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Phillips 66 - Quarter Report: 2018 June (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
June 30, 2018
 

 
 
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 464,262,410 shares of common stock, $0.01 par value, outstanding as of June 30, 2018.


Table of Contents

PHILLIPS 66

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
 
Consolidated Statement of Income
Phillips 66
 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues*
$
28,980

24,087

 
52,575

46,981

Equity in earnings of affiliates
743

462

 
1,167

827

Net gain on dispositions

14

 
17

15

Other income
13

18

 
23

470

Total Revenues and Other Income
29,736

24,581

 
53,782

48,293

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products
25,747

18,353

 
46,885

36,032

Operating expenses
1,143

1,137

 
2,389

2,407

Selling, general and administrative expenses
432

439

 
818

823

Depreciation and amortization
337

320

 
673

635

Impairments
6

15

 
6

17

Taxes other than income taxes*
109

3,356

 
219

6,512

Accretion on discounted liabilities
6

6

 
12

11

Interest and debt expense
135

107

 
258

212

Foreign currency transaction gains
(14
)

 
(30
)
(1
)
Total Costs and Expenses
27,901

23,733

 
51,230

46,648

Income before income taxes
1,835

848


2,552

1,645

Income tax expense
431

267

 
563

501

Net Income
1,404

581

 
1,989

1,144

Less: net income attributable to noncontrolling interests
65

31

 
126

59

Net Income Attributable to Phillips 66
$
1,339

550

 
1,863

1,085

 
 
 
 
 
 
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
 
 
 
 
 
Basic
$
2.86

1.06

 
3.89

2.08

Diluted
2.84

1.06

 
3.87

2.07

 
 
 
 
 
 
Dividends Paid Per Share of Common Stock (dollars)
$
0.80

0.70

 
1.50

1.33

 
 
 
 
 
 
Weighted-Average Common Shares Outstanding (thousands)
 
 
 
 
 
Basic
468,331

517,785

 
477,647

519,706

Diluted
471,638

520,160

 
480,995

522,329

* Includes excise taxes on sales of petroleum products for periods prior to the adoption of Accounting Standards Update No. 2014-09 on January 1, 2018:
 
$
3,252

 
 
6,288

See Notes to Consolidated Financial Statements.
 
 
 
 
 

1

Table of Contents

Consolidated Statement of Comprehensive Income
Phillips 66
 
 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

 
 
 
 
 
 
Net Income
$
1,404

581

 
1,989

1,144

Other comprehensive income (loss)
 
 
 
 
 
Defined benefit plans
 
 
 
 
 
Amortization to net income of net actuarial loss, prior service credit and settlements
21

77

 
43

100

Plans sponsored by equity affiliates
3

3

 
9

6

Income taxes on defined benefit plans
(5
)
(30
)
 
(12
)
(39
)
Defined benefit plans, net of tax
19

50

 
40

67

Foreign currency translation adjustments
(201
)
102

 
(110
)
128

Income taxes on foreign currency translation adjustments
4

(7
)
 
1

(9
)
Foreign currency translation adjustments, net of tax
(197
)
95

 
(109
)
119

Cash flow hedges
2

(3
)
 
8


Income taxes on hedging activities

1

 
(2
)

Hedging activities, net of tax
2

(2
)
 
6


Other Comprehensive Income (Loss), Net of Tax
(176
)
143

 
(63
)
186

Comprehensive Income
1,228

724

 
1,926

1,330

Less: comprehensive income attributable to noncontrolling interests
65

31

 
126

59

Comprehensive Income Attributable to Phillips 66
$
1,163

693

 
1,800

1,271

See Notes to Consolidated Financial Statements.

2

Table of Contents

Consolidated Balance Sheet
Phillips 66
 
 
Millions of Dollars
 
June 30
2018

 
December 31
2017

Assets
 
 
 
Cash and cash equivalents
$
1,884

 
3,119

Accounts and notes receivable (net of allowances of $22 million in 2018 and $29 million in 2017)
6,006

 
6,424

Accounts and notes receivable—related parties
1,167

 
1,082

Inventories
4,901

 
3,395

Prepaid expenses and other current assets
621

 
370

Total Current Assets
14,579

 
14,390

Investments and long-term receivables
14,177

 
13,941

Net properties, plants and equipment
21,465

 
21,460

Goodwill
3,270

 
3,270

Intangibles
866

 
876

Other assets
469

 
434

Total Assets
$
54,826

 
54,371

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
8,437

 
7,242

Accounts payable—related parties
899

 
785

Short-term debt
341

 
41

Accrued income and other taxes
1,133

 
1,002

Employee benefit obligations
461

 
582

Other accruals
461

 
455

Total Current Liabilities
11,732

 
10,107

Long-term debt
11,023

 
10,069

Asset retirement obligations and accrued environmental costs
646

 
641

Deferred income taxes
5,191

 
5,008

Employee benefit obligations
885

 
884

Other liabilities and deferred credits
389

 
234

Total Liabilities
29,866

 
26,943

 
 
 
 
Equity
 
 
 
Common stock (2,500,000,000 shares authorized at $0.01 par value)
     Issued (2018—645,214,810 shares; 2017—643,835,464 shares)
 
 
 
Par value
6

 
6

Capital in excess of par
19,831

 
19,768

Treasury stock (at cost: 2018—180,952,400 shares; 2017—141,565,145 shares)
(14,121
)
 
(10,378
)
Retained earnings
17,500

 
16,306

Accumulated other comprehensive loss
(680
)
 
(617
)
Total Stockholders’ Equity
22,536

 
25,085

Noncontrolling interests
2,424

 
2,343

Total Equity
24,960

 
27,428

Total Liabilities and Equity
$
54,826

 
54,371

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows
Phillips 66
 
Millions of Dollars
 
Six Months Ended
June 30
 
2018

 
2017

Cash Flows From Operating Activities
 
 
 
Net income
$
1,989

 
1,144

Adjustments to reconcile net income to net cash provided by operating
activities
 
 
 
Depreciation and amortization
673

 
635

Impairments
6

 
17

Accretion on discounted liabilities
12

 
11

Deferred income taxes
129

 
757

Undistributed equity earnings
(14
)
 
(252
)
Net gain on dispositions
(17
)
 
(15
)
Gain on consolidation of business

 
(423
)
Other
197

 
98

Working capital adjustments
 
 
 
Decrease (increase) in accounts and notes receivable
304

 
724

Decrease (increase) in inventories
(1,537
)
 
(1,047
)
Decrease (increase) in prepaid expenses and other current assets
(257
)
 
17

Increase (decrease) in accounts payable
1,311

 
(308
)
Increase (decrease) in taxes and other accruals
56

 
(42
)
Net Cash Provided by Operating Activities
2,852

 
1,316

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Capital expenditures and investments
(866
)
 
(928
)
Proceeds from asset dispositions*
29

 
51

Collection of advances/loans—related parties

 
325

Restricted cash received from consolidation of business

 
318

Other
16

 
(61
)
Net Cash Used in Investing Activities
(821
)
 
(295
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt
1,509

 
2,603

Repayment of debt
(260
)
 
(2,910
)
Issuance of common stock
30

 
6

Repurchase of common stock
(3,743
)
 
(666
)
Dividends paid on common stock
(699
)
 
(686
)
Distributions to noncontrolling interests
(96
)
 
(54
)
Net proceeds from issuance of Phillips 66 Partners LP common units
67

 
171

Other
(58
)
 
(54
)
Net Cash Used in Financing Activities
(3,250
)
 
(1,590
)
 
 
 
 
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash
(16
)
 
19

 
 
 
 
Net Change in Cash, Cash Equivalents and Restricted Cash
(1,235
)
 
(550
)
Cash, cash equivalents and restricted cash at beginning of period
3,119

 
2,711

Cash, Cash Equivalents and Restricted Cash at End of Period
$
1,884

 
2,161

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

4

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 Loss

Noncontrolling
Interests

Total

 
 
 
 
 
 
 
 
December 31, 2016
$
6

19,559

(8,788
)
12,608

(995
)
1,335

23,725

Net income



1,085


59

1,144

Other comprehensive income




186


186

Dividends paid on common stock



(686
)


(686
)
Repurchase of common stock


(666
)



(666
)
Benefit plan activity

20


(6
)


14

Issuance of Phillips 66 Partners LP common units

45




98

143

Distributions to noncontrolling interests





(54
)
(54
)
June 30, 2017
$
6

19,624

(9,454
)
13,001

(809
)
1,438

23,806

 
 
 
 
 
 
 
 
December 31, 2017
$
6

19,768

(10,378
)
16,306

(617
)
2,343

27,428

Cumulative effect of accounting changes



36


13

49

Net income



1,863


126

1,989

Other comprehensive loss




(63
)

(63
)
Dividends paid on common stock



(699
)


(699
)
Repurchase of common stock


(3,743
)



(3,743
)
Benefit plan activity

41


(6
)


35

Issuance of Phillips 66 Partners LP common units

22




38

60

Distributions to noncontrolling interests





(96
)
(96
)
June 30, 2018
$
6

19,831

(14,121
)
17,500

(680
)
2,424

24,960

 

 
Shares in Thousands
 
Common Stock Issued

Treasury Stock

December 31, 2016
641,594

122,827

Repurchase of common stock

8,391

Shares issued—share-based compensation
1,135


June 30, 2017
642,729

131,218

 
 
 
December 31, 2017
643,835

141,565

Repurchase of common stock

39,387

Shares issued—share-based compensation
1,380


June 30, 2018
645,215

180,952

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 2017 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2018, 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, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20),” which clarifies the scope and accounting for the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales.  This ASU eliminated the use of carryover basis for most nonmonetary exchanges, including contributions of assets to equity-method joint ventures, and could result in the entity recognizing a gain or loss on the sale or transfer of nonfinancial assets.  At the time of adoption, there was no impact on our consolidated financial statements from adopting this ASU.

Effective January 1, 2018, we adopted 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 screen is met and the transaction is not considered an acquisition of a business. If the screen is not met, 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 future transactions accounted for as business acquisitions. At the time of adoption, there was no impact on our consolidated financial statements from adopting this ASU.

Effective January 1, 2018, we adopted ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other Than Inventory.”  This ASU requires the income tax consequences of an intra-entity transfer of an asset, other than inventory, to be recognized when the transfer occurs.  At the time of adoption, this ASU did not have a material impact on our consolidated financial statements.

Effective January 1, 2018, we adopted ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The majority of this ASU’s provisions amend only the presentation or disclosures of financial instruments; however, one provision could also affect net income. Equity investments carried under the cost method or the lower of cost or fair value method of accounting, in accordance with previous generally accepted accounting principles in the United States (GAAP), will have to be carried at fair value 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. At the time of adoption, this ASU did not have a material impact on our consolidated financial statements.





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Effective January 1, 2018, we adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” using the modified retrospective transition method applied to all contracts. Under the new revenue recognition guidance, recognition of revenue involves a multiple step approach including (i) identifying the contract, (ii) identifying the separate performance obligations, (iii) determining the transaction price, (iv) allocating the price to the performance obligations and (v) recognizing the revenue as the obligations are satisfied. Additional disclosures are required to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

We recorded noncash cumulative effect adjustments to our opening total equity balance as of January 1, 2018, to increase retained earnings by $35 million, net of $11 million of income taxes, and noncontrolling interests by $13 million. These adjustments primarily reflected amounts recorded by our equity-method investees related to contracts that contain tier-pricing and minimum volume commitments with recovery provisions. One of our Midstream segment equity-method investees will adopt this ASU in 2019, and we do not expect their adoption to have a material impact on our consolidated financial statements.

In addition, prospectively from January 1, 2018, our presentation of excise taxes on sales of petroleum products changed to a net basis from a gross basis. As a result, the “Sales and other operating revenues” and “Taxes other than income taxes” lines on our consolidated statement of income for the three and six months ended June 30, 2018, are not presented on a comparable basis to the three and six months ended June 30, 2017. See Note 3—Sales and Other Operating Revenues, for more information on our presentation of excise taxes on sales of petroleum products.


Note 3—Sales and Other Operating Revenues

Our revenues are primarily associated with sales of crude oil, natural gas liquids (NGL), refined petroleum and chemical products, and other items. Each gallon, or other unit of measure of product, is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. The transaction prices of our contracts with customers are either fixed or variable, with variable pricing based upon various market indices. For our contracts that include variable consideration, we utilize the variable consideration allocation exception, whereby the variable consideration is only allocated to the performance obligations that are satisfied during the period. The related revenue is recognized at a point in time when control passes to the customer, which is when title and the risk of ownership passes to the customer and physical delivery of goods occurs, either immediately or within a fixed delivery schedule that is reasonable and customary in the industry.

