10-K 1 psx-20171231_10k.htm 10-K Document

2017
 
UNITED STATES
 
 
SECURITIES AND EXCHANGE COMMISSION
 
 
Washington, D.C. 20549
 
 
FORM 10-K
 
(Mark One)
 
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended
December 31, 2017
 
 
OR
 
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from
 
to
 
 
 
Commission file number: 001-35349
 
 
Phillips 66
 
 
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
45-3779385
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
2331 CityWest Blvd., Houston, Texas 77042
 
 
(Address of principal executive offices) (Zip Code)
 
 
Registrant’s telephone number, including area code: 281-293-6600
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
Name of each exchange on which registered
 
 
Common Stock, $0.01 Par Value
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[X] Yes [ ] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [X] No
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.
[X] Yes [ ] 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).
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
             [X]
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 [ ]
 
  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 Act).
[ ] Yes [X] No
The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $82.69, was $42.3 billion. The registrant, solely for the purpose of this required presentation, had deemed its Board of Directors and executive officers to be affiliates, and deducted their stockholdings in determining the aggregate market value.
The registrant had 501,237,339 shares of common stock outstanding at January 31, 2018.
Documents incorporated by reference:
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 2018 (Part III).



TABLE OF CONTENTS
Item
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 



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.

This Annual Report on Form 10-K contains forward-looking statements including, without limitation, statements relating to our 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 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.”


PART I

Items 1 and 2. BUSINESS AND PROPERTIES


CORPORATE STRUCTURE

Phillips 66, headquartered in Houston, Texas, was incorporated in Delaware in 2011 in connection with, and in anticipation of, a restructuring of ConocoPhillips that separated its downstream businesses into an independent, publicly traded company named Phillips 66. The two companies were separated by ConocoPhillips distributing to its stockholders all the shares of common stock of Phillips 66 after the market closed on April 30, 2012 (the Separation). Phillips 66 stock trades on the New York Stock Exchange under the “PSX” stock symbol.

Our business is organized into four operating segments:

1)
Midstream—Provides crude oil and refined products transportation, terminaling and processing services, as well as natural gas, natural gas liquids (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 LP (Phillips 66 Partners), as well as our 50 percent equity investment in DCP Midstream, LLC (DCP Midstream).

2)
Chemicals—Consists of our 50 percent equity investment in Chevron Phillips Chemical Company LLC (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 (such as base oils and lubricants), as well as power generation operations.

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

At December 31, 2017, Phillips 66 had approximately 14,600 employees.


1


SEGMENT AND GEOGRAPHIC INFORMATION

For operating segment and geographic information, see Note 26—Segment Disclosures and Related Information, in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.


MIDSTREAM

The Midstream segment consists of three business lines:

Transportation—Transports crude oil and other feedstocks to our refineries and other locations, delivers refined products to market, and provides terminaling and storage services for crude oil and petroleum products.

NGL and Other—Transports, stores, fractionates and markets NGL in the United States, exports LPG and provides other fee-based processing services.

DCP Midstream—Gathers, processes, transports and markets natural gas and transports, fractionates and markets NGL.

Phillips 66 Partners
In 2013, we formed Phillips 66 Partners, an MLP, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum products and NGL pipelines and terminals, as well as other midstream assets. At December 31, 2017, 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.

Headquartered in Houston, Texas, Phillips 66 Partners’ assets and equity investments currently consist of crude oil, refined petroleum products and NGL transportation, terminaling and storage systems, as well as crude oil and NGL processing facilities, that are geographically dispersed throughout the United States. The majority of Phillips 66 Partners’ assets are integral to Phillips 66-operated refineries.

During 2017, Phillips 66 Partners expanded its business by acquiring from us:

A 25 percent interest in both Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO), which collectively own the Bakken Pipeline.

A 100 percent interest in Merey Sweeny, L.P. (MSLP), a limited partnership that owns a delayed coker and performs crude oil processing at our Sweeny Refinery.

This acquisition closed in October 2017. See Note 27—Phillips 66 Partners LP, in the Notes to the Consolidated Financial Statements, for more information on this transaction.

The operations and financial results of Phillips 66 Partners are included in Midstream’s Transportation and NGL and Other business lines, based on the nature of the activity within the partnership.

Transportation

We own or lease various assets to provide terminaling and storage of crude oil, refined products, natural gas and NGL. These assets include pipeline systems; petroleum products, crude oil and LPG terminals; a petroleum coke handling facility; marine vessels; railcars and trucks.

Pipelines and Terminals
At December 31, 2017, our Transportation business managed over 21,000 miles of crude oil, natural gas, NGL and petroleum product pipeline systems in the United States, including those partially owned or operated by affiliates. We owned or operated 40 finished product terminals, 38 storage locations, 5 LPG terminals, 19 crude oil terminals and 1 petroleum coke exporting facility.


2


The Beaumont Terminal in Nederland, Texas, is the largest terminal in the Phillips 66 portfolio. During 2017, we continued to invest in the terminal by adding 0.9 million barrels of crude storage capacity and 1.3 million barrels of products storage. At December 31, 2017, including these additions, the terminal capacity was 11.1 million barrels, of which 7.4 million barrels was crude oil storage capacity and 3.7 million barrels was refined product storage capacity. We have 3.5 million barrels of incremental crude storage capacity under construction that will be commissioned throughout 2018. In addition, during the fourth quarter of 2017, we completed expansion of the terminal’s export facilities from 400,000 to 600,000 barrels per day (BPD). We have also initiated a variety of other projects aimed at increasing storage and throughput capabilities as we continue the expansion of the Beaumont terminal to 16 million barrels.

The Bakken Pipeline went into commercial service in June 2017.  The pipeline is approximately 1,915 miles long with an estimated capacity of 525,000 BPD at December 31, 2017. Phillips 66 Partners has a 25 percent interest in the Bakken Pipeline, through its 25 percent interests in both the Dakota Access and ETCO joint ventures. Energy Transfer Partners, L.P. (ETP) and MarEn Bakken Company LLC also have 38.25 percent and 36.75 percent interests, respectively, in the Bakken Pipeline, with ETP serving as the operator.  The Dakota Access section of the Bakken Pipeline is approximately 1,172 miles long and delivers crude oil from the Bakken/Three Forks production area in North Dakota to a storage and terminaling hub outside of Patoka, Illinois, which includes an interconnection with the ETCO pipeline.  The ETCO pipeline section of the Bakken Pipeline is approximately 743 miles long and transports crude oil from the Midwest to Phillips 66 and ETP storage terminals located in Nederland, Texas.

The Bayou Bridge Pipeline joint venture delivers crude oil from Nederland, Texas, to Lake Charles, Louisiana. At December 31, 2017, this pipeline had capacity of approximately 480,000 BPD. Phillips 66 Partners has a 40 percent interest in the joint venture, and ETP has a 60 percent interest and serves as the operator. The remaining section of the pipeline, which is being constructed, will deliver crude oil from Lake Charles to St. James, Louisiana, and is expected to be completed in the second half of 2018.

The Sacagawea Pipeline is owned by the joint venture Sacagawea Pipeline Company, LLC, in which Paradigm Pipeline LLC holds a 99 percent interest. Phillips 66 Partners and Paradigm Energy Partners, LLC each own a 50 percent interest in Paradigm Pipeline LLC. In August 2017, a new origin point on the Sacagawea Pipeline near New Town, North Dakota, was established, enabling crude to flow from this origin point to the Bakken Pipeline at Johnson’s Corner, Keene Terminal, Palermo Terminal, and North Dakota Pipeline at Stanley, North Dakota.

Phillips 66 Partners and Plains All American Pipeline, L.P. each own a 50 percent interest in the STACK Pipeline LLC joint venture, which owns and operates a crude oil storage terminal and a common carrier pipeline that transports crude oil from the Sooner Trend, Anadarko Basin, Canadian and Kingfisher Counties (STACK) play in northwestern Oklahoma to Cushing, Oklahoma. During the fourth quarter of 2017, this joint venture completed an expansion project to loop the existing pipeline and extend further into the STACK play, which increased capacity by 150,000 BPD.

3


The following table depicts our ownership interest in major pipeline systems as of December 31, 2017:
Name
 
Origination/Terminus
 
Interest

 
Size
 
Length
(Miles)

 
Gross Capacity
(MBD)

Crude and Feedstocks
 
 
 
 
 
 
 
 
 
 
Bakken Pipeline †
 
North Dakota/Nederland, TX

 
25
%
 
30”
 
1,915

 
525

Bayou Bridge †
 
Nederland, TX/Lake Charles, LA
 
40

 
30”
 
49

 
480

Clifton Ridge †
 
Clifton Ridge, LA/Westlake, LA
 
100

 
20”
 
10

 
260

Cushing †
 
Cushing, OK/Ponca City, OK
 
100

 
18”
 
62

 
130

Eagle Ford Gathering †
 
Helena, TX
 
100

 
6”
 
6

 
20

Eagle Ford Gathering †
 
Tilden, TX/Whitsett, TX
 
100

 
6”-10”
 
22

 
34

Glacier †
 
Cut Bank, MT/Billings, MT
 
79

 
8”-12”
 
865

 
126

Line O †
 
Cushing, OK/Borger, TX
 
100

 
10”
 
276

 
37

Line 80 †
 
Gaines, TX/Borger, TX
 
100

 
8”, 12”
 
237

 
28

Line 100
 
Taft, CA/Lost Hills, CA
 
100

 
8”, 10”, 12”
 
79

 
54

Line 200
 
Lost Hills, CA/Rodeo, CA
 
100

 
12”, 16”
 
228

 
93

Line 300
 
Nipomo, CA/Arroyo Grande, CA
 
100

 
8”, 10”, 12”
 
69

 
48

Line 400
 
Arroyo Grande, CA/Lost Hills, CA
 
100

 
8”, 10”, 12”
 
147

 
40

Louisiana Crude Gathering
 
Rayne, LA/Westlake, LA
 
100

 
4”-8”
 
80

 
25

North Texas Crude †
 
Wichita Falls, TX
 
100

 
2”-16”
 
224

 
28

Oklahoma Mainline †
 
Wichita Falls, TX/Ponca City, OK
 
100

 
12”
 
217

 
100

Sacagawea †
 
Keene, ND/Stanley, ND
 
50

 
16”
 
95

 
175

STACK PL †
 
Cashion, OK/Cushing, OK
 
50

 
8”-16”
 
149

 
250

Sweeny Crude
 
Sweeny, TX/Freeport, TX
 
100

 
12”, 24”, 30”
 
56

 
265

WA Line †
 
Odessa, TX/Borger, TX
 
100

 
12”, 14”
 
289

 
104

West Texas Gathering †
 
Permian Basin
 
100

 
4”-14”
 
757

 
115

Petroleum Products
 
 
 
 
 
 
 
 
 
 
ATA Line †
 
Amarillo, TX/Albuquerque, NM
 
50

 
6”, 10”
 
293

 
34

Borger to Amarillo †
 
Borger, TX/Amarillo, TX
 
100

 
8”, 10”
 
93

 
76

Borger-Denver
 
McKee, TX/Denver, CO
 
70

 
6”-12”
 
405

 
38

Cherokee East †
 
Medford, OK/Mount Vernon, MO
 
100

 
10”, 12”
 
287

 
55

Cherokee North †
 
Ponca City, OK/Arkansas City, KS
 
100

 
10”
 
29

 
57

Cherokee South †
 
Ponca City, OK/Oklahoma City, OK
 
100

 
8”
 
90

 
46

Cross Channel Connector †
 
Pasadena, TX/Galena Park, TX
 
100

 
20”
 
5

 
180

Explorer †
 
Texas Gulf Coast/Chicago, IL
 
22

 
24”, 28”
 
1,830

 
660

Gold Line †
 
Borger, TX/East St. Louis, IL
 
100

 
8”-16”
 
681

 
120

Harbor
 
Woodbury, NJ/Linden, NJ
 
33

 
16”
 
80

 
171

Heartland*
 
McPherson, KS/Des Moines, IA
 
50

 
8”, 6”
 
49

 
30

LAX Jet Line
 
Wilmington, CA/Los Angeles, CA
 
50

 
8”
 
