10-Q 1 psx-2015331_10q.htm 10-Q PSX-2015/3/31_10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
March 31, 2015
 

 
 
or
 
 

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

3010 Briarpark Drive, Houston, Texas 77042
(Address of principal executive offices) (Zip Code)
281-293-6600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  [X]    No  [    ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  [X]    No  [    ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   [X]        Accelerated filer  [    ]        Non-accelerated filer   [    ]        Smaller reporting company  [    ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  [    ]    No  [X]
The registrant had 541,632,079 shares of common stock, $.01 par value, outstanding as of March 31, 2015.



PHILLIPS 66

TABLE OF CONTENTS
 





PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
 
Consolidated Statement of Income
Phillips 66
 
Millions of Dollars
 
Three Months Ended
March 31
 
2015

2014

Revenues and Other Income
 
 
Sales and other operating revenues*
$
22,778

40,283

Equity in earnings of affiliates
456

778

Net gain on dispositions
122

7

Other income
70

31

Total Revenues and Other Income
23,426

41,099

 
 
 
Costs and Expenses
 
 
Purchased crude oil and products
16,695

34,381

Operating expenses
1,094

1,090

Selling, general and administrative expenses
394

402

Depreciation and amortization
253

234

Impairments

1

Taxes other than income taxes*
3,462

3,638

Accretion on discounted liabilities
5

6

Interest and debt expense
86

68

Foreign currency transaction losses (gains)
49

(19
)
Total Costs and Expenses
22,038

39,801

Income from continuing operations before income taxes
1,388

1,298

Provision for income taxes
391

426

Income From Continuing Operations
997

872

Income from discontinued operations**

706

Net Income
997

1,578

Less: net income attributable to noncontrolling interests
10

6

Net Income Attributable to Phillips 66
$
987

1,572

 
 
 
Amounts Attributable to Phillips 66 Common Stockholders:
 
 
Income from continuing operations
$
987

866

Income from discontinued operations

706

Net Income Attributable to Phillips 66
$
987

1,572

 
 
 
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
 
 
Basic
 
 
Continuing operations
$
1.80

1.48

Discontinued operations

1.21

Net Income Attributable to Phillips 66 Per Share of Common Stock
$
1.80

2.69

Diluted
 
 
Continuing operations
$
1.79

1.47

Discontinued operations

1.20

Net Income Attributable to Phillips 66 Per Share of Common Stock
$
1.79

2.67

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

0.39

 
 
 
Average Common Shares Outstanding (in thousands)
 
 
Basic
548,200

584,053

Diluted
552,337

589,575

  * Includes excise taxes on petroleum products sales:
$
3,362

3,522

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

5

See Notes to Consolidated Financial Statements.
 
 

1


Consolidated Statement of Comprehensive Income
Phillips 66
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2015

2014

 
 
 
Net Income
$
997

1,578

Other comprehensive income (loss)
 
 
Defined benefit plans
 
 
Actuarial gain/loss:
 
 
Amortization to net income of net actuarial loss and settlements
30

12

Plans sponsored by equity affiliates
5

3

Income taxes on defined benefit plans
(10
)
(5
)
Defined benefit plans, net of tax
25

10

Foreign currency translation adjustments
(197
)
31

Income taxes on foreign currency translation adjustments
9

(1
)
Foreign currency translation adjustments, net of tax
(188
)
30

Other Comprehensive Income (Loss), Net of Tax
(163
)
40

Comprehensive Income
834

1,618

Less: comprehensive income attributable to noncontrolling interests
10

6

Comprehensive Income Attributable to Phillips 66
$
824

1,612

See Notes to Consolidated Financial Statements.

2


Consolidated Balance Sheet
Phillips 66
 
 
Millions of Dollars
 
March 31
2015

 
December 31
2014

Assets
 
 
 
Cash and cash equivalents
$
5,390

 
5,207

Accounts and notes receivable (net of allowances of $69 million in 2015 and $71 million in 2014)
4,717

 
6,306

Accounts and notes receivable—related parties
1,020

 
949

Inventories
4,166

 
3,397

Prepaid expenses and other current assets
851

 
837

Total Current Assets
16,144

 
16,696

Investments and long-term receivables
10,529

 
10,189

Net properties, plants and equipment
17,918

 
17,346

Goodwill
3,274

 
3,274

Intangibles
882

 
900

Other assets
330

 
336

Total Assets
$
49,077

 
48,741

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
6,965

 
7,488

Accounts payable—related parties
728

 
576

Short-term debt
35

 
842

Accrued income and other taxes
1,112

 
878

Employee benefit obligations
283

 
462

Other accruals
741

 
848

Total Current Liabilities
9,864

 
11,094

Long-term debt
8,914

 
7,842

Asset retirement obligations and accrued environmental costs
650

 
683

Deferred income taxes
5,483

 
5,491

Employee benefit obligations
1,292

 
1,305

Other liabilities and deferred credits
279

 
289

Total Liabilities
26,482

 
26,704

 
 
 
 
Equity
 
 
 
Common stock (2,500,000,000 shares authorized at $.01 par value)
     Issued (2015—637,925,189 shares; 2014—637,031,760 shares)
 
 
 
Par value
6

 
6

Capital in excess of par
19,060

 
19,040

Treasury stock (at cost: 2015—96,293,110 shares; 2014—90,649,984 shares)
(6,633
)
 
(6,234
)
Retained earnings
10,021

 
9,309

Accumulated other comprehensive loss
(694
)
 
(531
)
Total Stockholders’ Equity
21,760

 
21,590

Noncontrolling interests
835

 
447

Total Equity
22,595

 
22,037

Total Liabilities and Equity
$
49,077

 
48,741

See Notes to Consolidated Financial Statements.

