Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PHILLIPS 66

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Management	67
Reports of Independent Registered Public Accounting Firm	68
Consolidated Financial Statements of Phillips 66:
Consolidated Statement of Income for the years ended December 31, 2016, 2015 and 2014	70
Consolidated Statement of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014	71
Consolidated Balance Sheet at December 31, 2016 and 2015	72
Consolidated Statement of Cash Flows for the years ended December 31, 2016, 2015 and 2014	73
Consolidated Statement of Changes in Equity for the years ended December 31, 2016, 2015 and 2014	74
Notes to Consolidated Financial Statements	76
Supplementary Information
Selected Quarterly Financial Data (Unaudited)	131

Index to Financial Statements

Report of Management

Management prepared, and is responsible for, the consolidated financial statements and the other information appearing in this annual report. The consolidated financial statements present fairly the company’s financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. In preparing its consolidated financial statements, the company includes amounts that are based on estimates and judgments management believes are reasonable under the circumstances. The company’s financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm appointed by the Audit and Finance Committee of the Board of Directors. Management has made available to Ernst & Young LLP all of the company’s financial records and related data, as well as the minutes of stockholders’ and directors’ meetings.

Assessment of Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Phillips 66’s internal control system was designed to provide reasonable assurance to the company’s management and directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on this assessment, management concluded the company’s internal control over financial reporting was effective as of December 31, 2016.

Ernst & Young LLP has issued an audit report on the company’s internal control over financial reporting as of December 31, 2016, and their report is included herein.

/s/ Greg C. Garland		/s/ Kevin J. Mitchell
Greg C. Garland		Kevin J. Mitchell
Chairman and		Executive Vice President, Finance and
Chief Executive Officer		Chief Financial Officer
February 17, 2017

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Phillips 66

We have audited the accompanying consolidated balance sheet of Phillips 66 as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Phillips 66 at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Phillips 66’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 17, 2017, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Houston, Texas

February 17, 2017

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Phillips 66

We have audited Phillips 66’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Phillips 66’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included under the heading “Assessment of Internal Control Over Financial Reporting” in the accompanying “Report of Management.” Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such-other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Phillips 66 maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2016 consolidated financial statements of Phillips 66 and our report dated February 17, 2017, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Houston, Texas