19

 
50

Los Angeles Products
 
Torrance, CA/Los Angeles, CA
 
100

 
6”, 12”
 
22

 
112

Paola Products †
 
Paola, KS/Kansas City, KS
 
100

 
8”, 10”
 
106

 
96

Pioneer
 
Sinclair, WY/Salt Lake City, UT
 
50

 
8”, 12”
 
562

 
63

Richmond
 
Rodeo, CA/Richmond, CA
 
100

 
6”
 
14

 
26

SAAL †
 
Amarillo, TX/Abernathy, TX
 
33

 
6”
 
102

 
33

SAAL †
 
Abernathy, TX/Lubbock, TX
 
54

 
6”
 
19

 
30

Seminoe †
 
Billings, MT/Sinclair, WY
 
100

 
6”-10”
 
342

 
33

Standish †
 
Marland Junction, OK/Wichita, KS
 
100

 
18”
 
92

 
72

Sweeny to Pasadena †
 
Sweeny, TX/Pasadena, TX
 
100

 
12”, 18”
 
120

 
294

Torrance Products
 
Wilmington, CA/Torrance, CA
 
100

 
10”, 12”
 
8

 
161

Watson Products Line
 
Wilmington, CA/Long Beach, CA
 
100

 
20”
 
9

 
238

Yellowstone
 
Billings, MT/Moses Lake, WA
 
46

 
6”-10”
 
710

 
66


4


Name
 
Origination/Terminus
 
Interest

 
Size
 
Length (Miles)

 
Gross Capacity
(MBD)

NGL
 
 
 
 
 
 
 
 
 
 
Chisholm
 
Kingfisher, OK/Conway, KS
 
50
%
 
4”-10”
 
202

 
42

Powder River
 
Sage Creek, WY/Borger, TX
 
100

 
6”-8”
 
705

 
14

River Parish NGL †
 
Southeast Louisiana
 
100

 
4”-20”
 
510

 
133

Sand Hills**†
 
Permian Basin/Mont Belvieu, TX
 
33

 
20”
 
1,190

 
315

Skelly-Belvieu
 
Skellytown, TX/Mont Belvieu, TX
 
50

 
8”
 
571

 
45

Southern Hills**†
 
U.S. Midcontinent/Mont Belvieu, TX
 
33

 
20”
 
941

 
140

Sweeny NGL
 
Brazoria, TX/Sweeny, TX
 
100

 
20”
 
18

 
204

TX Panhandle Y1/Y2
 
Sher-Han, TX/Borger, TX
 
100

 
3”-10”
 
299

 
61

LPG
 
 
 
 
 
 
 
 
 
 
Blue Line
 
Borger, TX/East St. Louis, IL
 
100

 
8”-12”
 
688

 
29

Brown Line †
 
Ponca City, OK/Wichita, KS
 
100

 
8”, 10”
 
76

 
26

Conway to Wichita
 
Conway, KS/Wichita, KS
 
100

 
12”
 
55

 
38

Medford †
 
Ponca City, OK/Medford, OK
 
100

 
4”-6”
 
42

 
10

Sweeny LPG Lines
 
Sweeny, TX/Mont Belvieu & Freeport, TX
 
100

 
10”-20”
 
246

 
942

Natural Gas
 
 
 
 
 
 
 
 
 
 
Rockies Express***
 
 
 
 
 
 
 
 
 
 
West to East
 
Meeker, CO/Clarington, OH
 
25

 
36”-42”
 
1,712

 
1.8 Bcf/d

East to West
 
Clarington, OH/Moultrie, IL
 
25

 
24”, 42”
 
670

 
2.6 Bcf/d

Owned by Phillips 66 Partners; Phillips 66 held a 57 percent ownership interest in Phillips 66 Partners at December 31, 2017.
* Total pipeline system is 419 miles. Phillips 66 has an ownership interest in multiple segments totaling 49 miles.
** Operated by DCP Midstream, LP; Phillips 66 Partners holds a direct one-third ownership interest in the pipeline entities.
*** Total pipeline system consists of three zones for a total of 1,712 miles. The third zone of the pipeline is bi-directional and can transport 2.6 Bcf/d of natural gas from east-to-west.

     


5


The following table depicts our ownership interest in finished product terminals as of December 31, 2017:
Facility Name
 
Location
 
Interest

 
Gross Storage Capacity (MBbl)

 
Gross Rack Capacity (MBD)

Albuquerque †
 
New Mexico
 
100
%
 
244

 
18

Amarillo †
 
Texas
 
100

 
277

 
29

Beaumont
 
Texas
 
100

 
3,700

 
8

Billings
 
Montana
 
100

 
88

 
16

Bozeman
 
Montana
 
100

 
113

 
13

Casper †
 
Montana
 
100

 
365

 
7

Colton
 
California
 
100

 
211

 
21

Denver
 
Colorado
 
100

 
310

 
43

Des Moines
 
Iowa
 
50

 
206

 
15

East St. Louis †
 
Illinois
 
100

 
2,085

 
78

Glenpool †
 
Oklahoma
 
100

 
588

 
19

Great Falls
 
Montana
 
100

 
198

 
12

Hartford †
 
Illinois
 
100

 
1,075

 
25

Helena
 
Montana
 
100

 
178

 
10

Jefferson City †
 
Missouri
 
100

 
110

 
16

Kansas City †
 
Kansas
 
100

 
1,294

 
66

La Junta
 
Colorado
 
100

 
101

 
10

Lincoln
 
Nebraska
 
100

 
219

 
21

Linden †
 
New Jersey
 
100

 
429

 
121

Los Angeles
 
California
 
100

 
116

 
75

Lubbock †
 
Texas
 
100

 
179

 
17

Missoula
 
Montana
 
50

 
368

 
29

Moses Lake
 
Washington
 
50

 
186

 
13

Mount Vernon †
 
Missouri
 
100

 
363

 
46

North Salt Lake
 
Utah
 
50

 
738

 
41

Oklahoma City †
 
Oklahoma
 
100

 
352

 
48

Pasadena †
 
Texas
 
100

 
3,210

 
65

Ponca City †
 
Oklahoma
 
100

 
51

 
23

Portland
 
Oregon
 
100

 
664

 
33

Renton
 
Washington
 
100

 
228

 
20

Richmond
 
California
 
100

 
334

 
28

Rock Springs
 
Wyoming
 
100

 
125

 
19

Sacramento
 
California
 
100

 
141

 
13

Sheridan †
 
Wyoming
 
100

 
86

 
15

Spokane
 
Washington
 
100

 
351

 
24

Tacoma
 
Washington
 
100

 
307

 
17

Tremley Point †
 
New Jersey
 
100

 
1,593

 
39

Westlake
 
Louisiana
 
100

 
128

 
16

Wichita Falls
 
Texas
 
100

 
303

 
15

Wichita North †
 
Kansas
 
100

 
679

 
19

Owned by Phillips 66 Partners; Phillips 66 held a 57 percent ownership interest in Phillips 66 Partners at December 31, 2017.


6


The following table depicts our ownership interest in crude and other terminals as of December 31, 2017:
Facility Name
 
Location
 
Interest

 
Gross Storage Capacity (MBbl)

 
 Gross Loading Capacity*

Crude and Feedstocks
 
 
 
 
 
 
 
 
Beaumont
 
Texas
 
100
%
 
7,400

 
N/A

Billings †
 
Montana
 
100

 
270

 
N/A

Borger
 
Texas
 
50

 
721

 
N/A

Clifton Ridge †
 
Louisiana
 
100

 
3,410

 
N/A

Cushing †
 
Oklahoma
 
100

 
700

 
N/A

Freeport
 
Texas
 
100

 
2,144

 
N/A

Jones Creek
 
Texas
 
100

 
2,577

 
N/A

Junction
 
California
 
100

 
523

 
N/A

Keene †
 
North Dakota
 
50

 
490

 
N/A

McKittrick
 
California
 
100

 
237

 
N/A

Odessa †
 
Texas
 
100

 
523

 
N/A

Palermo †
 
North Dakota
 
70

 
206

 
N/A

Pecan Grove †
 
Louisiana
 
100

 
142

 
N/A

Ponca City †
 
Oklahoma
 
100

 
1,200

 
N/A

Santa Margarita
 
California
 
100

 
335

 
N/A

Santa Maria
 
California
 
100

 
112

 
N/A

Tepetate
 
Louisiana
 
100

 
152

 
N/A

Torrance
 
California
 
100

 
309

 
N/A

Wichita Falls †
 
Texas
 
100

 
240

 
N/A

Petroleum Coke
 
 
 
 
 
 
 
 
Lake Charles
 
Louisiana
 
50

 
N/A

 
N/A

Rail
 
 
 
 
 
 
 
 
Bayway †
 
New Jersey
 
100

 
N/A

 
75

Beaumont
 
Texas
 
100

 
N/A

 
20

Ferndale †
 
Washington
 
100

 
N/A

 
30

Missoula
 
Montana
 
50

 
N/A

 
41

Palermo †
 
North Dakota
 
70

 
N/A

 
100

Thompson Falls
 
Montana
 
50

 
N/A

 
42

Marine
 
 
 
 
 
 
 
 
Beaumont
 
Texas
 
100

 
N/A

 
37

Clifton Ridge †
 
Louisiana
 
100

 
N/A

 
48

Hartford †
 
Illinois
 
100

 
N/A

 
3

Pecan Grove †
 
Louisiana
 
100

 
N/A

 
6

Portland
 
Oregon
 
100

 
N/A

 
10

Richmond
 
California
 
100

 
N/A

 
3

Tacoma
 
Washington
 
100

 
N/A

 
12

Tremley Point †
 
New Jersey
 
100

 
N/A

 
7

NGL Facilities
 
 
 
 
 
 
 
 
Freeport
 
Texas
 
100

 
1,000

 
36

River Parish †
 
Louisiana
 
100

 
1,500

 
N/A

Clemens †
 
Texas
 
100

 
9,000

 
N/A

Owned by Phillips 66 Partners; Phillips 66 held a 57 percent ownership interest in Phillips 66 Partners at December 31, 2017.
* Rail in thousands of barrels daily (MBD); Marine and NGL Facilities in thousands of barrels per hour.
 

Rockies Express Pipeline LLC (REX)
We own a 25 percent interest in REX, which owns a natural gas pipeline system with approximately 1,712 miles of transportation pipelines, including laterals, extending from Opal, Wyoming, and Meeker, Colorado, to Clarington, Ohio. The REX Pipeline delivers natural gas to markets, primarily in the Midwest, from both the Rocky Mountain region and the Appalachian Basin.

7


Marine Vessels
At December 31, 2017, we had 11 international-flagged crude oil and product tankers under time charter contracts, with capacities ranging in size from 300,000 to 1,100,000 barrels. Additionally, we had under time charter contract two Jones Act-compliant tankers and 38 tug/barge units. These vessels are used primarily to transport feedstocks or provide product transportation for certain of our refineries, including delivery of domestic crude oil to our Gulf Coast and East Coast refineries.
 
Truck and Rail
Our truck and rail fleets support our feedstock and distribution operations. Rail movements are provided via a fleet of more than 10,000 owned and leased railcars. Truck movements are provided through numerous third-party trucking companies, as well as through our 100-percent-owned subsidiary, Sentinel Transportation LLC.

NGL and Other

Our NGL and Other business includes the following:
 
A U.S. Gulf Coast NGL market hub comprising the Freeport LPG Export Terminal and Phillips 66 Partners’ 100,000 BPD Sweeny Fractionator. These assets are supported by 9 million barrels of gross capacity at Phillips 66 Partners’ Clemens storage facility. We refer to these facilities as the “Sweeny Hub.”

A 22.5 percent interest in Gulf Coast Fractionators, which owns an NGL fractionation plant in Mont Belvieu, Texas. We operate the facility, and our net share of its capacity is 32,625 BPD.

A 12.5 percent undivided interest in a fractionation plant in Mont Belvieu, Texas. Our net share of its capacity is 30,250 BPD.

A 40 percent undivided interest in a fractionation plant in Conway, Kansas. Our net share of its capacity is 43,200 BPD.