Effective for reporting periods ending after our adoption of ASU No. 2014-09 on January 1, 2018, excise taxes on sales of petroleum products charged to our customers are presented net of excise taxes on sales of petroleum products owed to governmental authorities in the “Taxes other than income taxes” line on our consolidated statement of income. For reporting periods ending prior to January 1, 2018, excise taxes on sales of petroleum products charged to our customers are presented in the “Sales and other operating revenues” line on our consolidated statement of income, and excise taxes on sales of petroleum products owed to governmental authorities are presented in the “Taxes other than income taxes” line on our consolidated statement of income. See Note 2—Changes in Accounting Principles, for more information regarding our adoption of this ASU.

Revenues associated with pipeline transportation services are recognized at a point in time when the volumes are delivered based on contractual rates. Revenues associated with terminaling and storage services are recognized over time as the services are performed based on throughput volume or capacity utilization at contractual rates.

Our products and services are billed and payments are received typically on a monthly basis, which may vary based upon the product or service offered.

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Disaggregated Revenues
The following tables present our sales and other operating revenues disaggregated by product line and services and geographic location:

 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

 
2018

Product Line and Services
 
 
 
Refined products
$
23,011

 
41,791

Crude oil resales
4,381

 
7,569

NGL
1,548

 
2,969

Services and other
40

 
246

Consolidated sales and other operating revenues by product line and services
$
28,980


52,575

 
 
 
 
Geographic Location
 
 
 
United States
$
22,902

 
41,413

United Kingdom
2,289

 
4,538

Germany
1,108

 
2,039

Other foreign countries
2,681

 
4,585

Consolidated sales and other operating revenues by geographic location
$
28,980


52,575



Contract-Related Assets and Liabilities
At June 30, 2018, and January 1, 2018, receivables from contracts with customers were $5.9 billion and $6.2 billion, respectively. Significant non-customer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.

Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At June 30, 2018, and January 1, 2018, our asset balances related to such payments were $220 million and $208 million, respectively.

Our contract liabilities represent advances from our customers prior to product or service delivery. At June 30, 2018, and January 1, 2018, contract liabilities were not material.

Remaining Performance Obligations
Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We do not disclose remaining performance obligations for these contracts as the expected duration is one year or less or because the variable consideration has been allocated entirely to an unsatisfied performance obligation. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing, most of which expire by 2021. The remaining performance obligations related to these minimum volume commitment contracts were immaterial at June 30, 2018.


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Note 4—Inventories

Inventories consisted of the following:

 
Millions of Dollars
 
June 30
2018

 
December 31
2017

 
 
 
 
Crude oil and petroleum products
$
4,608

 
3,106

Materials and supplies
293

 
289

 
$
4,901

 
3,395



Inventories valued on the last-in, first-out (LIFO) basis totaled $4,494 million and $2,980 million at June 30, 2018, and December 31, 2017, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $6.0 billion and $4.3 billion at June 30, 2018, and December 31, 2017, respectively.


Note 5—Business Combinations

Merey Sweeny, L.P. (MSLP) is a limited partnership that owns a delayed coker and related facilities at the Sweeny Refinery. In February 2017, we began accounting for MSLP as a consolidated subsidiary because the exercise of a call right triggered by certain defaults by the co-venturer, Petróleos de Venezuela S.A. (PDVSA), with respect to supply of crude oil to the Sweeny Refinery ceased to be subject to legal challenge. The purchase price for PDVSA’s 50 percent ownership interest was determined by a contractual formula. Because the distributions PDVSA received from MSLP exceeded the amounts it contributed to MSLP, the contractual formula required no cash consideration for the acquisition. 

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 the recognition of a pre-tax gain of $423 million during the three months ended March 31, 2017.  This gain was included in the “Other income” line on 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 properties, plants and equipment (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 in the first quarter of 2017.

The results of MSLP were included in our Refining segment until October 2017, when we contributed our 100 percent interest in MSLP to Phillips 66 Partners LP (Phillips 66 Partners), which is included in our Midstream segment.


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Note 6—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
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

 
 
 
 
 
 
Revenues and other income
$
3,188

2,370

 
5,936

4,909

Income before income taxes
667

603

 
1,267

1,124

Net income
650

590

 
1,235

1,093



Gray Oak Pipeline, LLC
Phillips 66 Partners has a 75 percent ownership interest in Gray Oak Pipeline, LLC (Gray Oak), an entity formed to develop and construct the Gray Oak Pipeline system which, upon completion, will provide crude oil transportation from the Permian Basin and Eagle Ford to destinations in the Corpus Christi and Sweeny/Freeport markets on the Texas Gulf Coast. The pipeline is expected to be placed in service by the end of 2019.

Gray Oak is considered a variable interest entity (VIE) because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. Phillips 66 Partners has determined it is not the primary beneficiary because it and its co-venturer jointly direct the activities of Gray Oak that most significantly impact economic performance. At June 30, 2018, Phillips 66 Partners’ maximum exposure to loss was $28 million, which represented the aggregate book value of its equity investment in Gray Oak.

Rockies Express Pipeline LLC
In July 2018, Rockies Express Pipeline LLC (REX) repaid $550 million of its debt, reducing its total debt to approximately $2.0 billion.  REX funded the repayment through member cash contributions.  Our 25 percent share was approximately $138 million, which we contributed to REX in July 2018.

Related Party Loans and Advances
During the three months ended March 31, 2017, we received payment of the $250 million outstanding sponsor loans to the Dakota Access, LLC and Energy Transfer Crude Oil Company, LLC joint ventures. We also received payment of the $75 million outstanding principal balance of the partner loan we made to WRB Refining LP (WRB) in 2016. These cash inflows, totaling $325 million, are included in the “Collection of advances/loans—related parties” line on our consolidated statement of cash flows.



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Note 7—Properties, Plants and Equipment

Our gross investment in PP&E and the associated accumulated depreciation and amortization (Accum. D&A) balances were as follows:

 
Millions of Dollars
 
June 30, 2018
 
December 31, 2017
 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
 
 
 
 
 
 
 
 
 
 
 
Midstream
$
9,158

 
2,004

 
7,154

 
8,849

 
1,853

 
6,996

Chemicals

 

 

 

 

 

Refining
22,406

 
9,356

 
13,050

 
22,144

 
8,987

 
13,157

Marketing and Specialties
1,639

 
920

 
719

 
1,658

 
909

 
749

Corporate and Other
1,125

 
583

 
542

 
1,091

 
533

 
558

 
$
34,328

 
12,863

 
21,465

 
33,742

 
12,282

 
21,460



Note 8—Earnings Per Share

The numerator of basic earnings per share (EPS) is net income attributable to Phillips 66, reduced by noncancelable dividends paid on unvested share-based employee awards during the vesting period (participating securities). The denominator of basic EPS is the sum of the daily weighted-average number of common shares outstanding during the periods presented and fully vested stock and unit awards that have not yet been issued as common stock. The numerator of diluted EPS is also based on net income attributable to Phillips 66, which is reduced only by dividend equivalents paid on participating securities for which the dividends are more dilutive than the participation of the awards in the earnings of the periods presented. To the extent unvested stock, unit or option awards and vested unexercised stock options are dilutive, they are included with the weighted-average common shares outstanding in the denominator. Treasury stock is excluded from the denominator in both basic and diluted EPS.
  
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018
 
2017
 
2018
 
2017
 
Basic

Diluted

 
Basic

Diluted

 
Basic

Diluted

 
Basic

Diluted

Amounts attributed to Phillips 66 Common
Stockholders (millions):
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Phillips 66
$
1,339

1,339

 
550

550

 
1,863

1,863

 
1,085

1,085

Income allocated to participating securities
(1
)

 
(2
)
(1
)
 
(3
)

 
(3
)
(2
)
Net income available to common stockholders
$
1,338

1,339


548

549

 
1,860

1,863


1,082

1,083

 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (thousands):
465,052

468,331

 
514,092

517,785

 
474,267

477,647

 
515,838

519,706

Effect of share-based compensation
3,279

3,307

 
3,693

2,375

 
3,380

3,348

 
3,868

2,623

Weighted-average common shares outstanding—EPS
468,331

471,638

 
517,785

520,160

 
477,647

480,995

 
519,706

522,329

 
 
 
 
 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock (dollars)
$
2.86

2.84

 
1.06

1.06

 
3.89

3.87

 
2.08

2.07




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Note 9—Debt

Debt Issuances
In March 2018, Phillips 66 closed on a public offering of $1,500 million aggregate principal amount of unsecured notes consisting of:

$500 million of floating-rate Senior Notes due 2021. Interest on these notes is equal to the three-month London Interbank Offered Rate (LIBOR) plus 0.60% per annum and is payable quarterly in arrears on February 26, May 26, August 26 and November 26, beginning on May 29, 2018.

$800 million of 3.900% Senior Notes due 2028. Interest on these notes is payable semiannually on March 15 and September 15 of each year, beginning on September 15, 2018.

An additional $200 million of our 4.875% Senior Notes due 2044. Interest on these notes is payable semiannually on May 15 and November 15 of each year, beginning on May 15, 2018.
 
These notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary. Phillips 66 used the net proceeds from the issuance of these notes and cash on hand to repay commercial paper borrowings during the three months ended March 31, 2018, and for general corporate purposes. The commercial paper borrowings during the three months ended March 31, 2018, were primarily used to repurchase shares of our common stock; see Note 16—Treasury Stock for additional information.

Debt Repayments
In June 2018, Phillips 66 repaid $250 million of the $450 million outstanding under its three-year term loan facility due 2020.

Debt Reclassifications
During the three months ended June 30, 2018, Phillips 66’s $300 million of floating-rate notes due 2019 were reclassified from long-term to short-term debt.


Note 10—Guarantees

At June 30, 2018, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability 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), we issued a guarantee, effective January 1, 2017, to support the debt DCP Midstream issued during the three months ended March 31, 2017. At June 30, 2018, the maximum potential amount of future payments to third parties under the guarantee is estimated to be $125 million.  Payment would be required if DCP Midstream defaults on this debt obligation, which matures in December 2019.

At June 30, 2018, we had other guarantees outstanding for our portion of certain joint venture debt obligations, which have remaining terms of up to seven years. The maximum potential amount of future payments to third parties under these guarantees was approximately $131 million. Payment would be required if a joint venture defaults on its debt obligations.






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Other Guarantees
Under the operating lease agreement on our headquarters facility in Houston, Texas, we have a residual value guarantee with a maximum future exposure of $554 million. The operating lease term ends in June 2021 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 also have residual value guarantees associated with railcar and airplane leases with maximum future exposures totaling $291 million, which have remaining terms of up to five years. For one of our railcar leases, we estimated a total residual value deficiency of $56 million based on a third-party appraisal of the railcars’ expected fair value at the end of their lease term in May 2019. The total residual value deficiency is our estimate of the amount we will owe to the lessor at the end of the lease term and is recognized as expense over the remaining lease term. During the six months ended June 30, 2018, we recognized $12 million of expense related to the residual value deficiency.  At June 30, 2018, the remaining unrecognized residual value deficiency was $24 million

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 indemnification. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses and employee claims, as well as real estate indemnity against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. At June 30, 2018, the carrying amount recorded for indemnifications was $187 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 to support that the liability was 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. At June 30, 2018, environmental accruals for known contaminations of $111 million were included in the recorded carrying amount for indemnifications. These accruals were primarily included in the “Asset retirement obligations and accrued environmental costs” line on our consolidated balance sheet. For additional information about environmental liabilities, see Note 11—Contingencies and Commitments.

Indemnification and Release Agreement
In 2012, in connection with 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 11—Contingencies and Commitments

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


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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 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, although some of the indemnifications are subject to dollar and time limits.

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At June 30, 2018, our total environmental accrual was $465 million, compared with $458 million at December 31, 2017. 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.


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

At June 30, 2018, we had performance obligations secured by letters of credit and bank guarantees of $729 million related to various purchase and other commitments incident to the ordinary conduct of business.


Note 12—Derivatives and Financial Instruments

Derivative Instruments
We use financial and commodity-based derivative contracts to manage exposures to fluctuations in commodity prices, interest rates and foreign currency exchange rates, or to capture market opportunities. Because we do not apply hedge accounting for commodity derivative contracts, all realized and unrealized gains and losses from commodity derivative contracts are recognized in our consolidated statement of income. Gains and losses from derivative contracts held for trading not directly related to our physical business are reported net in the “Other income” line on our consolidated statement of income. Cash flows from all our derivative activity for the periods presented appear in the operating section on our consolidated statement of cash flows.

