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Phillips 66 - Quarter Report: 2017 March (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
March 31, 2017
 

 
 
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filer  [X]     Accelerated filer  [    ]  Non-accelerated filer  [    ]    
 Smaller reporting company  [    ] Emerging growth company  [    ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [    ]    
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 516,098,240 shares of common stock, $.01 par value, outstanding as of March 31, 2017.


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
March 31
 
2017

 
2016

Revenues and Other Income
 
 
 
Sales and other operating revenues*
$
22,894

 
17,409

Equity in earnings of affiliates
365

 
333

Net gain on dispositions
1

 

Other income
452

 
18

Total Revenues and Other Income
23,712

 
17,760

 
 
 
 
Costs and Expenses
 
 
 
Purchased crude oil and products
17,679

 
11,930

Operating expenses
1,270

 
1,023

Selling, general and administrative expenses
384

 
386

Depreciation and amortization
315

 
280

Impairments
2

 

Taxes other than income taxes*
3,156

 
3,461

Accretion on discounted liabilities
5

 
5

Interest and debt expense
105

 
86

Foreign currency transaction gains
(1
)
 
(7
)
Total Costs and Expenses
22,915

 
17,164

Income before income taxes
797

 
596

Provision for income taxes
234

 
198

Net Income
563

 
398

Less: net income attributable to noncontrolling interests
28

 
13

Net Income Attributable to Phillips 66
$
535

 
385

 
 
 
 
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
 
 
 
Basic
$
1.02

 
0.72

Diluted
1.02

 
0.72

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

 
0.56

 
 
 
 
Average Common Shares Outstanding (in thousands)
 
 
 
Basic
521,647

 
531,739

Diluted
524,520

 
534,709

* Includes excise taxes on petroleum products sales:
$
3,036

 
3,360

See Notes to Consolidated Financial Statements.
 
 
 

1

Table of Contents

Consolidated Statement of Comprehensive Income
Phillips 66
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2017

 
2016

 
 
 
 
Net Income
$
563

 
398

Other comprehensive income (loss)
 
 
 
Defined benefit plans
 
 
 
Actuarial gain:
 
 
 
Amortization to net income of net actuarial loss and settlements
23

 
23

Plans sponsored by equity affiliates
3

 
6

Income taxes on defined benefit plans
(9
)
 
(11
)
Defined benefit plans, net of tax
17

 
18

Foreign currency translation adjustments
26

 
(15
)
Income taxes on foreign currency translation adjustments
(2
)
 
(2
)
Foreign currency translation adjustments, net of tax
24

 
(17
)
Cash flow hedges
3

 
(8
)
Income taxes on hedging activities
(1
)
 
3

Hedging activities, net of tax
2

 
(5
)
Other Comprehensive Income (Loss), Net of Tax
43

 
(4
)
Comprehensive Income
606

 
394

Less: comprehensive income attributable to noncontrolling interests
28

 
13

Comprehensive Income Attributable to Phillips 66
$
578

 
381

See Notes to Consolidated Financial Statements.

2

Table of Contents

Consolidated Balance Sheet
Phillips 66
 
 
Millions of Dollars
 
March 31
2017

 
December 31
2016

Assets
 
 
 
Cash and cash equivalents
$
1,513

 
2,711

Accounts and notes receivable (net of allowances of $34 million in 2017 and $34 million in 2016)
4,979

 
5,485

Accounts and notes receivable—related parties
711

 
912

Inventories
4,387

 
3,150

Prepaid expenses and other current assets
580

 
422

Total Current Assets
12,170

 
12,680

Investments and long-term receivables
13,359

 
13,534

Net properties, plants and equipment
21,240

 
20,855

Goodwill
3,270

 
3,270

Intangibles
895

 
888

Other assets
471

 
426

Total Assets
$
51,405

 
51,653

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
5,829

 
6,395

Accounts payable—related parties
543

 
666

Short-term debt
609

 
550

Accrued income and other taxes
853

 
805

Employee benefit obligations
284

 
527

Other accruals
612

 
520

Total Current Liabilities
8,730

 
9,463

Long-term debt
9,601

 
9,588

Asset retirement obligations and accrued environmental costs
616

 
655

Deferred income taxes
7,254

 
6,743

Employee benefit obligations
1,222

 
1,216

Other liabilities and deferred credits
257

 
263

Total Liabilities
27,680

 
27,928

 
 
 
 
Equity
 
 
 
Common stock (2,500,000,000 shares authorized at $.01 par value)
Issued (2017—642,459,966 shares; 2016—641,593,854 shares)
 
 
 
Par value
6

 
6

Capital in excess of par
19,569

 
19,559

Treasury stock (at cost: 2017—126,361,726 shares; 2016—122,827,264 shares)
(9,073
)
 
(8,788
)
Retained earnings
12,814

 
12,608

Accumulated other comprehensive loss
(952
)
 
(995
)
Total Stockholders’ Equity
22,364

 
22,390

Noncontrolling interests
1,361

 
1,335

Total Equity
23,725

 
23,725

Total Liabilities and Equity
$
51,405

 
51,653

See Notes to Consolidated Financial Statements.

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Table of Contents

Consolidated Statement of Cash Flows
Phillips 66
 
Millions of Dollars
 
Three Months Ended
March 31
 
2017

 
2016

Cash Flows From Operating Activities
 
 
 
Net income
$
563

 
398

Adjustments to reconcile net income to net cash provided by (used in) operating
activities
 
 
 
Depreciation and amortization
315

 
280

Impairments
2

 

Accretion on discounted liabilities
5

 
5

Deferred taxes
493

 
154

Undistributed equity earnings
(212
)
 
(166
)
Net gain on dispositions
(1
)
 

Gain on consolidation of business
(423
)
 

Other
6

 
51

Working capital adjustments
 
 
 
Decrease (increase) in accounts and notes receivable
621

 
524

Decrease (increase) in inventories
(1,222
)
 
(620
)
Decrease (increase) in prepaid expenses and other current assets
(91
)
 
(310
)
Increase (decrease) in accounts payable
(496
)
 
98

Increase (decrease) in taxes and other accruals
(109
)
 
(156
)
Net Cash Provided by (Used in) Operating Activities
(549
)
 
258

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Capital expenditures and investments
(470
)
 
(750
)
Proceeds from asset dispositions*
9

 
5

Advances/loans—related parties

 
(75
)
Collection of advances/loans—related parties
325

 

Restricted cash received from consolidation of business
318

 

Other
(24
)
 
(42
)
Net Cash Provided by (Used in) Investing Activities
158

 
(862
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt
712

 
50

Repayment of debt
(773
)
 
(100
)
Issuance of common stock
4

 
4

Repurchase of common stock
(285
)
 
(391
)
Dividends paid on common stock
(326
)
 
(296
)
Distributions to noncontrolling interests
(24
)
 
(11
)
Net proceeds from issuance of Phillips 66 Partners LP common units
40

 

Other
(34
)
 
(39
)
Net Cash Used in Financing Activities
(686
)
 
(783
)
 
 
 
 
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash
2

 
36

 
 
 
 
Net Change in Cash, Cash Equivalents and Restricted Cash
(1,075
)
 
(1,351
)
Cash, cash equivalents and restricted cash at beginning of period
2,711

 
3,074

Cash, Cash Equivalents and Restricted Cash at End of Period
$
1,636

 
1,723

* Includes return of investments in equity affiliates.
See Notes to Consolidated Financial Statements.

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Table of Contents

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

Capital in Excess of Par

Treasury Stock

Retained
Earnings

Accum. Other
Comprehensive Income (Loss)

Noncontrolling
Interests

Total

 
 
 
 
 
 
 
 
December 31, 2015
$
6

19,145

(7,746
)
12,348

(653
)
838

23,938

Net income



385


13

398

Other comprehensive loss




(4
)

(4
)
Cash dividends paid on common stock



(296
)


(296
)
Repurchase of common stock


(391
)



(391
)
Benefit plan activity

8


(3
)


5

Issuance of Phillips 66 Partners LP
common units

(11
)



15

4

Distributions to noncontrolling interests and other





(11
)
(11
)
March 31, 2016
$
6

19,142

(8,137
)
12,434

(657
)
855

23,643

 
 
 
 
 
 
 
 
December 31, 2016
$
6

19,559

(8,788
)
12,608

(995
)
1,335

23,725

Net income



535


28

563

Other comprehensive income




43


43

Cash dividends paid on common stock



(326
)


(326
)
Repurchase of common stock


(285
)



(285
)
Benefit plan activity

(1
)

(3
)


(4
)
Issuance of Phillips 66 Partners LP common units

11




22

33

Distributions to noncontrolling interests and other





(24
)
(24
)
March 31, 2017
$
6

19,569

(9,073
)
12,814

(952
)
1,361

23,725

 

 
Shares in Thousands
 
Common Stock Issued

Treasury Stock

December 31, 2015
639,336

109,926

Repurchase of common stock

4,899

Shares issued—share-based compensation
1,071


March 31, 2016
640,407

114,825

 
 
 
December 31, 2016
641,594

122,827

Repurchase of common stock

3,535

Shares issued—share-based compensation
866


March 31, 2017
642,460

126,362

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 2016 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2017, are not necessarily indicative of the results to be expected for the full year. Certain prior period financial information has been recast to reflect the current year’s presentation.


Note 2—Changes in Accounting Principles

Effective January 1, 2017, we early adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates Step 2 from the goodwill impairment test. Under the revised test, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We will apply this ASU prospectively to our goodwill impairment test.

Effective January 1, 2017, we early adopted ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The new update clarifies the classification and presentation of changes in restricted cash. The amendment requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Adoption of this ASU on a retrospective basis did not have a material impact on our financial statements. See Note 17—Restricted Cash for more information.