February 17, 2017

Index to Financial Statements

Consolidated Statement of Income	Phillips 66

	Millions of Dollars
Years Ended December 31	2016				2015			2014
Revenues and Other Income
Sales and other operating revenues*	$	84,279			98,975			161,212
Equity in earnings of affiliates	1,414				1,573			2,466
Net gain on dispositions	10				283			295
Other income	74				118			120
Total Revenues and Other Income	85,777				100,949			164,093
Costs and Expenses
Purchased crude oil and products	62,468				73,399			135,748
Operating expenses	4,275				4,294			4,435
Selling, general and administrative expenses	1,638				1,670			1,663
Depreciation and amortization	1,168				1,078			995
Impairments	5				7			150
Taxes other than income taxes*	13,688				14,077			15,040
Accretion on discounted liabilities	21				21			24
Interest and debt expense	338				310			267
Foreign currency transaction (gains) losses	(15		)		49			26
Total Costs and Expenses	83,586				94,905			158,348
Income from continuing operations before income taxes	2,191				6,044			5,745
Provision for income taxes	547				1,764			1,654
Income from Continuing Operations	1,644				4,280			4,091
Income from discontinued operations**	—				—			706
Net income	1,644				4,280			4,797
Less: net income attributable to noncontrolling interests	89				53			35
Net Income Attributable to Phillips 66	$	1,555			4,227			4,762
Amounts Attributable to Phillips 66 Common Stockholders:
Income from continuing operations	$	1,555			4,227			4,056
Income from discontinued operations	—				—			706
Net Income Attributable to Phillips 66	$	1,555			4,227			4,762
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
Basic
Continuing operations	$	2.94			7.78			7.15
Discontinued operations	—				—			1.25
Net Income Attributable to Phillips 66 Per Share of Common Stock	$	2.94			7.78			8.40
Diluted
Continuing operations	$	2.92			7.73			7.10
Discontinued operations	—				—			1.23
Net Income Attributable to Phillips 66 Per Share of Common Stock	$	2.92			7.73			8.33
Dividends Paid Per Share of Common Stock (dollars)	$	2.45			2.18			1.89
Average Common Shares Outstanding (in thousands)
Basic	527,531				542,355			565,902
Diluted	530,066				546,977			571,504
*Includes excise taxes on petroleum product sales:	$	13,381			13,780			14,698
**Net of provision for income taxes on discontinued operations:	$	—			—			5
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Consolidated Statement of Comprehensive Income	Phillips 66
	Millions of Dollars
Years Ended December 31	2016				2015			2014
Net Income	$	1,644			4,280			4,797
Other comprehensive income (loss)
Defined benefit plans
Actuarial gain/loss:
Actuarial loss arising during the period	(178		)		(138	)		(451	)
Amortization to net income of net actuarial loss and settlements	94				174			56
Curtailment gain	31				—			—
Plans sponsored by equity affiliates	(11		)		11			(66	)
Income taxes on defined benefit plans	13				(13	)		169
Defined benefit plans, net of tax	(51		)		34			(292	)
Foreign currency translation adjustments	(301		)		(163	)		(294	)
Income taxes on foreign currency translation adjustments	5				7			18
Foreign currency translation adjustments, net of tax	(296		)		(156	)		(276	)
Cash flow hedges	8				—			—
Income taxes on hedging activities	(3		)		—			—
Hedging activities, net of tax	5				—			—
Other Comprehensive Loss, Net of Tax	(342		)		(122	)		(568	)
Comprehensive Income	1,302				4,158			4,229
Less: comprehensive income attributable to noncontrolling interests	89				53			35
Comprehensive Income Attributable to Phillips 66	$	1,213			4,105			4,194
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Consolidated Balance Sheet	Phillips 66
	Millions of Dollars
At December 31	2016				2015
Assets
Cash and cash equivalents	$	2,711			3,074
Accounts and notes receivable (net of allowances of $34 million in 2016 and $55 million in 2015)	5,485				4,411
Accounts and notes receivable—related parties	912				762
Inventories	3,150				3,477
Prepaid expenses and other current assets	422				532
Total Current Assets	12,680				12,256
Investments and long-term receivables	13,534				12,143
Net properties, plants and equipment	20,855				19,721
Goodwill	3,270				3,275
Intangibles	888				906
Other assets	426				279
Total Assets	$	51,653			48,580
Liabilities
Accounts payable	$	6,395			5,155
Accounts payable—related parties	666				500
Short-term debt	550				44
Accrued income and other taxes	805				878
Employee benefit obligations	527				576
Other accruals	520				378
Total Current Liabilities	9,463				7,531
Long-term debt	9,588				8,843
Asset retirement obligations and accrued environmental costs	655				665
Deferred income taxes	6,743				6,041
Employee benefit obligations	1,216				1,285
Other liabilities and deferred credits	263				277
Total Liabilities	27,928				24,642
Equity
Common stock (2,500,000,000 shares authorized at $.01 par value) Issued (2016—641,593,854 shares; 2015—639,336,287 shares)
Par value	6				6
Capital in excess of par	19,559				19,145