Purchase and sales contracts with firm minimum notional volumes for commodities that are readily convertible to cash are recorded on our 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 products, 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 13—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 commodities to more profitable locations, storing commodities to capture seasonal or time premiums, and blending commodities to capture quality upgrades.

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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 our consolidated balance sheet when the right of setoff exists.

 
Millions of Dollars
 
June 30, 2018
 
December 31, 2017
 
Commodity Derivatives
Effect of Collateral Netting

Net Carrying Value Presented on the Balance Sheet

 
Commodity Derivatives
Effect of Collateral Netting

Net Carrying Value Presented on the Balance Sheet

 
Assets

Liabilities

 
Assets

Liabilities

 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
$
544

(485
)
(28
)
31

 
43

(19
)

24

Other assets
4

(2
)

2

 
7

(3
)

4

Liabilities
 
 
 
 
 
 
 
 
 
Other accruals
720

(870
)
112

(38
)
 
699

(746
)
21

(26
)
Other liabilities and deferred credits
11

(12
)

(1
)
 

(1
)

(1
)
Total
$
1,279

(1,369
)
84

(6
)
 
749

(769
)
21

1

 

At June 30, 2018, and December 31, 2017, there was no material cash collateral received or paid that was not offset on our consolidated balance sheet.

The realized and unrealized gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of income, were:
 
 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

 
 
 
 
 
 
Sales and other operating revenues
$
(137
)
87

 
(129
)
155

Other income
(15
)
4

 
(20
)
13

Purchased crude oil and products
(141
)
82

 
(173
)
127

Net gain (loss) from commodity derivative activity
$
(293
)
173

 
(322
)
295


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The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from non-derivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was at least 98 percent at June 30, 2018, and December 31, 2017.

 
Open Position
Long / (Short)
 
June 30
2018

 
December 31
2017

Commodity
 
 
 
Crude oil, refined products and NGL (millions of barrels)
(32
)
 
(11
)


Interest Rate Derivative Contracts—In 2016, we entered into interest rate swaps to hedge the variability of lease payments on our new headquarters. These monthly lease payments vary based on monthly changes in the one-month LIBOR and changes, if any, in our 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 in April 2021. We have designated these swaps as cash-flow hedges.

The aggregate net fair value of these swaps, which is included in the “Prepaid expenses and other current assets” and “Other assets” lines on our consolidated balance sheet, totaled $22 million and $14 million at June 30, 2018, and December 31, 2017, respectively.

We report the mark-to-market gains or losses on our interest rate swaps designated as highly effective cash-flow hedges as a component of other comprehensive income (loss), and reclassify such gains and losses into earnings in the same period during which the hedged transaction affects earnings. Net realized gains and losses from settlements of the swaps were immaterial for the three and six months ended June 30, 2018 and 2017.

We currently estimate that pre-tax gains of $6 million will be reclassified from accumulated other comprehensive loss into general and administrative expenses during the next twelve months as the hedged transactions settle; however, the actual amounts that will be reclassified will vary based on changes in interest rates.

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.


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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 immaterial at June 30, 2018, and December 31, 2017.


Note 13—Fair Value Measurements

Recurring Fair Value 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 significance of its observable or unobservable inputs to the measurement. However, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable. For the six months ended June 30, 2018, derivative assets with an aggregate value of $81 million and derivative liabilities with an aggregate value of $83 million were transferred to 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 our consolidated balance sheet approximates fair value.
Accounts and notes receivable—The carrying amount reported on our 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

18

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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 on observed market valuations for interest rate swaps that have notional values, terms and pay and reset frequencies similar to ours.
Rabbi trust assets—These deferred compensation investments are measured at fair value using unadjusted quoted prices available from national securities exchanges and are therefore categorized as Level 1 in the fair value hierarchy.
Debt—The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on observable 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 immaterial.

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 agreements 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
 
June 30, 2018
 
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
$
425

 
836

 

 
1,261

(1,218
)
(28
)

15

OTC instruments

 
1

 

 
1




1

Physical forward contracts

 
16

 
1

 
17




17

Interest rate derivatives

 
22

 

 
22




22

Rabbi trust assets
118

 

 

 
118

N/A

N/A


118

 
$
543

 
875

 
1

 
1,419

(1,218
)
(28
)

173

 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
433

 
909

 

 
1,342

(1,218
)
(112
)

12

Physical forward contracts

 
26

 
1

 
27




27

Floating-rate debt

 
1,400

 

 
1,400

N/A

N/A


1,400

Fixed-rate debt, excluding capital leases

 
10,046

 

 
10,046

N/A

N/A

(276
)
9,770

 
$
433

 
12,381

 
1

 
12,815

(1,218
)
(112
)
(276
)
11,209





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Millions of Dollars
 
December 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
$
333

 
395

 

 
728

(721
)


7

Physical forward contracts

 
20

 
1

 
21




21

Interest rate derivatives

 
14

 

 
14




14

Rabbi trust assets
112

 

 

 
112

N/A

N/A


112

 
$
445

 
429

 
1

 
875

(721
)


154

 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
369

 
373

 

 
742

(721
)
(21
)


Physical forward contracts

 
23

 
4

 
27




27

Floating-rate debt

 
1,150

 

 
1,150

N/A

N/A


1,150

Fixed-rate debt, excluding capital leases

 
9,746

 

 
9,746

N/A

N/A

(978
)
8,768

 
$
369

 
11,292

 
4

 
11,665

(721
)
(21
)
(978
)
9,945



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

Nonrecurring Fair Value Measurements
See Note 5—Business Combinations for information on the remeasurement of our investment in MSLP to fair value. During the six months ended June 30, 2018 and 2017, there were no other material nonrecurring fair value remeasurements of assets subsequent to their initial recognition.



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Note 14—Pension and Postretirement Plans

The components of net periodic benefit cost for the three and six months ended June 30, 2018 and 2017, were as follows:
 
Millions of Dollars
 
Pension Benefits
 
Other Benefits
 
2018
 
2017
 
2018

 
2017

 
U.S.

 
Int’l.

 
U.S.

 
Int’l.

 
 
 
 
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
34

 
10

 
33

 
9

 
2

 
2

Interest cost
26

 
8

 
27

 
7

 
2

 
2

Expected return on plan assets
(43
)
 
(12
)
 
(36
)
 
(9
)
 

 

Amortization of prior service credit

 
(1
)
 

 
(1
)
 
(1
)
 
(1
)
Recognized net actuarial loss
15

 
5

 
18

 
6

 

 

Settlements
3

 

 
54

 

 

 

Net periodic benefit cost*
$
35


10


96


12


3


3

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
68

 
17

 
66

 
17

 
3

 
3

Interest cost
52

 
15

 
54

 
13

 
4

 
4

Expected return on plan assets
(85
)
 
(24
)
 
(73
)
 
(19
)
 

 

Amortization of prior service cost (credit)

 
(1
)
 
1

 
(1
)
 
(1
)
 
(1
)
Recognized net actuarial loss
30

 
10

 
35

 
12

 

 

Settlements
5

 

 
55

 

 

 

Net periodic benefit cost*
$
70

 
17

 
138

 
22

 
6

 
6

* Included in the “Operating expenses” and “Selling, general and administrative expenses” lines on our consolidated statement of income.


During the six months ended June 30, 2018, we contributed $17 million to our U.S. employee benefit plans and $18 million to our international employee benefit plans. We currently expect to make additional contributions of approximately $140 million to our U.S. employee benefit plans and $20 million to our international employee benefit plans during the remainder of 2018.

21

Table of Contents

Note 15—Accumulated Other Comprehensive Loss

Changes in the balances of each component of accumulated other comprehensive loss were as follows:
 
Millions of Dollars
 
Defined Benefit Plans

 
Foreign Currency Translation

 
Hedging

 
Accumulated Other Comprehensive Loss

 
 
 
 
 
 
 
 
December 31, 2016
$
(713
)
 
(285
)
 
3

 
(995
)
Other comprehensive income before reclassifications
3

 
119

 

 
122

Amounts reclassified from accumulated other comprehensive loss*
 
 
 
 
 
 
 
Amortization of defined benefit plan items**
 
 
 
 
 
 
 
Net actuarial loss, prior service credit and settlements
64

 

 

 
64

Net current period other comprehensive income
67

 
119

 

 
186

June 30, 2017
$
(646
)
 
(166
)
 
3

 
(809
)
 
 
 
 
 
 
 
 
December 31, 2017
$
(598
)
 
(26
)
 
7

 
(617
)
Other comprehensive income before reclassifications
7

 
(99
)
 
6

 
(86
)
Amounts reclassified from accumulated other comprehensive loss*
 
 
 
 
 
 


Foreign currency translation

 
(10
)
 

 
(10
)
Amortization of defined benefit plan items**
 
 
 
 
 
 
 
Net actuarial loss, prior service credit and settlements
33

 

 

 
33

Net current period other comprehensive income
40

 
(109
)
 
6

 
(63
)
June 30, 2018
$
(558
)
 
(135
)
 
13

 
(680
)
* There were no significant reclassifications related to hedging in either period presented or foreign currency translation in the prior year period.
** Included in the computation of net periodic benefit cost. See Note 14—Pension and Postretirement Plans, for additional information.



Note 16—Treasury Stock

In February 2018, we entered into a Stock Purchase and Sale Agreement (Purchase Agreement) with Berkshire Hathaway Inc. and National Indemnity Company, a wholly owned subsidiary of Berkshire Hathaway, to repurchase 35 million shares of Phillips 66 common stock for an aggregate purchase price of $3,280 million. Pursuant to the Purchase Agreement, the purchase price per share of $93.725 was based on the volume-weighted-average price of our common stock on the New York Stock Exchange on February 13, 2018. The transaction closed in February 2018. We funded the repurchase with cash of $1,880 million and borrowings of $1,400 million under our commercial paper program. These borrowings were subsequently refinanced through a public offering of senior notes in March 2018. This specific share repurchase transaction was separately authorized by our Board of Directors and therefore does not impact previously announced authorizations to repurchase shares of Phillips 66 common stock under our share repurchase program, which total up to $12.0 billion. See Note 9—Debt, for additional information regarding our borrowing activity during the six months ended June 30, 2018.


Note 17—Restricted Cash

At June 30, 2018, and December 31, 2017, the company did not have any restricted cash. The restrictions on the cash acquired in February 2017, as a result of the consolidation of MSLP, were fully removed in May 2017 when MSLP’s outstanding debt that contained lender restrictions on the use of cash was paid in full. See Note 5—Business Combinations, for additional information regarding MSLP.


22

Table of Contents

Note 18—Related Party Transactions

Significant transactions with related parties were:

 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

 
 
 
 
 
 
Operating revenues and other income (a)
$
944

569

 
1,762

1,140

Purchases (b)
3,313

2,231

 
5,867

4,375

Operating expenses and selling, general and administrative expenses (c)
16

13

 
32

39


(a)
We sold NGL and other petrochemical feedstocks, along with solvents, to CPChem, gas oil and hydrogen feedstocks to Excel Paralubes (Excel), and refined products to OnCue Holdings, LLC. We also sold certain feedstocks and intermediate products to WRB and acted as agent for WRB in supplying crude oil and other feedstocks for a fee. In addition, we charged several of our affiliates, including CPChem, 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 and also acted as agent for WRB in distributing solvents. We also 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. In addition, we purchased base oils and fuel products from Excel for use in our refining and specialty businesses. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline equity companies for transporting crude oil, refined products and NGL.
 
(c)
We paid utility and processing fees to various affiliates.


23

Table of Contents

Note 19—Segment Disclosures and Related Information

Our operating segments are:

1)
Midstream—Provides crude oil and refined products transportation, terminaling and processing services, as well as natural gas, NGL and liquefied petroleum gas (LPG) transportation, storage, processing and marketing services, mainly in the United States. The Midstream segment includes our master limited partnership, Phillips 66 Partners, 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—Refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 13 refineries in the United States and Europe.

4)
Marketing and Specialties—Purchases for resale and markets refined petroleum products, mainly in the United States and Europe. In addition, this segment includes the manufacturing and marketing of specialty products, 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.

During the fourth quarter of 2017, the segment performance measure used by our chief executive officer to assess performance and allocate resources was changed from “net income attributable to Phillips 66” to “net income.”  This change reflects the recognition that management does not differentiate between those earnings attributable to Phillips 66 and those attributable to noncontrolling interests when making operating and resource allocation decisions impacting segment performance.  Prior period segment information has been recast to conform to the current presentation. Intersegment sales are at prices that we believe approximate market.