Effective January 1, 2017, we early adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new update clarifies the treatment of several cash flow categories. In addition, ASU No. 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. Adoption of this ASU on a retrospective basis did not have a material impact on our financial statements.

Effective January 1, 2017, we adopted ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment award transactions including accounting for income taxes and classification of excess tax benefits on the statement of cash flows, forfeitures and minimum statutory tax withholding requirements. Adoption of this ASU on a prospective basis did not materially impact our financial position, results of operations, or cash flows. We account for forfeitures of awards when they occur and excess tax benefits, which were previously reported in cash flows from financing, are now reported in cash flows from operating activities on a prospective basis.



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Note 3—Variable Interest Entities (VIEs)

Consolidated VIEs
In 2013, we formed Phillips 66 Partners LP, a master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and natural gas liquids (NGL) pipelines and terminals, as well as other 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 21—Phillips 66 Partners LP, for additional information.

The most significant assets and liabilities of Phillips 66 Partners that are available to settle only its obligations were:

 
Millions of Dollars
 
March 31
2017

 
December 31
2016

 
 
 
 
Equity investments*
$
1,176

 
1,142

Net properties, plants and equipment
2,669

 
2,675

Long-term debt
2,357

 
2,396

* Included in “Investments and long-term receivables” on the Phillips 66 consolidated balance sheet.


Non-consolidated VIEs
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. Under the agreements that governed the relationships between the co-venturers in MSLP, certain defaults by Petróleos de Venezuela S.A. (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. The call right was exercised in August 2009. The exercise of the call right was challenged, and the dispute was arbitrated in our favor and subsequently litigated. Through February 7, 2017, we determined MSLP was a VIE and used the equity method of accounting because the call right exercise remained subject to legal challenge. As discussed more fully in Note 5—Business Combinations, the exercise of the call right ceased to be subject to legal challenge in February 2017. At that point, we no longer considered MSLP a VIE and began consolidating the entity as a wholly owned subsidiary.

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 March 31, 2017, our maximum exposure to loss was $1,163 million, which represents the aggregate book value of our equity investments of $538 million and our share of borrowings under the project financing facility of $625 million.



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Table of Contents

Note 4—Inventories

Inventories consisted of the following:

 
Millions of Dollars
 
March 31
2017

 
December 31
2016

 
 
 
 
Crude oil and petroleum products
$
4,108

 
2,883

Materials and supplies
279

 
267

 
$
4,387

 
3,150



Inventories valued on the last-in, first-out (LIFO) basis totaled $4,003 million and $2,772 million at March 31, 2017, and December 31, 2016, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $3.1 billion and $3.3 billion at March 31, 2017, and December 31, 2016, 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. LIFO inventory liquidations during the first three months of 2017 were immaterial and decreased net income by approximately $43 million for the comparable period in 2016.


Note 5—Business Combinations

In November 2016, Phillips 66 Partners acquired NGL logistics assets located in southeast Louisiana, consisting of approximately 500 miles of pipelines and storage caverns connecting multiple fractionation facilities, refineries and a petrochemical facility. The acquisition provided an opportunity for fee-based growth in the Louisiana market within our Midstream segment. The acquisition was included in the “Capital expenditures and investments” line of our consolidated statement of cash flows. We recorded $183 million of properties, plants and equipment (PP&E) and $3 million of goodwill in connection with the acquisition in 2016. Our acquisition accounting was finalized during the first quarter of 2017, with no change to the provisional amounts recorded in 2016.

MSLP owns a delayed coker and related facilities at the Sweeny Refinery, and its results are included in our Refining segment.  Prior to August 28, 2009, MSLP was owned 50/50 by ConocoPhillips and PDVSA.  Under the agreements that governed the relationships between the partners, certain defaults by PDVSA with respect to supply of crude oil to the Sweeny Refinery triggered the right, exercised in August 2009, to acquire its 50 percent ownership interest in MSLP for a purchase price determined by a contractual formula.  As the distributions PDVSA received from MSLP exceeded the amounts it contributed to MSLP, the contractual formula required no cash consideration for the acquisition. The exercise was challenged, and the dispute was arbitrated in our favor and subsequently litigated.  While the dispute was being arbitrated and litigated, we continued to use the equity method of accounting for our 50 percent interest in MSLP.  When the exercise of the call right ceased to be subject to legal challenge on February 7, 2017, we deemed that the acquisition was complete and began accounting for MSLP as a wholly owned consolidated subsidiary.

Based on a third-party appraisal of the fair value of MSLP’s net assets, utilizing discounted cash flows and replacement costs, the acquisition of PDVSA’s 50 percent interest resulted in our recording a pre-tax gain of $423 million in the first quarter of 2017.  This gain was included in the “Other income” line of our consolidated statement of income. The fair value of our original equity interest in MSLP immediately prior to the deemed acquisition was $145 million. As a result of the transaction, we recorded $318 million of restricted cash, $250 million of PP&E and $238 million of debt, as well as a net $93 million for the elimination of our equity investment in MSLP and net intercompany payables. Our acquisition accounting was finalized during the first quarter of 2017.



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Note 6—Assets Held for Sale or Sold

In September 2016, we completed the sale of the Whitegate Refinery and related marketing assets, which were included primarily in our Refining segment. The net carrying value of the assets at the time of their disposition was $135 million, which consisted of $127 million of inventory, other working capital, and PP&E; and $8 million of allocated goodwill. An immaterial gain was recognized in 2016 on the disposition.


Note 7—Investments, Loans and Long-Term Receivables

Equity Investments
Summarized 100 percent financial information for Chevron Phillips Chemical Company LLC (CPChem) was as follows:
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2017

2016

 
 
 
Revenues
$
2,539

2,031

Income before income taxes
521

476

Net income
503

459



Related Party Loans and Advances
In the first quarter of 2017, we received payment of the $250 million outstanding principal balance at December 31, 2016, of our sponsor loans to the DAPL and ETCOP joint ventures. We also received payment of the $75 million outstanding principal balance of the partner loan to WRB Refining LP (WRB). These cash inflows totaling $325 million are included in the “Collections of advances/loans—related parties” line in the investing section of the consolidated statement of cash flows.


Note 8—Properties, Plants and Equipment

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

 
Millions of Dollars
 
March 31, 2017
 
December 31, 2016
 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
 
 
 
 
 
 
 
 
 
 
 
Midstream
$
8,305

 
1,642

 
6,663

 
8,179

 
1,579

 
6,600

Chemicals

 

 

 

 

 

Refining
21,670

 
8,382

 
13,288

 
21,152

 
8,197

 
12,955

Marketing and Specialties
1,466

 
793

 
673

 
1,451

 
776

 
675

Corporate and Other
1,218

 
602

 
616

 
1,207

 
582

 
625

 
$
32,659

 
11,419

 
21,240

 
31,989

 
11,134

 
20,855




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Note 9—Earnings Per Share

The numerator of basic earnings per share (EPS) is net income attributable to Phillips 66, reduced by noncancelable dividends paid on unvested share-based employee awards during the vesting period (participating securities). The denominator of basic EPS is the sum of the daily weighted-average number of common shares outstanding during the periods presented and fully vested stock and unit awards that have not yet been issued as common stock. The numerator of diluted EPS is also based on net income attributable to Phillips 66, which is reduced only by dividend equivalents paid on participating securities for which the dividends are more dilutive than the participation of the awards in the earnings of the periods presented. To the extent unvested stock, unit or option awards and vested unexercised stock options are dilutive, they are included with the weighted-average common shares outstanding in the denominator. Treasury stock is excluded from the denominator in both basic and diluted EPS.
  
 
Three Months Ended
March 31
 
2017
 
2016
 
Basic

Diluted

 
Basic

Diluted

Amounts attributed to Phillips 66 Common
Stockholders (millions):
 
 
 
 
 
Net income attributable to Phillips 66
$
535

535

 
385

385

Income allocated to participating securities
(1
)
(1
)
 
(1
)
(1
)
Net Income available to common stockholders
$
534

534


384

384

 
 
 
 
 
 
Weighted-average common shares outstanding (thousands):
517,603

521,647

 
527,229

531,739

Effect of stock-based compensation
4,044

2,873

 
4,510

2,970

Weighted-average common shares outstanding—EPS
521,647

524,520

 
531,739

534,709

 
 
 
 
 
 
Earnings Per Share of Common Stock (dollars)
$
1.02

1.02

 
0.72

0.72



Note 10—Debt

At both March 31, 2017, and December 31, 2016, we had no direct outstanding borrowings under our $5 billion revolving credit agreement, while $51 million in letters of credit had been issued that were supported by it. At March 31, 2017, $157 million was outstanding under the $750 million revolving credit agreement of Phillips 66 Partners, compared with $210 million outstanding under the facility at December 31, 2016. Accordingly, as of March 31, 2017, an aggregate $5.5 billion of total capacity was available under these facilities.

At March 31, 2017, we classified $1.05 billion of the 2.95% Senior Notes maturing in 2017 as long-term debt on our consolidated balance sheet, based on our ability and intent to refinance the obligation on a long-term basis, with such ability demonstrated by our April 2017 debt issuances discussed below.

Debt Issuances
On April 21, 2017, Phillips 66 completed a private offering of $600 million aggregate principal amount of unsecured notes consisting of:

$300 million of floating rate Notes due 2019.
$300 million of floating rate Notes due 2020.

The notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary. Phillips 66 expects to use the net proceeds from the notes, together with a portion of the proceeds from $900 million of term loans received in late April 2017, to repay its outstanding 2.95% Senior Notes due 2017, for capital expenditures and for general corporate purposes.


