview
We reported earnings of $496 million in the second quarter of 2016 and generated $1,155 million in cash from operating activities. In addition, Phillips 66 Partners raised net proceeds of $669 million in public offerings of common units. We used available cash to fund capital expenditures and investments of $620 million, pay dividends of $329 million and repurchase $242 million of our common stock. We ended the second quarter of 2016 with $2.2 billion of cash and cash equivalents and approximately $5.4 billion of total capacity available under our liquidity facilities.

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Business Environment
Commodity prices increased during the second quarter of 2016 compared with the first quarter of 2016; however, prices were still lower compared with the second quarter of 2015. Additionally, the discount for U.S. benchmark West Texas Intermediate (WTI) versus the international benchmark Brent narrowed over the course of 2015 and the first half of 2016 due to falling domestic production. The sustained low commodity price environment has had a variety of impacts, both favorable and unfavorable, on our downstream businesses that vary by segment.

Earnings in the Midstream segment, which includes our 50 percent equity investment in DCP Midstream, LLC (DCP Midstream), are closely linked to natural gas liquids (NGL) prices, natural gas prices and crude oil prices. NGL prices increased in the second quarter of 2016 compared with the first quarter of 2016 as crude oil prices increased. NGL production growth from liquids-rich shale plays continued to outpace domestic demand growth from the petrochemical industry, but exports continue to support prices and reduce inventories. Natural gas prices recovered throughout the second quarter of 2016 from the first quarter of 2016 as production flattened and demand for natural gas to fuel electricity generation increased. Though the average NGL prices and natural gas prices increased in the second quarter of 2016, prices were lower compared with the second quarter of 2015 due to large inventories.

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 lower ethylene cash costs in regions of the world where ethylene manufacturing is based upon NGL rather than crude-oil-derived feedstocks. In particular, companies with North American light NGL-based crackers have benefited from lower-priced feedstocks. The ethylene to polyethylene chain margins in the second quarter of 2016 improved slightly compared with the first quarter of 2016; however, the chain margins remained compressed in the second quarter of 2016 with lower crude oil prices compared with the second quarter of 2015.

The results of our Refining segment are driven by several factors including refining margins, cost control, refinery throughput and product yields. Refinery margins, often referred to as crack spreads, are measured as the difference between market prices for refined petroleum products and crude oil. 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 second quarter of 2016, compared with the first quarter of 2016, due to seasonally increasing demand for refined products. The U.S. crack spread was lower during the second quarter of 2016, compared with the second quarter of 2015, because of high product inventories resulting from high refinery utilization.

The Northwest Europe benchmark crack spread improved during the second quarter of 2016 compared with the first quarter of 2016. The increase was due to seasonally increasing demand for refined products. The crack spread decreased in the second quarter of 2016 compared with the second quarter of 2015 because of high product inventories resulting from high refinery utilization.

Results for our Marketing and Specialties (M&S) segment depend largely on marketing fuel margins, lubricant margins, and other specialty product margins. While M&S margins are primarily driven by market factors, largely determined by the relationship between supply and demand, marketing fuel margins, in particular, are primarily determined by the trend of spot prices for refined products. Generally speaking, a downward trend of spot prices has a favorable impact on marketing fuel margins, while an upward trend of spot prices has an unfavorable impact on marketing fuel margins.


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Table of Contents

RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three- and six-month periods ended June 30, 2016, is based on a comparison with the corresponding periods of 2015.

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

 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

 
 
 
 
 
 
Midstream
$
39

(78
)
 
104

(11
)
Chemicals
190

295

 
346

498

Refining
149

604

 
235

1,142

Marketing and Specialties
229

314

 
434

618

Corporate and Other
(111
)
(123
)
 
(238
)
(248
)
Net income attributable to Phillips 66
$
496

1,012

 
881

1,999



Earnings for Phillips 66 decreased $516 million, or 51 percent, in the second quarter of 2016, and $1,118 million, or 56 percent, in the six-month period. The decreases were primarily attributable to lower realized margins in our Refining segment driven by decreased market crack spreads, and lower olefins and polyolefins margins in our Chemicals segment. In addition, earnings from our M&S segment decreased due to the absence of a deferred gain recognized in the first half of 2015 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. These decreases were partially offset by higher equity earnings from DCP Midstream.