24

Table of Contents

Analysis of Results by Operating Segment

 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

Sales and Other Operating Revenues
 
 
 
 
 
Midstream
 
 
 
 
 
Total sales
$
1,996

1,375

 
3,947

3,034

Intersegment eliminations
(498
)
(389
)
 
(1,031
)
(827
)
Total Midstream
1,498

986

 
2,916

2,207

Chemicals
2

1

 
3

2

Refining
 
 
 
 
 
Total sales
22,126

15,223

 
39,758

29,515

Intersegment eliminations
(13,605
)
(9,510
)
 
(24,220
)
(18,180
)
Total Refining
8,521

5,713

 
15,538

11,335

Marketing and Specialties
 
 
 
 
 
Total sales
19,522

17,650

 
35,139

34,016

Intersegment eliminations
(571
)
(270
)
 
(1,035
)
(594
)
Total Marketing and Specialties
18,951

17,380

 
34,104

33,422

Corporate and Other
8

7

 
14

15

Consolidated sales and other operating revenues
$
28,980

24,087

 
52,575

46,981

 
 
 
 
 
 
Net Income (Loss)
 
 
 
 
 
Midstream
$
202

96

 
435

208

Chemicals
262

196

 
494

377

Refining
910

224

 
1,001

483

Marketing and Specialties
237

214

 
421

355

Corporate and Other
(207
)
(149
)
 
(362
)
(279
)
Consolidated net income
$
1,404

581

 
1,989

1,144


 
Millions of Dollars
 
June 30
2018

 
December 31
2017

Total Assets
 
 
 
Midstream
$
13,624

 
13,231

Chemicals
6,440

 
6,226

Refining
24,862

 
23,820

Marketing and Specialties
7,136

 
7,103

Corporate and Other
2,764

 
3,991

Consolidated total assets
$
54,826

 
54,371




25

Table of Contents

Note 20—Income Taxes

Our effective income tax rates for the three and six months ended June 30, 2018, were 23 percent and 22 percent, respectively, compared with 31 percent and 30 percent for the corresponding periods of 2017. The decrease was primarily attributable to the enactment of the U.S. Tax Cuts and Jobs Act (the Tax Act) in December 2017, which reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent beginning January 1, 2018. The effective income tax rate varies from the federal statutory income tax rate of 21 percent primarily due to state income tax expense and adjustments to the provisional income tax benefit related to the Tax Act, partially offset by the impact of our foreign operations and income attributable to noncontrolling interests.

During the three and six months ended June 30, 2018, adjustments to the provisional income tax benefit recorded in December 2017 from the enactment of the Tax Act totaled $19 million and $29 million, respectively. The adjustments to date were primarily due to the issuance of additional guidance related to the calculation of the one-time deemed repatriation tax on foreign-sourced earnings that were previously tax deferred. We have not yet completed our accounting for the income tax effects of the Tax Act, but have made reasonable estimates of those effects on our existing deferred income tax balances and the one-time deemed repatriation tax. The final financial statement impact of the Tax Act may differ from our previously recorded estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, and changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the provisional impacts. The Securities and Exchange Commission (SEC) has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related income tax impacts.


Note 21—Phillips 66 Partners LP

In 2013, we formed Phillips 66 Partners, a publicly traded master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum products and NGL pipelines, terminals and other midstream assets. Headquartered in Houston, Texas, Phillips 66 Partners’ operations currently consist of crude oil, refined petroleum products and NGL transportation, processing, terminaling and storage assets.
 
We consolidate Phillips 66 Partners because we determined it is a VIE of which 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. As a result of this consolidation, the public common and perpetual convertible preferred unitholders’ ownership interests in Phillips 66 Partners are reflected as noncontrolling interests in our financial statements. At June 30, 2018, we owned a 55 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, while the public owned a 43 percent limited partner interest and 13.8 million perpetual convertible preferred units.

The most significant assets of Phillips 66 Partners that are available to settle only its obligations, along with its most significant liabilities for which its creditors do not have recourse to Phillips 66’s general credit, were:

 
Millions of Dollars
 
June 30
2018

 
December 31
2017

 
 
 
 
Cash and cash equivalents
$
151

 
185

Equity investments*
2,104

 
1,932

Net properties, plants and equipment
2,948

 
2,918

Long-term debt
2,921

 
2,920

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

26

Table of Contents

2018 Financing Activities
Phillips 66 Partners’ initial $250 million continuous offering of common units, or at-the-market (ATM) program, was completed during the three months ended June 30, 2018.  At that time, Phillips 66 Partners commenced issuing common units under its second $250 million ATM program. For the three and six months ended June 30, 2018, on a settlement-date basis, Phillips 66 Partners had issued an aggregate of 1,152,119 and 1,340,934 common units, respectively, under the ATM programs, which generated net proceeds of $58 million and $67 million, respectively. Since inception through June 30, 2018, Phillips 66 Partners had issued an aggregate of 5,059,802 common units under the ATM programs, which generated net proceeds of $259 million.


Note 22—New Accounting Standards

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows for the deferred income tax effects stranded in accumulated other comprehensive income (AOCI) resulting from the Tax Act enacted in December 2017 to be reclassed from AOCI to retained earnings. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.

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 may result in earlier 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 consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition.  Classification for both lessees and lessors will be based on an assessment of whether risks and rewards, as well as substantive control have been transferred through a lease contract.  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. As part of our assessment to-date, we have formed an implementation team, selected a software package, and completed software design and configuration within a test environment. Furthermore, we have loaded a majority of our lease population into the software and commenced both software and lease data testing. We expect the adoption of ASU 2016-02 will materially gross up our consolidated balance sheet with the recognition of the ROU assets and operating lease liabilities.  The impact to our consolidated statements of income and cash flows is not expected to be material.  The new standard will also require additional disclosures for financing and operating leases.



27

Table of Contents

Note 23—Condensed Consolidating Financial Information

Phillips 66 has senior notes outstanding, the payment obligations of which are fully and unconditionally guaranteed by Phillips 66 Company, a 100-percent-owned subsidiary. 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 June 30, 2018
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

22,561

6,419


28,980

Equity in earnings of affiliates
1,427

864

185

(1,733
)
743

Other income

3

10


13

Intercompany revenues

786

4,136

(4,922
)

Total Revenues and Other Income
1,427

24,214

10,750

(6,655
)
29,736

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

20,855

9,717

(4,825
)
25,747

Operating expenses

847

312

(16
)
1,143

Selling, general and administrative expenses
1

339

94

(2
)
432

Depreciation and amortization

229

108


337

Impairments

1

5


6

Taxes other than income taxes

82

27


109

Accretion on discounted liabilities

4

2


6

Interest and debt expense
111

42

61

(79
)
135

Foreign currency transaction gains


(14
)

(14
)
Total Costs and Expenses
112

22,399

10,312

(4,922
)
27,901

Income before income taxes
1,315

1,815

438

(1,733
)
1,835

Income tax expense (benefit)
(24
)
388

67


431

Net Income
1,339

1,427

371

(1,733
)
1,404

Less: net income attributable to noncontrolling interests


65


65

Net Income Attributable to Phillips 66
$
1,339

1,427

306

(1,733
)
1,339

 
 
 
 
 
 
Comprehensive Income
$
1,163

1,251

188

(1,374
)
1,228


28

Table of Contents

 
Millions of Dollars
 
Three Months Ended June 30, 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
$

17,653

6,434


24,087

Equity in earnings of affiliates
608

585

121

(852
)
462

Net gain on dispositions

(1
)
15


14

Other income

9

9


18

Intercompany revenues

222

2,942

(3,164
)

Total Revenues and Other Income
608

18,468

9,521

(4,016
)
24,581

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

14,757

6,685

(3,089
)
18,353

Operating expenses

891

266

(20
)
1,137

Selling, general and administrative expenses
1

335

106

(3
)
439

Depreciation and amortization

218

102


320

Impairments

15



15

Taxes other than income taxes

1,451

1,905


3,356

Accretion on discounted liabilities

5

1


6

Interest and debt expense
87

14

58

(52
)
107

Total Costs and Expenses
88

17,686

9,123

(3,164
)
23,733

Income before income taxes
520

782

398

(852
)
848

Income tax expense (benefit)
(30
)
174

123


267

Net Income
550

608

275

(852
)
581

Less: net income attributable to noncontrolling interests


31


31

Net Income Attributable to Phillips 66
$
550

608

244

(852
)
550

 
 
 
 
 
 
Comprehensive Income
$
693

751

372

(1,092
)
724


29

Table of Contents

 
Millions of Dollars
 
Six Months Ended June 30, 2018
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

40,837

11,738


52,575

Equity in earnings of affiliates
2,027

1,478

380

(2,718
)
1,167

Net gain on dispositions

7

10


17

Other income

2

21


23

Intercompany revenues

1,365

7,015

(8,380
)

Total Revenues and Other Income
2,027

43,689

19,164

(11,098
)
53,782

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

38,068

17,018

(8,201
)
46,885

Operating expenses

1,825

595

(31
)
2,389

Selling, general and administrative expenses
4

628

191

(5
)
818

Depreciation and amortization

459

214


673

Impairments

1

5


6

Taxes other than income taxes

164

55


219

Accretion on discounted liabilities

9

3


12

Interest and debt expense
204

72

125

(143
)
258

Foreign currency transaction gains


(30
)

(30
)
Total Costs and Expenses
208

41,226

18,176

(8,380
)
51,230

Income before income taxes
1,819

2,463

988

(2,718
)
2,552

Income tax expense (benefit)
(44
)
436

171


563

Net Income
1,863

2,027

817

(2,718
)
1,989

Less: net income attributable to noncontrolling interests


126


126

Net Income Attributable to Phillips 66
$
1,863

2,027

691

(2,718
)
1,863

 
 
 
 
 
 
Comprehensive Income
$
1,800

1,964

722

(2,560
)
1,926


30

Table of Contents

 
Millions of Dollars
 
Six Months Ended June 30, 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
$

33,903

13,078


46,981

Equity in earnings of affiliates
1,203

1,069

236

(1,681
)
827

Net gain on dispositions


15


15

Other income

435

35


470

Intercompany revenues

650

5,849

(6,499
)

Total Revenues and Other Income
1,203

36,057

19,213

(8,180
)
48,293

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

28,641

13,745

(6,354
)
36,032

Operating expenses

1,922

521

(36
)
2,407

Selling, general and administrative expenses
4

624

200

(5
)
823

Depreciation and amortization

432

203


635

Impairments

17



17

Taxes other than income taxes

2,823

3,689


6,512

Accretion on discounted liabilities

9

2


11

Interest and debt expense
177

26

113

(104
)
212

Foreign currency transaction gains


(1
)

(1
)
Total Costs and Expenses
181

34,494

18,472

(6,499
)
46,648

Income before income taxes
1,022

1,563

741

(1,681
)
1,645

Income tax expense (benefit)
(63
)
360

204


501

Net Income
1,085

1,203

537

(1,681
)
1,144

Less: net income attributable to noncontrolling interests


59


59

Net Income Attributable to Phillips 66
$
1,085

1,203

478

(1,681
)
1,085

 
 
 
 
 
 