3


Consolidated Statement of Cash Flows
Phillips 66
 
Millions of Dollars
 
Three Months Ended
March 31
 
2015

 
2014

Cash Flows From Operating Activities
 
 
 
Net income
$
997

 
1,578

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
253

 
234

Impairments

 
1

Accretion on discounted liabilities
5

 
6

Deferred taxes
(6
)
 
(444
)
Undistributed equity earnings
(337
)
 
632

Net gain on dispositions
(122
)
 
(7
)
Income from discontinued operations

 
(706
)
Other
90

 
(21
)
Working capital adjustments
 
 
 
Decrease (increase) in accounts and notes receivable
1,684

 
619

Decrease (increase) in inventories
(834
)
 
(2,567
)
Decrease (increase) in prepaid expenses and other current assets
(130
)
 
(132
)
Increase (decrease) in accounts payable
(349
)
 
1,505

Increase (decrease) in taxes and other accruals
101

 
698

Net cash provided by continuing operating activities
1,352

 
1,396

Net cash provided by discontinued operations

 
2

Net Cash Provided by Operating Activities
1,352

 
1,398

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Capital expenditures and investments
(1,081
)
 
(572
)
Proceeds from asset dispositions*
(9
)
 
507

Advances/loans—related parties
(50
)
 

Other
102

 
13

Net cash used in continuing investing activities
(1,038
)
 
(52
)
Net cash used in discontinued operations

 
(34
)
Net Cash Used in Investing Activities
(1,038
)
 
(86
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of debt
1,169

 

Repayment of debt
(895
)
 
(8
)
Issuance of common stock
(25
)
 
(20
)
Repurchase of common stock
(399
)
 
(640
)
Share exchange—PSPI transaction

 
(450
)
Dividends paid on common stock
(272
)
 
(229
)
Distributions to noncontrolling interests
(6
)
 
(4
)
Net proceeds from issuance of Phillips 66 Partners LP common units
384

 

Other
(14
)
 
(4
)
Net cash used in continuing financing activities
(58
)
 
(1,355
)
Net cash used in discontinued operations

 

Net Cash Used in Financing Activities
(58
)
 
(1,355
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(73
)
 
(31
)
 
 
 
 
Net Change in Cash and Cash Equivalents
183

 
(74
)
Cash and cash equivalents at beginning of period
5,207

 
5,400

Cash and Cash Equivalents at End of Period
$
5,390

 
5,326

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

4


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

Capital in Excess of Par

Treasury Stock

Retained
Earnings

Accum. Other
Comprehensive Income (Loss)

Noncontrolling
Interests

Total

 
 
 
 
 
 
 
 
December 31, 2013
$
6

18,887

(2,602
)
5,622

37

442

22,392

Net income



1,572


6

1,578

Other comprehensive income




40


40

Cash dividends paid on common stock



(229
)


(229
)
Repurchase of common stock


(640
)



(640
)
Share exchange—PSPI transaction


(1,350
)



(1,350
)
Benefit plan activity

45


(3
)


42

Distributions to noncontrolling interests and other





(4
)
(4
)
March 31, 2014
$
6

18,932

(4,592
)
6,962

77

444

21,829

 
 
 
 
 
 
 
 
December 31, 2014
$
6

19,040

(6,234
)
9,309

(531
)
447

22,037

Net income



987


10

997

Other comprehensive loss




(163
)

(163
)
Cash dividends paid on common stock



(272
)


(272
)
Repurchase of common stock


(399
)



(399
)
Benefit plan activity

20


(3
)


17

Issuance of Phillips 66 Partners LP common units





384

384

Distributions to noncontrolling interests and other





(6
)
(6
)
March 31, 2015
$
6

19,060

(6,633
)
10,021

(694
)
835

22,595

 

 
Shares in Thousands
 
Common Stock Issued

Treasury Stock

December 31, 2013
634,286

44,106

Repurchase of common stock

8,410

Share exchange—PSPI transaction

17,423

Shares issued—share-based compensation
1,499


March 31, 2014
635,785

69,939

 
 
 
December 31, 2014
637,032

90,650

Repurchase of common stock

5,643

Shares issued—share-based compensation
893


March 31, 2015
637,925

96,293

See Notes to Consolidated Financial Statements.

5


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

The interim financial information presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2014 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2015, are not necessarily indicative of the results to be expected for the full year.


Note 2—Variable Interest Entities (VIEs)

In 2013, we formed Phillips 66 Partners LP, a master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and natural gas liquids pipelines and terminals, as well as other transportation and midstream assets. We consolidate Phillips 66 Partners as we determined that Phillips 66 Partners is a VIE and we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as well as the ability to direct the activities of Phillips 66 Partners that most significantly impact its economic performance. See Note 20—Phillips 66 Partners LP, for additional information.

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

Merey Sweeny, L.P. (MSLP) is a limited partnership that owns a delayed coker and related facilities at the Sweeny Refinery. As discussed more fully in Note 6—Investments, Loans and Long-Term Receivables, in August 2009, a call right was exercised to acquire the 50 percent ownership interest in MSLP of the co-venturer, Petróleos de Venezuela S.A. (PDVSA). That exercise was challenged, and the dispute has been arbitrated. In April 2014, the arbitral tribunal upheld the exercise of the call right and the acquisition of the 50 percent ownership interest. In July 2014, PDVSA filed a petition to vacate the tribunal’s award. Until this matter is resolved, we will continue to use the equity method of accounting for MSLP, and the VIE analysis below is based on the ownership and governance structure in place prior to the exercise of the call right. MSLP is a VIE because, in securing lender consents in connection with our separation from ConocoPhillips in 2012 (the Separation), we provided a 100 percent debt guarantee to the lender of the 8.85% Senior Notes issued by MSLP. PDVSA did not participate in the debt guarantee. In our VIE assessment, this disproportionate debt guarantee, plus other liquidity support provided jointly by us and PDVSA independently of equity ownership, results in MSLP not being exposed to all potential losses. We have determined we are not the primary beneficiary while our call exercise award is subject to vacatur because under the partnership agreement the co-venturers jointly direct the activities of MSLP that most significantly impact economic performance. At March 31, 2015, our maximum exposure to loss represented the outstanding debt principal balance of $189 million and our investment of $135 million.