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Interest is a floating rate equal to three-month LIBOR plus 0.65% per annum for the 2019 Notes and three-month LIBOR plus 0.75% per annum for the 2020 Notes. Interest on both series of notes is payable quarterly in arrears on January 15, April 15, July 15 and October 15, commencing in July 2017. The 2019 Notes mature on April 15, 2019, and the 2020 Notes mature on April 15, 2020.

The term loans consist of a $450 million 364-day facility and a $450 million three-year facility. Interest on the term loans is a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by our long-term credit ratings.


Note 11—Guarantees

At March 31, 2017, 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 December 2016, as part of the restructuring within DCP Midstream, LLC (DCP Midstream) which occurred effective January 1, 2017, we issued a guarantee in support of DCP Midstream’s newly issued debt. At March 31, 2017, the maximum potential amount of future payments to third parties under the guarantee is estimated to be $188 million.  Payment would be required if DCP Midstream defaults on this debt obligation. DCP Midstream’s debt matures in 2019.

Other Guarantees
In 2016, the operating lease commenced on our headquarters facility in Houston, Texas. 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 $356 million. At year-end 2016, based on an outside appraisal of the railcars’ fair value at the end of their lease terms, we estimated a total residual value deficiency of $94 million and recognized $28 million as expense in 2016.  During the first quarter of 2017, we recognized an additional $12 million of the residual value deficiency.  Beginning March 31, 2017, the remaining residual value deficiency of $54 million will be recognized on a straight-line basis with approximately one-third recognized through October 2017 and two-thirds recognized through May 2019. 

Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses, and employee claims; and real estate indemnity against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues with generally indefinite terms, and the maximum amount of future payments is generally unlimited. The carrying amount recorded for indemnifications at March 31, 2017, was $199 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 $109 million of environmental accruals for known contamination that were primarily included in “Asset retirement obligations and accrued environmental costs” at March 31, 2017. For additional information about environmental liabilities, see Note 12—Contingencies and Commitments.


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Indemnification and Release Agreement
In 2012, following our separation from ConocoPhillips (the Separation), we entered into the Indemnification and Release Agreement. 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 12—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 March 31, 2017, our total environmental accrual was $511 million, compared with $496 million at December 31, 2016. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

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

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

At March 31, 2017, we had performance obligations secured by letters of credit and bank guarantees of $602 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 13—Derivatives and Financial Instruments

Derivative Instruments
We use financial and commodity-based derivative contracts to manage exposures to fluctuations in commodity prices, interest rates, foreign currency exchange rates, or to capture market opportunities. Because we do not apply hedge accounting for commodity derivative contracts, all realized or unrealized gains and losses from commodity derivative contracts are recognized in the consolidated statement of income. Gains and losses from derivative contracts held for trading not directly related to our physical business are 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 are recorded on the consolidated balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception, whereby the contracts are recorded on an accrual basis. We generally apply the normal purchases and normal sales exception to eligible crude oil, refined product, NGL, natural gas and power commodity contracts to purchase or sell quantities we expect to use or sell in the normal course of business. All other derivative instruments are recorded at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 14—Fair Value Measurements.

Commodity Derivative Contracts—We sell into or receive supply from the worldwide crude oil, refined products, NGL, natural gas and electric power markets, exposing our revenues, purchases, cost of operating activities, and cash flows to fluctuations in the prices for these commodities. Generally, our policy is to remain exposed to the market prices of commodities; however, we use futures, forwards, swaps and options in various markets to balance physical systems, meet customer needs, manage price exposures on specific transactions, and do a limited, immaterial amount of trading not directly related to our physical business, all of which may reduce our exposure to fluctuations in market prices. We also use the market knowledge gained from these activities to capture market opportunities such as moving physical

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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 consolidated balance sheet line items that include the fair values of commodity derivative assets and liabilities. The balances in the following table are presented on a gross basis, before the effects of counterparty and collateral netting. However, we have elected to present our commodity derivative assets and liabilities with the same counterparty on a net basis on the consolidated balance sheet when the right of setoff exists.

 
Millions of Dollars
 
March 31, 2017
 
Commodity Derivatives
 
Effect of Collateral Netting

Net Carrying Value Presented on the Balance Sheet

 
Assets

 
Liabilities

 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Prepaid expenses and other current assets
$
106

 
73

 

33

Other assets
4

 
1

 

3

Liabilities


 


 


Other accruals
320

 
364

 
(20
)
24

Other liabilities and deferred credits
1

 
2

 

1

Total
$
431

 
440

 
(20
)
11

 

 
Millions of Dollars
 
December 31, 2016
 
Commodity Derivatives
 
Effect of Collateral Netting

Net Carrying Value Presented on the Balance Sheet

 
Assets

 
Liabilities

 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Prepaid expenses and other current assets
$
267

 
154

 

113

Other assets
5

 
1

 

4

Liabilities


 


 


Other accruals
474

 
612

 
(73
)
65

Other liabilities and deferred credits

 
1

 

1

Total
$
746

 
768

 
(73
)
51



At March 31, 2017, and December 31, 2016, there was no material cash collateral received or paid that was not offset on the consolidated balance sheet.


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The gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of income, were:
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2017

2016

 
 
 
Sales and other operating revenues
$
68

(86
)
Other income
9

9

Purchased crude oil and products
45

(36
)
Net gain (loss) from commodity derivative activity
$
122

(113
)


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 at least 98 percent at March 31, 2017, and December 31, 2016.

 
Open Position
Long/(Short)
 
March 31
2017

 
December 31
2016

Commodity
 
 
 
Crude oil, refined products and NGL (millions of barrels)
(33
)
 
(18
)


Interest-Rate Derivative Contracts—During the first quarter of 2016, we entered into interest-rate swaps to hedge the variability of anticipated lease payments on our new headquarters. These monthly lease payments will vary based on monthly changes in the one-month LIBOR and changes, if any, in the Company’s credit rating over the five-year term of the lease. The pay-fixed, receive-floating interest rate swaps have an aggregate notional value of $650 million and end on April 25, 2021. They qualify for and are designated as cash-flow hedges.

At March 31, 2017, and December 31, 2016, the aggregate net fair value of these swaps, which is included in the “Other accruals” and “Other assets” lines of our consolidated balance sheet, amounted to $10 million and $8 million, respectively.

We report the effective portion of the mark-to-market gain or loss on our interest rate swaps designated and qualifying as a cash flow hedging instrument as a component of other comprehensive income/loss and reclassify such gains and losses into earnings in the same period during which the hedged forecasted transaction affects earnings. Gains and losses due to ineffectiveness are recognized in general and administrative expenses. We did not recognize any material hedge ineffectiveness gain or loss in the consolidated income statement for the three months ended March 31, 2017 and 2016. Net realized loss from settlements of the swaps was immaterial for the three months ended March 31, 2017 and 2016.

We estimate that pre-tax losses of $1 million will be reclassified from accumulated other comprehensive income/loss into general and administrative expenses during the next twelve months as the hedged transaction settles; however, the actual amounts that will be reclassified will vary based on changes in interest rates.


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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, or 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 to 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 March 31, 2017, or December 31, 2016.



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Note 14—Fair Value Measurements

Recurring Fair Values Measurements
We carry certain assets and liabilities at fair value, which we measure at the reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability), and disclose the quality of these fair values based on the valuation inputs used in these measurements under the following hierarchy:

Level 1: Fair value measured with unadjusted quoted prices from an active market for identical assets or liabilities.
Level 2: Fair value measured either with: (1) adjusted quoted prices from an active market for similar assets or liabilities; or (2) other valuation inputs that are directly or indirectly observable.
Level 3: Fair value measured with unobservable inputs that are significant to the measurement.

We classify the fair value of an asset or liability based on the lowest level of input significant to its measurement; however, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable. For the three-month period ended March 31, 2017, derivative assets with an aggregate value of $30 million and derivative liabilities with an aggregate value of $34 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.

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.
Derivative instruments—We fair value our exchange-traded contracts based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange, or other exchanges, and classify them 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 forward 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. 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. 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.
We determine the fair value of our interest rate swaps based upon observed market valuations for interest-rate swaps that have notionals, durations, and pay and reset frequencies similar to ours.
Rabbi trust assets—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.


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Debt—The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on quoted market prices.

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 on a gross basis in the hierarchy sections of these tables, before the effects of counterparty and collateral netting. 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 impact of these contracts in the column “Effect of Counterparty Netting.”

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

 
Millions of Dollars
 
March 31, 2017
 
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

 
Level 1

 
Level 2

 
Level 3

Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
193

 
219

 

 
412

(395
)


17

OTC instruments

 
2

 

 
2




2

Physical forward contracts

 
17

 

 
17




17

Interest-rate derivatives

 
10

 

 
10




10

Rabbi trust assets
106

 

 

 
106

N/A

N/A


106

 
$
299

 
248

 

 
547

(395
)


152

 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
182

 
234

 

 
416

(395
)
(20
)

1

OTC instruments

 
1

 

 
1




1

Physical forward contracts

 
22

 
1

 
23




23

Floating-rate debt
100

 
157

 

 
257

N/A

N/A


257

Fixed-rate debt, excluding capital leases

 
10,126

 

 
10,126

N/A

N/A

(366
)
9,760

 
$
282

 
10,540

 
1

 
10,823

(395
)
(20
)
(366
)
10,042





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Millions of Dollars
 
December 31, 2016
 
Fair Value Hierarchy
 
Total Fair Value of Gross Assets & Liabilities

Effect of Counterparty Netting

Effect of Collateral Netting

Difference in Carrying Value and Fair Value

Net Carrying Value Presented on the Balance Sheet

 
Level 1

 
Level 2

 
Level 3

 
Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
273

 
371

 

 
644

(628
)


16

OTC instruments

 
6

 

 
6

(1
)


5

Physical forward contracts

 
94

 
2

 
96




96

Interest-rate derivatives

 
8

 

 
8




8

Rabbi trust assets
97

 

 

 
97

N/A

N/A


97

 
$
370

 
479

 
2

 
851

(629
)


222

 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
249

 
452

 

 
701

(628
)
(73
)


OTC instruments

 
1

 

 
1

(1
)



Physical forward contracts

 
61

 
5

 
66




66

Floating-rate debt
50

 
210

 

 
260

N/A

N/A


260

Fixed-rate debt, excluding capital leases

 
10,260

 

 
10,260

N/A

N/A

(570
)
9,690

 
$
299

 
10,984

 
5

 
11,288

(629
)
(73
)
(570
)
10,016



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 the location of our commodity derivative assets and liabilities on the balance sheet, see the first table in Note 13—Derivatives and Financial Instruments.