Comprehensive Income
$
1,271

1,389

662

(1,992
)
1,330


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Table of Contents

 
Millions of Dollars
 
June 30, 2018
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

793

1,091


1,884

Accounts and notes receivable
11

5,260

4,452

(2,550
)
7,173

Inventories

3,150

1,751


4,901

Prepaid expenses and other current assets
1

435

185


621

Total Current Assets
12

9,638

7,479

(2,550
)
14,579

Investments and long-term receivables
31,037

22,537

9,709

(49,106
)
14,177

Net properties, plants and equipment

13,050

8,415


21,465

Goodwill

2,853

417


3,270

Intangibles

718

148


866

Other assets
11

295

165

(2
)
469

Total Assets
$
31,060

49,091

26,333

(51,658
)
54,826

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
$

7,865

4,021

(2,550
)
9,336

Short-term debt
300

11

30


341

Accrued income and other taxes

517

616


1,133

Employee benefit obligations

417

44


461

Other accruals
69

264

128


461

Total Current Liabilities
369

9,074

4,839

(2,550
)
11,732

Long-term debt
7,925

58

3,040


11,023

Asset retirement obligations and accrued environmental costs

472

174


646

Deferred income taxes

3,470

1,723

(2
)
5,191

Employee benefit obligations

658

227


885

Other liabilities and deferred credits
201

4,453

3,902

(8,167
)
389

Total Liabilities
8,495

18,185

13,905

(10,719
)
29,866

Common stock
5,716

24,952

9,374

(34,326
)
5,716

Retained earnings
17,529

6,634

930

(7,593
)
17,500

Accumulated other comprehensive loss
(680
)
(680
)
(300
)
980

(680
)
Noncontrolling interests


2,424


2,424

Total Liabilities and Equity
$
31,060

49,091

26,333

(51,658
)
54,826




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Table of Contents

 
Millions of Dollars
 
December 31, 2017
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

1,411

1,708


3,119

Accounts and notes receivable
10

5,317

4,476

(2,297
)
7,506

Inventories

2,386

1,009


3,395

Prepaid expenses and other current assets
2

276

92


370

Total Current Assets
12

9,390

7,285

(2,297
)
14,390

Investments and long-term receivables
32,125

23,483

9,959

(51,626
)
13,941

Net properties, plants and equipment

13,117

8,343


21,460

Goodwill

2,853

417


3,270

Intangibles

722

154


876

Other assets
12

266

158

(2
)
434

Total Assets
$
32,149

49,831

26,316

(53,925
)
54,371

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Accounts payable
$

7,272

3,052

(2,297
)
8,027

Short-term debt

9

32


41

Accrued income and other taxes

451

551


1,002

Employee benefit obligations

513

69


582

Other accruals
55

298

102


455

Total Current Liabilities
55

8,543

3,806

(2,297
)
10,107

Long-term debt
6,972

50

3,047


10,069

Asset retirement obligations and accrued environmental costs

467

174


641

Deferred income taxes

3,349

1,661

(2
)
5,008

Employee benefit obligations

639

245


884

Other liabilities and deferred credits
8

4,700

3,814

(8,288
)
234

Total Liabilities
7,035

17,748

12,747

(10,587
)
26,943

Common stock
9,396

24,952

10,125

(35,077
)
9,396

Retained earnings
16,335

7,748

1,306

(9,083
)
16,306

Accumulated other comprehensive loss
(617
)
(617
)
(205
)
822

(617
)
Noncontrolling interests


2,343


2,343

Total Liabilities and Equity
$
32,149

49,831

26,316

(53,925
)
54,371




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Table of Contents

 
Millions of Dollars
 
Six Months Ended June 30, 2018
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
$
3,080

2,523

1,203

(3,954
)
2,852

 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Capital expenditures and investments*

(374
)
(492
)

(866
)
Proceeds from asset dispositions**

326

28

(325
)
29

Intercompany lending activities
131

121

(252
)


Other

(33
)
49


16

Net Cash Provided by (Used in) Investing Activities
131

40

(667
)
(325
)
(821
)
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Issuance of debt
1,509




1,509

Repayment of debt
(250
)
(7
)
(3
)

(260
)
Issuance of common stock
30




30

Repurchase of common stock
(3,743
)



(3,743
)
Dividends paid on common stock
(699
)
(3,174
)
(780
)
3,954

(699
)
Distributions to noncontrolling interests


(96
)

(96
)
Net proceeds from issuance of Phillips 66 Partners LP common units


67


67

Other*
(58
)

(325
)
325

(58
)
Net Cash Used in Financing Activities
(3,211
)
(3,181
)
(1,137
)
4,279

(3,250
)
 
 
 
 
 
 
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash


(16
)

(16
)
 
 
 
 
 
 
Net Change in Cash, Cash Equivalents and Restricted Cash

(618
)
(617
)

(1,235
)
Cash, cash equivalents and restricted cash at beginning of period

1,411

1,708


3,119

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

793

1,091


1,884

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


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Table of Contents

 
Millions of Dollars
 
Six Months Ended June 30, 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 Operating Activities
$
1,143

701

1,104

(1,632
)
1,316

 
 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
 
Capital expenditures and investments*

(675
)
(393
)
140

(928
)
Proceeds from asset dispositions**

2

49


51

Intercompany lending activities
256

855

(1,111
)


Collection of advances/loans—related parties

75

250


325

Restricted cash received from consolidation of business


318


318

Other

(59
)
(2
)

(61
)
Net Cash Provided by (Used in) Investing Activities
256

198

(889
)
140

(295
)
 
 
 
 
 
 
Cash Flows From Financing Activities
 
 
 
 
 
Issuance of debt
1,500


1,103


2,603

Repayment of debt
(1,500
)
(10
)
(1,400
)

(2,910
)
Issuance of common stock
6




6

Repurchase of common stock
(666
)



(666
)
Dividends paid on common stock
(686
)
(1,202
)
(430
)
1,632

(686
)
Distributions to noncontrolling interests


(54
)

(54
)
Net proceeds from issuance of Phillips 66 Partners LP
common units


171


171

Other*
(53
)

139

(140
)
(54
)
Net Cash Used in Financing Activities
(1,399
)
(1,212
)
(471
)
1,492

(1,590
)
 
 
 
 
 
 
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash


19


19

 
 
 
 
 
 
Net Change in Cash, Cash Equivalents and Restricted Cash

(313
)
(237
)

(550
)
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
$

541

1,620


2,161

* 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, 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 June 30, 2018, we had total assets of $54.8 billion. Our common stock trades on the New York Stock Exchange under the symbol PSX.

Executive Overview
In the second quarter of 2018, we reported earnings of $1.3 billion and generated cash from operating activities of $2.4 billion. We used available cash to fund capital expenditures and investments of $538 million, pay dividends of $372 million, repay term loans of $250 million and repurchase $230 million of our common stock. We ended the second quarter of 2018 with $1.9 billion of cash and cash equivalents and approximately $5.8 billion of total committed capacity available under our credit facilities.

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Table of Contents

Business Environment
The U.S. crude oil benchmark price, West Texas Intermediate (WTI), increased to an average of $67.99 per barrel during the second quarter of 2018, compared with an average of $62.88 per barrel during the first quarter of 2018. During the second quarter of 2018, the WTI discount versus the international benchmark Dated Brent expanded $2.48 per barrel compared with the first quarter of 2018. The expansion of the discount was driven by uncertainty surrounding increased production expected by the Organization of the Petroleum Exporting Countries (OPEC) and certain non-OPEC countries, and inventories not being reduced as expected at the Cushing, Oklahoma, trading hub. During the second quarter of 2018, commodity prices had both favorable and unfavorable impacts on our businesses that vary by segment.

The Midstream segment, which includes our 50 percent equity investment in DCP Midstream, contains fee-based operations that are not directly exposed to commodity price risk, as well as operations that are directly linked to natural gas liquids (NGL) prices, natural gas prices and crude oil prices. Average natural gas prices decreased in the second quarter of 2018, compared with the first quarter of 2018, due to fewer heating days in the second quarter.  In January 2018, natural gas prices gained momentum due to colder than average temperatures, which increased residential and commercial heating demand.  Additionally, U.S. natural gas production has been at record highs due to increased dry gas production and associated gains in gas production from tight oil developments.  NGL prices were higher in the second quarter of 2018, compared with the first quarter of 2018, due to higher global crude oil prices and increased Asian demand for imports.

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. During the second quarter of 2018, the chemicals and plastics industry continued to benefit from feedstock cost advantages associated with manufacturing ethylene in regions of the world with significant NGL production.  The price of crude oil is rising faster than NGL prices and thus the petrochemicals industry continues to experience lower ethylene costs in regions of the world where ethylene manufacturing is based on NGL rather than crude oil-derived feedstocks.  In particular, companies with North American ethane-based crackers integrated through ethylene derivatives have benefited from a feedstock price advantage and have captured a higher polyethylene chain margin than crackers in most other regions of the world.

Our Refining segment results are driven by several factors, including refining margins, cost control, refinery throughput, feedstock costs, product yields and turnaround activity. Industry crack spread indicators, the difference between market prices for refined products and crude oil, are used to estimate refining margins. During the second quarter of 2018, the U.S. 3:2:1 crack spread (three barrels of crude oil producing two barrels of gasoline and one barrel of diesel) increased compared with the first quarter of 2018 due to higher gasoline and distillate cracks caused by the start of the summer driving season. Northwest Europe crack spreads on average increased in the second quarter of 2018, compared with the first quarter of 2018 due to higher demand.

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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Table of Contents

RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three and six months ended June 30, 2018, is based on a comparison with the corresponding periods of 2017.

Basis of Presentation

During the fourth quarter of 2017, the segment performance measure used by our chief executive officer to assess performance and allocate resources was changed from “net income attributable to Phillips 66” to “net income.”  Prior period segment information has been recast to conform to the current presentation.

Consolidated Results

A summary of net income (loss) by business segment with a reconciliation to net income attributable to Phillips 66 follows:

 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

 
 
 
 
 
 
Midstream
$
202

96

 
435

208

Chemicals
262

196

 
494

377

Refining
910

224

 
1,001

483

Marketing and Specialties
237

214

 
421

355

Corporate and Other
(207
)
(149
)
 
(362
)
(279
)
Net income
1,404

581


1,989

1,144

Less: net income attributable to noncontrolling interests
65

31

 
126

59

Net income attributable to Phillips 66
$
1,339

550


1,863

1,085



Our earnings increased $789 million, or 143 percent, in the second quarter of 2018, mainly reflecting:

Higher realized refining margins.
Improved earnings from equity affiliates in our Midstream and Chemicals segments.
Lower income taxes due to the reduction of the U.S. federal corporate income tax rate beginning January 1, 2018, as a result of the U.S. Tax Cuts and Jobs Act (the Tax Act) enacted in December 2017.

These increases were partially offset by:

Higher interest and debt expense.
Higher net income attributable to noncontrolling interests due to contributions of assets to Phillips 66 Partners LP (Phillips 66 Partners) in the fourth quarter of 2017.


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Table of Contents

Our earnings increased $778 million, or 72 percent, in the six-month period of 2018, mainly reflecting:

Higher realized refining margins.
Improved earnings from equity affiliates in our Midstream and Chemicals segments.
Lower income taxes due to the reduction of the U.S. federal corporate income tax rate beginning January 1, 2018, as a result of the Tax Act enacted in December 2017.
Lower refining turnaround costs.

These increases were partially offset by:

Absence of a $261 million after-tax gain from the consolidation of Merey Sweeny, L.P. (MSLP) in 2017.
Higher net income attributable to noncontrolling interests due to contributions of assets to Phillips 66 Partners in the fourth quarter of 2017.
Higher interest and debt expense.

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

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Table of Contents

Statement of Income Analysis

Sales and other operating revenues for the second quarter and six-month period of 2018 increased 20 percent and 12 percent, respectively, and purchased crude oil and products increased 40 percent and 30 percent, respectively, mainly due to higher prices for petroleum products, crude oil and NGL. The increases in sales and other operating revenues in both periods were partially offset by a change in the presentation of excise taxes on sales of petroleum products resulting from our adoption of Financial Accounting Standard Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” on January 1, 2018. As part of our adoption of this ASU, prospectively from January 1, 2018, our presentation of excise taxes on sales of petroleum products changed to a net basis from a gross basis. As a result, the “Sales and other operating revenues” and “Taxes other than income taxes” lines on our consolidated statement of income for the second quarter and six-month period of 2018 are not presented on a comparable basis to prior year periods. See Note 2—Changes in Accounting Principles and Note 3—Sales and Other Operating Revenues, in the Notes to Consolidated Financial Statements, for further information on our adoption of this ASU and our presentation of excise taxes on sales of petroleum products, respectively.

Equity in earnings of affiliates increased 61 percent and 41 percent in the second quarter and six-month period of 2018, respectively. These increases were mainly due to improved equity earnings from WRB Refining LP (WRB), driven by higher realized margins, as well as higher equity earnings from affiliates in our Midstream and Chemicals segments. See the “Segment Results” section for additional information.

Other income decreased $447 million in the six-month period of 2018. We recognized a noncash, pre-tax gain of $423 million in February 2017 related to the consolidation of MSLP. See Note 5—Business Combinations, in the Notes to Consolidated Financial Statements, for additional information.

Taxes other than income taxes decreased 97 percent in both the second quarter and six-month period of 2018. The decrease was primarily attributable to the change in our presentation of excise taxes on sales of petroleum products resulting from our adoption of ASU No. 2014-09 on January 1, 2018. See the “Sales and other operating revenues” section above for further discussion.
 
Interest and debt expense increased 26 percent and 22 percent in the second quarter and six-month period of 2018, respectively. The increase was due to higher average debt principal balances, reflecting our issuance of senior notes totaling $1,500 million in March 2018 and Phillips 66 Partners’ issuance of senior notes totaling $650 million in October 2017, as well as lower capitalized interest.