We have a 50 percent ownership interest with a 50 percent governance interest in Excel Paralubes (Excel). Excel is a VIE because, in securing lender consents in connection with the Separation, ConocoPhillips provided a 50 percent debt guarantee to the lender of the 7.43% senior secured bonds issued by Excel. We provided a full indemnity to ConocoPhillips for this debt guarantee. Our co-venturer did not participate in the debt guarantee. In our assessment of the VIE, this debt guarantee, plus other liquidity support up to $60 million provided jointly by us and our co-venturer independently of equity ownership, results in Excel not being exposed to all potential losses. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of Excel that most significantly impact economic performance. We use the equity method of accounting for this investment. At March 31, 2015, our maximum exposure to loss represented 50 percent of the outstanding debt principal balance of $58 million, or $29 million, plus half of the $60 million liquidity support, or $30 million. The book value of our investment in Excel at March 31, 2015, was $143 million.


6


In 2013, we entered into a multi-year consignment fuels agreement with a marketer that we supported with debt guarantees. Pursuant to the consignment fuels agreement, we own the fuels inventory, control the fuel marketing at each site, and pay a fixed monthly fee to the marketer. In November 2014, the marketer refinanced its debt which allowed us to remove the debt guarantees in exchange for an extended term on the consignment fuels agreement. We determined the consignment fuels agreement creates a variable interest in the marketer, with the marketer not being exposed to all potential losses as the consignment fuels agreement provides liquidity to the marketer for its debt service costs. We determined we are not the primary beneficiary because we do not have an ownership interest in the marketer or have the power to direct the activities that most significantly impact the economic performance of the marketer. At March 31, 2015, our maximum exposure to loss represented the fixed annual contractual payments under the consignment fuels agreement of approximately $90 million.


Note 3—Inventories

Inventories consisted of the following:

 
Millions of Dollars
 
March 31
2015

 
December 31
2014

 
 
 
 
Crude oil and petroleum products
$
3,911

 
3,141

Materials and supplies
255

 
256

 
$
4,166

 
3,397



Inventories valued on the last-in, first-out (LIFO) basis totaled $3,798 million and $3,004 million at March 31, 2015, and December 31, 2014, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $3,200 million and $3,000 million at March 31, 2015, and December 31, 2014, respectively.

Certain planned year-to-date reductions in inventory caused liquidations of LIFO inventory values. These liquidations decreased net income by approximately $36 million during the three-month period ended March 31, 2015, while the impact to net income during the three-month period ended March 31, 2014, was not material.


Note 4—Business Combinations

We completed the following acquisitions in 2014:

In August 2014, we acquired a 7.1 million-barrel-storage-capacity crude oil and petroleum products terminal located near Beaumont, Texas, to promote growth plans in our Midstream segment.
In July 2014, we acquired Spectrum Corporation, a private label and specialty lubricants business headquartered in Memphis, Tennessee. The acquisition supports our plans to selectively grow stable-return businesses in our Marketing and Specialties (M&S) segment.
In March 2014, we acquired our co-venturer’s interest in an entity that operates a power and steam generation plant located in Texas that is included in our M&S segment. This acquisition provided us with full operational control over a key facility providing utilities and other services to one of our refineries.

We funded each of these acquisitions with cash on hand. Total cash consideration paid in 2014 was $741 million, net of cash acquired. Cash consideration paid for acquisitions is included in the “Capital expenditures and investments” line of our consolidated statement of cash flows. In the aggregate, as of December 31, 2014, we provisionally recorded $471 million of properties, plants and equipment (PP&E), $232 million of goodwill, $196 million of intangible assets, $70 million of net working capital and $109 million of long-term liabilities. Our acquisition accounting for the transactions completed in March 2014 and August 2014 is final. The completion of our acquisition accounting for the July 2014

7


transaction is expected to be finalized in the second quarter of 2015. There were no material measurement period adjustments recorded in the first quarter of 2015.


Note 5—Assets Held for Sale or Sold

In July 2014, we entered into an agreement to sell the Bantry Bay terminal in Ireland, which was included in our Refining segment. Accordingly, the net assets of the terminal were classified as held for sale, which resulted in a before-tax impairment of $12 million from reducing the carrying value of the long-lived assets to estimated fair value less costs to sell. As of December 31, 2014, long-lived assets of $77 million were recorded in the “Prepaid expenses and other current assets” line of our consolidated balance sheet. In addition, an immaterial amount of long-term liabilities were recorded in the “Other accruals” line of our consolidated balance sheet. In February 2015, we completed the sale of the terminal. At the time of the disposition, the terminal had a net carrying value of $68 million, which primarily related to net PP&E. An immaterial gain was recognized on this disposition.