Phillips 66 Partners owns the River Parish NGL logistics system in southeast Louisiana, comprising approximately 500 miles of pipelines and a storage cavern connecting multiple fractionation facilities, refineries and a petrochemical facility.

Phillips 66 Partners owns a direct one-third interest in both the DCP Sand Hills Pipeline, LLC (Sand Hills) and DCP Southern Hills Pipeline, LLC, which own pipelines that connect Eagle Ford, Permian and Midcontinent production to the Mont Belvieu, Texas, market.

Phillips 66 Partners, through its ownership of MSLP, owns a 125,000 BPD capacity vacuum distillation unit and a 70,000 BPD capacity delayed coker unit located at our Sweeny Refinery in Old Ocean, Texas.

The Sweeny Fractionator is located adjacent to our Sweeny Refinery in Old Ocean, Texas, and supplies purity ethane to the petrochemical industry and LPG to domestic and global markets. Raw NGL supply to the fractionator is delivered from nearby major pipelines, including the Sand Hills Pipeline. The fractionator is supported by significant infrastructure including connectivity to two NGL supply pipelines, a pipeline connecting to the Mont Belvieu market center and a multi-million-barrel salt dome storage facility with access to our LPG export terminal in Freeport, Texas.

The Freeport LPG Export Terminal leverages our fractionation, transportation and storage infrastructure to supply petrochemical, heating and transportation markets globally. The terminal can simultaneously load two ships with refrigerated propane and butane at a combined rate of 36,000 barrels per hour. In support of the terminal, a 100,000 BPD unit to upgrade domestic propane for export was installed near the Sweeny Fractionator. In addition, the terminal exports 10,000 to 15,000 BPD of natural gasoline (C5+) produced at the Sweeny Fractionator.

MSLP processes long residue, which is produced from heavy sour crude oil, for a processing fee. The fuel-grade petroleum coke and other by-products produced as a result of the processing are retained by our Sweeny Refinery.


8


During 2017, Phillips 66 Partners continued development of a new 25,000 BPD isomerization unit at our Lake Charles Refinery to increase production of higher octane gasoline blend components. The project is expected to be completed by the end of 2019.

DCP Midstream

Our Midstream segment includes our 50 percent equity investment in DCP Midstream, which is headquartered in Denver, Colorado. As of December 31, 2017, DCP Midstream owned or operated 61 natural gas processing facilities, with a net processing capacity of approximately 7.8 billion cubic feet per day (Bcf/d). DCP Midstream’s owned or operated natural gas pipeline systems included gathering services for these facilities, as well as natural gas transmission, and totaled approximately 63,000 miles of pipeline. DCP Midstream also owned or operated 12 NGL fractionation plants, along with natural gas and NGL storage facilities, a propane wholesale marketing business and NGL pipeline assets.

The residual natural gas, primarily methane, which results from processing raw natural gas, is sold by DCP Midstream at market-based prices to marketers and end users, including large industrial companies, natural gas distribution companies and electric utilities. DCP Midstream purchases or takes custody of substantially all of its raw natural gas from producers, principally under contractual arrangements that expose DCP Midstream to the prices of NGL, natural gas and condensate. DCP Midstream also has fee-based arrangements with producers to provide midstream services such as gathering and processing.

DCP Midstream markets a portion of its NGL to us and CPChem under existing contracts. The primary commitment on certain contracts began a ratable wind-down period in December 2014 and expires in January 2019. These purchase commitments are on an “if-produced, will-purchase” basis.
During 2017, DCP Midstream completed or advanced the following growth projects:
In the first quarter of 2017, DCP Midstream announced the construction of a 200-million-cubic-feet-per-day (MMcf/d) natural gas processing plant, the Mewbourn 3 plant, and further expansion of its Grand Parkway gathering system. Both are located in the Denver-Julesburg (DJ) Basin and are expected to be in service in the third quarter of 2018.
In the second quarter of 2017, DCP Midstream approved the 200 MMcf/d O'Connor 2 natural gas processing plant in the DJ Basin. The O'Connor 2 plant and associated gathering infrastructure are expected to be in service in 2019.
In the second quarter of 2017, DCP Midstream increased capacity in the DJ Basin by up to 40 MMcf/d by placing additional field compression and plant bypass infrastructure in service.
In the third quarter of 2017, DCP Midstream executed definitive joint-venture agreements on its 25 percent interest in the development of the Gulf Coast Express pipeline project (GCX project). The GCX project is designed to transport up to 1.98 Bcf/d of natural gas. The mostly 42-inch pipeline would traverse approximately 500 miles and be placed in service in 2019, pending regulatory approvals.
DCP Midstream is jointly developing the Cheyenne Connector pipeline with Tallgrass Energy Partners, LP (Tallgrass) and Western Gas Partners, LP (Western Gas). Tallgrass serves as the operator, and both DCP Midstream and Western Gas hold an option to invest in this pipeline at a later date. The Cheyenne Connector pipeline will provide takeaway solutions with capacity of at least 600 MMcf/d for DCP Midstream's DJ Basin assets, connecting natural gas to REX’s Cheyenne Hub, where it can then be delivered to numerous demand markets across the country.
DCP Midstream is currently expanding the Sand Hills Pipeline to 365,000 BPD, which is expected to be completed in the first quarter of 2018. Further expansion to 450,000 BPD is progressing and is expected to be in service during the second half of 2018. This expansion includes a partial looping of the pipeline and the addition of new pump stations.


9


Effective January 1, 2017, DCP Midstream and its master limited partnership (then named DCP Midstream Partners, LP, subsequently renamed DCP Midstream, LP on January 11, 2017, and referred to herein as DCP Partners) closed a transaction in which DCP Midstream contributed subsidiaries owning all of its operating assets and its existing debt to DCP Partners, in exchange for approximately 31.1 million DCP Partners units. Following the transaction, we and our co-venturer retained our 50/50 investment in DCP Midstream, DCP Midstream retained its incentive distribution rights in DCP Partners through its ownership of the general partner of DCP Partners, and DCP Midstream held a 36 percent limited partner interest and a 2 percent general partner interest in DCP Partners. See the “Equity Affiliates” section of “Significant Sources of Capital” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on this transaction.


CHEMICALS

The Chemicals segment consists of our 50 percent equity investment in CPChem, which is headquartered in The Woodlands, Texas. At the end of 2017, CPChem owned or had joint-venture interests in 30 global manufacturing facilities and two U.S. research and development centers.

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). The O&P business segment produces and markets ethylene and other olefin products; the ethylene produced is primarily consumed within CPChem for the production of polyethylene, normal alpha olefins (NAO) and polyethylene pipe. The SA&S business segment manufactures and markets aromatics and styrenics products, such as benzene, styrene, paraxylene and cyclohexane, as well as polystyrene. SA&S also manufactures and/or markets a variety of specialty chemical products including organosulfur chemicals, solvents, catalysts, drilling chemicals and mining chemicals.

The manufacturing of petrochemicals and plastics involves the conversion of hydrocarbon-based raw material feedstocks into higher-value products, often through a thermal process referred to in the industry as “cracking.” For example, ethylene can be produced from cracking the feedstocks ethane, propane, butane, natural gasoline or certain refinery liquids, such as naphtha and gas oil. The produced ethylene has a number of uses, primarily as a raw material in the production of plastics, such as polyethylene and polyvinyl chloride. Plastic resins, such as polyethylene, are manufactured in a thermal/catalyst process, and the produced output is used as a further raw material for various applications, such as packaging and plastic pipe.

CPChem and its equity affiliates have manufacturing facilities located in Belgium, China, Colombia, Qatar, Saudi Arabia, Singapore and the United States.

10


The following table reflects CPChem’s petrochemicals and plastics product capacities at December 31, 2017:
 
 
Millions of Pounds per Year
 
 
U.S.

 
Worldwide

O&P
 
 
 
Ethylene
8,110

 
10,585

Propylene
2,675

 
3,180

High-density polyethylene
5,305

 
7,600

Low-density polyethylene
620

 
620

Linear low-density polyethylene
1,590

 
1,590

Polypropylene

 
310

Normal alpha olefins
2,335

 
2,850

Polyalphaolefins
125

 
255

Polyethylene pipe
590

 
590

Total O&P
21,350

 
27,580

 
 
 
 
SA&S
 
 
 
Benzene
1,600

 
2,530

Cyclohexane
1,060

 
1,455

Paraxylene
1,000

 
1,000

Styrene
1,050

 
1,875

Polystyrene
835

 
1,070

Specialty chemicals
439

 
574

Total SA&S
5,984

 
8,504

Total O&P and SA&S
27,334

 
36,084

Capacities include CPChem’s share in equity affiliates and excludes CPChem’s NGL fractionation capacity.


In 2017, CPChem continued construction of two polyethylene facilities and an ethane cracker in the U.S. Gulf Coast region.  This project leverages the development of the significant shale resources in the United States. The polyethylene facilities successfully completed commissioning and start-up in September 2017.  The two polyethylene units, each with an annual capacity of 1.1 billion pounds, are located near CPChem’s Sweeny facility in Old Ocean, Texas. CPChem’s Cedar Bayou facility in Baytown, Texas, is the location of the 3.3 billion-pound-per-year ethane cracker.  Mechanical completion of the ethane cracker was achieved in December 2017, and commissioning is expected to be completed in the first quarter of 2018, with a transition to full production during the second quarter of 2018.  
 
In February 2017, CPChem completed the sale of its K-Resin® styrene-butadiene copolymers (SBC) business, which included the K-Resin® SBC plant in the Yeosu Petrochemical Complex in South Korea.
 
In April 2017, CPChem completed expansion of the polyalphaolefins capacity at its Cedar Bayou plant by 20 million pounds per year, or 20 percent. This expansion, together with the NAO capacity added in 2015, allows CPChem to meet the increasing demand for high-performance lubricants feedstocks. 
 
In October 2017, CPChem completed the sale of its equity investment in Petrochemical Conversion Company, which included nylon 6,6, nylon compounding, and polymer conversion assets.



11


REFINING

Our 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. 

The table below depicts information for each of our U.S. and international refineries at December 31, 2017:
 
 
 
 
 
 
Thousands of Barrels Daily
 
 
Region/Refinery
 
Location
 
Interest

 
Net Crude Throughput
Capacity
 
Net Clean Product
Capacity**
 
Clean
Product
Yield
Capability

At
December 31
2017

Effective January 1
2018

 
Gasolines

 
Distillates

 
Atlantic Basin/Europe
 
 
 
 
 
 
 
 
 
 
 
 
 
Bayway
 
Linden, NJ
 
100.00
%
 
241

258

 
155

 
130

 
92
%
Humber
 
N. Lincolnshire, United Kingdom
 
100.00

 
221

221

 
95

 
115

 
81

MiRO*
 
Karlsruhe, Germany
 
18.75

 
58

58

 
25

 
25

 
87

 
 
 
 
 
 
520

537

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gulf Coast
 
 
 
 
 
 
 
 
 
 
 
 
 
Alliance
 
Belle Chasse, LA
 
100.00

 
247

247

 
130

 
120

 
87

Lake Charles
 
Westlake, LA
 
100.00

 
249

249

 
100

 
115

 
70

Sweeny
 
Old Ocean, TX
 
100.00

 
247

256

 
135

 
120

 
86

 
 
 
 
 
 
743

752

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Central Corridor
 
 
 
 
 
 
 
 
 
 
 
 
 
Wood River
 
Roxana, IL
 
50.00

 
157

157

 
85

 
60

 
81

Borger
 
Borger, TX
 
50.00

 
73

73

 
50

 
30

 
91

Ponca City
 
Ponca City, OK
 
100.00

 
203

203

 
120

 
95

 
93

Billings
 
Billings, MT
 
100.00

 
60

60

 
35

 
30

 
90

 
 
 
 
 
 
493

493

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
West Coast
 
 
 
 
 
 
 
 
 
 
 
 
 
Ferndale
 
Ferndale, WA
 
100.00

 
101

105

 
65

 
35

 
81

Los Angeles
 
Carson/Wilmington, CA
 
100.00

 
139

139

 
85

 
65

 
90

San Francisco
 
Arroyo Grande/San Francisco, CA
 
100.00

 
120

120

 
60

 
65

 
85

 
 
 
 
 
 
360

364

 
 
 
 
 
 
 
 
 
 
 
 
2,116

2,146

 
 
 
 
 
 
* Mineraloelraffinerie Oberrhein GmbH.
** Clean product capacities are maximum rates for each clean product category, independent of each other. They are not additive when calculating the clean product yield capability for each refinery.