Income tax expense increased 61 percent and 12 percent in the second quarter and six-month period of 2018, respectively, primarily due to higher income before income taxes. These increases were partially offset by the reduction of the U.S. federal corporate income tax rate from 35 percent to 21 percent beginning January 1, 2018, as a result of the Tax Act. See Note 20—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our income tax expense and effective income tax rates.

Net income attributable to noncontrolling interests increased $34 million and $67 million in the second quarter and six-month period of 2018, respectively, reflecting the contribution of assets to Phillips 66 Partners in 2017.

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Table of Contents

Segment Results

Midstream

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

 
 
 
 
 
 
 
Millions of Dollars
Net Income
 
 
 
 
 
Transportation
$
137

74

 
273

152

NGL and Other
50

9

 
123

26

DCP Midstream
15

13

 
39

30

Total Midstream
$
202

96


435

208


 
Thousands of Barrels Daily
Transportation Volumes
 
 
 
 
 
Pipelines*
3,594

3,430

 
3,501

3,449

Terminals
3,214

2,581

 
2,942

2,489

Operating Statistics
 
 
 
 
 
NGL fractionated**
227

177

 
206

176

NGL production***
430

367

 
405

354

* 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
$
0.76

0.55

 
0.73

0.57

* Based on index prices from the Mont Belvieu market hub, which are weighted by NGL component mix.


The Midstream segment provides crude oil and refined products transportation, terminaling and processing services, as well as natural gas, NGL and liquefied petroleum gas (LPG) transportation, storage, processing and marketing services, mainly in the United States. This segment includes our master limited partnership (MLP), Phillips 66 Partners, as well as our 50 percent equity investment in DCP Midstream, which includes the operations of its MLP, DCP Midstream, LP (DCP Partners).

Net income from the Midstream segment increased $106 million in the second quarter of 2018 and $227 million in the six-month period of 2018.

Net income from our Transportation business increased $63 million in the second quarter of 2018 and $121 million in the six-month period of 2018. The increased results in both periods were mainly driven by higher equity earnings from affiliates, including our joint ventures that own the Bakken Pipeline, which commenced commercial operations in June 2017, and increased revenue volumes from our consolidated assets.

Net income from our NGL and Other business increased $41 million in the second quarter of 2018 and $97 million in the six-month period of 2018. The increases in both periods were mainly due to higher volumes and equity earnings from affiliates, as well as the contribution of MSLP to Phillips 66 Partners in October 2017.


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Table of Contents

Net income from our investment in DCP Midstream increased $2 million in the second quarter of 2018 and $9 million in the six-month period of 2018. The increases in both periods were mainly due to the timing of incentive distribution income allocations from DCP Partners, higher equity earnings from DCP Midstream’s affiliates and favorable impacts of the new U.S. federal corporate income tax rate beginning January 1, 2018, partially offset by unfavorable hedging results.

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

Chemicals

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

 
 
 
 
 
 
 
Millions of Dollars
 
 
 
 
 
 
Net Income
$
262

196

 
494

377

 
 
Millions of Pounds
CPChem Externally Marketed Sales Volumes*
 
 
 
 
 
Olefins and Polyolefins
4,738

4,137

 
9,165

8,153

Specialties, Aromatics and Styrenics
1,595

1,175

 
2,608

2,381

 
6,333

5,312


11,773

10,534

* Represents 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)
95
%
98
 
96
93


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 segments: Olefins and Polyolefins (O&P) and Specialties, Aromatics and Styrenics (SA&S).

Net income from the Chemicals segment increased $66 million in the second quarter of 2018 and $117 million in the six-month period of 2018. The increases in both periods reflect the commencement of full operations at its new U.S. Gulf Coast petrochemicals assets in the second quarter of 2018, which resulted in higher sales volumes of polyethylene and ethylene, partially offset by lower capitalized interest. Additionally, higher equity earnings from CPChem’s affiliates, and the favorable impacts of the new U.S. federal corporate income tax rate beginning January 1, 2018, contributed to the increases in both periods.

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

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Table of Contents

Refining
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

 
 
 
 
 
 
 
Millions of Dollars
Net Income (Loss)
 
 
 
 
 
Atlantic Basin/Europe
$
131

107

 
58

57

Gulf Coast
275

53

 
276

381

Central Corridor
392

27

 
595

89

West Coast
112

37

 
72

(44
)
Worldwide
$
910

224

 
1,001

483


 
Dollars Per Barrel
Net Income (Loss)
 
 
 
 
 
Atlantic Basin/Europe
$
2.73

2.07

 
0.67

0.62

Gulf Coast
3.58

0.73

 
1.89

2.74

Central Corridor
14.96

1.21

 
11.35

1.89

West Coast
3.18

1.05

 
1.06

(0.70
)
Worldwide
4.89

1.23

 
2.83

1.42

 
 
 
 
 
 
Realized Refining Margins
 
 
 
 
 
Atlantic Basin/Europe
$
10.42

7.90

 
8.96

7.20

Gulf Coast
9.93

6.74

 
8.43

7.36

Central Corridor
17.51

9.96

 
16.85

10.25

West Coast
12.77

10.83

 
10.61

10.44

Worldwide
12.28

8.44

 
10.88

8.49


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Table of Contents

 
Thousands of Barrels Daily
 
Three Months Ended
June 30
 
Six Months Ended
June 30
Operating Statistics
2018

2017

 
2018

2017

Refining operations*
 
 
 
 
 
Atlantic Basin/Europe
 
 
 
 
 
Crude oil capacity
537

520

 
537

520

Crude oil processed
495

533

 
457

450

Capacity utilization (percent)
92
%
103

 
85

87

Refinery production
532

575

 
485

516

Gulf Coast
 
 
 
 
 
Crude oil capacity
752

743

 
752

743

Crude oil processed
767

715

 
732

691

Capacity utilization (percent)
102
%
96

 
97

93

Refinery production
850

801

 
813

775

Central Corridor
 
 
 
 
 
Crude oil capacity
493

493

 
493

493

Crude oil processed
513

465

 
486

468

Capacity utilization (percent)
104
%
94

 
99

95

Refinery production
537

485

 
508

489

West Coast
 
 
 
 
 
Crude oil capacity
364

360

 
364

360

Crude oil processed
362

366

 
351

323

Capacity utilization (percent)
100
%
102

 
97

90

Refinery production
387

388

 
378

347

Worldwide
 
 
 
 
 
Crude oil capacity
2,146

2,116

 
2,146

2,116

Crude oil processed
2,137

2,079

 
2,026

1,932

Capacity utilization (percent)
100
%
98

 
94

91

Refinery production
2,306

2,249


2,184

2,127

* Includes our share of equity affiliates.
 
 
 
 
 


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

Net income for the Refining segment increased $686 million in the second quarter of 2018 and $518 million in the six-month period of 2018. The increases in both periods were primarily due to higher realized refining margins mainly driven by improved market crack spreads, configuration benefits and higher feedstock advantage, as well as lower turnaround costs. Additionally, results for the six-month period of 2017 reflect an after-tax gain of $261 million recognized on the consolidation of MSLP in February 2017.

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

Our worldwide refining crude oil capacity utilization rate was 100 percent and 94 percent in the second quarter and six-month period of 2018, respectively, compared with 98 percent and 91 percent in the second quarter and six-month period of 2017, respectively. These increases were primarily attributable to lower planned maintenance and turnaround activity, and improved market conditions in 2018 as compared with 2017. These increases were partially offset by higher unplanned downtime.

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Table of Contents

Non-GAAP Reconciliations

Our realized refining margins measure the difference between a) sales and other operating revenues derived from the sale of petroleum products manufactured at our refineries and b) purchase costs of feedstocks, primarily crude oil, used to produce the petroleum products. The margins are adjusted to include our proportional share of our joint venture refineries’ realized margins, as well as to exclude those items that are not representative of the underlying operating performance of a period, which we call “special items.” The realized refining margins are converted to a per-barrel basis by dividing them by total refinery processed inputs (primarily crude oil) measured on a barrel basis, including our share of inputs processed by our joint venture refineries. Our realized refining margin per barrel is intended to be comparable with industry refining margins, which are known as “crack spreads.” As discussed in “Business Environment,” industry crack spreads measure the difference between market prices for refined petroleum products and crude oil. Realized refining margin per barrel calculated on a similar basis as industry crack spreads provides a useful measure of how well we performed relative to benchmark industry margins.

Under generally accepted accounting principles in the United States (GAAP), the performance measure most directly comparable to refining margin per barrel is the Refining segment’s “net income per barrel.” Refining margin per barrel excludes items that are typically included in a manufacturer’s gross margin, such as depreciation and operating expenses, and other items used to determine net income, such as general and administrative expenses and income taxes. It also includes our proportional share of joint venture refineries’ realized margins and excludes special items. Because refining margin per barrel is calculated in this manner, and because refining margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. Following are reconciliations of net income to realized refining margins:

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Table of Contents

 
Millions of Dollars, Except as Indicated
Realized Refining Margins
Atlantic Basin/
Europe

Gulf
Coast

Central
Corridor

West
Coast

Worldwide

 
 
 
 
 
 
Three Months Ended June 30, 2018
 
 
 
 
 
Net income
$
131

275

392

112

910

Plus:
 
 
 
 
 
Income tax expense
33

91

129

27

280

Taxes other than income taxes
15

23

9

25

72

Depreciation, amortization and impairments
50

64

32

60

206

Selling, general and administrative expenses
15

13

7

12

47

Operating expenses
225

292

124

228

869

Equity in (earnings) losses of affiliates
3

3

(220
)

(214
)
Other segment (income) expense, net

3

(8
)
(14
)
(19
)
Proportional share of refining gross margins contributed by equity affiliates
28


381


409

Realized refining margins
$
500

764

846

450

2,560

 
 
 
 
 
 
Total processed inputs (thousands of barrels)
47,978

76,875

26,209

35,195

186,257

Adjusted total processed inputs (thousands of barrels)*
47,978

76,875

48,347

35,195

208,395

 
 
 
 
 
 
Net income per barrel (dollars per barrel)**
$
2.73

3.58

14.96

3.18

4.89

Realized refining margins (dollars per barrel)***
10.42

9.93

17.51

12.77

12.28

 
 
 
 
 
 
Three Months Ended June 30, 2017
 
 
 
 
 
Net income
$
107

53

27

37

224

Plus:
 
 
 
 
 
Income tax expense
13

33

15

22

83

Taxes other than income taxes
13

23

13

21

70

Depreciation, amortization and impairments
47

68

37

67

219

Selling, general and administrative expenses
15

14

8

12

49

Operating expenses
198

294

183

222

897

Equity in (earnings) losses of affiliates
2

2

(26
)

(22
)
Other segment (income) expense, net
(3
)
1

4

1

3

Proportional share of refining gross margins contributed by equity affiliates
16


175


191

Realized refining margins
$
408

488

436

382

1,714

 
 
 
 
 
 
Total processed inputs (thousands of barrels)
51,749

72,346

22,331

35,304

181,730

Adjusted total processed inputs (thousands of barrels)*
51,749

72,346

43,718

35,304

203,117

 
 
 
 
 
 
Net income per barrel (dollars per barrel)**
$
2.07

0.73

1.21

1.05

1.23

Realized refining margins (dollars per barrel)***
7.90

6.74

9.96

10.83

8.44

    * Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate.
  ** Net income divided by total processed inputs.
*** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding.