In February 2014, we exchanged the stock of Phillips Specialty Products Inc. (PSPI), a flow improver business, which was included in our M&S segment, for shares of Phillips 66 common stock owned by another party. The PSPI share exchange resulted in the receipt of approximately 17.4 million shares of Phillips 66 common stock, which are held as treasury shares, and the recognition of a before-tax gain of $696 million. At the time of the disposition, PSPI had a net carrying value of $685 million, which primarily included $481 million of cash and cash equivalents, $60 million of net PP&E and $117 million of allocated goodwill. Cash and cash equivalents of $450 million included in PSPI’s net carrying value is reflected as a financing cash outflow in the “Share exchange—PSPI transaction” line of our consolidated statement of cash flows. Revenues, income before-tax and net income from discontinued operations, excluding the recognized before-tax gain of $696 million, were not material for the three-month period ended March 31, 2014.

In July 2013, we completed the sale of the Immingham Combined Heat and Power Plant (ICHP), which was included in our M&S segment. A gain was deferred due to an indemnity provided to the buyer, which expired in April 2015. A portion of the deferred gain is denominated in a foreign currency; accordingly, the amount of the deferred gain translated into U.S. dollars is subject to change based on currency fluctuations. Absent claims under the indemnity, the deferred gain will be recognized into earnings as our exposure under this indemnity declines. As of December 31, 2014, the deferred gain was $243 million. In the first quarter of 2015, we recognized $110 million of the previously deferred gain, which is recorded in the “Net gain on dispositions” line of our consolidated statement of income. As of March 31, 2015, the remaining deferred gain was $132 million, all of which we expect to recognize in the second quarter of 2015.


Note 6—Investments, Loans and Long-Term Receivables

Equity Investments
Summarized 100 percent financial information for WRB Refining LP (WRB) and Chevron Phillips Chemical Company LLC (CPChem) were as follows:
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2015

 
2014

 
 
 
 
Revenues
$
4,906

 
7,998

Income before income taxes
692

 
1,124

Net income
672

 
1,101




8


WRB
WRB is a 50-percent-owned business venture with Cenovus Energy Inc. (Cenovus). Cenovus was obligated to contribute $7.5 billion, plus accrued interest, to WRB over a 10-year period that began in 2007. In the first quarter of 2014, Cenovus prepaid its remaining balance under this obligation. As a result, WRB declared a special dividend, which was distributed to the co-venturers in March 2014. Of the $1,232 million that we received, $760 million was considered a return on our investment in WRB (an operating cash inflow), and $472 million was considered a return of our investment in WRB (an investing cash inflow). The return of investment portion of the dividend was included in the “Proceeds from asset dispositions” line in our consolidated statement of cash flows. At March 31, 2015, the book value of our investment in WRB was $1,898 million and our basis difference was $3,326 million.

Other
In April 2015, Rockies Express Pipeline LLC (REX) repaid $450 million of its debt, reducing its long-term debt to approximately $2.6 billion.  REX funded the repayment through member cash contributions. Our 25 percent share was approximately $112 million, which we contributed to REX in April 2015.

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


Note 7—Properties, Plants and Equipment

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

 
Millions of Dollars
 
March 31, 2015
 
December 31, 2014
 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
Gross
PP&E

 
Accum.
D&A

 
Net
PP&E

 
 
 
 
 
 
 
 
 
 
 
 
Midstream
$
5,337

 
1,209

 
4,128

 
4,726

 
1,185

 
3,541

Chemicals

 

 

 

 

 

Refining
20,126

 
7,558

 
12,568

 
19,951

 
7,424

 
12,527

Marketing and Specialties
1,410

 
702

 
708

 
1,490

 
738

 
752

Corporate and Other
983

 
469

 
514

 
978

 
452

 
526

 
$
27,856

 
9,938

 
17,918

 
27,145

 
9,799

 
17,346






9


Note 8—Earnings Per Share

The numerator of basic earnings per share (EPS) is net income attributable to Phillips 66, reduced by noncancelable dividends paid on unvested share-based employee awards during the vesting period (participating securities). The denominator of basic EPS is the sum of the daily weighted-average number of common shares outstanding during the periods presented and fully vested stock and unit awards that have not yet been issued as common stock. The numerator of diluted EPS is also based on net income attributable to Phillips 66, which is reduced only by dividend equivalents paid on participating securities for which the dividends are more dilutive than the participation of the awards in the earnings of the periods presented. To the extent unvested stock, unit or option awards and vested unexercised stock options are dilutive, they are included with the weighted-average common shares outstanding in the denominator. Treasury stock is excluded from the denominator in both basic and diluted EPS.
  
 
Three Months Ended
March 31
 
2015
 
2014
 
Basic

Diluted

 
Basic

Diluted

Amounts attributed to Phillips 66 Common Stockholders (millions):
 
 
 
 
 
Income from continuing operations attributable to Phillips 66
$
987

987

 
866

866

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

Income from continuing operations available to common stockholders
985

986

 
865

866

Discontinued operations


 
706

706

Net Income available to common stockholders
$
985

986

 
1,571

1,572

 
 
 
 
 
 
Weighted-average common shares outstanding (thousands):
543,469

548,200

 
580,027

584,053

Effect of stock-based compensation
4,731

4,137

 
4,026

5,522

Weighted-average common shares outstanding—EPS
548,200

552,337

 
584,053

589,575

 
 
 
 
 
 
Earnings Per Share of Common Stock (dollars):
 
 
 
 
 
Income from continuing operations attributable to Phillips 66
$
1.80

1.79

 
1.48

1.47

Discontinued operations


 
1.21

1.20

Earnings Per Share
$
1.80

1.79

 
2.69

2.67



10


Note 9—Debt

In March 2015, we repaid $800 million of 1.95% Senior Notes upon maturity.

Debt Issuance
During February 2015, Phillips 66 Partners closed on a public offering of $1.1 billion aggregate principal amount of unsecured senior notes, consisting of:

$300 million aggregate principal amount of 2.646% Senior Notes due 2020.
$500 million aggregate principal amount of 3.605% Senior Notes due 2025.
$300 million aggregate principal amount of 4.680% Senior Notes due 2045.