Treasury stock (at cost: 2016—122,827,264 shares; 2015—109,925,907 shares)	(8,788		)		(7,746	)
Retained earnings	12,608				12,348
Accumulated other comprehensive loss	(995		)		(653	)
Total Stockholders’ Equity	22,390				23,100
Noncontrolling interests	1,335				838
Total Equity	23,725				23,938
Total Liabilities and Equity	$	51,653			48,580
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Consolidated Statement of Cash Flows	Phillips 66
	Millions of Dollars
Years Ended December 31	2016				2015			2014
Cash Flows From Operating Activities
Net income	$	1,644			4,280			4,797
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	1,168				1,078			995
Impairments	5				7			150
Accretion on discounted liabilities	21				21			24
Deferred taxes	612				529			(488	)
Undistributed equity earnings	(815		)		185			197
Net gain on dispositions	(10		)		(283	)		(295	)
Income from discontinued operations	—				—			(706	)
Other	(163		)		117			(127	)
Working capital adjustments
Decrease (increase) in accounts and notes receivable	(1,258		)		2,129			2,226
Decrease (increase) in inventories	216				(144	)		(85	)
Decrease (increase) in prepaid expenses and other current assets	(147		)		324			(316	)
Increase (decrease) in accounts payable	1,579				(2,300	)		(3,323	)
Increase (decrease) in taxes and other accruals	111				(230	)		478
Net cash provided by continuing operating activities	2,963				5,713			3,527
Net cash provided by discontinued operations	—				—			2
Net Cash Provided by Operating Activities	2,963				5,713			3,529
Cash Flows From Investing Activities
Capital expenditures and investments	(2,844		)		(5,764	)		(3,773	)
Proceeds from asset dispositions*	156				70			1,244
Advances/loans—related parties	(432		)		(50	)		(3	)
Collection of advances/loans—related parties	108				50			—
Other	(146		)		(44	)		238
Net cash used in continuing investing activities	(3,158		)		(5,738	)		(2,294	)
Net cash used in discontinued operations	—				—			(2	)
Net Cash Used in Investing Activities	(3,158		)		(5,738	)		(2,296	)
Cash Flows From Financing Activities
Issuance of debt	2,090				1,169			2,487
Repayment of debt	(833		)		(926	)		(49	)
Issuance of common stock	(12		)		(19	)		1
Repurchase of common stock	(1,042		)		(1,512	)		(2,282	)
Share exchange—PSPI transaction	—				—			(450	)
Dividends paid on common stock	(1,282		)		(1,172	)		(1,062	)
Distributions to noncontrolling interests	(75		)		(46	)		(30	)
Net proceeds from issuance of Phillips 66 Partners LP common units	972				384			—
Other	4				5			23
Net cash used in continuing financing activities	(178		)		(2,117	)		(1,362	)
Net cash used in discontinued operations	—				—			—
Net Cash Used in Financing Activities	(178		)		(2,117	)		(1,362	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	10				9			(64	)
Net Change in Cash and Cash Equivalents	(363		)		(2,133	)		(193	)
Cash and cash equivalents at beginning of year	3,074				5,207			5,400
Cash and Cash Equivalents at End of Year	$	2,711			3,074			5,207
* Includes return of investments in equity affiliates and working capital true-ups on dispositions.
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Consolidated Statement of Changes in Equity												Phillips 66
	Millions of Dollars
	Attributable to Phillips 66
	Common Stock
	Par Value			Capital in Excess of Par		Treasury Stock		Retained Earnings		Accum. Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
December 31, 2013	$	6		18,887		(2,602	)	5,622		37		442		22,392
Net income	—			—		—		4,762		—		35		4,797
Other comprehensive loss	—			—		—		—		(568	)	—		(568	)
Cash dividends paid on common stock	—			—		—		(1,062	)	—		—		(1,062	)
Repurchase of common stock	—			—		(2,282	)	—		—		—		(2,282	)
Share exchange—PSPI transaction	—			—		(1,350	)	—		—		—		(1,350	)
Benefit plan activity	—			153		—		(13	)	—		—		140
Distributions to noncontrolling interests and other	—			—		—		—		—		(30	)	(30	)
December 31, 2014	6			19,040		(6,234	)	9,309		(531	)	447		22,037
Net income	—			—		—		4,227		—		53		4,280
Other comprehensive loss	—			—		—		—		(122	)	—		(122	)
Cash dividends paid on common stock	—			—		—		(1,172	)	—		—		(1,172	)
Repurchase of common stock	—			—		(1,512	)	—		—		—		(1,512	)
Benefit plan activity	—			105		—		(16	)	—		—		89
Issuance of Phillips 66 Partners LP common units	—			—		—		—		—		384		384
Distributions to noncontrolling interests and other	—			—		—		—		—		(46	)	(46	)
December 31, 2015	6			19,145		(7,746	)	12,348		(653	)	838		23,938
Net income	—			—		—		1,555		—		89		1,644
Other comprehensive loss	—			—		—		—		(342	)	—		(342	)
Cash dividends paid on common stock	—			—		—		(1,282	)	—		—		(1,282	)
Repurchase of common stock	—			—		(1,042	)	—		—		—		(1,042	)
Benefit plan activity	—			106		—		(13	)	—		—		93
Issuance of Phillips 66 Partners LP common units	—			308		—		—		—		483		791
Distributions to noncontrolling interests and other	—			—		—		—		—		(75	)	(75	)
December 31, 2016	$	6		19,559		(8,788	)	12,608		(995	)	1,335		23,725