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Primary crude oil characteristics and sources of crude oil for our refineries are as follows:
 
 
Characteristics
 
Sources
 
Sweet
Medium
Sour
Heavy
Sour
High
TAN* 
 
United
States
Canada
South
America
Europe
Middle East
& Africa
Bayway
l
l
 
 
 
 l
l
 
 
l
Humber
l
l
 
l
 
 l
 
 
l
l
MiRO
l
l
l
 
 
 
 
 
l
l
Alliance
l
l
 
 
 
l
 
 
 
 
Lake Charles
l
l
l
l
 
l
l
l
 
l
Sweeny
l
l
l
l
 
l
l
l
 
 
Wood River
l
l
l
l
 
l
l
 
 
 
Borger
 
l
l
 
 
l
l
 
 
 
Ponca City
l
l
 
 
 
l
l
 
 
 
Billings
 
l
l
l
 
 
l
 
 
 
Ferndale
l
l
 
 
 
l
l
 
 
 
Los Angeles
 
l
l
l
 
l
l
l
 
l
San Francisco
l
l
l
l
 
l
 
l
 
l
* High TAN (Total Acid Number): acid content greater than or equal to 1.0 milligram of potassium hydroxide (KOH) per gram.


Atlantic Basin/Europe Region

Bayway Refinery
The Bayway Refinery is located on the New York Harbor in Linden, New Jersey. Bayway’s facilities include crude distilling, naphtha reforming, fluid catalytic cracking, solvent deasphalting, hydrodesulfurization and alkylation units. The complex also includes a polypropylene plant with the capacity to produce up to 775 million pounds per year. The refinery produces a high percentage of transportation fuels, as well as petrochemical feedstocks, residual fuel oil and home heating oil. Refined products are distributed to East Coast customers by pipeline, barge, railcar and truck.

Humber Refinery
The Humber Refinery is located on the east coast of England in North Lincolnshire, United Kingdom, approximately 180 miles north of London, United Kingdom. Humber’s facilities include crude distilling, naphtha reforming, fluid catalytic cracking, hydrodesulfurization, thermal cracking and delayed coking units. The refinery has two coking units with associated calcining plants, which produce high-value graphite and anode petroleum cokes. The refinery produces a high percentage of transportation fuels. Humber is the only coking refinery in the United Kingdom, and a major producer of specialty graphite cokes and anode coke. Approximately 70 percent of the light oils produced by the refinery are distributed to customers in the United Kingdom by pipeline, railcar and truck, while the other products are exported to the rest of Europe, West Africa and the United States by waterborne cargo.

MiRO Refinery
The MiRO Refinery is located on the Rhine River in Karlsruhe, Germany, approximately 95 miles south of Frankfurt, Germany. MiRO is a joint venture in which we own an 18.75 percent interest. Facilities include crude distilling, naphtha reforming, fluid catalytic cracking, petroleum coking and calcining, hydrodesulfurization, isomerization, ethyl tert-butyl ether and alkylation units. MiRO produces a high percentage of transportation fuels. Other products include petrochemical feedstocks, home heating oil, bitumen, anode-grade petroleum coke and petroleum coke. Refined products are distributed to customers in Germany, Switzerland and Austria by truck, railcar and barge.



13


Gulf Coast Region

Alliance Refinery
The Alliance Refinery is located on the Mississippi River in Belle Chasse, Louisiana, approximately 25 miles southeast of New Orleans, Louisiana. The single-train facility includes crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrodesulfurization, aromatics and delayed coking units. Alliance produces a high percentage of transportation fuels. Other products include petrochemical feedstocks, home heating oil and anode-grade petroleum coke. Refined products are distributed to customers in the southeastern and eastern United States through major common-carrier pipeline systems and by barge. Refined products are exported primarily to customers in Latin America by waterborne cargo.

Lake Charles Refinery
The Lake Charles Refinery is located in Westlake, Louisiana, approximately 150 miles east of Houston, Texas. Refinery facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrocracking, hydrodesulfurization and delayed coking units. Refinery facilities also include a specialty coker and calciner. The refinery produces a high percentage of transportation fuels. Other products include off-road diesel, home heating oil, feedstock for our Excel Paralubes joint venture in our M&S segment, specialty graphite petroleum coke and petroleum coke. The majority of the refined products are distributed to customers in the southeastern and eastern United States by truck, railcar, barge or major common carrier pipelines. Refined products are also exported primarily to customers in Latin America and West Africa by waterborne cargo.

Sweeny Refinery
The Sweeny Refinery is located in Old Ocean, Texas, approximately 65 miles southwest of Houston, Texas. Refinery facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrodesulfurization, and aromatics units, as well as access to the on-site vacuum tower and delayed coking unit, which effective October 2017 became an asset owned by Phillips 66 Partners. The refinery produces a high percentage of transportation fuels. Other products include petrochemical feedstocks, home heating oil and petroleum coke. The refinery receives crude oil by pipeline and via tankers, through wholly and jointly owned terminals on the Gulf Coast, including a deepwater terminal at Freeport, Texas. Refined products are distributed to customers throughout the Midcontinent region, southeastern and eastern United States by pipeline, barge and railcar. Refined products are also exported primarily to customers in Latin America by waterborne cargo.

Central Corridor Region

WRB Refining LP (WRB)
We are the operator and managing partner of WRB, a 50/50 joint venture with Cenovus Energy Inc., which consists of the Wood River and Borger refineries.

Wood River Refinery
The Wood River Refinery is located in Roxana, Illinois, about 15 miles northeast of St. Louis, Missouri, at the confluence of the Mississippi and Missouri rivers. Refinery facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrocracking, hydrodesulfurization and delayed coking units. The refinery produces a high percentage of transportation fuels. Other products include petrochemical feedstocks, asphalt and petroleum coke. Refined products are distributed to customers by pipeline, railcar, barge and truck and are shipped to markets throughout the Midcontinent region.
 
Borger Refinery
The Borger Refinery is located in Borger, Texas, in the Texas Panhandle, approximately 50 miles north of Amarillo, Texas. Refinery facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrodesulfurization, and delayed coking units, as well as an NGL fractionation facility. It produces a high percentage of transportation fuels, as well as petroleum coke, NGL’s and solvents. Refined products are distributed to customers via pipelines from the refinery to West Texas, New Mexico, Colorado and the Midcontinent region.




14


Ponca City Refinery
The Ponca City Refinery is located in Ponca City, Oklahoma, approximately 95 miles northwest of Tulsa, Oklahoma. Its facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrodesulfurization, and delayed coking units. It produces a high percentage of transportation fuels and anode-grade petroleum coke. Refined products are primarily distributed to customers by company-owned and common-carrier pipelines to markets throughout the Midcontinent region.

Billings Refinery
The Billings Refinery is located in Billings, Montana. Its facilities include crude distilling, naphtha reforming, fluid catalytic cracking, alkylation, hydrodesulfurization and delayed coking units. The refinery produces a high percentage of transportation fuels and petroleum coke. Finished petroleum products from the refinery are distributed to customers by pipeline, railcar and truck. Pipelines transport most of the refined products to markets in Montana, Wyoming, Idaho, Utah, Colorado and Washington.

West Coast Region

Ferndale Refinery
The Ferndale Refinery is located on Puget Sound in Ferndale, Washington, approximately 20 miles south of the U.S.-Canada border. Facilities include crude distillation, naphtha reforming, fluid catalytic cracking, alkylation and hydrodesulfurization units. The refinery produces a high percentage of transportation fuels. Other products include residual fuel oil, which is supplied to the northwest marine bunker fuel market. Most refined products are distributed to customers by pipeline and barge to major markets in the northwest United States.

Los Angeles Refinery
The Los Angeles Refinery consists of two linked facilities located five miles apart in Carson and Wilmington, California, approximately 15 miles southeast of Los Angeles. The Carson facility serves as the front end of the refinery by processing crude oil, and the Wilmington facility serves as the back end of the refinery by upgrading the intermediate products to finished products. The facilities include crude distillation, naphtha reforming, fluid catalytic cracking, alkylation, hydrocracking, and delayed coking units. The refinery produces a high percentage of transportation fuels. The refinery produces California Air Resources Board (CARB)-grade gasoline. Other products include petroleum coke. Refined products are distributed to customers in California, Nevada and Arizona by pipeline and truck.

San Francisco Refinery
The San Francisco Refinery consists of two facilities linked by a 200-mile pipeline. The Santa Maria facility is located in Arroyo Grande, California, 200 miles south of San Francisco, California, while the Rodeo facility is in the San Francisco Bay Area. Semi-refined liquid products from the Santa Maria facility are shipped by pipeline to the Rodeo facility for upgrading into finished petroleum products. Facilities include crude distillation, naphtha reforming, hydrocracking, hydrodesulfurization and delayed coking units, as well as a calciner. The refinery produces a high percentage of transportation fuels. It also produces CARB-grade gasoline. Other products include petroleum coke. The majority of the refined products are distributed to customers in California by pipeline and barge. Additional refined products are also exported to customers in Latin America by waterborne cargo.




15


MARKETING AND SPECIALTIES

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

Marketing

Marketing—United States
In the United States, as of December 31, 2017, we marketed gasoline, diesel and aviation fuel through approximately 7,550 independently owned outlets in 48 states. These sites utilize the Phillips 66, Conoco or 76 brands.

At December 31, 2017, our wholesale operations utilized a network of marketers operating approximately 5,700 outlets. We place a strong emphasis on the wholesale channel of trade because of its lower capital requirements. In addition, we held brand-licensing agreements covering approximately 1,050 sites. Our refined products are marketed on both a branded and unbranded basis. A high percentage of our branded marketing sales are made in the Midcontinent, Rockies and West Coast regions, where our wholesale marketing operations provide efficient off-take from our refineries. We continue to utilize consignment fuel arrangements with several marketers whereby we own the fuel inventory and pay the marketers a fixed monthly fee.

In the Gulf Coast and East Coast regions, most sales are conducted via unbranded sales which do not require a highly integrated marketing and distribution infrastructure to secure product placement for refinery pull through. We are expanding our export capability at our U.S. coastal refineries to meet growing international demand and increase flexibility to provide product to the highest-value markets.

In addition to automotive gasoline and diesel, we produce and market jet fuel and aviation gasoline. At December 31, 2017, aviation gasoline and jet fuel were sold through dealers and independent marketers at approximately 800 Phillips 66-branded locations in the United States.

Marketing—International
We have marketing operations in four European countries. Our European marketing strategy is to sell primarily through owned, leased or joint-venture retail sites using a low-cost, high-volume approach. We use the JET brand name to market retail and wholesale products in Austria, Germany and the United Kingdom. In addition, a joint venture in which we have an equity interest markets products in Switzerland under the COOP brand name.

We also market aviation fuels, LPG, heating oils, transportation fuels, marine bunker fuels, bitumen and fuel coke specialty products to commercial customers and into the bulk or spot markets in the above countries.

At December 31, 2017, we had 1,324 marketing outlets in our European operations, of which 993 were company owned and 331 were dealer owned. In addition, through our COOP joint-venture operations in Switzerland, we have interests in 306 additional sites.

Specialties

We manufacture and sell a variety of specialty products, including petroleum coke products, waxes, solvents and polypropylene. Certain manufacturing operations are included in the Refining segment, while the marketing function for these products is included in the Specialties business.

Premium Coke, Polypropylene & Solvents
We market high-quality graphite and anode-grade petroleum cokes in the United States, Europe and Asia for use in a variety of industries that include steel, aluminum, titanium dioxide and battery manufacturing.  We also market polypropylene in North America under the COPYLENE brand name for use in consumer products, and market specialty solvents that include pentane, iso-pentane, hexane, heptane and odorless mineral spirits for use in the petrochemical, agriculture and consumer markets.