Phillips 66 Partners utilized a portion of the net proceeds to fund part of the purchase price for its acquisition of our equity interests in Explorer Pipeline Company, DCP Sand Hills Pipeline, LLC, and DCP Southern Hills Pipeline, LLC. The remaining proceeds were used to repay existing borrowings from a subsidiary of Phillips 66, fund capital expenditures and for general partnership purposes. See Note 20—Phillips 66 Partners LP, for additional information.

Credit Facilities
At both March 31, 2015, and December 31, 2014, we had no direct outstanding borrowings under our $5 billion revolving credit agreement, while $51 million in letters of credit had been issued that were supported by it. At March 31, 2015, and December 31, 2014, no amount and $18 million, respectively, were outstanding under the $500 million revolving credit agreement of Phillips 66 Partners. Accordingly, as of March 31, 2015, an aggregate $5.4 billion of total capacity was available under these facilities.


Note 10—Guarantees

At March 31, 2015, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence.

Guarantees of Joint Venture Debt
In 2012, in connection with the Separation, we issued a guarantee for 100 percent of the 8.85% Senior Notes issued by MSLP in July 1999. At March 31, 2015, the maximum potential amount of future payments to third parties under the guarantee was estimated to be $189 million, which could become payable if MSLP fails to meet its obligations under the senior notes agreement. The senior notes mature in 2019.

Other Guarantees
We have residual value guarantees associated with leases with maximum future potential payments totaling $361 million. We have other guarantees with maximum future potential payment amounts totaling $123 million, which consist primarily of guarantees to fund the short-term cash liquidity deficits of certain joint ventures and guarantees of the lease payment obligations of a joint venture. These guarantees generally extend up to 9 years or life of the venture.


11


Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses, supply arrangements, and employee claims; and real estate indemnity against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues with generally indefinite terms, and the maximum amount of future payments is generally unlimited. The carrying amount recorded for indemnifications at March 31, 2015, was $216 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the recorded carrying amount were $102 million of environmental accruals for known contamination that were included in asset retirement obligations and accrued environmental costs at March 31, 2015. For additional information about environmental liabilities, see Note 11—Contingencies and Commitments.

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


Note 11—Contingencies and Commitments

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

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

12


Environmental
We are subject to international, federal, state and local environmental laws and regulations. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using all information available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable.

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

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At March 31, 2015, our total environmental accrual was $480 million, compared with $496 million at December 31, 2014. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

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

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

At March 31, 2015, we had performance obligations secured by letters of credit and bank guarantees of $665 million (of which $51 million was issued under the provisions of our revolving credit facility, and the remainder was issued as direct bank letters of credit and bank guarantees) related to various purchase and other commitments incident to the ordinary conduct of business.



13


Note 12—Derivatives and Financial Instruments

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

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

Commodity Derivative Contracts—We operate in the worldwide crude oil, refined products, NGL, natural gas and electric power markets and are exposed to fluctuations in the prices for these commodities. These fluctuations can affect our revenues, as well as the cost of operating, investing and financing activities. Generally, our policy is to remain exposed to the market prices of commodities; however, we use futures, forwards, swaps and options in various markets to balance physical systems, meet customer needs, manage price exposures on specific transactions, and do a limited, immaterial amount of trading not directly related to our physical business. We also use the market knowledge gained from these activities to capture market opportunities such as moving physical commodities to more profitable locations, storing commodities to capture seasonal or time premiums, and blending commodities to capture quality upgrades. Derivatives may be used to optimize these activities, which may move our risk profile away from market average prices.

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

 
Millions of Dollars
 
March 31
2015

 
December 31
2014

Assets
 
 
 
Accounts and notes receivable
$

 
(1
)
Prepaid expenses and other current assets
1,989

 
3,839

Other assets
36

 
29

Liabilities
 
 
 
Other accruals
1,776

 
3,472

Other liabilities and deferred credits
11

 
1

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



14


The gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of income, were:
 
 
Millions of Dollars
 
Three Months Ended
March 31
 
2015

 
2014

 
 
 
 
Sales and other operating revenues
$
(31
)
 
57

Other income
43

 
14

Purchased crude oil and products
20

 
2

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


The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from non-derivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward sales contracts. As of March 31, 2015, and December 31, 2014, the percentages of our derivative contract volume expiring within the next 12 months were approximately 98 percent and 99 percent, respectively.
 
Open Position
Long/(Short)
 
March 31
2015

 
December 31
2014

Commodity
 
 
 
Crude oil, refined products and NGL (millions of barrels)
(23
)
 
(11
)


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

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

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

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


15


The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were not material at March 31, 2015, or December 31, 2014.


Note 13—Fair Value Measurements

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

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

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

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

We classify the fair value of an asset or liability based on the lowest level of input significant to its measurement; however, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable. We made no material transfers in or out of Level 1 during the three-month periods ended March 31, 2015 and 2014.

Recurring Fair Value Measurements
Financial assets and liabilities recorded at fair value on a recurring basis consist primarily of investments to support nonqualified deferred compensation plans and derivative instruments. The deferred compensation investments are measured at fair value using unadjusted prices available from national securities exchanges; therefore, these assets are categorized as Level 1 in the fair value hierarchy. We value our exchange-traded commodity derivatives using closing prices provided by the exchange as of the balance sheet date, and these are also classified as Level 1 in the fair value hierarchy. When exchange-cleared contracts lack sufficient liquidity or are valued using either adjusted exchange-provided prices or non-exchange quotes, we classify those contracts as Level 2. OTC financial swaps and physical commodity forward purchase and sales contracts are generally valued using quotations provided by brokers and price index developers such as Platts and Oil Price Information Service. We corroborate these quotes with market data and classify the resulting fair values as Level 2. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, OTC swaps and physical commodity purchase and sales contracts are valued using internally developed methodologies that consider historical relationships among various commodities that

16


result in management’s best estimate of fair value. We classify these contracts as Level 3. Financial OTC and physical commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines whether the options are classified as Level 2 or 3. We use a mid-market pricing convention (the mid-point between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.