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

Statement of Income Analysis

Sales and other operating revenues for both the second quarter and six-month period of 2016 decreased 23 percent, and purchased crude oil and products decreased 27 percent and 28 percent, respectively. These decreases were primarily due to lower prices for petroleum products, crude oil and NGL.

Equity in earnings of affiliates increased 7 percent in the second quarter of 2016, and decreased 11 percent in the six-month period of 2016. The increase in the second quarter of 2016 was mainly due to improved earnings from DCP Midstream and other equity companies in our Midstream segment as a result of higher volumes, partially offset by lower earnings from CPChem and WRB Refining LP (WRB). The decrease in the six-month period of 2016 was primarily driven by lower earnings from CPChem and WRB, partially offset by higher earnings from DCP Midstream and other Midstream equity companies. Lower equity in earnings from WRB for both periods primarily resulted from lower market crack spreads. See the “Segment Results” section for additional information on DCP Midstream and CPChem earnings.

Net gain on dispositions decreased $133 million and $255 million in the second quarter and six-month period of 2016, respectively. We recognized the deferred gain related to the sale of ICHP 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 $132 million and $242 million of the deferred gain in the second quarter and six-month period of 2015, respectively. See Note 5—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements, for additional information.


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See Note 18—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our provision for income taxes and effective tax rates.


Segment Results

Midstream

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

 
Millions of Dollars
Net Income (Loss) Attributable to Phillips 66
 
 
 
 
 
Transportation
$
65

65

 
137

130

DCP Midstream
(9
)
(151
)
 
(5
)
(163
)
NGL
(17
)
8

 
(28
)
22

Total Midstream
$
39

(78
)
 
104

(11
)

 
Dollars Per Gallon
Weighted Average NGL Price*
 
 
 
 
 
DCP Midstream
$
0.46

0.48

 
0.41

0.48

* 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*
3,638

3,290

 
3,563

3,218

Terminals
2,442

1,969

 
2,325

1,976

Operating Statistics
 
 
 
 
 
NGL extracted**
416

408

 
399

404

NGL fractionated***
174

108

 
168

108

* 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 gathers, processes, transports and markets natural gas; and transports, fractionates and markets NGL in the United States. In addition, this segment transports crude oil and other feedstocks to our refineries and other locations, delivers refined and specialty products to market, and provides terminaling and storage services for crude oil and petroleum products. The Midstream segment includes our master limited partnership, Phillips 66 Partners LP, as well as our 50 percent equity investment in DCP Midstream.

Earnings from the Midstream segment increased $117 million in the second quarter of 2016 and $115 million in the six-month period.

Transportation earnings were flat in the second quarter of 2016 compared with the second quarter of 2015. Earnings in the second quarter of 2016 reflected higher throughput volumes and improved earnings from equity affiliates, offset by higher operating costs. Transportation earnings increased $7 million in the first half of 2016. The increase was primarily driven by improved volumes and earnings from equity affiliates, partially offset by higher operating costs and the absence of a 2015 first-quarter claim settlement.


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Results from our investment in DCP Midstream increased $142 million in the second quarter of 2016 and $158 million in the six-month period. In the second quarter of 2015, DCP Midstream recorded a goodwill impairment, which reduced our equity earnings from DCP Midstream by $126 million, after-tax. The increases for both 2016 periods also reflected higher volumes due to asset growth and higher earnings from DCP Midstream’s equity affiliates. In addition, DCP Midstream’s receipt of funds related to a favorable legal settlement during the first quarter of 2016 benefited earnings for the six-month period. These increases were partially offset by lower volumes related to existing assets and lower commodity prices.

Results from our NGL business decreased $25 million in the second quarter of 2016 and $50 million in the six-month period. The decreases in both periods reflected increased costs associated with growth projects starting up, as well as lower realized margins.