16


Excel Paralubes
We own a 50 percent interest in Excel Paralubes, a joint venture which owns a hydrocracked lubricant base oil manufacturing plant located adjacent to the Lake Charles Refinery. The facility has a nameplate capacity to produce 22,200 BPD of high-quality, clear hydrocracked base oils. The facility’s feedstock is sourced primarily from our Lake Charles Refinery.

Lubricants
We manufacture and sell automotive, commercial, industrial and specialty lubricants which are marketed worldwide under the Phillips 66, Kendall and Red Line brands, as well as other private label brands. We also market Group II Pure Performance base oils globally, as well as import and market Group III Ultra-S base oils through an agreement with South Korea’s S-Oil corporation.

Other

Power Generation
We own a cogeneration power plant located adjacent to the Sweeny Refinery. The plant generates electricity and provides process steam to the refinery, as well as merchant power into the Texas market. The plant has a net electrical output of 440 megawatts and is capable of generating up to 3.6 million pounds per hour of process steam.


TECHNOLOGY DEVELOPMENT

Our Technology organization conducts applied and fundamental research in three areas: 1) support for our current business, 2) new environmental solutions to address governmental regulations and 3) future growth. Technology programs include evaluating advantaged crudes; and modeling to reduce energy consumption, increase product yield and increase reliability. Our sustainability group is focusing efforts on organic photovoltaic polymers, solid oxide fuel cells, atmospheric modeling and air chemistry, water use and reuse and renewable fuels. Additionally, we monitor emerging technologies such as electric vehicles and impacts of the digital space on energy consumption, and perform research and monitoring of developments in battery technology.


COMPETITION

The Midstream segment, through our equity investment in DCP Midstream and our other operations, competes with numerous integrated petroleum companies, as well as natural gas transmission and distribution companies, to deliver components of natural gas to end users in commodity natural gas markets. DCP Midstream is one of the leading natural gas gatherers and processors in the United States based on wellhead volumes, and one of the largest U.S. producers and marketers of NGL, based on published industry sources. Principal methods of competing include economically securing the right to purchase raw natural gas for gathering systems, managing the pressure of those systems, operating efficient NGL processing plants and securing markets for the products produced.

In the Chemicals segment, CPChem is ranked among the top 10 producers of many of its major product lines according to published industry sources, based on average 2017 production capacity. Petroleum products, petrochemicals and plastics are typically delivered into the worldwide commodity markets. Our Refining and M&S segments compete primarily in the United States and Europe. We are one of the largest refiners of petroleum products in the United States based on published industry sources. Elements of competition for both our Chemicals and Refining segments include product improvement, new product development, low-cost structures, and efficient manufacturing and distribution systems. In the marketing portion of the business, competitive factors include product properties and processibility, reliability of supply, customer service, price and credit terms, advertising and sales promotion, and development of customer loyalty to branded products.



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GENERAL

At December 31, 2017, we held a total of 356 active patents in 18 countries worldwide, including 275 active U.S. patents. The overall profitability of any business segment is not dependent on any single patent, trademark, license or franchise.

Company-sponsored research and development activities charged against earnings were $60 million in both 2017 and 2016 and $65 million in 2015.

In support of our goal to attain zero incidents, we have implemented a comprehensive Health, Safety and Environmental (HSE) management system to support consistent management of HSE risks across our enterprise.  The management system is designed to ensure that personal safety, process safety, and environmental impact risks are identified and mitigation steps are taken to reduce the risk.  The management system requires periodic audits to ensure compliance with government regulations, as well as our internal requirements. Our commitment to continuous improvement is reflected in annual goal setting and performance measurement.

See the environmental information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Contingencies” under the captions “Environmental” and “Climate Change.” It includes information on expensed and capitalized environmental costs for 2017 and those expected for 2018 and 2019.


Website Access to SEC Reports

Our Internet website address is http://www.phillips66.com. Information contained on our Internet website is not part of this Annual Report on Form 10-K.

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website, free of charge, as soon as reasonably practicable after such reports are filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC). Alternatively, you may access these reports at the SEC’s website at http://www.sec.gov.



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Item 1A. RISK FACTORS

You should carefully consider the following risk factors in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as affect the value of an investment in our common stock.

Our operating results and future rate of growth are exposed to the effects of changing commodity prices and refining, marketing and petrochemical margins.

Our revenues, operating results and future rate of growth are highly dependent on a number of factors, including fixed and variable expenses (including the cost of crude oil, NGL, and other refining and petrochemical feedstocks) and the margin we can derive from selling refined and Chemicals segment products. The prices of feedstocks and our products fluctuate substantially. These prices depend on numerous factors beyond our control, including the global supply and demand for feedstocks and our products, which are subject to, among other things:
 
Changes in the global economy and the level of foreign and domestic production of crude oil, natural gas and NGL and refined, petrochemical and plastics products.
Availability of feedstocks and refined products and the infrastructure to transport them.
Local factors, including market conditions, the level of operations of other facilities in our markets, and the volume of products imported and exported.
Threatened or actual terrorist incidents, acts of war and other global political conditions.
Government regulations.
Weather conditions, hurricanes or other natural disasters.

The price of crude oil influences prices for refined products. We do not produce crude oil and must purchase all of the crude oil we process. Many crude oils available on the world market will not meet the quality restrictions for use in our refineries. Others are not economical to use due to high transportation costs or for other reasons. The prices for crude oil and refined products can fluctuate differently based on global, regional and local market conditions. In addition, the timing of the relative movement of the prices (both among different classes of refined products and among various global markets for similar refined products), as well as the overall change in refined product prices, can reduce refining margins and could have a significant impact on our refining, wholesale marketing and retail operations, revenues, operating income and cash flows. Also, crude oil supply contracts generally have market-responsive pricing provisions. We normally purchase our refinery feedstocks weeks before manufacturing and selling the refined products. Changes in prices that occur between when we purchase feedstocks and when we sell the refined products produced from these feedstocks could have a significant effect on our financial results. We also purchase refined products produced by others for sale to our customers. Price changes that occur between when we purchase and sell these refined products also could have a material adverse effect on our business, financial condition and results of operations.

The price of feedstocks also influences prices for petrochemical and plastics products. Although our Chemicals segment transports and fractionates feedstocks to meet a portion of their demand and has certain long-term feedstock supply contracts with others, it is still subject to volatile feedstock prices. In addition, the petrochemicals industry is both cyclical and volatile. Cyclicality occurs when periods of tight supply, resulting in increased prices and profit margins, are followed by periods of capacity expansion, resulting in oversupply and declining prices and profit margins. Volatility occurs as a result of changes in supply and demand for products, changes in energy prices, and changes in various other economic conditions around the world.

Uncertainty and illiquidity in credit and capital markets can impair our ability to obtain credit and financing on acceptable terms and can adversely affect the financial strength of our business partners.

Our ability to obtain credit and capital depends in large measure on the state of the credit and capital markets, which is beyond our control. Our ability to access credit and capital markets may be restricted at a time when we would like, or need, access to those markets, which could constrain our flexibility to react to changing economic and business conditions. In addition, the cost and availability of debt and equity financing may be adversely impacted by unstable or illiquid market conditions. Protracted uncertainty and illiquidity in these markets also could have an adverse impact on our lenders, commodity hedging counterparties, or our customers, preventing them from meeting their obligations to us.

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From time to time, our cash needs may exceed our internally generated cash flow, and our business could be materially and adversely affected if we are unable to obtain necessary funds from financing activities. From time to time, we may need to supplement cash generated from operations with proceeds from financing activities. Uncertainty and illiquidity in financial markets may materially impact the ability of the participating financial institutions to fund their commitments to us under our liquidity facilities. Accordingly, we may not be able to obtain the full amount of the funds available under our liquidity facilities to satisfy our cash requirements, and our failure to do so could have a material adverse effect on our operations and financial position.

Deterioration in our credit profile could increase our costs of borrowing money and limit our access to the capital markets and commercial credit, and could trigger co-venturer rights under joint-venture arrangements.

Our or Phillips 66 Partners’ credit ratings could be lowered or withdrawn entirely by a rating agency if, in its judgment, the circumstances warrant. If a rating agency were to downgrade our rating below investment grade, our or Phillips 66 Partners’ borrowing costs would increase, and our funding sources could decrease. In addition, a failure by us to maintain an investment grade rating could affect our business relationships with suppliers and operating partners. For example, our agreement with Chevron regarding CPChem permits Chevron to buy our 50 percent interest in CPChem for fair market value if we experience a change in control or if both Standard & Poor’s and Moody’s lower our credit ratings below investment grade and the credit rating from either rating agency remains below investment grade for 365 days thereafter, with fair market value determined by agreement or by nationally recognized investment banks. As a result of these factors, a downgrade of credit ratings could have a materially adverse impact on our future operations and financial position.

We expect to continue to incur substantial capital expenditures and operating costs as a result of our compliance with existing and future environmental laws and regulations. Likewise, future environmental laws and regulations may impact or limit our current business plans and reduce demand for our products.

Our business is subject to numerous laws and regulations relating to the protection of the environment. These laws and regulations continue to increase in both number and complexity and affect our operations with respect to, among other things:
 
The discharge of pollutants into the environment.
Emissions into the atmosphere (such as nitrogen oxides, sulfur dioxide and mercury emissions, and greenhouse gas emissions as they are, or may become, regulated).
The quantity of renewable fuels that must be blended into motor fuels.
The handling, use, storage, transportation, disposal and cleanup of hazardous materials and hazardous and nonhazardous wastes.
The dismantlement and abandonment of our facilities and restoration of our properties at the end of their useful lives.

We have incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of these laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, our business, financial condition, results of operations and cash flows in future periods could be materially adversely affected.

The U.S. Environmental Protection Agency (EPA) has implemented a Renewable Fuel Standard (RFS) pursuant to the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007. The RFS program sets annual quotas for the quantity of renewable fuels (such as ethanol) that must be blended into motor fuels consumed in the United States. To provide certain flexibility in compliance options available to the industry, a Renewable Identification Number (RIN) is assigned to each gallon of renewable fuel produced in, or imported into, the United States. As a producer of petroleum-based motor fuels, we are obligated to blend renewable fuels into the products we produce at a rate that is at least commensurate to the EPA’s quota and, to the extent we do not, we must purchase RINs in the open market to satisfy our obligation under the RFS program. To the extent the EPA mandates a blending quantity of renewable fuel that exceeds the amount that is commercially feasible to blend into motor fuel (a situation commonly referred to as “the blend wall”), our operations could be materially adversely impacted, up to and including a reduction in produced motor fuel.


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The adoption of climate change legislation or regulation could result in increased operating costs and reduced demand for the refined products we produce.

The U.S. government, including the EPA, as well as several state and international governments, have either considered or adopted legislation or regulations in an effort to reduce greenhouse gas (GHG) emissions. 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. In addition, various groups suggest that additional laws may be needed in an effort to address climate change, as illustrated by the Paris Agreement negotiated at the 2015 United Nations Conference on Climate Change, referred to as COP 21, which entered into force on November 4, 2016. We cannot predict the extent to which any such legislation or regulation will be enacted and, if so, what its provisions would be. To the extent we incur additional costs required to comply with the adoption of new laws and regulations that are not ultimately reflected in the prices of our products and services, our business, financial condition, results of operations and cash flows in future periods could be materially adversely affected. In addition, demand for the refined products we produce could be adversely affected.

Climate change may adversely affect our facilities and our ongoing operations.

The potential physical effects of climate change on our operations are highly uncertain and depend upon the unique geographic and environmental factors present. Examples of such effects include rising sea levels at our coastal facilities, changing storm patterns and intensities, and changing temperature levels. As many of our facilities are located near coastal areas, rising sea levels may disrupt our ability to operate those facilities or transport crude oil and refined petroleum products. Extended periods of such disruption could have an adverse effect on our results of operation. We could also incur substantial costs to prevent or repair damage to these facilities.