Index to Financial Statements

			Shares in Thousands
			Common Stock Issued		Treasury Stock
December 31, 2013			634,286		44,106
Repurchase of common stock			—		29,121
Share exchange—PSPI transaction			—		17,423
Shares issued—share-based compensation			2,746		—
December 31, 2014			637,032		90,650
Repurchase of common stock			—		19,276
Shares issued—share-based compensation			2,304		—
December 31, 2015			639,336		109,926
Repurchase of common stock			—		12,901
Shares issued—share-based compensation			2,258		—
December 31, 2016			641,594		122,827
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Notes to Consolidated Financial Statements	Phillips 66

Note 1—Summary of Significant Accounting Policies

▪

Consolidation Principles and Investments—Our consolidated financial statements include the accounts of majority-owned, controlled subsidiaries and variable interest entities where we are the primary beneficiary. The equity method is used to account for investments in affiliates in which we have the ability to exert significant influence over the affiliates’ operating and financial policies. When we do not have the ability to exert significant influence, the investment is either classified as available-for-sale if fair value is readily determinable, or the cost method if fair value is not readily determinable. Undivided interests in pipelines, natural gas plants and terminals are consolidated on a proportionate basis. Other securities and investments are generally carried at cost.

▪

Foreign Currency Translation—Adjustments resulting from the process of translating foreign functional currency financial statements into U.S. dollars are included in accumulated other comprehensive income/loss in stockholders’ equity. Foreign currency transaction gains and losses result from remeasuring monetary assets and liabilities denominated in a foreign currency into the functional currency of our subsidiary holding the asset or liability. We include these transaction gains and losses in current earnings. Most of our foreign operations use their local currency as the functional currency.

▪	Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ from these estimates.

▪	Revenue Recognition—Revenues associated with sales of crude oil, natural gas liquids (NGL), petroleum and chemical products, and other items are recognized when title passes to the customer, which is when the risk of ownership passes to the purchaser and physical delivery of goods occurs, either immediately or within a fixed delivery schedule that is reasonable and customary in the industry.

Revenues associated with transactions commonly called buy/sell contracts, in which the purchase and sale of inventory with the same counterparty are entered into in contemplation of one another, are combined and reported net (i.e., on the same income statement line) in the “Purchased crude oil and products” line of our consolidated statement of income.

▪	Cash Equivalents—Cash equivalents are highly liquid, short-term investments that are readily convertible to known amounts of cash and will mature within 90 days or less from the date of acquisition. We carry these at cost plus accrued interest, which approximates fair value.

▪	Shipping and Handling Costs—We record shipping and handling costs in the “Purchased crude oil and products” line of our consolidated statement of income. Freight costs billed to customers are recorded in “Sales and other operating revenues.”