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

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

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

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

Effect of Counterparty Netting

Effect of Collateral Netting

Difference in Carrying Value and Fair Value

Net Carrying Value Presented on the Balance Sheet

Cash Collateral Received or Paid, Not Offset on Balance Sheet

 
Level 1

 
Level 2

 
Level 3

Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
1,146

 
796

 

 
1,942

(1,734
)
(101
)

107


OTC instruments

 
10

 

 
10

(6
)


4


Physical forward contracts*

 
72

 
1

 
73




73


Rabbi trust assets
83

 

 

 
83

N/A

N/A


83

N/A

 
$
1,229

 
878

 
1

 
2,108

(1,740
)
(101
)

267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
1,159

 
575

 

 
1,734

(1,734
)




OTC instruments

 
12

 

 
12

(6
)


6


Physical forward contracts*

 
41

 

 
41




41


Floating-rate debt
50

 

 

 
50

N/A

N/A


50

N/A

Fixed-rate debt, excluding capital leases**

 
9,410

 

 
9,410

N/A

N/A

(711
)
8,699

N/A

 
$
1,209

 
10,038

 

 
11,247

(1,740
)

(711
)
8,796


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



17


 
Millions of Dollars
 
December 31, 2014
 
Fair Value Hierarchy
 
Total Fair Value of Gross Assets & Liabilities

Effect of Counterparty Netting

Effect of Collateral Netting

Difference in Carrying Value and Fair Value

Net Carrying Value Presented on the Balance Sheet

Cash Collateral Received or Paid, Not Offset on Balance Sheet

 
Level 1

 
Level 2

 
Level 3

 
Commodity Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
2,058

 
1,525

 

 
3,583

(3,255
)
(225
)

103


OTC instruments

 
24

 

 
24

(14
)


10


Physical forward contracts*

 
253

 
7

 
260

(38
)


222


Rabbi trust assets
76

 

 

 
76

N/A

N/A


76

N/A

 
$
2,134

 
1,802

 
7

 
3,943

(3,307
)
(225
)

411



 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Exchange-cleared instruments
$
1,833

 
1,422

 

 
3,255

(3,255
)




OTC instruments

 
29

 

 
29

(14
)


15


Physical forward contracts*

 
189

 

 
189

(38
)


151


Floating-rate debt
68

 

 

 
68

N/A

N/A


68

N/A

Fixed-rate debt, excluding capital leases**

 
8,806

 

 
8,806

N/A

N/A

(400
)
8,406

N/A

 
$
1,901

 
10,446

 

 
12,347

(3,307
)

(400
)
8,640


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


The values presented in the preceding tables appear on our balance sheet as follows: for commodity derivative assets and liabilities, see the first table in Note 12—Derivatives and Financial Instruments; rabbi trust assets appear in the “Investments and long-term receivables” line; and floating-rate and fixed-rate debt appear in the “Short-term debt” and “Long-term debt” lines.
 

Note 14—Employee Benefit Plans

Pension and Postretirement Plans
The components of net periodic benefit cost for the three months ended March 31, 2015 and 2014, were as follows:
 
 
Millions of Dollars
 
Pension Benefits
 
Other Benefits
 
2015
 
2014
 
2015

 
2014

 
U.S.

 
Int’l.

 
U.S.

 
Int’l.

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

 
10

 
30

 
10

 
2

 
2

Interest cost
27

 
7

 
27

 
9

 
2

 
2

Expected return on plan assets
(35
)
 
(10
)
 
(36
)
 
(9
)
 

 

Amortization of prior service cost (credit)
1

 

 
1

 
(1
)
 

 

Recognized net actuarial loss (gain)
19

 
4

 
10

 
3

 

 
(1
)
Settlements
1

 

 

 

 

 

Net periodic benefit cost
$
44


11


32


12


4


3



18


During the first three months of 2015, we contributed $3 million to our U.S. plans and $14 million to our international plans. We currently expect to make additional contributions of approximately $60 million to our U.S. plans and $45 million to our international plans during the remainder of 2015.


Note 15—Accumulated Other Comprehensive Income (Loss)

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

 
Foreign Currency Translation

 
Hedging

 
Accumulated Other Comprehensive Income (Loss)

 
 
 
 
 
 
 
 
December 31, 2013
$
(404
)
 
443

 
(2
)
 
37

Other comprehensive income before reclassifications
2

 
30

 

 
32

Amounts reclassified from accumulated other comprehensive income (loss)*
 
 
 
 
 
 
 
Amortization of defined benefit plan items**
 
 
 
 
 
 
 
Actuarial losses
8

 

 

 
8

Net current period other comprehensive income
10

 
30

 

 
40

March 31, 2014
$
(394
)
 
473

 
(2
)
 
77

 
 
 
 
 
 
 
 
December 31, 2014
$
(696
)
 
167

 
(2
)
 
(531
)
Other comprehensive income (loss) before reclassifications
3

 
(188
)
 

 
(185
)
Amounts reclassified from accumulated other comprehensive income (loss)*
 
 
 
 
 
 


Amortization of defined benefit plan items**
 
 
 
 
 
 
 
Actuarial losses and settlements
22

 

 

 
22

Net current period other comprehensive income (loss)
25

 
(188
)
 

 
(163
)
March 31, 2015
$
(671
)
 
(21
)
 
(2
)
 
(694
)
* There were no significant reclassifications related to foreign currency translation or hedging.
** These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost (see Note 14—Employee Benefit Plans, for additional information).