Domestic and worldwide political and economic developments could affect our operations and materially reduce our profitability and cash flows.

Actions of the U.S., state, local and international governments through tax and other legislation or regulation, executive order, permit or other review of infrastructure or facility development, and commercial restrictions could delay projects, increase costs, limit development, or otherwise reduce our operating profitability both in the United States and abroad. Any such actions may affect many aspects of our operations, including requiring permits or other approvals that may impose unforeseen or unduly burdensome conditions or potentially cause delays in our operations; further limiting or prohibiting construction or other activities in environmentally sensitive or other areas; requiring increased capital costs to construct, maintain or upgrade equipment or facilities; or restricting the locations where we may construct facilities or requiring the relocation of facilities. In addition, the U.S. government can prevent or restrict us from doing business in foreign countries. These restrictions and those of foreign governments could limit our ability to operate in, or gain access to various countries, as well as limit our ability to obtain the optimum slate of crude oil and other refinery feedstocks. Our foreign operations and those of our joint ventures are further subject to risks of loss of revenue, equipment and property as a result of expropriation, acts of terrorism, war, civil unrest and other political risks; unilateral or forced renegotiation, modification or nullification of existing contracts with governmental entities; and difficulties enforcing rights against a governmental agency because of the doctrine of sovereign immunity and foreign sovereignty over international operations. Our foreign operations and those of our joint ventures are also subject to fluctuations in currency exchange rates. Actions by both the United States and host governments may affect our operations significantly in the future.

Renewable fuels, alternative energy mandates and energy conservation efforts could reduce demand for refined products. Tax incentives and other subsidies can make renewable fuels and alternative energy more competitive with refined products than they otherwise might be, which may reduce refined product margins and hinder the ability of refined products to compete with renewable fuels.

Large capital projects can take many years to complete, and market conditions could deteriorate significantly between the project approval date and the project startup date, negatively impacting project returns.

Our basis for approving a large-scale capital project is the expectation that it will deliver an acceptable level of return on the capital invested. We base these forecasted project economics on our best estimate of future market conditions. Most large-scale projects take several years to complete. During this multi-year period, market conditions can change from those we forecast, and these changes could be significant. Accordingly, we may not be able to realize our expected

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returns from a large investment in a capital project, and this could negatively impact our results of operations, cash flows and our return on capital employed.

Our investments in joint ventures decrease our ability to manage risk.

We conduct some of our operations, including parts of our Midstream, Refining and M&S segments, and our entire Chemicals segment, through joint ventures in which we share control with our joint-venture participants. Our joint-venture participants may have economic, business or legal interests or goals that are inconsistent with ours or those of the joint venture, or our joint-venture participants may be unable to meet their economic or other obligations, and we may be required to fulfill those obligations alone. Failure by us, or an entity in which we have a joint-venture interest, to adequately manage the risks associated with any acquisitions or joint ventures could have a material adverse effect on the financial condition or results of operations of our joint ventures and, in turn, our business and operations.

Activities in our Chemicals and Midstream segments involve numerous risks that may result in accidents that could affect the ability of our equity affiliates to make distributions to us.

There are a variety of hazards and operating risks inherent in the manufacturing of petrochemicals and the gathering, processing, transmission, storage, and distribution of natural gas and NGL, such as spills, leaks, explosions and mechanical problems that could cause substantial financial losses. In addition, these risks could result in significant injury, loss of human life, damage to property, environmental pollution and impairment of operations, any of which could result in substantial losses. For assets located near populated areas, including residential areas, commercial business centers, industrial sites and other public gathering areas, the level of damage resulting from these risks could be greater. Should any of these risks materialize, it could have a material adverse effect on the business and financial condition of our equity affiliates in these segments and negatively impact their ability to make future distributions to us.

Our operations present hazards and risks, which may not be fully covered by insurance, if insured. If a significant accident or event occurs for which we are not adequately insured, our operations and financial results could be adversely affected.

The scope and nature of our operations present a variety of operational hazards and risks, including explosions, fires, toxic emissions, maritime hazards and natural catastrophes, that must be managed through continual oversight and control. For example, the operation of refineries, power plants, fractionators, pipelines, terminals and vessels is inherently subject to the risks of spills, discharges or other inadvertent releases of petroleum or hazardous substances. If any of these events had previously occurred or occurs in the future in connection with any of our refineries, pipelines or refined products terminals, or in connection with any facilities that receive our wastes or by-products for treatment or disposal, other than events for which we are indemnified, we could be liable for all costs and penalties associated with their remediation under federal, state, local and international environmental laws or common law, and could be liable for property damage to third parties caused by contamination from releases and spills. These and other risks are present throughout our operations. As protection against these hazards and risks, we maintain insurance against many, but not all, potential losses or liabilities arising from such operating risks. As such, our insurance coverage may not be sufficient to fully cover us against potential losses arising from such risks. Uninsured losses and liabilities arising from operating risks could reduce the funds available to us for capital and investment spending and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are subject to interruptions of supply and increased costs as a result of our reliance on third-party transportation of crude oil, NGL and refined products.

We often utilize the services of third parties to transport crude oil, NGL and refined products to and from our facilities. In addition to our own operational risks discussed above, we could experience interruptions of supply or increases in costs to deliver refined products to market if the ability of the pipelines or vessels to transport crude oil or refined products is disrupted because of weather events, accidents, governmental regulations or third-party actions. A prolonged disruption of the ability of a pipeline or vessel to transport crude oil, NGL or refined products to or from one or more of our refineries or other facilities could have a material adverse effect on our business, financial condition, results of operations and cash flows.


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Increased regulation of hydraulic fracturing could result in reductions or delays in U.S. production of crude oil and natural gas, which could adversely impact our results of operations.

An increasing percentage of crude oil supplied to our refineries and the crude oil and gas production of our Midstream segment’s customers is being produced from unconventional oil shale reservoirs. These reservoirs require hydraulic fracturing completion processes to release the hydrocarbons from the rock so they can flow through casing to the surface. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate hydrocarbon production. The EPA, as well as several state agencies, have commenced studies and/or convened hearings regarding the potential environmental impacts of hydraulic fracturing activities. At the same time, certain environmental groups have suggested that additional laws may be needed to more closely and uniformly regulate the hydraulic fracturing process, and legislation has been proposed to provide for such regulation. In addition, some communities have adopted measures to ban hydraulic fracturing in their communities. We cannot predict whether any such legislation will ever be enacted and, if so, what its provisions would be. Any additional levels of regulation and permits required with the adoption of new laws and regulations at the federal or state level could result in our having to rely on higher priced crude oil for our refineries. This could lead to delays, increased operating costs and process prohibitions that could reduce the volumes of natural gas that move through DCP Midstream’s gathering systems and could reduce supplies and increase costs of NGL feedstocks to CPChem ethylene facilities. This could materially adversely affect our results of operations and the ability of DCP Midstream and CPChem to make cash distributions to us.

DCP Midstream’s success depends on its ability to obtain new sources of natural gas and NGL. Any decrease in the volumes of natural gas DCP Midstream gathers could adversely affect its business and operating results.

DCP Midstream’s gathering and transportation pipeline systems are connected to or dependent on the level of production from natural gas wells, which naturally declines over time. As a result, its cash flows associated with these wells will also decline over time. In order to maintain or increase throughput levels on its gathering and transportation pipeline systems and NGL pipelines and the asset utilization rates at its natural gas processing plants, DCP Midstream must continually obtain new supplies. The primary factors affecting DCP Midstream’s ability to obtain new supplies of natural gas and NGL, and to attract new customers to its assets, include the level of successful drilling activity near these assets, prices of, and the demand for, natural gas and crude oil, producers’ desire and ability to obtain necessary permits in an efficient manner, natural gas field characteristics and production performance, surface access and infrastructure issues, and its ability to compete for volumes from successful new wells. If DCP Midstream is not able to obtain new supplies of natural gas to replace the natural decline in volumes from existing wells or because of competition, throughput on its pipelines and the utilization rates of its treating and processing facilities would decline. This could have a material adverse effect on its business, results of operations, financial position and cash flows, and its ability to make cash distributions to us.

Competitors that produce their own supply of feedstocks, have more extensive retail outlets, or have greater financial resources may have a competitive advantage.

The refining and marketing industry is highly competitive with respect to both feedstock supply and refined product markets. We compete with many companies for available supplies of crude oil and other feedstocks and for outlets for our refined products. We do not produce any of our crude oil feedstocks. Some of our competitors, however, obtain a portion of their feedstocks from their own production and some have more extensive retail outlets than we have. Competitors that have their own production or extensive retail outlets (and greater brand-name recognition) are at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better positioned to withstand periods of depressed refining margins or feedstock shortages.

Some of our competitors also have materially greater financial and other resources than we have. Such competitors have a greater ability to bear the economic risks inherent in all phases of our business. In addition, we compete with other industries that provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial and individual customers.


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We may incur losses as a result of our forward-contract activities and derivative transactions.

We currently use commodity derivative instruments, and we expect to use them in the future. If the instruments we utilize to hedge our exposure to various types of risk are not effective, we may incur losses. Derivative transactions involve the risk that counterparties may be unable to satisfy their obligations to us. The risk of counterparty default is heightened in a poor economic environment. 

One of our subsidiaries acts as the general partner of a publicly traded master limited partnership, Phillips 66 Partners, which may involve a greater exposure to legal liability than our historic business operations.

One of our subsidiaries acts as the general partner of Phillips 66 Partners, a publicly traded master limited partnership. Our control of the general partner of Phillips 66 Partners may increase the possibility that we could be subject to claims of breach of fiduciary duties, including claims of conflicts of interest, related to Phillips 66 Partners. Any liability resulting from such claims could have a material adverse effect on our future business, financial condition, results of operations and cash flows.

A significant interruption in one or more of our facilities could adversely affect our business.

Our operations could be subject to significant interruption if one or more of our facilities were to experience a major accident, mechanical failure, or power outage, encounter work stoppages relating to organized labor issues, be damaged by severe weather or other natural or man-made disaster, such as an act of terrorism, or otherwise be forced to shut down. If any facility were to experience an interruption in operations, earnings from the facility could be materially adversely affected (to the extent not recoverable through insurance, if insured) because of lost production and repair costs. A significant interruption in one or more of our facilities could also lead to increased volatility in prices for feedstocks and refined products, and could increase instability in the financial and insurance markets, making it more difficult for us to access capital and to obtain insurance coverage that we consider adequate.

Our performance depends on the uninterrupted operation of our facilities, which are becoming increasingly dependent on our information technology systems.

Our performance depends on the efficient and uninterrupted operation of the manufacturing equipment in our production facilities. The inability to operate one or more of our facilities due to a natural disaster; power outage; labor dispute; or failure of one or more of our information technology, telecommunications, or other systems could significantly impair our ability to manufacture our products. Our manufacturing equipment is becoming increasingly dependent on our information technology systems. A disruption in our information technology systems due to a catastrophic event or security breach could interrupt or damage our operations.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect sensitive data, including personally identifiable information of our customers using credit cards at our branded retail outlets. Despite our security measures, our information technology and infrastructure, or information technology and infrastructure of our third-party service providers (e.g., cloud-based service providers), may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Although we have experienced occasional, actual or attempted breaches of our cybersecurity, none of these breaches has had a material effect on our business, operations or reputation (or compromised any customer data). Any such breaches could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of customer information, disrupt the services we provide to customers, and damage our reputation, any of which could adversely affect our business.


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The level of returns on pension and postretirement plan assets and the actuarial assumptions used for valuation purposes could affect our earnings and cash flows in future periods.

Assumptions used in determining projected benefit obligations and the expected return on plan assets for our pension plan and other postretirement benefit plans are evaluated by us based on a variety of independent sources of market information and in consultation with outside actuaries. If we determine that changes are warranted in the assumptions used, such as the discount rate, expected long-term rate of return, or health care cost trend rate, our future pension and postretirement benefit expenses and funding requirements could increase. In addition, several factors could cause actual results to differ significantly from the actuarial assumptions that we use. Funding obligations are determined based on the value of assets and liabilities on a specific date as required under relevant regulations. Future pension funding requirements, and the timing of funding payments, could be affected by legislation enacted by governmental authorities.