Nonrecurring Fair Value Measurements
See Note 5—Business Combinations for remeasurement of our investment in MSLP to fair value. During the three months ended March 31, 2017 and 2016, there were no other material nonrecurring fair value remeasurements of assets subsequent to their initial recognition.



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Note 15—Employee Benefit Plans

Pension and Postretirement Plans
The components of net periodic benefit cost for the three-month periods ended March 31, 2017 and 2016, were as follows:
 
Millions of Dollars
 
Pension Benefits
 
Other Benefits
 
2017
 
2016
 
2017

 
2016

 
U.S.

 
Int’l.

 
U.S.

 
Int’l.

 
 
 
 
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
33

 
8

 
32

 
9

 
1

 
2

Interest cost
27

 
6

 
29

 
7

 
2

 
2

Expected return on plan assets
(37
)
 
(10
)
 
(32
)
 
(10
)
 

 

Amortization of prior service cost
1

 

 
1

 

 

 

Recognized net actuarial loss
17

 
6

 
18

 
4

 

 

Settlements
1

 

 
3

 

 

 

Net periodic benefit cost
$
42


10


51


10


3


4



During the first three months of 2017, we contributed $4 million to our U.S. benefit plans and $8 million to our international benefit plans. We currently expect to make additional contributions of approximately $260 million to our U.S. benefit plans and $27 million to our international benefit plans during the remainder of 2017.



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Note 16—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, 2015
$
(662
)
 
11

 
(2
)
 
(653
)
Other comprehensive income (loss) before reclassifications
4

 
(17
)
 
(5
)
 
(18
)
Amounts reclassified from accumulated other comprehensive income (loss)*
 
 
 
 
 
 
 
Amortization of defined benefit plan items**
 
 
 
 
 
 
 
Actuarial losses and settlements
14

 

 

 
14

Net current period other comprehensive income (loss)
18

 
(17
)
 
(5
)
 
(4
)
March 31, 2016
$
(644
)
 
(6
)
 
(7
)
 
(657
)
 
 
 
 
 
 
 
 
December 31, 2016
$
(713
)
 
(285
)
 
3

 
(995
)
Other comprehensive income before reclassifications
2

 
24

 
2

 
28

Amounts reclassified from accumulated other comprehensive income (loss)*
 
 
 
 
 
 


Amortization of defined benefit plan items**
 
 
 
 
 
 
 
Actuarial losses and settlements
15

 

 

 
15

Net current period other comprehensive income
17

 
24

 
2

 
43

March 31, 2017
$
(696
)
 
(261
)
 
5

 
(952
)
* 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 15—Employee Benefit Plans, for additional information).


Note 17— Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash as shown in the consolidated statement of cash flows to the amounts reflected in the consolidated balance sheet.

 
Millions of Dollars
 
March 31
2017

 
December 31
2016

 
 
 
 
Cash and cash equivalents
$
1,513

 
2,711

Restricted cash included in:
 
 
 
   Prepaid expenses and other current assets
69

 

   Other assets
54

 

Cash, cash equivalents and restricted cash
$
1,636

 
2,711



Restricted cash in prepaid expenses and other current assets represents amounts set aside in accordance with a lender’s agreement for payment of MSLP’s operating expenditures and financing principal and interest. Restricted cash in other assets represents amounts set aside in accordance with a lender’s agreement for payment of MSLP turnaround expenses expected to be paid in 2018.

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Note 18—Related Party Transactions

Significant transactions with related parties were:

 
Millions of Dollars
 
Three Months Ended
March 31
 
2017

2016

 
 
 
Operating revenues and other income (a)
$
571

407

Purchases (b)
2,144

1,503

Operating expenses and selling, general and administrative expenses (c)
26

33



As discussed more fully in Note 5—Business Combinations, in February 2017, we began accounting for MSLP as a wholly owned consolidated subsidiary. Accordingly, processing fees paid to MSLP are only included through the consolidation date in the table above.
(a)
We sold NGL and other petrochemical feedstocks, along with solvents, to CPChem, and we sold gas oil and hydrogen feedstocks to Excel Paralubes (Excel). We sold certain feedstocks and intermediate products to WRB and also acted as agent for WRB in supplying crude oil and other feedstocks for a fee. 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 for a fee. We purchased natural gas and NGL from DCP Midstream and CPChem, as well as other feedstocks from various affiliates, for use in our refinery and fractionation processes. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline equity companies for transporting crude oil, 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.



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Note 19—Segment Disclosures and Related Information

Our operating segments are:

1)
Midstream—Gathers, processes, transports and markets natural gas; and transports, stores, 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 segment also stores, refrigerates and exports liquefied petroleum gas primarily to Asia and Europe. 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—Consists of our 50 percent equity investment in CPChem, which manufactures and markets petrochemicals and plastics on a worldwide basis.

3)
Refining—Buys, sells and refines crude oil and other feedstocks at 13 refineries, mainly in the United States and Europe.

4)
Marketing and Specialties—Purchases for resale and markets refined products (such as gasolines, 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.

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 segment performance based on net income attributable to Phillips 66. Intersegment sales are at prices that approximate market.




23

Table of Contents

Analysis of Results by Operating Segment

 
Millions of Dollars
 
Three Months Ended
March 31
 
2017

 
2016

Sales and Other Operating Revenues
 
 
 
Midstream
 
 
 
Total sales
$
1,659

 
931

Intersegment eliminations
(438
)
 
(292
)
Total Midstream
1,221

 
639

Chemicals
1

 
1

Refining
 
 
 
Total sales
14,292

 
10,238

Intersegment eliminations
(8,670
)
 
(6,559
)
Total Refining
5,622

 
3,679

Marketing and Specialties
 
 
 
Total sales
16,366

 
13,348

Intersegment eliminations
(324
)
 
(266
)
Total Marketing and Specialties
16,042

 
13,082

Corporate and Other
8

 
8

Consolidated sales and other operating revenues
$
22,894

 
17,409

 
 
 
 
Net Income (Loss) Attributable to Phillips 66
 
 
 
Midstream
$
77

 
65

Chemicals
181

 
156

Refining
259

 
86

Marketing and Specialties
141

 
205

Corporate and Other
(123
)
 
(127
)
Consolidated net income attributable to Phillips 66
$
535

 
385



 
Millions of Dollars
 
March 31
2017

 
December 31
2016

Total Assets
 
 
 
Midstream
$
12,584

 
12,832

Chemicals
6,029

 
5,802

Refining
23,715

 
22,825

Marketing and Specialties
6,051

 
6,227

Corporate and Other
3,026

 
3,967

Consolidated total assets
$
51,405

 
51,653




24

Table of Contents

Note 20—Income Taxes

Our effective tax rate for the first quarter of 2017 was 29 percent, compared with 33 percent for the corresponding period of 2016. The decrease in the effective tax rate was primarily attributable to the relative impact of foreign earnings that are subject to a lower tax rate and the recognition in the income statement of excess tax benefits associated with share-based compensation.

The effective tax rate varies from the federal statutory tax rate of 35 percent primarily as a result of foreign operations, excess tax benefits associated with share-based compensation and the impact of income attributable to noncontrolling interests, partially offset by state tax expense.


Note 21—Phillips 66 Partners LP

Phillips 66 Partners is a publicly traded master limited partnership formed to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and NGL pipelines and terminals, as well as other midstream assets. Headquartered in Houston, Texas, Phillips 66 Partners’ assets currently consist of crude oil, refined petroleum products and NGL transportation, terminaling and storage systems, as well as an NGL fractionator. Phillips 66 Partners conducts its operations through both wholly owned and joint-venture operations. The majority of Phillips 66 Partners’ wholly owned assets are associated with, and integral to the operation of, nine of Phillips 66’s owned or joint-venture refineries.

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 (such continuous offering program, or at-the-market program, referred to as the ATM program). For the three months ended March 31, 2017, on a settlement-date basis, Phillips 66 Partners issued 744,968 common units under the ATM program, which generated net proceeds of $40 million. From inception through March 31, 2017, Phillips 66 Partners has issued an aggregate of 1,091,120 common units under the ATM program, generating net proceeds of $58 million.

At March 31, 2017, we owned a 58 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, while the public owned a 40 percent limited partner interest. We consolidate Phillips 66 Partners as a variable interest entity for financial reporting purposes. See Note 3—Variable Interest Entities (VIEs), for additional information on why we consolidate the partnership. As a result of this consolidation, the public unitholders’ ownership interest in Phillips 66 Partners is reflected as a noncontrolling interest in our financial statements.