Note 16—Cash Flow Information

PSPI Noncash Stock Exchange
As discussed more fully in Note 5—Assets Held for Sale or Sold, in February 2014 we completed the exchange of the stock of PSPI for shares of Phillips 66 common stock owned by the other party to the transaction. The noncash portion of the net assets surrendered by us in the exchange was $204 million, and we received approximately 17.4 million shares of our common stock, with a fair value at the time of the exchange of $1.35 billion.


19


Note 17—Related Party Transactions

Significant transactions with related parties were:

 
Millions of Dollars
 
Three Months Ended
March 31
 
2015

 
2014

 
 
 
 
Operating revenues and other income (a)
$
617

 
2,067

Purchases (b)
1,948

 
3,991

Operating expenses and selling, general and administrative expenses (c)
31

 
35

Interest expense (d)
2

 
2



In December 2014, we completed the sale of our interest in the Malaysian Refining Company Sdn. Bdh. (MRC). Accordingly, sales of crude oil to MRC and purchases of refined products from MRC are only included in the 2014 period in the table above.

(a)
NGL and other petrochemical feedstocks, along with solvents, were sold to CPChem, and gas oil and hydrogen feedstocks were sold to Excel. Certain feedstocks and intermediate products were sold to WRB. We also acted as agent for WRB in supplying crude oil and other feedstocks, wherein the transactional amounts did not impact operating revenues. In addition, we charged several of our affiliates, including CPChem and MSLP, for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities.

(b)
We purchased refined products from WRB. We also acted as agent for WRB in distributing asphalt and solvents, wherein the transactional amounts did not impact purchases. We purchased natural gas and NGL from DCP Midstream, LLC (DCP Midstream) and CPChem for use in our refinery processes and other feedstocks from various affiliates. We also paid fees to various pipeline equity companies for transporting finished refined products. In addition, we paid a price upgrade to MSLP for heavy crude processing. We purchased base oils and fuel products from Excel for use in our refining and specialty businesses.

(c)
We paid utility and processing fees to various affiliates.

(d)
We incurred interest expense on a note payable to MSLP.


20


Note 18—Segment Disclosures and Related Information

Our operating segments are:

1)
Midstream—Gathers, processes, transports and markets natural gas; and transports, fractionates and markets NGL in the United States. In addition, this segment transports crude oil and other feedstocks to our refineries and other locations, delivers refined and specialty products to market, and provides storage services for crude oil and petroleum products. The Midstream segment includes, among other businesses, our 50 percent equity investment in DCP Midstream and our investment in Phillips 66 Partners.

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

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

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

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

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




21


Analysis of Results by Operating Segment

 
Millions of Dollars
 
Three Months Ended
March 31
 
2015

2014

Sales and Other Operating Revenues
 
 
Midstream
 
 
Total sales
$
969

2,155

Intersegment eliminations
(254
)
(292
)
Total Midstream
715

1,863

Chemicals
2

2

Refining
 
 
Total sales
14,271

29,215

Intersegment eliminations
(8,756
)
(17,558
)
Total Refining
5,515

11,657

Marketing and Specialties
 
 
Total sales
16,748

27,046

Intersegment eliminations
(211
)
(292
)
Total Marketing and Specialties
16,537

26,754

Corporate and Other
9

7

Consolidated sales and other operating revenues
$
22,778

40,283

 
 
 
Net Income (Loss) Attributable to Phillips 66
 
 
Midstream
$
67

188

Chemicals
203

316

Refining
538

306

Marketing and Specialties
304

137

Corporate and Other
(125
)
(81
)
Discontinued operations

706

Consolidated net income attributable to Phillips 66
$
987

1,572



 
Millions of Dollars
 
March 31
2015

 
December 31
2014

Total Assets
 
 
 
Midstream
$
7,847

 
7,295

Chemicals
5,469

 
5,209

Refining
23,040

 
22,808

Marketing and Specialties
6,461

 
7,051

Corporate and Other
6,260

 
6,378

Consolidated total assets
$
49,077

 
48,741




22


Note 19—Income Taxes

Our effective tax rate for the first quarter of 2015 was 28 percent, compared with 33 percent for the corresponding period of 2014. The decrease in the effective tax rate for the first quarter of 2015, compared with the first quarter of 2014, was primarily attributable to a favorable tax settlement in the United Kingdom and the recognition of a nontaxable gain associated with the sale of ICHP. For additional information on the nontaxable gain, see Note 5—Assets Held for Sale or Sold. The effective tax rate varies from the federal statutory tax rate of 35 percent primarily as a result of state tax expense, offset by the manufacturing deduction and foreign operations.