In connection with the Separation, ConocoPhillips has indemnified us for certain liabilities and we have agreed to indemnify ConocoPhillips for certain liabilities. If we are required to act on these indemnities to ConocoPhillips, we may need to use cash to meet those obligations and our financial results could be negatively impacted. The ConocoPhillips indemnity may not be sufficient to insure us against the full amount of liabilities for which it has been allocated responsibility, and ConocoPhillips may not be able to satisfy its indemnification obligations in the future.

Pursuant to the Indemnification and Release Agreement and certain other agreements with ConocoPhillips entered into in connection with the Separation, ConocoPhillips agreed to indemnify us for certain liabilities, and we agreed to indemnify ConocoPhillips for certain liabilities. Indemnities that we may be required to provide ConocoPhillips are not subject to any cap, may be significant and could negatively impact our business, particularly indemnities relating to our actions that could impact the tax-free nature of the distribution of Phillips 66 stock. Third parties could also seek to hold us responsible for any of the liabilities that ConocoPhillips has agreed to retain. Further, the indemnity from ConocoPhillips may not be sufficient to protect us against the full amount of such liabilities, and ConocoPhillips may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from ConocoPhillips any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, results of operations and financial condition.

We are subject to continuing contingent liabilities of ConocoPhillips following the Separation.

Notwithstanding the Separation, there are several significant areas where the liabilities of ConocoPhillips may become our obligations. For example, under the Internal Revenue Code and the related rules and regulations, each corporation that was a member of the ConocoPhillips consolidated U.S. federal income tax reporting group during any taxable period or portion of any taxable period ending on or before the effective time of the Separation is jointly and severally liable for the U.S. federal income tax liability of the entire ConocoPhillips consolidated tax reporting group for that taxable period. In connection with the Separation, we entered into the Tax Sharing Agreement with ConocoPhillips that allocates the responsibility for prior period taxes of the ConocoPhillips consolidated tax reporting group between us and ConocoPhillips. ConocoPhillips may be unable to pay any prior period taxes for which it is responsible, and we could be required to pay the entire amount of such taxes. Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans as well as other contingent liabilities.

If the distribution in connection with the Separation, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, our stockholders and ConocoPhillips could be subject to significant tax liability and, in certain circumstances, we could be required to indemnify ConocoPhillips for material taxes pursuant to indemnification obligations under the Tax Sharing Agreement.

ConocoPhillips received a private letter ruling from the Internal Revenue Service (IRS) substantially to the effect that, among other things, the distribution, together with certain related transactions, qualified as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The private letter ruling and the tax opinion that ConocoPhillips received relied on certain representations, assumptions and undertakings, including those relating to the past and future conduct of our business, and neither the private letter ruling nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter ruling does not address all the issues that are relevant to determining whether the distribution qualified for tax-free treatment. Notwithstanding the private letter ruling and the tax opinion, the IRS could determine the distribution should be treated as a taxable transaction for U.S. federal income tax purposes if it determines any of the representations, assumptions or

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undertakings that were included in the request for the private letter ruling are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling.

If the IRS were to determine that the distribution failed to qualify for tax-free treatment, in general, ConocoPhillips would be subject to tax as if it had sold the Phillips 66 common stock in a taxable sale for its fair market value, and ConocoPhillips stockholders who received shares of Phillips 66 common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.

Under the Tax Sharing Agreement, we would generally be required to indemnify ConocoPhillips against any tax resulting from the distribution to the extent that such tax resulted from (i) any of our representations or undertakings being incorrect or violated, or (ii) other actions or failures to act by us. Our indemnification obligations to ConocoPhillips and its subsidiaries, officers and directors are not limited by any maximum amount. If we are required to indemnify ConocoPhillips or such other persons under the circumstances set forth in the Tax Sharing Agreement, we may be subject to substantial liabilities.


Item 1B. UNRESOLVED STAFF COMMENTS

None.


Item 3. 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. While it is not possible to accurately predict the final outcome of these pending proceedings, if any one or more of such proceedings were decided adversely to Phillips 66, we expect there would be no material effect on our consolidated financial position. Nevertheless, such proceedings are reported pursuant to 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 (unresolved or resolved since the quarterly report on Form 10-Q for the quarterly period ended September 30, 2017)
The California Air Resources Board issued four separate Notices of Violation (NOV) to the company alleging violations of fuel specification requirements at our Los Angeles Refinery and Torrance Tank Farm. This matter was resolved with a payment of $190,000 in December 2017.

On June 27, 2017, Phillips 66 reached settlement with the San Francisco Regional Water Quality Control Board for certain exceedances of copper and chlorine under the Rodeo Refinery’s National Pollutant Discharge Elimination System permit. The settlement was finalized and payment of $109,000 to resolve the matter was made following a 30-day public comment period that ended in November 2017.


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In October 2016, after receiving a Notice of Intent to Sue from the Sierra Club, we entered into a voluntary settlement with the Illinois Environmental Protection Agency for alleged violations of wastewater requirements at the Wood River Refinery.  The settlement involves certain capital projects and payment of $125,000.  After the settlement was filed with the Court for final approval, the Sierra Club sought and was granted approval to intervene in the case. The settlement and a first modification have been entered by the Court, but the Sierra Club still seeks to reopen and challenge the settlement.

In September 2014, the EPA issued an NOV alleging a violation of hazardous air pollution regulations at the Wood River Refinery during 2014. We are working with the EPA to resolve this NOV.

In July 2014, Phillips 66 received an NOV from the EPA alleging various flaring-related violations between 2009 and 2013 at the Wood River Refinery. We are working with the EPA to resolve this NOV.

In May 2012, the Illinois Attorney General’s office filed and notified us of a complaint with respect to operations at the Wood River Refinery alleging violations of the Illinois groundwater standards and a third-party’s hazardous waste permit. The complaint seeks as relief remediation of area groundwater; compliance with the hazardous waste permit; enhanced pipeline and tank integrity measures; additional spill reporting; and fines and penalties exceeding $100,000. We are working with the Illinois Environmental Protection Agency and Attorney General’s office to resolve these allegations.


Item 4. MINE SAFETY DISCLOSURES

Not applicable.

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EXECUTIVE OFFICERS OF THE REGISTRANT
 
Name
Position Held
Age*

 
 
 
Greg C. Garland
Chairman and Chief Executive Officer
60

Robert A. Herman
Executive Vice President, Refining
58

Paula A. Johnson
Executive Vice President, Legal and Government Affairs, General Counsel and Corporate Secretary
54

Kevin J. Mitchell
Executive Vice President, Finance and Chief Financial Officer
51

Chukwuemeka A. Oyolu
Vice President and Controller
48

* On February 23, 2018.


There are no family relationships among any of the officers named above. The Board of Directors annually elects the officers to serve until a successor is elected and qualified or as otherwise provided in our By-Laws. Set forth below is information about the executive officers identified above.

Greg C. Garland is the Chairman and Chief Executive Officer of Phillips 66, a position he has held since June 2014. Previously, Mr. Garland served as Phillips 66’s Chairman, President and Chief Executive Officer from April 2012 to June 2014. Mr. Garland previously served as ConocoPhillips’ Senior Vice President, Exploration and Production—Americas from October 2010 to April 2012, and as President and Chief Executive Officer of CPChem from 2008 to 2010.

Robert A. Herman is Executive Vice President, Refining for Phillips 66, a position he has held since September 2017. Previously, Mr. Herman served Phillips 66 as Executive Vice President, Midstream from June 2014 to September 2017, Senior Vice President, HSE, Projects and Procurement from February 2014 to June 2014, and Senior Vice President, Health, Safety, and Environment from April 2012 to February 2014.

Paula A. Johnson is Executive Vice President, Legal and Government Affairs, General Counsel and Corporate Secretary of Phillips 66, a position she has held since October 2016. Previously, Ms. Johnson served as Executive Vice President, Legal, General Counsel and Corporate Secretary of Phillips 66 from May 2013 to October 2016, and Senior Vice President, Legal, General Counsel and Corporate Secretary of Phillips 66 from April 2012 to May 2013.

Kevin J. Mitchell is Executive Vice President, Finance and Chief Financial Officer of Phillips 66, a position he has held since January 2016. Previously, Mr. Mitchell served as Phillips 66’s Vice President, Investor Relations from September 2014, when he joined the company, to January 2016. Prior to joining the company, he served as the General Auditor of ConocoPhillips from May 2010 until September 2014.

Chukwuemeka A. Oyolu is Vice President and Controller of Phillips 66, a position he has held since December 2014. Mr. Oyolu was Phillips 66’s General Manager, Finance for Refining, Marketing and Transportation from May 2012 to February 2014 when he became General Manager, Planning and Optimization.

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PART II

Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Quarterly Common Stock Prices and Cash Dividends Per Share

Phillips 66’s common stock is traded on the New York Stock Exchange under the symbol “PSX.” The following table reflects intraday high and low sales prices of, and dividends declared on, our common stock for each quarter presented:

 
Stock Price
 
 
 
High
 
Low

 
Dividends

2017
 
 
 
 
First Quarter
$
88.26
 
76.28

 
0.63

Second Quarter
83.11
 
75.14

 
0.70

Third Quarter
92.19
 
80.73

 
0.70

Fourth Quarter
102.43
 
89.26

 
0.70

 
 
 
 
 
2016
 
 
 
 
First Quarter
$
90.87
 
71.74

 
0.56

Second Quarter
89.31
 
76.40

 
0.63

Third Quarter
81.31
 
73.67

 
0.63

Fourth Quarter
88.87
 
77.66

 
0.63


Closing Stock Price at December 29, 2017
 
 
 
$
101.15

Closing Stock Price at January 31, 2018
 
 
 
$
102.40

Number of Stockholders of Record at January 31, 2018
 
 
 
38,605


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Performance Graph
chart-d951c480e5999fe5e9f.jpg
In our 2016 annual report, the performance graph included a peer index (the “Previous Peer Group”) composed of Celanese Corporation; Delek US Holdings, Inc.; Dow Chemical Company; Eastman Chemical Co.; Energy Transfer Equity, LP; Enterprise Products Partners, LP; HollyFrontier Corporation; Huntsman Corporation; Marathon Petroleum Corporation; Oneok, Inc.; PBF Energy Inc.; Targa Resources Corp.; Tesoro Corporation; Valero Energy Corporation; Western Refining, Inc.; and Westlake Chemical Corp. To more appropriately weight our peers with our business segments and utilize peers with more comparable market capitalizations, we have removed Energy Transfer from the peer group and replaced Dow with LyondellBasell Industries N.V. Additionally, Tesoro acquired Western Refining (subsequently renamed Andeavor). Accordingly, the New Peer Index is composed of Andeavor; Celanese Corporation; Delek US Holdings, Inc.; Eastman Chemical Co.; Enterprise Products Partners, LP; HollyFrontier Corporation; Huntsman Corporation; LyondellBasell Industries N.V.; Marathon Petroleum Corporation; Oneok, Inc.; PBF Energy Inc.; Targa Resources Corp.; Valero Energy Corporation; and Westlake Chemical Corp.


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

 
 
 
 
 
 
 
 
October 1-31, 2017
1,717,513

 
$
92.25

 
1,717,513

 
$
3,277

November 1-30, 2017
1,675,652

 
93.30

 
1,675,652

 
3,120

December 1-31, 2017
1,492,675

 
99.17

 
1,492,675

 
2,972

Total
4,885,840

 
$
94.72

 
4,885,840

 
 
* 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 December 31, 2017, our Board of Directors has authorized repurchases totaling up to $12 billion of our outstanding common stock, including the authorization in October 2017 to repurchase $3 billion of additional shares. The authorizations from the Board of Directors do not have expiration dates. The share repurchases are expected to be funded primarily through available cash. The authorized shares will be repurchased from time to time in the open market at the company’s discretion, subject to market conditions and other factors, and in accordance with applicable regulatory requirements. We are not obligated to acquire any particular amount of common stock and may commence, suspend or discontinue purchases at any time or from time to time without prior notice. Shares of stock repurchased are held as treasury shares.