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Table of Contents

 
Millions of Dollars, Except as Indicated
Realized Refining Margins
Atlantic Basin/
Europe

Gulf
Coast

Central
Corridor

West
Coast

Worldwide

 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
Net income
$
58

276

595

72

1,001

Plus:
 
 
 
 
 
Income tax expense (benefit)
(2
)
90

198

15

301

Taxes other than income taxes
30

48

21

50

149

Depreciation, amortization and impairments
102

130

67

118

417

Selling, general and administrative expenses
28

23

14

23

88

Operating expenses
510

658

232

458

1,858

Equity in (earnings) losses of affiliates
5

4

(159
)

(150
)
Other segment (income) expense, net
(7
)
2

(12
)
(11
)
(28
)
Proportional share of refining gross margins contributed by equity affiliates
57


579


636

Realized refining margins
$
781

1,231

1,535

725

4,272

 
 
 
 
 
 
Total processed inputs (thousands of barrels)
87,196

146,082

52,445

68,246

353,969

Adjusted total processed inputs (thousands of barrels)*
87,196

146,082

91,112

68,246

392,636

 
 
 
 
 
 
Net income per barrel (dollars per barrel)**
$
0.67

1.89

11.35

1.06

2.83

Realized refining margins (dollars per barrel)***
8.96

8.43

16.85

10.61

10.88

Six Months Ended June 30, 2017
 
 
 
 
 
Net income (loss)
$
57

381

89

(44
)
483

Plus:
 
 
 
 
 
Income tax expense (benefit)
(35
)
226

50

(27
)
214

Taxes other than income taxes
29

50

27

41

147

Depreciation, amortization and impairments
96

135

64

125

420

Selling, general and administrative expenses
29

26

16

23

94

Operating expenses
455

632

319

535

1,941

Equity in (earnings) losses of affiliates
6

(5
)
(17
)

(16
)
Other segment (income) expense, net
(6
)
(421
)
6

2

(419
)
Proportional share of refining gross margins contributed by equity affiliates
30

1

344


375

Realized refining margins
$
661

1,025

898

655

3,239

 
 
 
 
 
 
Total processed inputs (thousands of barrels)
91,865

139,194

46,978

62,718

340,755

Adjusted total processed inputs (thousands of barrels)*
91,865

139,194

87,639

62,718

381,416

 
 
 
 
 
 
Net income (loss) per barrel (dollars per barrel)**
$
0.62

2.74

1.89

(0.70
)
1.42

Realized refining margins (dollars per barrel)***
7.20

7.36

10.25

10.44

8.49

    * Adjusted total processed inputs include our proportional share of processed inputs of an equity affiliate.
  ** Net income (loss) divided by total processed inputs.
*** Realized refining margins per barrel, as presented, are calculated using the underlying realized refining margin amounts, in dollars, divided by adjusted total processed inputs, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding.

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Table of Contents

Marketing and Specialties

 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

 
 
 
 
 
 
 
Millions of Dollars
Net Income
 
 
 
 
 
Marketing and Other
$
187

181

 
326

305

Specialties
50

33

 
95

50

Total Marketing and Specialties
$
237

214

 
421

355


 
Dollars Per Barrel
Net Income
 
 
 
 
 
U.S.
$
0.79

0.75

 
0.72

0.64

International
2.67

2.31

 
1.99

1.95

 
 
 
 
 
 
Realized Marketing Fuel Margins
 
 
 
 
 
U.S.
$
1.61

1.74

 
1.51

1.61

International
5.25

4.95

 
4.29

4.33


 
Dollars Per Gallon
U.S. Average Wholesale Prices*
 
 
 
 
 
Gasoline
$
2.33

1.85

 
2.19

1.83

Distillates
2.37

1.71

 
2.25

1.73

* On third-party branded petroleum product sales, excluding excise taxes.
 
 
 
 
 

 
Thousands of Barrels Daily
Marketing Petroleum Products Sales Volumes
 
 
 
 
 
Gasoline
1,196

1,275

 
1,150

1,215

Distillates
1,012

912

 
946

874

Other
17

18

 
19

16

Total
2,225

2,205

 
2,115

2,105



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 net income increased $23 million in the second quarter of 2018 and $66 million in the six-month period of 2018. The increases in both periods were primarily due to benefits from the retroactive extension of the 2017 biodiesel blender’s tax incentive in early 2018, favorable impacts of the new U.S. federal corporate income tax rate beginning January 1, 2018, and higher margins for specialty products and services. These increases were partially offset by lower U.S. realized marketing margins.

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

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Table of Contents

Non-GAAP Reconciliations

Our realized marketing fuel margins measure the difference between a) sales and other operating revenues derived from the sale of fuels in our M&S segment and b) purchase costs of those fuels. These margins are converted to a per-barrel basis by dividing them by sales volumes measured on a barrel basis. Marketing fuel margin per barrel demonstrates the value uplift our marketing operations provide by optimizing the placement and ultimate sale of our refineries’ fuel production.
 
Within the M&S segment, the GAAP performance measure most directly comparable to marketing fuel margin per barrel is the marketing business’ “net income per barrel.” Marketing fuel margin per barrel excludes items that are typically included in gross margin, such as depreciation and operating expenses, and other items used to determine net income, such as general and administrative expenses and income taxes. Because marketing fuel margin per barrel excludes these items, and because marketing fuel margin per barrel may be defined differently by other companies in our industry, it has limitations as an analytical tool. Following are reconciliations of net income to realized marketing fuel margins:

 
Millions of Dollars, Except as Indicated
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2017
 
U.S.

International

 
U.S.

International

Realized Marketing Fuel Margins
 
 
 
 
 
Net income
$
140

66

 
132

56

Plus:
 
 
 
 
 
Income tax expense
47

16

 
79

19

Taxes other than income taxes*
3

2

 
1,375

1,881

Depreciation and amortization
3

18

 
3

16

Selling, general and administrative expenses
193

71

 
193

63

Equity in earnings of affiliates
(2
)
(25
)
 
(2
)
(22
)
Other operating revenues*
(98
)
(6
)
 
(1,459
)
(1,883
)
Other segment (income) expense, net

2

 
(14
)
1

Marketing margins
286

144


307

131

Less: margin for non-fuel related sales

14

 

11

Realized marketing fuel margins
$
286

130


307

120

 
 
 
 
 
 
Total fuel sales volumes (thousands of barrels)
177,725

24,717

 
176,419

24,229

 
 
 
 
 
 
Net income per barrel (dollars per barrel)
$
0.79

2.67

 
0.75

2.31

Realized marketing fuel margins (dollars per barrel)**
1.61

5.25

 
1.74

4.95

* Includes excise taxes on sales of petroleum products for periods prior to the adoption of ASU No. 2014-09 on January 1, 2018. See Note 2—Changes in Accounting Principles, in the Notes to Consolidated Financial Statements, for further information on our adoption of this ASU. Other operating revenues also includes other non-fuel revenues.
** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

 
Millions of Dollars, Except as Indicated
 
Six Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2017
 
U.S.

International

 
U.S.

International

Realized Marketing Fuel Margins
 
 
 
 
 
Net income
$
239

98

 
213

94

Plus:
 
 
 
 
 
Income tax expense
80

21

 
127

29

Taxes other than income taxes*
(7
)

 
2,653

3,637

Depreciation and amortization
7

36

 
7

31

Selling, general and administrative expenses
369

141

 
367

123

Equity in earnings of affiliates
(4
)
(43
)
 
(2
)
(41
)
Other operating revenues*
(182
)
(13
)
 
(2,813
)
(3,643
)
Other segment income, net

(3
)
 
(15
)

Marketing margins
502

237


537

230

Less: margin for non-fuel related sales

26

 

22

Realized marketing fuel margins
$
502

211


537

208

 
 
 
 
 
 
Total fuel sales volumes (thousands of barrels)
333,505

49,251

 
332,967

48,114

 
 
 
 
 
 
Net income per barrel (dollars per barrel)
$
0.72

1.99

 
0.64

1.95

Realized marketing fuel margins (dollars per barrel)**
1.51

4.29

 
1.61

4.33

* Includes excise taxes on sales of petroleum products for periods prior to the adoption of ASU No. 2014-09 on January 1, 2018. See Note 2—Changes in Accounting Principles, in the Notes to Consolidated Financial Statements, for further information on our adoption of this ASU. Other operating revenues also includes other non-fuel revenues.
** Realized marketing fuel margins per barrel, as presented, are calculated using the underlying realized marketing fuel margin amounts, in dollars, divided by sales volumes, in barrels. As such, recalculated per barrel amounts using the rounded margins and barrels presented may differ from the presented per barrel amounts due to rounding.


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Table of Contents

Corporate and Other

 
Millions of Dollars
 
Three Months Ended
June 30
 
Six Months Ended
June 30
 
2018

2017

 
2018

2017

Net Loss
 
 
 
 
 
Net interest expense
$
(101
)
(65
)
 
(190
)
(130
)
Corporate general and administrative expenses
(58
)
(47
)
 
(105
)
(86
)
Technology
(17
)
(14
)
 
(35
)
(29
)
U.S. tax reform
(24
)

 
(17
)

Other
(7
)
(23
)
 
(15
)
(34
)
Total Corporate and Other
$
(207
)
(149
)

(362
)
(279
)


Net interest consists of interest and financing expense, net of interest income and capitalized interest. Net interest increased in the second quarter and six-month period of 2018, mainly due to higher average debt principal balances, reflecting our issuance of senior notes totaling $1,500 million in March 2018 and Phillips 66 Partners’ issuance of senior notes totaling $650 million in October 2017; lower capitalized interest; and impacts of the new U.S. federal corporate income tax rate beginning January 1, 2018.

During the second quarter and six-month period of 2018, Corporate and Other also includes one-time impacts related to the enactment of the Tax Act in December 2017, totaling $24 million and $17 million, respectively. These one-time impacts related to the Tax Act are comprised of adjustments to the provisional deemed repatriation income tax expense and deferred income tax revaluation benefit recorded in December 2017, income tax benefits recorded by equity affiliates, as well as other indirect income tax effects of the Tax Act.

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Table of Contents

CAPITAL RESOURCES AND LIQUIDITY

Financial Indicators

 
Millions of Dollars,
Except as Indicated
 
June 30
2018

 
December 31
2017

 
 
 
 
Cash and cash equivalents
$
1,884

 
3,119

Short-term debt
341

 
41

Total debt
11,364

 
10,110

Total equity
24,960

 
27,428

Percent of total debt to capital*
31
%
 
27

Percent of floating-rate debt to total debt
12
%
 
11

* 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. Additionally, Phillips 66 Partners has the ability to fund its growth activities through debt and equity offerings. During the first six months of 2018, we generated $2.9 billion in cash from operations and raised net proceeds of $1.5 billion from the issuance of senior notes. Available cash was primarily used for repurchases of our common stock of $3.7 billion; capital expenditures and investments of $866 million; dividend payments on our common stock of $699 million; and repayment of term loans of $250 million. During the first six months of 2018, cash and cash equivalents decreased by $1.2 billion to $1.9 billion.

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

Significant Sources of Capital

Operating Activities
During the first six months of 2018, cash generated by operating activities was $2,852 million, compared with $1,316 million for the first six months of 2017. The increase in the first six months of 2018, compared with the same period in 2017, reflects higher realized refining margins and distributions from our equity affiliates, as well as net favorable working capital changes primarily driven by the effects of increased commodity prices, inventory impacts and timing of payments and collections.

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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Table of Contents

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 six months of 2018, cash from operations included distributions of $1,153 million from our equity affiliates, compared with $575 million during the same period of 2017. CPChem resumed distributions to us in the first quarter of 2018 following the return to full operations of its Cedar Bayou facility post-Hurricane Harvey and the start-up of its new U.S. Gulf Coast petrochemicals assets. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these companies are not assured.

Phillips 66 Partners LP
Phillips 66 Partners’ initial $250 million continuous offering of common units, or at-the-market (ATM) program, was completed during the three months ended June 30, 2018.  At that time, Phillips 66 Partners commenced issuing common units under its second $250 million ATM program. For the six months ended June 30, 2018, on a settlement-date basis, Phillips 66 Partners had issued an aggregate of 1,340,934 common units under the ATM programs, which generated net proceeds of $67 million. Since inception through June 30, 2018, Phillips 66 Partners had issued an aggregate of 5,059,802 common units under the ATM programs, which generated net proceeds of $259 million.

Debt Issuances
In March 2018, Phillips 66 closed on a public offering of $1,500 million aggregate principal amount of unsecured notes consisting of:

$500 million of floating-rate Senior Notes due 2021. Interest on these notes is equal to the three-month London Interbank Offered Rate (LIBOR) plus 0.60% per annum and is payable quarterly in arrears on February 26, May 26, August 26 and November 26, beginning on May 29, 2018.

$800 million of 3.900% Senior Notes due 2028. Interest on these notes is payable semiannually on March 15 and September 15 of each year, beginning on September 15, 2018.

An additional $200 million of our 4.875% Senior Notes due 2044. Interest on these notes is payable semiannually on May 15 and November 15 of each year, beginning on May 15, 2018.
 
These notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary. Phillips 66 used the net proceeds from the issuance of these notes to repay commercial paper borrowings during the first quarter of 2018, and for general corporate purposes.

Credit Facilities and Commercial Paper
At June 30, 2018, no amount had been directly drawn under our $5.0 billion revolving credit facility or our $5.0 billion commercial paper program supported by our revolving credit facility. In addition, at June 30, 2018, Phillips 66 Partners had no borrowings outstanding under its $750 million revolving credit facility. As a result, we had approximately $5.8 billion of total committed capacity available under our credit facilities at June 30, 2018.