Note 22—New Accounting Standards

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendment provides a screen for determining when a transaction involves an acquisition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the transaction does not involve the acquisition of a business. If the screen is not met, then the amendment requires that to be considered a business, the operation must include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The guidance may reduce the number of transactions accounted for as business acquisitions. Public business entities should apply the guidance in ASU No. 2017-01 to annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The amendments should be applied prospectively, and no disclosures are required at the effective date. We are currently evaluating the provisions of ASU No. 2017-01.

In June 2016, the FASB issued ASU No. 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 No. 2016-13 for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption will be permitted for annual

25

Table of Contents

periods beginning after December 15, 2018. We are currently evaluating the provisions of ASU No. 2016-13 and assessing the impact on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” In the new standard, the FASB modified its determination of whether a contract is a lease rather than whether a lease is a capital or operating lease under the previous accounting principles generally accepted in the United States (GAAP). A contract represents a lease if a transfer of control occurs over an identified property, plant and equipment for a period of time in exchange for consideration. Control over the use of the identified asset includes the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct its use. The FASB continued to maintain two classifications of leases—financing and operating—which are substantially similar to capital and operating leases in the previous lease guidance. Under the new standard, recognition of assets and liabilities arising from operating leases will require recognition on the balance sheet. The effect of all leases in the statement of comprehensive income and the statement of cash flows will be largely unchanged. Lessor accounting will also be largely unchanged. Additional disclosures will be required for financing and operating leases for both lessors and lessees. Public business entities should apply the guidance in ASU No. 2016-02 for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. Entities are required to adopt the ASU using a modified retrospective approach, subject to certain optional practical expedients, and apply the provisions of ASU No. 2016-02 to leasing arrangements existing at or entered into after the earliest comparative period presented in the financial statements. We are currently evaluating the provisions of ASU No. 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 No. 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 No. 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 No. 2016-01. Our initial review indicates that ASU No. 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 No. 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 No. 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU No. 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. 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. Our expectation is to adopt the standard on January 1, 2018, using the modified retrospective application. In addition, we expect to present revenue net of sales-based taxes collected from our customers resulting in no impact to earnings. Sales-based taxes include excise taxes on petroleum product sales as noted on our consolidated statement of income. Our evaluation of the new ASU is ongoing, which includes understanding the impact of adoption on earnings from equity method investments. Based on our analysis to date, we have not identified any other material impact on our financial statements other than disclosure.



26

Table of Contents

Note 23—Condensed Consolidating Financial Information

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

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

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.
 
Millions of Dollars
 
Three Months Ended March 31, 2017
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

16,250

6,644


22,894

Equity in earnings of affiliates
595

484

115

(829
)
365

Net gain on dispositions

1



1

Other income

426

26


452

Intercompany revenues

428

2,907

(3,335
)

Total Revenues and Other Income
595

17,589

9,692

(4,164
)
23,712

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

13,884

7,060

(3,265
)
17,679

Operating expenses

1,031

255

(16
)
1,270

Selling, general and administrative expenses
3

289

94

(2
)
384

Depreciation and amortization

214

101


315

Impairments

2



2

Taxes other than income taxes

1,372

1,784


3,156

Accretion on discounted liabilities

4

1


5

Interest and debt expense
90

12

55

(52
)
105

Foreign currency transaction gains


(1
)

(1
)
Total Costs and Expenses
93

16,808

9,349

(3,335
)
22,915

Income before income taxes
502

781

343

(829
)
797

Provision (benefit) for income taxes
(33
)
186

81


234

Net Income
535

595

262

(829
)
563

Less: net income attributable to noncontrolling interests


28


28

Net Income Attributable to Phillips 66
$
535

595

234

(829
)
535

 
 
 
 
 
 
Comprehensive Income
$
578

638

290

(900
)
606


27

Table of Contents

 
Millions of Dollars
 
Three Months Ended March 31, 2016
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

11,698

5,711


17,409

Equity in earnings of affiliates
447

398

86

(598
)
333

Other income

15

3


18

Intercompany revenues

178

1,587

(1,765
)

Total Revenues and Other Income
447

12,289

7,387

(2,363
)
17,760

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

8,994

4,645

(1,709
)
11,930

Operating expenses

832

199

(8
)
1,023

Selling, general and administrative expenses
3

287

99

(3
)
386

Depreciation and amortization

200

80


280

Taxes other than income taxes

1,344

2,117


3,461

Accretion on discounted liabilities

4

1


5

Interest and debt expense
93

8

30

(45
)
86

Foreign currency transaction gains


(7
)

(7
)
Total Costs and Expenses
96

11,669

7,164

(1,765
)
17,164

Income before income taxes
351

620

223

(598
)
596

Provision (benefit) for income taxes
(34
)
173

59


198

Net Income
385

447

164

(598
)
398

Less: net income attributable to noncontrolling interests


13


13

Net Income Attributable to Phillips 66
$
385

447

151

(598
)
385

 
 
 
 
 
 
Comprehensive Income
$
381

443

152

(582
)
394



 
 
 
 
 
 


 
 
 
 
 
 



28

Table of Contents

 
Millions of Dollars
 
March 31, 2017
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

217

1,296


1,513

Accounts and notes receivable
11

3,935

3,778

(2,034
)
5,690

Inventories

3,095

1,292


4,387

Prepaid expenses and other current assets
1

371

208


580

Total Current Assets
12

7,618

6,574

(2,034
)
12,170

Investments and long-term receivables
29,698

21,203

8,421

(45,963
)
13,359

Net properties, plants and equipment

13,110

8,130


21,240

Goodwill

2,853

417


3,270

Intangibles

729

166


895

Other assets
330

242

217

(318
)
471

Total Assets
$
30,040

45,755

23,925

(48,315
)
51,405

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
$

5,507

2,899

(2,034
)
6,372

Short-term debt
450

15

144


609

Accrued income and other taxes

330

523


853

Employee benefit obligations

254

30


284

Other accruals
143

370

99


612

Total Current Liabilities
593

6,476

3,695

(2,034
)
8,730

Long-term debt
6,972

51

2,578


9,601

Asset retirement obligations and accrued
environmental costs

460

156


616

Deferred income taxes

4,773

2,484

(3
)
7,254

Employee benefit obligations

954

268


1,222

Other liabilities and deferred credits
82

3,387

3,781

(6,993
)
257

Total Liabilities
7,647

16,101

12,962

(9,030
)
27,680

Common stock
10,502

25,403

10,297

(35,700
)
10,502

Retained earnings
12,843

5,203

(245
)
(4,987
)
12,814

Accumulated other comprehensive loss
(952
)
(952
)
(450
)
1,402

(952
)
Noncontrolling interests


1,361


1,361

Total Liabilities and Equity
$
30,040

45,755

23,925

(48,315
)
51,405




29

Table of Contents

 
Millions of Dollars
 
December 31, 2016
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

854

1,857


2,711

Accounts and notes receivable
13

4,336

3,276

(1,228
)
6,397

Inventories

2,198

952


3,150

Prepaid expenses and other current assets
2

317

103


422

Total Current Assets
15

7,705

6,188

(1,228
)
12,680

Investments and long-term receivables
31,165

22,733

8,588

(48,952
)
13,534

Net properties, plants and equipment

13,044

7,811


20,855

Goodwill

2,853

417


3,270

Intangibles

719

169


888

Other assets
15

245

168

(2
)
426

Total Assets
$
31,195

47,299

23,341

(50,182
)
51,653

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
$

5,626

2,663

(1,228
)
7,061

Short-term debt
500

30

20


550

Accrued income and other taxes

348

457


805

Employee benefit obligations

475

52


527

Other accruals
59

371

90


520

Total Current Liabilities
559

6,850

3,282

(1,228
)
9,463

Long-term debt
6,920

150

2,518


9,588

Asset retirement obligations and accrued
environmental costs

501

154


655

Deferred income taxes

4,391

2,354

(2
)
6,743

Employee benefit obligations

948

268


1,216

Other liabilities and deferred credits
1,297

3,337

4,060

(8,431
)
263

Total Liabilities
8,776

16,177

12,636

(9,661
)
27,928

Common stock
10,777

25,403

10,117

(35,520
)
10,777

Retained earnings
12,637

6,714

(269
)
(6,474
)
12,608

Accumulated other comprehensive loss
(995
)
(995
)
(478
)
1,473

(995
)
Noncontrolling interests


1,335


1,335

Total Liabilities and Equity
$
31,195

47,299

23,341

(50,182
)
51,653




30

Table of Contents

 
Millions of Dollars
 
Three Months Ended March 31, 2017
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 (Used in) Operating Activities
$
609

(583
)
411

(986
)
(549
)
 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Capital expenditures and investments*

(291
)
(179
)

(470
)
Proceeds from asset dispositions**


9


9

Intercompany lending activities
31

755

(786
)


Collection of advances/loans—related parties

75

250


325

Restricted cash received from consolidation of business


318


318

Other

(31
)
7


(24
)
Net Cash Provided by (Used in) Investing Activities
31

508

(381
)

158

 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Issuance of debt


712


712

Repayment of debt

(6
)
(767
)

(773
)
Issuance of common stock
4




4

Repurchase of common stock
(285
)



(285
)
Dividends paid on common stock
(326
)
(556
)
(430
)
986

(326
)
Distributions to noncontrolling interests


(24
)

(24
)
Net proceeds from issuance of Phillips 66 Partners LP common units


40


40

Other*
(33
)

(1
)

(34
)
Net Cash Used in Financing Activities
(640
)
(562
)
(470
)
986

(686
)
 
 
 
 
 
 
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash


2


2

 
 
 
 
 
 
Net Change in Cash, Cash Equivalents and
Restricted Cash

(637
)
(438
)

(1,075
)
Cash, cash equivalents and restricted cash at
beginning of period

854

1,857


2,711

Cash, Cash Equivalents and Restricted Cash at
End of Period
$

217

1,419


1,636

* Includes intercompany capital contributions.
** Includes return of investments in equity affiliates.