▪

Inventories—We have several valuation methods for our various types of inventories and consistently use the following methods for each type of inventory. Crude oil and petroleum products inventories are valued at the lower of cost or market in the aggregate, primarily on the last-in, first-out (LIFO) basis. Any necessary lower-of-cost-or-market write-downs at year end are recorded as permanent adjustments to the LIFO cost basis. LIFO is used to better match current inventory costs with current revenues and to meet tax-conformity requirements. Costs include both direct and indirect expenditures incurred in bringing an item or product to its existing condition and location, but not unusual or nonrecurring costs or research and development costs. Materials and supplies inventories are valued using the weighted-average-cost method.

▪	Fair Value Measurements—We categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs which are observable,

Index to Financial Statements

other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting significant modifications to observable related market data or our assumptions about pricing by market participants.

▪	Derivative Instruments—Derivative instruments are recorded on the balance sheet at fair value. We have elected to net derivative assets and liabilities with the same counterparty on the balance sheet if the right of offset exists and certain other criteria are met. We also net collateral payables or receivables against derivative assets and derivative liabilities, respectively.

Recognition and classification of the gain or loss that results from recording and adjusting a derivative to fair value depends on the purpose for issuing or holding the derivative. Gains and losses from derivatives not designated as cash-flow hedges are recognized immediately in earnings. For derivative instruments that are designated and qualify as a fair value hedge, the gains or losses from adjusting the derivative to its fair value will be immediately recognized in earnings and, to the extent the hedge is effective, offset the concurrent recognition of changes in the fair value of the hedged item. Gains or losses from derivative instruments that are designated and qualify as a cash flow hedge or hedge of a net investment in a foreign entity are recognized in other comprehensive income/loss and appear on the balance sheet in accumulated other comprehensive income/loss until the hedged transaction is recognized in earnings; however, to the extent the change in the value of the derivative exceeds the change in the anticipated cash flows of the hedged transaction, the excess gains or losses are recognized immediately in earnings.

▪	Capitalized Interest—A portion of interest from external borrowings is capitalized on major projects with an expected construction period of one year or longer. Capitalized interest is added to the cost of the underlying asset’s properties, plants and equipment and is amortized over the useful life of the asset.

▪

Intangible Assets Other Than Goodwill—Intangible assets with finite useful lives are amortized by the straight-line method over their useful lives. Intangible assets with indefinite useful lives are not amortized but are tested at least annually for impairment. Each reporting period, we evaluate the remaining useful lives of intangible assets not being amortized to determine whether events and circumstances continue to support indefinite useful lives. These indefinite-lived intangibles are considered impaired if the fair value of the intangible asset is lower than net book value. The fair value of intangible assets is determined based on quoted market prices in active markets, if available. If quoted market prices are not available, the fair value of intangible assets is determined based upon the present values of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants, or upon estimated replacement cost, if expected future cash flows from the intangible asset are not determinable.

▪

Goodwill—Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in a business combination. It is not amortized, but is tested annually for impairment, and when events or changes in circumstance indicate that the fair value of a reporting unit with goodwill is below its carrying value. The impairment test requires allocating goodwill and other assets and liabilities to reporting units. The fair value of each reporting unit is determined and compared to the book value of the reporting unit. If the fair value of the reporting unit is less than the book value, including goodwill, the implied fair value of goodwill is calculated. The excess, if any, of the book value over the implied fair value of the goodwill is charged to net income. For purposes of testing goodwill for impairment, we have three reporting units with goodwill balances: Transportation, Refining and Marketing and Specialties (M&S).

▪	Depreciation and Amortization—Depreciation and amortization of properties, plants and equipment are determined by either the individual-unit-straight-line method or the group-straight-line method (for those individual units that are highly integrated with other units).