See the “Business Environment and Executive Overview” section for information on market factors impacting this quarter’s results.


Chemicals

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

 
Millions of Dollars
 
 
 
 
 
 
Net Income Attributable to Phillips 66
$
190

295

 
346

498

 
 
Millions of Pounds
CPChem Externally Marketed Sales Volumes*
 
 
 
 
 
Olefins and Polyolefins (O&P)
4,139

4,258

 
8,141

8,277

Specialties, Aromatics and Styrenics (SA&S)
1,212

1,356

 
2,466

2,838

 
5,351

5,614

 
10,607

11,115

* 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)
91
%
91
 
92
89


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. We structure our reporting of CPChem’s operations around two primary business lines: Olefins and Polyolefins (O&P) and Specialties, Aromatics and Styrenics (SA&S).

Earnings from the Chemicals segment decreased $105 million, or 36 percent, in the second quarter of 2016, and $152 million, or 31 percent, in the six-month period. The decreases were mainly due to lower realized O&P margins driven by a decline in sales prices, lower equity earnings from CPChem’s SA&S equity affiliates and lower SA&S volumes. In the second quarter of 2015, CPChem recorded additional earnings from business interruption and property damage insurance proceeds related to the 2014 Port Arthur fire. These decreases were partially offset by improved normal alpha olefin (NAO) sales volumes and lower utility costs due to decreases in natural gas prices.

See the “Business Environment and Executive Overview” section for information on market factors impacting this quarter’s results.

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Table of Contents

Refining
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

 
Millions of Dollars
Net Income Attributable to Phillips 66
 
 
 
 
 
Atlantic Basin/Europe
$
32

90

 
36

203

Gulf Coast
5

83

 
73

154

Central Corridor
55

216

 
75

411

West Coast
57

215

 
51

374

Worldwide
$
149

604

 
235

1,142

 
 
 
 
 
 
 
Dollars Per Barrel
Refining Margins*
 
 
 
 
 
Atlantic Basin/Europe
$
6.15

10.45

 
5.97

10.18

Gulf Coast
5.18

7.38

 
5.94

8.80

Central Corridor
8.65

13.49

 
8.05

13.67

West Coast
10.94

19.87

 
10.34

18.22

Worldwide
7.13

11.70

 
7.12

11.97

* 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
594

475

 
585

494

Capacity utilization (percent)
101
%
81

 
100

84

Refinery production
629

526

 
620

549

Gulf Coast
 
 
 


Crude oil capacity
743

738

 
743

738

Crude oil processed
738

662

 
709

596

Capacity utilization (percent)
99
%
90

 
95

81

Refinery production
817

742

 
786

672

Central Corridor
 
 
 


Crude oil capacity
493

492

 
493

492

Crude oil processed
500

495

 
486

478

Capacity utilization (percent)
101
%
101

 
99

97

Refinery production
520

513

 
507

500

West Coast
 
 
 


Crude oil capacity
360

360

 
360

360

Crude oil processed
348

337

 
336

332

Capacity utilization (percent)
97
%
94

 
93

92

Refinery production
371

356

 
360

359

Worldwide
 
 
 


Crude oil capacity
2,184

2,178

 
2,184

2,178

Crude oil processed
2,180

1,969

 
2,116

1,900

Capacity utilization (percent)
100
%
90

 
97

87

Refinery production
2,337

2,137

 
2,273

2,080

* Includes our share of equity affiliates.
 
 
 
 
 


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Table of Contents

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 decreased $455 million, or 75 percent, in the second quarter of 2016 and $907 million, or 79 percent, in the six-month period. The decreases were primarily due to lower realized refining margins resulting from decreased market crack spreads. These decreases were partially offset by higher refining volumes and lower controllable costs as a result of lower turnaround activities and less unplanned downtime. See the “Business Environment and Executive Overview” section for information on market factors impacting this quarter’s results.