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Table of Contents

 
Millions of Dollars
 
Three Months Ended March 31, 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
$
1,863

561

321

(2,487
)
258

 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Capital expenditures and investments*

(345
)
(443
)
38

(750
)
Proceeds from asset dispositions**

3

2


5

Intercompany lending activities
(1,141
)
1,396

(255
)


Advances/loans—related parties

(75
)


(75
)
Other

8

(50
)

(42
)
Net Cash Provided by (Used in) Investing Activities
(1,141
)
987

(746
)
38

(862
)
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Issuance of debt


50


50

Repayment of debt

(6
)
(94
)

(100
)
Issuance of common stock
4




4

Repurchase of common stock
(391
)



(391
)
Dividends paid on common stock
(296
)
(1,807
)
(680
)
2,487

(296
)
Distributions to noncontrolling interests


(11
)

(11
)
Other*
(39
)

38

(38
)
(39
)
Net Cash Used in Financing Activities
(722
)
(1,813
)
(697
)
2,449

(783
)
 
 
 
 
 
 
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash


36


36

 
 
 
 
 
 
Net Change in Cash, Cash Equivalents and Restricted Cash

(265
)
(1,086
)

(1,351
)
Cash, cash equivalents and restricted cash at
beginning of period

575

2,499


3,074

Cash, Cash Equivalents and Restricted Cash at
End of Period
$

310

1,413


1,723

* Includes intercompany capital contributions.
** Includes return of investments in equity affiliates.




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Table of Contents

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

Unless otherwise indicated, “the company,” “we,” “our,” “us” and “Phillips 66” are used in this report to refer to the businesses of Phillips 66 and its consolidated subsidiaries. Unless the context requires otherwise, references to “DCP Midstream” include the consolidated operations of DCP Midstream, LLC, including DCP Midstream, LP (formerly named DCP Midstream Partners, LP), the master limited partnership formed by DCP Midstream, LLC.

Management’s Discussion and Analysis is the company’s analysis of its financial performance, its 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 March 31, 2017, we had total assets of $51 billion. Our common stock trades on the New York Stock Exchange under the symbol “PSX.”

Executive Overview
We reported earnings of $535 million in the first quarter of 2017 and cash used in operating activities of $549 million. We used available cash to fund capital expenditures and investments of $470 million, pay dividends of $326 million and repurchase $285 million of our common stock. We ended the first quarter of 2017 with $1.5 billion of cash and cash equivalents and approximately $5.5 billion of total capacity available under our liquidity facilities.

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Business Environment
Commodity prices remained compressed but generally improved during the first quarter of 2017. The discount of the U.S. benchmark West Texas Intermediate (WTI) crude oil price to the international benchmark Brent crude oil price widened considerably to about $2 per barrel. The sustained low-commodity-price environment had a variety of impacts, both favorable and unfavorable, on our 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 first quarter of 2017 compared with the fourth quarter and the first quarter of 2016 due to rising NGL exports and declining NGL inventories. Average natural gas prices remained consistent compared with the fourth quarter of 2016, and improved compared with the first quarter of 2016, benefiting from declining production.

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 first quarter of 2017 improved compared with the fourth quarter and the first quarter of 2016.

The results of our Refining segment are driven by several factors including refining margins, cost control, refinery throughput, feedstock costs, and product yields. Industry crack spread indicators, the difference between market prices for refined products and crude oil, are used to estimate refining margins. The U.S. Gulf Coast 3:2:1 crack spread (three barrels of crude oil producing two barrels of gasoline and one barrel of diesel) increased in the first quarter of 2017 compared with the fourth quarter of 2016 due to higher gasoline crack spreads. The U.S. crack spread was also higher compared with the first quarter of 2016 due to increased gasoline and distillate crack spreads.

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 influenced by the trend in 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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RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three-month period ended March 31, 2017, is based on a comparison with the corresponding period of 2016.

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

 
Millions of Dollars
 
Three Months Ended
March 31
 
2017

 
2016

 
 
 
 
Midstream
$
77

 
65

Chemicals
181

 
156

Refining
259

 
86

Marketing and Specialties
141

 
205

Corporate and Other
(123
)
 
(127
)
Net income attributable to Phillips 66
$
535

 
385



Earnings for Phillips 66 increased $150 million, or 39 percent, in the first quarter of 2017, primarily due to higher earnings from the Refining segment. Earnings for the Refining segment improved mainly driven by the gain recognized from the consolidation of Merey Sweeny, L.P. (MSLP) and higher realized margins, partially offset by increased turnaround costs. See Note 5—Business Combinations, in the Notes to Consolidated Financial Statements, for additional information on the MSLP consolidation.

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

Statement of Income Analysis

Sales and other operating revenues increased 32 percent in the first quarter of 2017, and purchased crude oil and products increased 48 percent. These increases were mainly due to higher prices for petroleum products, crude oil and NGL.

Equity in earnings of affiliates increased 10 percent in the first quarter of 2017. The increase was mainly due to higher earnings from CPChem, DCP Midstream and WRB Refining LP (WRB), partially offset by lower results from Excel Paralubes (Excel). Improved results from WRB were primarily attributable to higher market crack spreads, partially offset by increased turnaround costs. Lower equity in earnings from Excel were due to turnaround activity in the first quarter of 2017. See the “Segment Results” section for additional information on DCP Midstream and CPChem earnings.

Other income increased $434 million in the first quarter of 2017. We recognized a noncash, pre-tax gain of $423 million in the first quarter of 2017 related to the consolidation of MSLP. See Note 5—Business Combinations, in the Notes to Consolidated Financial Statements, for additional information.

Operating expenses increased 24 percent in the first quarter of 2017, mainly driven by higher refining turnaround activities.

Depreciation and amortization increased 13 percent in the first quarter of 2017, reflecting the impact of the full commercial operations of the Freeport LPG Export Terminal and a general increase in gross properties, plants and equipment.

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Taxes other than income taxes decreased 9 percent in the first quarter of 2017. The decrease was mainly attributable to lower excise taxes from our U.K. operation due to the depreciation of the British pound and the sale of the Whitegate Refinery in September 2016.
 
Net income attributable to noncontrolling interest increased $15 million in the first quarter of 2017 reflecting the contribution of assets to Phillips 66 Partners during 2016.

See Note 20—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
March 31
 
2017

2016

 
Millions of Dollars
Net Income (Loss) Attributable to Phillips 66
 
 
Transportation
$
56

72

NGL
4

(11
)
DCP Midstream
17

4

Total Midstream
$
77

65


 
Thousands of Barrels Daily
Transportation Volumes
 
 
Pipelines*
3,469

3,488

Terminals
2,395

2,209

Operating Statistics
 
 
NGL fractionated**
175

161

NGL extracted***
341

382

* 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.
** Excludes DCP Midstream.
*** Includes 100 percent of DCP Midstream’s volumes.

 
Dollars Per Gallon
Weighted Average NGL Price*
 
 
DCP Midstream
$
0.60

0.37

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


The Midstream segment gathers, processes, transports and markets natural gas; and transports, stores, 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 segment also stores, refrigerates, and exports liquefied petroleum gas (LPG) primarily to Asia and Europe. 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 $12 million in the first quarter of 2017.

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Transportation earnings decreased $16 million in the first quarter of 2017. The decrease was mainly due to higher operating costs, primarily related to integrity and maintenance activities, and higher income attributable to noncontrolling interests, reflecting the contribution of assets to Phillips 66 Partners.

Results from our NGL business improved $15 million in the first quarter of 2017. The quarter benefited from higher realized margins, including a full quarter of commercial operations at the Freeport LPG Export Terminal, as well as lower project development and other costs. These increases were partially offset by higher depreciation expenses and income attributable to noncontrolling interests.

Earnings from our investment in DCP Midstream increased $13 million in the first quarter of 2017. The increase was mainly driven by improved hedging results, improved margins due to higher commodity prices, and lower operating costs. These increases were partially offset by a favorable legal settlement recognized in 2016.

Effective January 1, 2017, DCP Midstream, LLC and its master limited partnership (then named DCP Midstream Partners, LP, subsequently renamed DCP Midstream, LP on January 11, 2017, and referred to herein as DCP Partners) closed a transaction in which DCP Midstream, LLC contributed subsidiaries owning all of its operating assets and its existing debt to DCP Partners, in exchange for approximately 31.1 million DCP Partners units. Following the transaction, we and our co-venturer retained our 50/50 investment in DCP Midstream, LLC and DCP Midstream, LLC retained its incentive distribution rights in DCP Partners, through its ownership of the general partner of DCP Partners, and held a 38 percent interest in DCP Partners. See the “Equity Affiliates” section of “Significant Sources of Capital” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on this transaction.

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



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Chemicals

 
Three Months Ended
March 31
 
2017

2016

 
Millions of Dollars
 
 
 
Net Income Attributable to Phillips 66
$
181

156

 
 
Millions of Pounds
CPChem Externally Marketed Sales Volumes*
 
 
Olefins and Polyolefins (O&P)
4,016

4,002

Specialties, Aromatics and Styrenics (SA&S)
1,206

1,254

 
5,222

5,256

* 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)*
89
%
94
* Revised to exclude polyethylene pipe operations. Prior periods recast for comparability.


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 increased $25 million in the first quarter of 2017. The increase was mainly driven by higher O&P volumes and improved benzene margins. In addition, CPChem recognized a gain from the sale of its K-Resin® SBC business in the first quarter of 2017. These increases were partially offset by lower equity earnings from CPChem’s SA&S equity affiliates due to an impairment recognized by CPChem, as well as higher turnaround expenses.