Note 20—Phillips 66 Partners LP

In 2013, we formed Phillips 66 Partners, a master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and NGL pipelines and terminals, as well as other transportation and midstream assets.
On March 2, 2015, we contributed to Phillips 66 Partners our equity interests in Explorer Pipeline Company (19.5 percent), DCP Sand Hills Pipeline, LLC (33.3 percent), and DCP Southern Hills Pipeline, LLC (33.3 percent). We account for each of these investments under the equity method of accounting. The total consideration for the transaction was $1,010 million, which consisted of $880 million in cash and the issuance of common units and general partner units to us with an aggregate fair value of $130 million.
On February 23, 2015, Phillips 66 Partners completed a public offering of 5,250,000 common units representing limited partner interests, at a public offering price of $75.50 per unit. The net proceeds at closing were $384 million. Additionally, Phillips 66 Partners closed a public offering of $1.1 billion aggregate principal amount of senior notes. For additional information about the senior notes, see Note 9—Debt.
Phillips 66 Partners used the net proceeds of both offerings to fund the acquisition transaction discussed above and repay existing borrowings from a subsidiary of Phillips 66. The remainder is expected to be used for capital expenditures and for general partnership purposes.
At March 31, 2015, we owned a 69 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, while the public owned a 29 percent limited partner interest. We consolidate Phillips 66 Partners because we control the partnership through our general partner interest (see Note 2—Variable Interest Entities (VIEs), for additional information). The public’s ownership interest in Phillip’s 66 Partners was $801 million at March 31, 2015, and is reflected as a noncontrolling interest in our financial statements. The most significant assets of Phillips 66 Partners that are available to settle only its obligations were equity investments of $801 million and net PP&E of $465 million at March 31, 2015.


Note 21—New Accounting Standards

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and quarterly reporting periods of public entities beginning after December 15, 2015, applied on a retrospective basis. Early adoption is permitted for financial statements that have not been previously issued. We currently have debt issuance costs included as deferred charges in our balance sheet, which will be reclassified as a reduction of debt when we adopt ASU 2015-03.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new standard converged guidance on recognizing revenues in contracts with customers under accounting principles generally accepted in the United States and International Financial Reporting Standards. This ASU is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. ASU 2014-09 is effective for annual and quarterly reporting periods of public entities beginning after December 15, 2016. Early application for public entities is not permitted. In April 2015, the FASB issued for comment an exposure draft, “Revenue

23


Recognition - Deferral of the Effective Date of ASU 2014-09,” which will delay implementation for one year. We are currently evaluating the provisions of ASU 2014-09 and assessing the impact, if any, it may have on our financial position and results of operations.


Note 22—Condensed Consolidating Financial Information

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

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

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

24


 
Millions of Dollars
 
Three Months Ended March 31, 2015
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

15,587

7,191


22,778

Equity in earnings of affiliates
1,052

722

49

(1,367
)
456

Net gain on dispositions

(5
)
127


122

Other income

59

11


70

Intercompany revenues

140

2,149

(2,289
)

Total Revenues and Other Income
1,052

16,503

9,527

(3,656
)
23,426

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

12,277

6,673

(2,255
)
16,695

Operating expenses
4

874

230

(14
)
1,094

Selling, general and administrative expenses
2

292

101

(1
)
394

Depreciation and amortization

194

59


253

Impairments





Taxes other than income taxes

1,381

2,081


3,462

Accretion on discounted liabilities

4

1


5

Interest and debt expense
93

6

6

(19
)
86

Foreign currency transaction losses


49


49

Total Costs and Expenses
99

15,028

9,200

(2,289
)
22,038

Income from continuing operations before income taxes
953

1,475

327

(1,367
)
1,388

Provision (benefit) for income taxes
(34
)
423

2


391

Income from Continuing Operations
987

1,052

325

(1,367
)
997

Income from discontinued operations





Net income
987

1,052

325

(1,367
)
997

Less: net income attributable to noncontrolling interests


10


10

Net Income Attributable to Phillips 66
$
987

1,052

315

(1,367
)
987

 
 
 
 
 
 
Comprehensive Income
$
824

889

149

(1,028
)
834




25


 
Millions of Dollars
 
Three Months Ended March 31, 2014
Statement of Income
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Revenues and Other Income
 
 
 
 
 
Sales and other operating revenues
$

27,239

13,044


40,283

Equity in earnings of affiliates
922

738

178

(1,060
)
778

Net gain on dispositions


7


7

Other income

22

9


31

Intercompany revenues

376

4,603

(4,979
)

Total Revenues and Other Income
922

28,375

17,841

(6,039
)
41,099

 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
Purchased crude oil and products

24,384

14,938

(4,941
)
34,381

Operating expenses
2

893

201

(6
)
1,090

Selling, general and administrative expenses
3

286

138

(25
)
402

Depreciation and amortization

180

54


234

Impairments

1



1

Taxes other than income taxes

1,301

2,337


3,638

Accretion on discounted liabilities

5

1


6

Interest and debt expense
66

4

5

(7
)
68

Foreign currency transaction losses (gains)


(19
)

(19
)
Total Costs and Expenses
71

27,054

17,655

(4,979
)
39,801

Income from continuing operations before income taxes
851

1,321

186

(1,060
)
1,298

Provision (benefit) for income taxes
(25
)
399

52


426

Income from Continuing Operations
876

922

134

(1,060
)
872

Income from discontinued operations*
696


10


706

Net income
1,572

922

144

(1,060
)
1,578

Less: net income attributable to noncontrolling interests


6


6

Net Income Attributable to Phillips 66
$
1,572

922

138

(1,060
)
1,572

 
 
 
 
 
 
Comprehensive Income
$
1,612

962

176

(1,132
)
1,618

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


5


5




26


 
Millions of Dollars
 
March 31, 2015
Balance Sheet
Phillips 66

Phillips 66 Company

All Other Subsidiaries

Consolidating Adjustments

Total Consolidated

Assets
 
 
 
 
 
Cash and cash equivalents
$

1,686

3,704


5,390

Accounts and notes receivable
26

3,761

2,424

(474
)
5,737

Inventories

2,637

1,529


4,166

Prepaid expenses and other current assets
9

499

343


851

Total Current Assets
35

8,583

8,000

(474
)
16,144

Investments and long-term receivables
31,029

20,428

5,332

(46,260
)
10,529

Net properties, plants and equipment

12,369

5,549