Our worldwide refining crude oil capacity utilization rate was 100 percent and 97 percent in the second quarter and six-month period of 2016, respectively, compared with 90 percent and 87 percent in the second quarter and six-month period of 2015, respectively. These increases were primarily due to lower turnaround activities and less unplanned downtime.


Marketing and Specialties

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

 
Millions of Dollars
Net Income Attributable to Phillips 66
 
 
 
 
 
Marketing and Other
$
199

266

 
361

520

Specialties
30

48

 
73

98

Total Marketing and Specialties
$
229

314

 
434

618


 
Dollars Per Barrel
Realized Marketing Fuel Margin*
 
 
 
 
 
U.S.
$
1.79

1.46

 
1.81

1.46

International
4.16

2.98

 
3.66

3.41

* On third-party petroleum products sales.

 
Dollars Per Gallon
U.S. Average Wholesale Prices*
 
 
 
 
 
Gasoline
$
1.73

2.19

 
1.55

1.97

Distillates
1.51

1.98

 
1.34

1.90

* Excludes excise taxes.
 
 
 
 
 

 
Thousands of Barrels Daily
Marketing Petroleum Products Sales Volumes
 
 
 
 
 
Gasoline
1,261

1,268

 
1,219

1,165

Distillates
975

960

 
939

922

Other products
19

14

 
16

15

Total
2,255

2,242

 
2,174

2,102



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.


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Table of Contents

The M&S segment earnings decreased $85 million, or 27 percent, in the second quarter of 2016 and $184 million, or 30 percent, in the six-month period of 2016. The decreases were primarily due to the deferred gain recognized in the first half of 2015 related to the 2013 ICHP sale and lower lubricants earnings resulting from decreased margins and sales volumes. See Note 5—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements, for additional information on the deferred ICHP gain. These decreases were partially offset by improved marketing margins.

See the “Business Environment and Executive Overview” section for information on marketing fuel margins and other market factors impacting this quarter’s results.


Corporate and Other

 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2016

2015

 
2016

2015

Net Income (Loss) Attributable to Phillips 66
 
 
 
 
 
Net interest
$
(52
)
(46
)
 
(106
)
(99
)
Corporate general and administrative expenses
(40
)
(36
)
 
(82
)
(81
)
Technology
(14
)
(15
)
 
(28
)
(29
)
Other
(5
)
(26
)
 
(22
)
(39
)
Total Corporate and Other
$
(111
)
(123
)
 
(238
)
(248
)


Net interest consists of interest and financing expense, net of interest income and capitalized interest. Net interest increased in the three-month period ended June 30, 2016, mainly due to lower capitalized interest.

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 decrease in other costs in the second quarter of 2016 primarily resulted from lower accrued environmental costs and remediation expenses. The write-off of certain fixed assets during the second quarter of 2015 contributed to the decreases for both the three-month and six-month periods of 2016.




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Table of Contents

CAPITAL RESOURCES AND LIQUIDITY

Financial Indicators

 
Millions of Dollars
Except as Indicated
 
June 30
2016

 
December 31
2015

 
 
 
 
Cash and cash equivalents
$
2,232

 
3,074

Short-term debt
1,532

 
44

Total debt
8,862

 
8,887

Total equity
24,066

 
23,938

Percent of total debt to capital*
27
%
 
27

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 and Phillips 66 Partners’ debt and equity offerings. During the first six months of 2016, we generated $1,413 million in cash from operations. In addition, Phillips 66 Partners raised net proceeds of $669 million in public offerings of common units. Available cash was primarily used for capital expenditures and investments ($1,370 million), repurchases of our common stock ($633 million) and dividend payments on our common stock ($625 million). During the first six months of 2016, cash and cash equivalents decreased by $842 million, to $2,232 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 six months of 2016, cash provided by operating activities was $1,413 million, compared with $2,779 million for the first six months of 2015. The decrease was primarily attributable to lower realized refining margins as well as a reduction in distributions from our equity affiliates.

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.