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Item 6. SELECTED FINANCIAL DATA

 
Millions of Dollars Except Per Share Amounts
 
2017

 
2016

 
2015

 
2014

 
2013

 
 
 
 
 
 
 
 
 
 
Sales and other operating revenues
$
102,354

 
84,279

 
98,975

 
161,212

 
171,596

Income from continuing operations
5,248

 
1,644

 
4,280

 
4,091

 
3,682

Income from continuing operations attributable to Phillips 66
5,106

 
1,555

 
4,227

 
4,056

 
3,665

Per common share
 
 
 
 
 
 
 
 
 
Basic
9.90

 
2.94

 
7.78

 
7.15

 
5.97

Diluted
9.85

 
2.92

 
7.73

 
7.10

 
5.92

Net income
5,248

 
1,644

 
4,280

 
4,797

 
3,743

Net income attributable to Phillips 66
5,106

 
1,555

 
4,227

 
4,762

 
3,726

Per common share
 
 
 
 
 
 
 
 
 
Basic
9.90

 
2.94

 
7.78

 
8.40

 
6.07

Diluted
9.85

 
2.92

 
7.73

 
8.33

 
6.02

Total assets
54,371

 
51,653

 
48,580

 
48,692

 
49,769

Long-term debt
10,069

 
9,588

 
8,843

 
7,793

 
6,101

Cash dividends declared per common share
2.7300

 
2.4500

 
2.1800

 
1.8900

 
1.3275



In December 2013, we entered into an agreement to exchange the stock of Phillips Specialty Products Inc. (PSPI), a flow improver business, which was included in our Marketing and Specialties segment, for shares of Phillips 66 common stock owned by the other party. The PSPI share exchange was completed in February 2014. Accordingly, the selected income from continuing operations data above for the years ended December 31, 2014 and 2013, exclude income from PSPI’s discontinued operations of $706 million and $61 million, respectively.

To ensure full understanding, you should read the selected financial data presented above in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K.



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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis is the company’s analysis of its financial performance, financial condition, and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. 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 December 31, 2017, we had total assets of $54.4 billion.

Executive Overview
We reported earnings of $5.1 billion and generated $3.6 billion in cash from operating activities in 2017. Our reported earnings included a $2.7 billion provisional income tax benefit from the U.S. Tax Cuts and Jobs Act (the Tax Act) enacted on December 22, 2017. Phillips 66 Partners LP (Phillips 66 Partners) raised net proceeds totaling $1.8 billion from equity and debt offerings. We used available cash to fund capital expenditures and investments of $1.8 billion, repurchase $1.6 billion of our common stock and pay dividends of $1.4 billion. We ended 2017 with $3.1 billion of cash and cash equivalents and approximately $5.8 billion of total committed capacity available under both our and Phillips 66 Partners’ credit facilities.

We continue to focus on the following strategic priorities:

Operating Excellence. Our commitment to operating excellence guides everything we do. We are committed to protecting the health and safety of everyone who has a role in our operations and the communities in which we operate. Continuous improvement in safety, environmental stewardship, reliability and cost efficiency is a fundamental requirement for our company and employees. We employ rigorous training and audit programs to drive ongoing improvement in both personal and process safety as we strive for zero incidents. We achieved a record-low combined injury rate in 2017. Since we cannot control commodity prices, controlling operating expenses and overhead costs, within the context of our commitment to safety and environmental stewardship, is a high priority.  Senior management actively monitors these costs. We are committed to protecting the environment and strive to reduce our environmental footprint throughout our operations. Optimizing utilization rates at our refineries through reliable and safe operations enables us to capture the value available in the market in terms of prices and margins. During 2017, our worldwide refining crude oil capacity utilization rate was 95 percent.

Growth. We have budgeted $2.3 billion in capital expenditures and investments in 2018, including $0.6 billion for Phillips 66 Partners. Additionally, our share of expected capital spending by joint ventures DCP Midstream, LLC (DCP Midstream), Chevron Phillips Chemical Company LLC (CPChem) and WRB Refining LP (WRB) in 2018 is $0.9 billion. In Midstream, we plan to invest in our Transportation and NGL businesses, focusing on projects integrated with our existing assets and infrastructure. In Chemicals, CPChem’s capital expenditures are expected to decrease due to completion of its U.S. Gulf Coast Petrochemicals Project. The two polyethylene units started up in September 2017, while commissioning of the ethane cracker is expected to begin in the first

32


quarter of 2018. Growth capital in Refining will be directed toward small, high-return, quick-payout projects primarily to increase clean product yields, while in Marketing and Specialties (M&S) it will be directed primarily towards increasing our retail sites in Europe.

Returns. We plan to improve refining returns by increasing throughput of advantaged feedstocks, disciplined capital allocation and portfolio optimization. A disciplined capital allocation process ensures we focus investments in projects that generate competitive returns throughout the business cycle. In 2017, we improved clean product yield in Refining, and in M&S, we continued to enhance our network and brand by re-imaging sites in the United States, while growing our number of sites in Europe.

Distributions. We believe shareholder value is enhanced through, among other things, consistent growth of regular dividends, complemented by share repurchases. We increased our quarterly dividend rate by 11 percent during 2017, and have increased it 250 percent since the company’s inception in 2012. Regular dividends demonstrate the confidence our Board of Directors and management have in our capital structure and operations’ capability to generate free cash flow throughout the business cycle. In 2017, we repurchased $1.6 billion, or approximately 18.7 million shares, of our common stock. Also, in October 2017, our Board of Directors authorized up to $3 billion of additional share repurchases. At the discretion of our Board of Directors, we plan to increase dividends annually and fund our share repurchase program while continuing to invest in the growth of our business.

High-Performing Organization. We strive to attract, develop and retain individuals with the knowledge and skills to implement our business strategy and who support our values and culture. Throughout the company, we focus on getting results in the right way and believe success is both what we do and how we do it. We encourage collaboration throughout our company, while valuing differences, respecting diversity, and creating a great place to work. We foster an environment of learning and development through structured programs focused on enhancing functional and technical skills where employees are engaged in our business and committed to their own, as well as the company’s, success.


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Business Environment
Commodity prices rose significantly during 2017, compared with 2016. The discount for the U.S. crude oil benchmark West Texas Intermediate (WTI) versus the international benchmark Brent widened over much of 2017, initially related to extended production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and certain non-OPEC countries, but further widened with Hurricane Harvey and logistical issues at the Cushing, Oklahoma, trading hub. Over the course of 2017, commodity prices had both favorable and unfavorable impacts on our businesses that vary by segment.

Net income in the Midstream segment, which includes our 50 percent equity investment in DCP Midstream, is closely linked to natural gas liquids (NGL) prices, natural gas prices and crude oil prices. Average natural gas prices increased in 2017, compared with 2016, due to higher demand and low production in early 2017. In the fourth quarter of 2017, natural gas prices gained momentum with colder temperatures and increased residential and commercial heating demand. Total U.S. natural gas production also increased through the fourth quarter of 2017, largely from dry gas in the Marcellus play and associated gas from the Permian Basin. NGL prices improved throughout 2017 due to international demand.
 
The Chemicals segment consists of our 50 percent equity investment in 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 2017, 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 cash costs in regions of the world where ethylene manufacturing is based upon NGL rather than crude oil-derived feedstocks. In particular, companies with North American ethane-based crackers have benefited and have captured a somewhat higher polyethylene chain margin. The ethylene-to-polyethylene chain margins expanded in 2017 because of the crude oil price recovery after the significant decline in oil prices that began in 2014.

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 2017, the U.S. 3:2:1 crack spread (three barrels of crude oil producing two barrels of gasoline and one barrel of diesel) strengthened across all quarters, compared with 2016, largely attributable to higher product demand and lower product inventories in the last half of 2017 due to Hurricane Harvey. Northwest European crack spreads on average increased in 2017, compared with 2016, also due to higher demand.

Results for our 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. Spot prices moved upward in 2017, following the increase in crude oil prices.



34


RESULTS OF OPERATIONS

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.”  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.

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
 
Year Ended December 31
 
2017

 
2016

 
2015

 
 
 
 
 
 
Midstream
$
464

 
280

 
74

Chemicals
525

 
583

 
962

Refining
1,404

 
374

 
2,555

Marketing and Specialties
686

 
891

 
1,187

Corporate and Other
2,169

 
(484
)
 
(498
)
Net income
5,248

 
1,644

 
4,280

Less: net income attributable to noncontrolling interests
142

 
89

 
53

Net income attributable to Phillips 66
$
5,106

 
1,555

 
4,227



2017 vs. 2016

Our earnings increased $3,551 million, or 228 percent, in 2017, mainly reflecting:

Recognition of a $2,735 million provisional income tax benefit from the enactment of the Tax Act in December 2017.
Higher realized refining margins.
Recognition of a $261 million after-tax gain from the consolidation of Merey Sweeny, L.P. (MSLP).
Improved equity earnings from affiliates in our Midstream segment.

These increases were partially offset by:

Increased costs due to Hurricane Harvey, primarily impacting CPChem in our Chemicals segment.
Lower realized marketing margins.
Higher interest and debt expense.

35


2016 vs. 2015

Our earnings decreased $2,672 million, or 63 percent, in 2016, primarily resulting from:

Lower realized refining margins.
Lower olefins and polyolefins margins.
Recognition in 2015 of $242 million of the deferred gain related to the sale in 2013 of the Immingham Combined Heat and Power Plant (ICHP).

These decreases were partially offset by:

Improved results from DCP Midstream, primarily as a result of goodwill and other asset impairments recorded in 2015.

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

Income Statement Analysis

2017 vs. 2016

Sales and other operating revenues and purchased crude oil and products increased 21 percent and 27 percent, respectively, in 2017. The increases were primarily due to higher prices for petroleum products, crude oil and NGL.

Equity in earnings of affiliates increased 22 percent in 2017, primarily resulting from higher equity in earnings from DCP Midstream and other affiliates in our Midstream segment, as well as WRB, partially offset by lower results from CPChem.

Equity in earnings from our Midstream segment increased $270 million due to improved results from DCP Midstream, primarily driven by improved margins, as well as higher equity in earnings from our Transportation affiliates, including our joint ventures that own the Bakken Pipeline, which started commercial operations in June 2017.
Equity in earnings of WRB increased $207 million, primarily due to higher market crack spreads, partially offset by lower feedstock advantage.
Equity in earnings of CPChem decreased $120 million, primarily due to hurricane-related costs and downtime.

Other income increased $447 million in 2017. 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.

Operating expenses increased 10 percent in 2017. This increase was mainly due to the consolidation of a transportation joint venture in December 2016, as well as higher refining turnaround expenses and utility costs, pension settlement expense, and costs associated with a full year of operations at the Freeport LPG Export Terminal. These increases were partially offset by lower costs due to the sale of the Whitegate Refinery in 2016.

Depreciation and amortization increased 13 percent in 2017 due to the Freeport LPG Export Terminal beginning operations in late 2016, as well as other assets placed in service in 2017.

Interest and debt expense increased 30 percent in 2017. This increase was primarily due to lower capitalized interest from the completion of major projects, including the startup of the Freeport LPG Export Terminal in late 2016, as well as higher average debt principal balances.


36


Income tax expense (benefit) was a benefit in 2017, compared with expense in 2016, primarily due to the $2,735 million provisional income tax benefit from the enactment of the Tax Act in December 2017. This benefit was partially offset by higher income tax expense from increased income before income taxes. See Note 21—Income Taxes, in the Notes to Consolidated Financial Statements, for more information regarding our income taxes.

Net income attributable to noncontrolling interest increased $53 million in 2017, reflecting the contribution of assets to Phillips 66 Partners during 2017 and late 2016. See Note 27—Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for more information.

2016 vs. 2015

Sales and other operating revenues and purchased crude oil and products both decreased 15 percent in 2016. The decreases were primarily due to lower average prices for petroleum products and crude oil, while average NGL prices were slightly improved during 2016.

Equity in earnings of affiliates decreased 10 percent in 2016, primarily resulting from decreased earnings from CPChem and WRB, partially offset by improved results from DCP Midstream.