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


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Refining
 
Three Months Ended
March 31
 
2017

2016

 
Millions of Dollars
Net Income (Loss) Attributable to Phillips 66
 
 
Atlantic Basin/Europe
$
(50
)
4

Gulf Coast
328

68

Central Corridor
62

20

West Coast
(81
)
(6
)
Worldwide
$
259

86

 
 
 
 
Dollars Per Barrel
Refining Margins*
 
 
Atlantic Basin/Europe
$
6.29

5.79

Gulf Coast
8.03

6.76

Central Corridor
10.54

7.41

West Coast
9.95

9.70

Worldwide
8.55

7.11

* 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
520

588

Crude oil processed
366

577

Capacity utilization (percent)
70
%
98

Refinery production
457

611

Gulf Coast
 
 
Crude oil capacity
743

743

Crude oil processed
668

679

Capacity utilization (percent)
90
%
91

Refinery production
749

755

Central Corridor
 
 
Crude oil capacity
493

493

Crude oil processed
470

472

Capacity utilization (percent)
95
%
96

Refinery production
493

494

West Coast
 
 
Crude oil capacity
360

360

Crude oil processed
279

323

Capacity utilization (percent)
78
%
90

Refinery production
305

350

Worldwide
 
 
Crude oil capacity
2,116

2,184

Crude oil processed
1,783

2,051

Capacity utilization (percent)
84
%
94

Refinery production
2,004

2,210

* Includes our share of equity affiliates.
 
 


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The Refining segment buys, sells and refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 13 refineries, mainly in the United States and Europe.

Earnings for the Refining segment increased $173 million in the first quarter of 2017.

The increase in earnings was due to a gain recognized from the consolidation of MSLP, which owns a delayed coker and related facilities at the Sweeny Refinery. See Note 5—Business Combinations, in the Notes to Consolidated Financial Statements, for additional information.

Realized refining margins improved in the first quarter of 2017, resulting from increased market crack spreads, partially offset by lower feedstock advantage and secondary product margins. This net margin improvement was more than offset by increased turnaround costs.

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 84 percent in the first quarter of 2017, compared with 94 percent in the first quarter of 2016. The decrease was primarily attributable to higher turnaround activities, mainly in the Atlantic Basin/Europe, Gulf Coast and West Coast Regions.



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Marketing and Specialties

 
Three Months Ended
March 31
 
2017

2016

 
Millions of Dollars
Net Income Attributable to Phillips 66
 
 
Marketing and Other
$
124

162

Specialties
17

43

Total Marketing and Specialties
$
141

205


 
Dollars Per Barrel
Realized Marketing Fuel Margin*
 
 
U.S.
$
1.47

1.83

International
3.70

3.16

* On third-party petroleum products sales.

 
Dollars Per Gallon
U.S. Average Wholesale Prices*
 
 
Gasoline
$
1.82

1.37

Distillates
1.75

1.16

* Excludes excise taxes.
 
 

 
Thousands of Barrels Daily
Marketing Petroleum Products Sales Volumes
 
 
Gasoline
1,155

1,176

Distillates
835

903

Other products
15

15

Total
2,005

2,094



The M&S segment purchases for resale and markets refined petroleum products (such as gasoline, distillates and aviation fuels), mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products (such as base oils and lubricants), as well as power generation operations.

The M&S segment earnings decreased $64 million in the first quarter of 2017. The decrease reflected lower U.S. realized marketing margins driven by a relatively less favorable spot market compared with the first quarter of 2016, and lower equity earnings due to turnaround activity at Excel.

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



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Corporate and Other

 
Millions of Dollars
 
Three Months Ended
March 31
 
2017

2016

Net Loss Attributable to Phillips 66
 
 
Net interest
$
(65
)
(54
)
Corporate general and administrative expenses
(39
)
(42
)
Technology
(15
)
(14
)
Other
(4
)
(17
)
Total Corporate and Other
$
(123
)
(127
)


Net interest consists of interest and financing expense, net of interest income and capitalized interest. Net interest increased in the first quarter of 2017, mainly due to lower capitalized interest and higher interest expense driven by a higher average debt principal balance as a result of Phillips 66 Partners’ debt issuance in October 2016.

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 costs during the first quarter of 2017 reflected favorable tax impacts and the impact of an increase in noncontrolling interests on interest expense incurred by Phillips 66 Partners.




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CAPITAL RESOURCES AND LIQUIDITY

Financial Indicators

 
Millions of Dollars
Except as Indicated
 
March 31
2017

 
December 31
2016

 
 
 
 
Cash and cash equivalents
$
1,513

 
2,711

Short-term debt
609

 
550

Total debt
10,210

 
10,138

Total equity
23,725

 
23,725

Percent of total debt to capital*
30
%
 
30

Percent of floating-rate debt to total debt
3
%
 
3

* 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 three months of 2017, we used $549 million in cash from operations. In addition, Phillips 66 Partners raised net proceeds of $40 million from its continuous offering program of common units. Available cash was primarily used for capital expenditures and investments ($470 million), repurchases of our common stock ($285 million) and dividend payments on our common stock ($326 million). During the first three months of 2017, cash and cash equivalents decreased by $1,198 million, to $1,513 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, benefit plan contributions, debt repayment and share repurchases.

Significant Sources of Capital

Operating Activities
During the first three months of 2017, cash used in operating activities was $549 million, compared with cash provided by operations of $258 million for the first three months of 2016. The decrease in cash generated by operating activities primarily reflects the impact of larger seasonal inventory builds in the first quarter of 2017 compared with the first quarter of 2016, as well as a higher tax refund received in the first quarter of 2016 than we received in the first quarter of 2017.

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.


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Equity Affiliates
Our operating cash flows are also impacted by distribution decisions made by our equity affiliates, including DCP Midstream, CPChem and WRB. During the first three months of 2017, cash from operations included distributions of $153 million from our equity affiliates, compared with $167 million during the same period of 2016. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these companies are not assured.

Effective January 1, 2017, DCP Midstream, LLC and DCP Partners closed a transaction in which DCP Midstream, LLC contributed subsidiaries owning all of its operating assets, $424 million of cash and $3.15 billion of debt to DCP Partners, in exchange for DCP Partners units which had an estimated fair value of $1.125 billion at the time of the transaction. We and our co-venturer retained our 50/50 investment in DCP Midstream, LLC, and DCP Midstream, LLC retained its incentive distribution rights in DCP Partners through its ownership of the general partner of DCP Partners. After the transaction, DCP Midstream, LLC held a 38 percent interest in DCP Partners. DCP Midstream, LLC, through its ownership of the general partner, has agreed, if required, to forgo receipt of incentive distribution rights up to $100 million annually (100 percent basis) through 2019, to support a minimum distribution coverage ratio for DCP Partners. In connection with the transaction, DCP Midstream, LLC terminated its revolving credit agreement, which had previously served to limit distributions to its owners while amounts had been borrowed under the facility. As a result, we expect distributions to the owners of DCP Midstream, LLC to resume in 2017 as it receives distributions from DCP Partners.

Foreign Cash Holdings
At March 31, 2017, approximately 17 percent of our consolidated cash and cash equivalents balance was available for domestic use without incurring material U.S. income taxes in excess of the amounts already accrued in the financial statements. We believe the remaining amount, primarily attributable to cash we hold in foreign locations where we have asserted our intention to indefinitely reinvest earnings, does not materially affect our consolidated liquidity due to the following factors:

A substantial portion of our foreign cash supports the liquidity needs and regulatory requirements of our foreign operations.
We have the ability to fund a significant portion of our domestic capital requirements with cash provided by domestic operating activities.
We have access to U.S. capital markets through our $5 billion committed revolving credit facility, commercial paper program, and universal shelf registration statement.

Phillips 66 Partners LP
In 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. For the three months ended March 31, 2017, on a settlement-date basis, Phillips 66 Partners issued 744,968 common units under the ATM program, which generated net proceeds of $40 million. From inception through March 31, 2017, Phillips 66 Partners has issued an aggregate of 1,091,120 common units generating net proceeds of $58 million.

Credit Facilities and Commercial Paper
As of March 31, 2017, 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 March 31, 2017, $157 million was outstanding under the $750 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 March 31, 2017, we had no outstanding commercial paper.


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Debt Issuances
On April 21, 2017, Phillips 66 completed a private offering of $600 million aggregate principal amount of unsecured notes consisting of:

$300 million of floating rate Notes due 2019.
$300 million of floating rate Notes due 2020.

The notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary. Phillips 66 expects to use the net proceeds from the notes, together with a portion of the proceeds from $900 million of term loans received in late April 2017, to repay its outstanding 2.95% Senior Notes due 2017, for capital expenditures and for general corporate purposes.

Interest is a floating rate equal to three-month LIBOR plus 0.65% per annum for the 2019 Notes and three-month LIBOR plus 0.75% per annum for the 2020 Notes. Interest on both series of notes is payable quarterly in arrears on January 15, April 15, July 15 and October 15, commencing in July 2017. The 2019 Notes mature on April 15, 2019, and the 2020 Notes mature on April 15, 2020.

The term loans consist of a $450 million 364-day facility and a $450 million three-year facility. Interest on the term loans is a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by our long-term credit ratings.