The level and quality of output from our refineries also impacts our cash flows. Factors such as operating efficiency, maintenance turnarounds, market conditions, feedstock availability and weather conditions can affect output. We actively manage the operations of our refineries, and any variability in their operations typically 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 six months of 2016, cash from operations included distributions of $253 million from our equity affiliates, compared with $1,188 million during the same period of 2015. Operating cash flows for the first six months of 2015 included a special distribution from CPChem of $696 million. We cannot control

42

Table of Contents

the amount of future dividends from equity affiliates; therefore, future dividend payments by these companies are not assured.
 
In the second quarter of 2016, DCP Midstream amended its revolving credit agreement to, among other items, lower its borrowing capacity from $1.8 billion to $700 million and extend the maturity date of the facility from March 2017 to May 2019. As part of the amended terms of the revolving credit agreement, DCP Midstream has certain restrictions on its ability to pay distributions to its owners. DCP Midstream cannot pay distributions, other than certain tax distributions related to the sale of assets, if it has borrowings under the facility or does not meet certain leverage and liquidity thresholds as specified in the agreement. As of June 30, 2016, DCP Midstream was not eligible to make distributions to its owners under the terms of the facility.

Contributions to Phillips 66 Partners LP
In March 2016, we contributed to Phillips 66 Partners a 25 percent interest in our then wholly owned subsidiary, Phillips 66 Sweeny Frac LLC, which owns the Sweeny Fractionator One, an NGL fractionator located within our Sweeny Refinery complex in Old Ocean, Texas, and the Clemens Caverns, an NGL salt dome storage facility located near Brazoria, Texas. Total consideration for the transaction was $236 million, which consisted of Phillips 66 Partners’ issuance of common and general partner units to us, with an aggregate fair value of $24 million, and Phillips 66 Partners’ assumption of a $212 million note payable to us.

In May 2016, we contributed to Phillips 66 Partners the remaining 75 percent interest in Phillips 66 Sweeny Frac LLC and a 100 percent interest in our wholly owned subsidiary, Phillips 66 Plymouth LLC, which owns the Standish Pipeline, a refined petroleum product pipeline system extending from the Ponca City Refinery in Ponca City, Oklahoma, and terminating at the North Wichita Terminal in Wichita, Kansas. Total consideration for the transaction was $775 million, consisting of Phillips 66 Partners’ assumption of $675 million of notes payable to us and the issuance of common units and general partner units to us with an aggregate fair value of $100 million.

Phillips 66 Partners LP Equity Offerings
In May 2016, Phillips 66 Partners completed a public offering of 12,650,000 common units representing limited partner interests, at a public offering price of $52.40 per unit. The net proceeds at closing were $656 million. Phillips 66 Partners used these net proceeds to repay a portion of the notes assumed in the May transaction discussed above.

In June 2016, Phillips 66 Partners began issuing common units under a continuous offering program, which allows for the issuance of up to an aggregate of $250 million of Phillips 66 Partners’ common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the time of the offerings. We refer to this as an at-the-market, or ATM, program. During the three months ended June 30, 2016, on a settlement-date basis, Phillips 66 Partners issued an aggregate of 262,858 common units under the ATM program, generating net proceeds of approximately $14 million.

Credit Facilities and Commercial Paper
As of June 30, 2016, 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 June 30, 2016, $40 million was outstanding under the $500 million revolving credit agreement of Phillips 66 Partners.

We have a $5 billion commercial paper program, supported by our credit facility, for short-term working capital needs. Commercial paper maturities are generally limited to 90 days. As of June 30, 2016, we had no outstanding commercial paper.

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.


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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 June 30, 2016, the aggregate principal amount of MSLP debt guaranteed by us was $140 million.

In June 2016, the operating lease commenced on our new headquarters facility in Houston, Texas, after construction was deemed substantially complete. Under this lease agreement, we have a residual value guarantee with a maximum future exposure of $554 million. 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 lessor in marketing it for resale.