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


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Table of Contents

Off-Balance Sheet Arrangements

Under the operating lease agreement on our headquarters facility in Houston, Texas, we have a residual value guarantee with a maximum future exposure of $554 million. The operating lease term ends in June 2021 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 also have residual value guarantees associated with railcar and airplane leases with maximum future exposures totaling $291 million, which have remaining terms of up to five years. For one of our railcar leases, we estimated a total residual value deficiency of $56 million based on third-party appraisals of the railcars’ expected fair value at the end of their lease term in May 2019. The total residual value deficiency is our estimate of the amount we will owe to the lessor at the end of the lease term and is recognized as expense over the remaining lease term. At June 30, 2018, the remaining unrecognized residual value deficiency was $24 million

In addition, we have guarantees outstanding related to certain joint venture debt obligations, which have remaining terms of up to seven years. The maximum potential amount of future payments to third parties under these guarantees was approximately $256 million.

See Note 10—Guarantees, in the Notes to Consolidated Financial Statements, for additional information on our guarantees.

Capital Requirements

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

Debt Financing
Our total debt balance at June 30, 2018, and December 31, 2017, was $11,364 million and $10,110 million, respectively. Our total debt-to-capital ratio was 31 percent and 27 percent at June 30, 2018, and December 31, 2017, respectively.

In June 2018, Phillips 66 repaid $250 million of the $450 million outstanding under its three-year term loan facility due 2020.

Dividends
On May 9, 2018, our Board of Directors declared a quarterly cash dividend of $0.80 per common share. The dividend was paid June 1, 2018, to shareholders of record at the close of business on May 21, 2018. On July 11, 2018, our Board of Directors declared a quarterly cash dividend of $0.80 per common share. This dividend is payable on September 4, 2018, to shareholders of record at the close of business on August 21, 2018.

Share Repurchases
Our Board of Directors, at various times, has authorized repurchases of our outstanding common stock under our share repurchase program, which aggregate to a total authorization of up to $12.0 billion. The share repurchases have been, and 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 six months ended June 30, 2018, we repurchased 4,387,255 shares at a cost of $463 million under our share repurchase program. Since the inception of our share repurchase program in 2012 through June 30, 2018, we have repurchased a total of 128,529,785 shares at a cost of $9,491 million. Shares of stock repurchased are held as treasury shares.

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Table of Contents

In February 2018, we entered into a Stock Purchase and Sale Agreement (Purchase Agreement) with Berkshire Hathaway Inc. and National Indemnity Company, a wholly owned subsidiary of Berkshire Hathaway, to repurchase 35 million shares of Phillips 66 common stock for an aggregate purchase price of $3,280 million. Pursuant to the Purchase Agreement, the purchase price per share of $93.725 was based on the volume-weighted-average price of our common stock on the New York Stock Exchange on February 13, 2018. The transaction closed in February 2018. We funded the repurchase with cash of $1,880 million and borrowings of $1,400 million under our commercial paper program. These borrowings were subsequently refinanced through a public offering of senior notes. This specific share repurchase transaction was separately authorized by our Board of Directors and therefore does not impact previously announced authorizations under our share repurchase program, which are discussed above.

Railcar and Airplane Lease Residual Value Guarantees
For one of our railcar leases, we estimated a total residual value deficiency of $56 million based on a third-party appraisal of the railcars’ expected fair value at the end of their lease term. The total residual value deficiency is our estimate of the amount we will owe to the lessor at the end of the lease term in 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.

At June 30, 2018, our maximum future exposure for residual value guarantees under railcar and airplane lease arrangements was approximately $291 million. For additional information, see Note 10—Guarantees, in the Notes to Consolidated Financial Statements.

Capital Spending
 
 
Millions of Dollars
 
Six Months Ended
June 30
 
2018

 
2017

Capital Expenditures and Investments
 
 
 
Midstream
$
475

 
381

Chemicals

 

Refining
325

 
475

Marketing and Specialties
28

 
38

Corporate and Other
38

 
34

 
$
866

 
928

 
 
 
 
Selected Equity Affiliates*
 
 
 
DCP Midstream
$
193

 
104

CPChem
224

 
387

WRB
75

 
64

 
$
492

 
555

* Our share of capital spending.


Midstream
During the first six months of 2018, capital spending in our Midstream segment included continued development of additional Gulf Coast fractionation capacity, construction activities related to increasing storage capacity at our crude oil and petroleum products terminal located near Beaumont, Texas, and spending associated with return, reliability and maintenance projects in our Transportation and NGL businesses.  Phillips 66 Partners advanced several major construction projects, including progressing construction on the eastern leg of its 40-percent-owned Bayou Bridge joint venture pipeline, expansion activities on its 33-percent-owned DCP Sand Hills joint venture pipeline, constructing a new isomerization unit at the Lake Charles Refinery, and development of the Gray Oak Pipeline joint venture and related ventures.

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In April 2018, Phillips 66 Partners announced that it received sufficient binding commitments to proceed with construction of the Gray Oak Pipeline. The pipeline will provide crude oil transportation from the Permian Basin and Eagle Ford to destinations in the Corpus Christi and Sweeny/Freeport markets on the Texas Gulf Coast, including the Sweeny Refinery. In July 2018, Phillips 66 Partners completed the expansion open season to determine the scope and capacity of the pipeline system. The pipeline will have an initial capacity of 800,000 barrels per day (BPD) based on shipper commitments of 700,000 BPD and the reservation of capacity for walk-up shippers.  The pipeline is expandable to approximately 1 million BPD subject to additional shipper commitments. Phillips 66 Partners currently owns a 75 percent interest in the pipeline system, and other third parties have options to acquire up to a 32.75 percent interest. If all options are exercised, Phillips 66 Partners would own 42.25 percent. The pipeline is expected to be in service by the end of 2019, with total cost of approximately $2 billion on a 100 percent basis.

In Corpus Christi, Texas, the Gray Oak Pipeline will connect to the new South Texas Gateway Terminal under development by Buckeye Partners, L.P. The marine terminal will have an initial storage capacity of 3.4 million barrels and is expected to begin operations by the end of 2019. Phillips 66 Partners owns a 25 percent interest in the joint venture that is constructing the terminal.

In June 2018, we announced the expansion of the Sweeny Hub, which is an integrated NGL fractionation, storage and export complex strategically located on the Texas Gulf Coast with access to petrochemicals, fuels and liquefied petroleum gas (LPG) export markets. The expansion includes two 150,000-BPD fractionators, associated pipeline infrastructure, and 6 million barrels of additional storage capacity at Phillips 66 Partners’ Clemens Caverns. DCP Midstream has committed to supply Y-grade NGL feedstock and has an option to acquire up to a 30 percent ownership interest in the fractionators. Upon completion of the expansion, expected in late 2020, the Sweeny Hub will have 400,000 BPD of fractionation capability and access to 15 million barrels of storage capacity.

During the first six months of 2018, 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 $385 million, which were primarily for expansion capital expenditures, including construction of the Mewbourn 3 and O’Connor 2 plants, and investments in the DCP Sand Hills and Gulf Coast Express joint venture pipelines, as well as maintenance capital expenditures for existing assets. We expect DCP to continue self-funding its capital program for the remainder of 2018.

In July 2018, Rockies Express Pipeline LLC (REX) repaid $550 million of its debt, reducing its total debt to approximately $2.0 billion.  REX funded the repayment through member cash contributions.  Our 25 percent share was approximately $138 million, which we contributed to REX in July 2018.

Chemicals
During the first six months of 2018, 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 $448 million, which were primarily for completion of its U.S. Gulf Coast Petrochemicals Project. We expect CPChem to continue self-funding its capital program for the remainder of 2018.

Refining
Capital spending for the Refining segment during the first six months of 2018 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 included:
Installation of facilities to comply with U.S. Environmental Protection Agency (EPA) Tier 3 gasoline regulations at the Bayway and Ferndale refineries.
Installation of facilities to improve processing of advantaged crudes at the Lake Charles Refinery.
Installation of facilities to improve clean product yield at the Bayway Refinery, as well as the jointly owned Wood River Refinery.




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Additionally, a project was approved at the Sweeny Refinery to optimize a fluid catalytic cracking unit to increase production of higher-value petrochemical products and higher-octane gasoline. The project is anticipated to be completed in mid-2020.

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

Marketing and Specialties
Capital spending for the M&S segment during the first six months of 2018 was primarily for reliability and maintenance projects and 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 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 international and federal environmental laws and regulations, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2017 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, 2017, we reported that we had been notified of potential liability under

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CERCLA and comparable state laws at 31 sites within the United States. During the first six months of 2018, there was one new site for which we received notification of potential liability, two sites were deemed resolved and closed, and one site was deemed resolved but not closed, leaving 29 unresolved sites with potential liability at June 30, 2018.

Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in certain of 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 2017 Annual Report on Form 10-K.

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 GHG emissions. Data on our 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.


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NEW ACCOUNTING STANDARDS

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows for the deferred income tax effects stranded in accumulated other comprehensive income (AOCI) resulting from the Tax Act enacted in December 2017 to be reclassed from AOCI to retained earnings. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.

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 may result in earlier 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 consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition.  Classification for both lessees and lessors will be based on an assessment of whether risks and rewards, as well as substantive control have been transferred through a lease contract.  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. As part of our assessment to-date, we have formed an implementation team, selected a software package, and completed software design and configuration within a test environment. Furthermore, we have loaded a majority of our lease population into the software and commenced both software and lease data testing. We expect the adoption of ASU 2016-02 will materially gross up our consolidated balance sheet with the recognition of the ROU assets and operating lease liabilities.  The impact to our consolidated statements of income and cash flows is not expected to be material.  The new standard will also require additional disclosures for financing and operating leases.


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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 2017 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 June 30, 2018, did not differ materially from the risks disclosed under Item 7A of our 2017 Annual Report on Form 10-K.


Item 4.   CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of June 30, 2018, with the participation of management, our Chairman and Chief Executive Officer and our Executive Vice President, Finance and Chief Financial Officer carried out an evaluation, pursuant to Rule 13a-15(b) of the Act, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our Chairman and Chief Executive Officer and our Executive Vice President, Finance and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of June 30, 2018.

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the quarterly period ended June 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS

The following is a description of reportable legal proceedings, including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment, for this reporting period. There were no new matters that arose during the second quarter of 2018. There were material developments that occurred with respect to one matter previously reported in our 2017 Annual Report on Form 10-K or our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018. While it is not possible to accurately predict the final outcome of reported, 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 Securities and Exchange Commission (SEC) regulations.

Our U.S. refineries are implementing two separate consent decrees, regarding alleged violations of the Federal Clean Air Act, with the U.S. Environmental Protection Agency (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.

New Matters
There are no new matters to report.

Matters Previously Reported
In March 2018, Phillips 66 Partners received notification from the Illinois Attorney General’s office of a proposed penalty arising from the April 2015 release of approximately 800 barrels of diesel fuel from its pipeline that transports products from a terminal in Hartford, Illinois, to a dock on the Mississippi River. This matter has been resolved with a penalty payment of $120,000.


Item 1A.   RISK FACTORS

There have been no material changes from the risk factors disclosed in Item 1A of our 2017 Annual Report on Form 10-K.



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

 
 
 
 
 
 
Millions of Dollars

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

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

April 1-30, 2018
678,312
 
$
101.89

678,312
 
$
2,670

May 1-31, 2018
676,104
 
117.00

676,104
 
2,591

June 1-30, 2018
707,994
 
115.41

707,994
 
2,509

Total
2,062,410
 
$
111.49

2,062,410
 

  * Includes repurchase of shares of common stock from company employees in connection with the company’s broad-based employee incentive plans, when applicable.
** As of June 30, 2018, our Board of Directors has authorized repurchases totaling up to $12.0 billion of our outstanding common stock. The authorizations do not have expiration dates. 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
 
 
 
 
Incorporated by Reference
Exhibit Number
 
Exhibit Description
Form
Exhibit Number
Filing Date
SEC File No.
 
 
 
 
 
 
 
 
 
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the company has not filed with this Quarterly Report on Form 10-Q certain instruments defining the rights of holders of long-term debt of the company and its subsidiaries because the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the company and its subsidiaries on a consolidated basis. The company agrees to furnish a copy of such agreements to the Commission upon request.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.
 
 
 
 
 
 
 
 
 
 
 
* Filed herewith.
 
 
 
 
    

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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)

Date: July 27, 2018

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