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

Off-Balance Sheet Arrangements

In 2016, the operating lease commenced on our 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 $356 million. For information on our need to perform under the railcar lease guarantee, see the Capital Requirements section to follow, as well as Note 11—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 March 31, 2017, and December 31, 2016, was $10.2 billion and $10.1 billion, respectively. Our debt-to-capital ratio was 30 percent at both March 31, 2017, and December 31, 2016. Our target debt-to-capital ratio is between 20 and 30 percent. At March 31, 2017, we classified $1.05 billion of the 2.95% Senior Notes maturing in 2017 as long-term debt on our consolidated balance sheet, based on our ability and intent to refinance the obligation on a long-term basis, with such ability demonstrated by our April 2017 financing transactions.

On February 8, 2017, our Board of Directors declared a quarterly cash dividend of $0.63 per common share. The dividend was paid on March 1, 2017, to shareholders of record at the close of business on February 21, 2017.

Our Board of Directors at various times has authorized repurchases of our outstanding common stock, which aggregate to a total authorization of 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 first quarter of 2017, we repurchased 3,534,462 shares at a cost of $285 million.

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Since the inception of our share repurchases in 2012 through March 31, 2017, we have repurchased a total of 108,939,111 shares at a cost of $7,723 million. Shares of stock repurchased are held as treasury shares.

We own a 25 percent interest in the Dakota Access, LLC (DAPL) and Energy Transfer Crude Oil Company, LLC (ETCOP) joint ventures, which were formed to construct pipelines to deliver crude oil produced in the Bakken area of North Dakota to market centers in the Midwest and the Gulf Coast. In 2016, we and our co-venturer executed agreements, and an amendment to the original agreements, that provided we and our co-venturer would loan DAPL and ETCOP up to a maximum of $1,411 million and $76 million, respectively, with the amounts loaned by us and our co-venturer being proportionate to our ownership interests (Sponsor Loans). Also in 2016, DAPL and ETCOP secured a $2.5 billion facility (Facility) with a syndicate of financial institutions on a limited recourse basis with certain guarantees. Allowable draws under the Facility were initially reduced and finally suspended in September 2016 pending resolution of permitting delays. As a result, DAPL and ETCOP resumed making draws under the Sponsor Loans. In February 2017, DAPL was granted the lone outstanding easement required to complete work beneath the Missouri River. As a result, construction of the pipelines resumed and draws under the Facility were reinitiated and all outstanding Sponsor Loans were paid in February 2017. As of March 31, 2017, DAPL and ETCOP have an aggregate balance outstanding under the Facility of $2.5 billion; our 25 percent share is $625 million. The book values of our investments in DAPL and ETCOP at March 31, 2017, were $409 million and $129 million, respectively. Construction on both pipelines has been completed. Commercial operations are expected to begin by June 1, 2017.

In 2016, we and our co-venturer in WRB each made a $75 million partner loan to provide for WRB’s short-term operating needs. These partner loans were repaid in the first quarter of 2017.

During the first quarter of 2017, we recognized an additional $12 million of the residual value deficiency of our leased railcars.  The residual value deficiency of $54 million remaining at March 31, 2017, will be recognized on a straight-line basis with approximately one-third recognized through October 2017 and two-thirds recognized through May 2019.  Due to current market uncertainties, changes in the estimated fair values of railcars could occur, which could increase or decrease our currently estimated residual value deficiency. As of March 31, 2017, our maximum future exposure under the residual value guarantees was approximately $317 million. For additional information, see Note 11—Guarantees, in the Notes to Consolidated Financial Statements.

Capital Spending
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2017

 
2016

Capital Expenditures and Investments
 
 
 
Midstream
$
182

 
446

Chemicals

 

Refining
259

 
261

Marketing and Specialties
15

 
15

Corporate and Other
14

 
28

Total consolidated from continuing operations
$
470

 
750

 
 
 
 
Selected Equity Affiliates*
 
 
 
DCP Midstream
$
44

 
35

CPChem
256

 
247

WRB
42

 
37

 
$
342

 
319

* Our share of capital spending.



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Midstream
During the first three months of 2017, capital spending in our Midstream segment included construction activities related to increasing storage capacity at our crude oil and petroleum products terminal located near Beaumont, Texas, wrap-up activities related to our Freeport LPG Export Terminal and spending associated with return, reliability and maintenance projects in our Transportation and NGL businesses. Other major construction activities in progress include the further development of Phillips 66 Partners’ 40-percent owned joint venture Bayou Bridge Pipeline, which will provide Gulf Coast refineries more efficient and sustainable access to North American crude oil, and the development by our 25-percent owned joint ventures, DAPL and ETCOP, of two crude oil pipelines.

During the first three months of 2017, 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 $87 million, primarily for expansion capital expenditures including construction of the Mewbourn 3 plant and investments in the Sand Hills Pipeline joint venture, and maintenance capital expenditures for existing assets.

Chemicals
During the first three months of 2017, 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 $512 million, primarily for its U.S. Gulf Coast Petrochemicals Project. We expect CPChem to self-fund its capital program in 2017.

Refining
Capital spending for the Refining segment during the first three months of 2017 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 and Bayway refineries.
Installation of facilities to improve processing of advantaged crudes at the Billings refinery.
Installation of facilities to improve clean product yield at the Bayway and Ponca City refineries, as well as the jointly owned Wood River refinery.

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 three months of 2017 was primarily for reliability and maintenance projects and projects targeted at developing our new international sites.

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

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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.

Environmental
Like other companies in our industry, we are subject to numerous international, federal, state and local environmental laws and regulations. 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 in our 2016 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, 2016, we reported that we had been notified of potential liability under CERCLA and comparable state laws at 31 sites within the United States. During the first three months of 2017, there were two new sites for which we received notice of potential liability and two sites were deemed resolved and closed, leaving 31 sites with potential liability at March 31, 2017.

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. 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 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 in our 2016 Annual Report on Form 10-K.


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We consider and take into account anticipated future GHG emissions in designing and developing major facilities and projects, and implement energy efficiency initiatives to reduce such emissions. GHG emissions, legal requirements regulating such emissions, and the possible physical effects of climate change on our coastal assets are incorporated into our planning, investment, and risk management decision-making.


NEW ACCOUNTING STANDARDS

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendment provides a screen for determining when a transaction involves an acquisition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the transaction does not involve the acquisition of a business. If the screen is not met, then the amendment requires that to be considered a business, the operation must include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The guidance may reduce the number of transactions accounted for as business acquisitions. Public business entities should apply the guidance in ASU No. 2017-01 to annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The amendments should be applied prospectively, and no disclosures are required at the effective date. We are currently evaluating the provisions of ASU No. 2017-01.

In June 2016, the FASB issued ASU No. 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 No. 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 No. 2016-13 and assessing the impact on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” In the new standard, the FASB modified its determination of whether a contract is a lease rather than whether a lease is a capital or operating lease under the previous accounting principles generally accepted in the United States (GAAP). A contract represents a lease if a transfer of control occurs over an identified property, plant and equipment for a period of time in exchange for consideration. Control over the use of the identified asset includes the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct its use. The FASB continued to maintain two classifications of leases—financing and operating—which are substantially similar to capital and operating leases in the previous lease guidance. Under the new standard, recognition of assets and liabilities arising from operating leases will require recognition on the balance sheet. The effect of all leases in the statement of comprehensive income and the statement of cash flows will be largely unchanged. Lessor accounting will also be largely unchanged. Additional disclosures will be required for financing and operating leases for both lessors and lessees. Public business entities should apply the guidance in ASU No. 2016-02 for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. Entities are required to adopt the ASU using a modified retrospective approach, subject to certain optional practical expedients, and apply the provisions of ASU No. 2016-02 to leasing arrangements existing at or entered into after the earliest comparative period presented in the financial statements. We are currently evaluating the provisions of ASU No. 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 No. 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 No. 2016-01 for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption prohibited. We are

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currently evaluating the provisions of ASU No. 2016-01. Our initial review indicates that ASU No. 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 No. 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 No. 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU No. 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 No. 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. Our expectation is to adopt the standard on January 1, 2018, using the modified retrospective application. In addition, we expect to present revenue net of sales-based taxes collected from our customers resulting in no impact to earnings. Sales-based taxes include excise taxes on petroleum product sales as noted on our consolidated statement of income. Our evaluation of the new ASU is ongoing, which includes understanding the impact of adoption on earnings from equity method investments. Based upon our analysis to-date, we have not identified any other material impact on our financial statements other than disclosure.


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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 2016 Annual Report on Form 10-K.



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Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our commodity price risk and interest rate risk at March 31, 2017, did not differ materially from the risks disclosed under Item 7A of our 2016 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 March 31, 2017, 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 March 31, 2017.

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 March 31, 2017, 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 first quarter of 2017. However, there was one development that occurred with respect to matters previously reported in our 2016 Annual Report on Form 10-K. 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, five 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.

Matters Previously Reported
In October 2016, after Phillips 66 received a Notice of Intent to Sue from the Sierra Club, Phillips 66 entered into a voluntary settlement with the Illinois Environmental Protection Agency regarding alleged violations of wastewater requirements at the Wood River Refinery.  The settlement involves certain capital projects and payment of $125,000. After the settlement was filed with the Court for final approval, the Sierra Club sought and was granted approval to intervene in the case. We are working to obtain Court approval for the settlement.


Item 1A.   RISK FACTORS

There have been no material changes from the risk factors disclosed in Item 1A of our 2016 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

January 1-31, 2017
989,225
 
$
84.93

989,225
 
$
1,478

February 1-28, 2017
1,080,970
 
79.90

1,080,970
 
1,392

March 1-31, 2017
1,464,267
 
78.56

1,464,267
 
1,277

Total
3,534,462
 
$
80.75

3,534,462
 

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

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
PHILLIPS 66
 
 
 
/s/ Chukwuemeka A. Oyolu
 
Chukwuemeka A. Oyolu
Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
 
 
May 5, 2017
 



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