We have residual value guarantees associated with railcar and airplane leases with maximum future exposures totaling $376 million. We have other guarantees with maximum future exposures totaling $112 million, which consist primarily of guarantees to fund the short-term cash liquidity deficits of certain joint ventures and guarantees of the lease payment obligations of a joint venture. These guarantees generally extend up to 8 years or the life of the venture.

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 both June 30, 2016, and December 31, 2015, was $8.9 billion. Our debt-to-capital ratio was 27 percent at both June 30, 2016, and December 31, 2015. Our target debt-to-capital ratio is between 20 and 30 percent.

On May 4, 2016, our Board of Directors declared a quarterly cash dividend of $0.63 per common share, which represented a 12.5 percent increase from the previous quarter. The dividend was paid on June 1, 2016, to shareholders of record at the close of business on May 18, 2016. On July 13, 2016, our Board of Directors declared a quarterly cash dividend of $0.63 per common share. The dividend is payable on September 1, 2016, to shareholders of record at the close of business on August 18, 2016.

On October 9, 2015, our Board of Directors increased our current share repurchase authorization by $2 billion resulting in a total authorization of $4 billion. Since July 2012, including this current authorization, our Board of Directors has authorized repurchases of our outstanding common stock totaling up to $9 billion. The share repurchases are expected to be funded primarily through available cash. The shares will be repurchased from time to time in the open market at our 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. During the second quarter of 2016, we repurchased 2,932,668 shares at a cost of $242 million. Since the inception of our share repurchases in 2012 through June 30, 2016, we have repurchased a total of 100,335,164 shares at a cost of $7,029 million. Shares of stock repurchased are held as treasury shares.

We and our co-venturer in WRB each made a $75 million partner loan to WRB in the first quarter of 2016 to provide for WRB’s short-term operating needs. In May 2016, we and our co-venturer executed agreements to loan Dakota Access, LLC (DAPL) up to $2,256 million and Energy Transfer Crude Oil Company, LLC (ETCOP) up to $227 million through 2018. As of June 30, 2016, DAPL and ETCOP have borrowed $382 million and $46 million, respectively. Our 25 percent share of those loans was $95 million and $12 million, respectively.

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 crude oil railcar fleet, which is mostly held under operating leases. The regulations become effective subsequent to the expiration dates of our leases. Although we have no direct contractual obligation to retrofit these leased railcars, certain leases are subject to residual value guarantees. Under the lease terms, we have the option either to purchase the railcars

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or to return them to the lessors. If railcars are returned to the lessors, we may be required to make the lessors whole under the residual value guarantees, which are subject to a cap. The current market demand for crude oil railcars is low, which has resulted in a significant decline in crude oil railcar prices. Due to current market uncertainties, it is difficult to estimate the future market value for our railcars at the end of their lease terms. However, at this time, if crude oil railcar prices remain low, it is possible we may incur a charge in the future to recognize our obligation under the residual value guarantees. As of June 30, 2016, our maximum future exposure under the residual value guarantees was approximately $330 million.

Capital Spending
 
 
Millions of Dollars
 
Six Months Ended
June 30
 
2016

 
2015

Capital Expenditures and Investments
 
 
 
Midstream
$
730

 
1,668

Chemicals

 

Refining
538

 
542

Marketing and Specialties
37

 
54

Corporate and Other
65

 
30

Total consolidated from continuing operations
$
1,370

 
2,294

 
 
 
 
Selected Equity Affiliates*
 
 
 
DCP Midstream
$
55

 
306

CPChem**
541

 
508

WRB
80

 
71

 
$
676

 
885

* Our share of capital spending.
** 2015 amount restated.


Midstream
During the first six months of 2016, 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 $110 million, primarily for maintenance capital expenditures for existing assets and expansion capital expenditures including investments in the Sand Hills Pipeline and Panola Pipeline joint ventures. DCP Midstream continues to focus on disciplined capital spending in the current market downturn.

During the first six months of 2016, capital spending in our Midstream segment included construction activities related to our Freeport Liquid Petroleum Gas Export Terminal project; increasing expansion at our crude oil and petroleum products terminal located near Beaumont, Texas; and spending associated with return, reliability and maintenance projects in our Transportation and NGL businesses. In addition to the Freeport Liquid Petroleum Gas Export Terminal and Beaumont projects, our major construction activities in progress included the development by our joint ventures, DAPL and ETCOP, of two crude oil pipelines. We own a 25 percent interest in each joint venture, with our co-venturers holding the remaining 75 percent interest and acting as operator of both the DAPL and ETCOP pipeline systems.

Chemicals
During the first six months of 2016, 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 $1,081 million, primarily for its U.S. Gulf Coast Petrochemicals Project. We currently expect CPChem to self-fund its capital program in 2016.


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Refining
Capital spending for the Refining segment during the first six months of 2016 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 facilities to comply with U.S. Environmental Protection Agency (EPA) Tier 3 gasoline regulations at the Sweeny, Alliance, Bayway and Lake Charles refineries.
Installation of facilities to improve processing of advantaged crudes at Billings refinery.
Installation of facilities to improve clean product yield at Bayway and Ponca City 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 six months of 2016 was primarily for reliability and maintenance projects and projects targeted at growing our international marketing business.

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 financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other potentially responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

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.


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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 56, 57, 58 and 59 of our 2015 Annual Report on Form 10-K.

We occasionally 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, 2015, we reported that we had been notified of potential liability under CERCLA and comparable state laws at 36 sites within the United States. During the first six months of 2016, we resolved one site, leaving 35 sites with potential liability at June 30, 2016.

At June 30, 2016, our total environmental accrual was $486 million, compared with $485 million at December 31, 2015. 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 regulating GHG emissions 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 items, 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 59 and 60 of our 2015 Annual Report on Form 10-K.


NEW ACCOUNTING STANDARDS

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The new standard amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. Public business entities should apply the guidance in ASU 2016-13 for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption will be permitted for annual periods beginning after December 15, 2018. We are currently evaluating the provisions of ASU 2016-13 and assessing the impact on our financial statements.

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

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We are currently evaluating the provisions of ASU 2016-07, but do not expect any significant impact on our financial statements.

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

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

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new standard converged guidance on recognizing revenues in contracts with customers under GAAP and International Financial Reporting Standards. This ASU is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” The amendment in this ASU defers the effective date of ASU 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. Retrospective or modified retrospective application of the accounting standard is required. We are currently evaluating the provisions of ASU 2014-09 and assessing the impact on our financial statements. As part of our assessment work to-date, we have formed an implementation work team, completed training on the new ASU’s revenue recognition model and are continuing our contract review and documentation.


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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 2015 Annual Report on Form 10-K.



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Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks at June 30, 2016, do not differ materially from the risks discussed under Item 7A in our 2015 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 June 30, 2016, with the participation of management, our Chairman and Chief Executive Officer and our Executive Vice President, Finance 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, Finance and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of June 30, 2016.

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 June 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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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 second quarter of 2016. In addition, no material developments occurred with respect to matters previously reported in our 2015 Annual Report on Form 10-K or our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016. 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 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 2015 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

April 1-30, 2016
1,168,701
 
$
86.27

1,168,701
 
$
2,112

May 1-31, 2016
911,411
 
80.33

911,411
 
2,039

June 1-30, 2016
852,556
 
79.78

852,556
 
1,971

Total
2,932,668
 
$
82.54

2,932,668
 

* Includes repurchase of shares of common stock from company employees in connection with the company’s broad-based employee incentive plans, when applicable.
** Our Board of Directors has authorized repurchases totaling up to $9 billion of our outstanding common stock. The current authorization was announced in
July 2014, in the amount of $2 billion, and increased to $4 billion as announced in October 2015. The authorization does not have an expiration date. The
share repurchases are expected to be funded primarily through available cash. The shares under these authorizations 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
 
 
 
10.1
 
Phillips 66 Amended and Restated Executive Severance Plan*
 
 
 
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.
 
 
 
* Management contracts and compensatory plans or arrangements
    

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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)
 
 
July 29, 2016
 



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