▪

Impairment of Properties, Plants and Equipment—Properties, plants and equipment (PP&E) used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in the future cash flows expected to be generated by an asset group. If indicators of potential impairment exist, an undiscounted cash flow test is performed. If the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, including applicable liabilities, the carrying value of the PP&E included in the asset group is written down to estimated fair value through additional amortization or

Index to Financial Statements

depreciation provisions and reported in the “Impairments” line of our consolidated statement of income in the period in which the determination of the impairment is made. Individual assets are grouped for impairment purposes at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets (for example, at a refinery complex level). Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined using one or more of the following methods: the present values of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants; a market multiple of earnings for similar assets; or historical market transactions of similar assets, adjusted using principal market participant assumptions when necessary. Long-lived assets held for sale are accounted for at the lower of amortized cost or fair value, less cost to sell, with fair value determined using a binding negotiated price, if available, or present value of expected future cash flows as previously described.

The expected future cash flows used for impairment reviews and related fair value calculations are based on estimated future volumes, prices, costs, margins and capital project decisions, considering all available evidence at the date of review.

▪

Impairment of Investments in Nonconsolidated Entities—Investments in nonconsolidated entities are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred. When indicators exist, the fair value is estimated and compared to the investment carrying value. If any impairment is judgmentally determined to be other than temporary, the carrying value of the investment is written down to fair value. The fair value of the impaired investment is based on quoted market prices, if available, or upon the present value of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants and a market analysis of comparable assets, if appropriate.

▪	Maintenance and Repairs—Costs of maintenance and repairs, which are not significant improvements, are expensed when incurred. Major refinery maintenance turnarounds are expensed as incurred.

▪

Property Dispositions—When complete units of depreciable property are sold, the asset cost and related accumulated depreciation are eliminated, with any gain or loss reflected in the “Net gain on dispositions” line of our consolidated statement of income. When less than complete units of depreciable property are disposed of or retired, the difference between asset cost and salvage value is charged or credited to accumulated depreciation.

▪

Asset Retirement Obligations and Environmental Costs—The fair value of legal obligations to retire and remove long-lived assets are recorded in the period in which the obligation is incurred. When the liability is initially recorded, we capitalize this cost by increasing the carrying amount of the related PP&E. Over time, the liability is increased for the change in its present value, and the capitalized cost in PP&E is depreciated over the useful life of the related asset. Our estimate of the liability may change after initial recognition, in which case we record an adjustment to the liability and PP&E.

Environmental expenditures are expensed or capitalized, depending upon their future economic benefit. Expenditures relating to an existing condition caused by past operations, and those having no future economic benefit, are expensed. Liabilities for environmental expenditures are recorded on an undiscounted basis (unless acquired in a purchase business combination) when environmental assessments or cleanups are probable and the costs can be reasonably estimated. Recoveries of environmental remediation costs from other parties, such as state reimbursement funds, are recorded as assets when their receipt is probable and estimable.

▪

Guarantees—The fair value of a guarantee is determined and recorded as a liability at the time the guarantee is given. The initial liability is subsequently reduced as we are released from exposure under the guarantee. We amortize the guarantee liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of guarantee. In cases where the guarantee term is indefinite, we reverse the liability when we have information indicating the liability has essentially been relieved or amortize it over an appropriate time period as the fair value of our guarantee exposure declines over time. We amortize the guarantee liability to the related income statement line item based on the nature of the guarantee. When it becomes probable we will have to perform on a guarantee, we accrue a separate liability if it is reasonably estimable, based on the facts and

Index to Financial Statements

circumstances at that time. We reverse the fair value liability only when there is no further exposure under the guarantee.

▪

Stock-Based Compensation—We recognize stock-based compensation expense over the shorter of: (1) the service period (i.e., the time required to earn the award); or (2) the period beginning at the start of the service period and ending when an employee first becomes eligible for retirement, but not less than six months, which is the minimum time required for an award not to be subject to forfeiture. We have elected to recognize expense on a straight-line basis over the service period for the entire award, irrespective of whether the award was granted with ratable or cliff vesting.

▪

Income Taxes—Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Interest related to unrecognized tax benefits is reflected in interest expense, and penalties in operating expenses.

▪	Taxes Collected from Customers and Remitted to Governmental Authorities—Excise taxes are reported gross within sales and other operating revenues and taxes other than income taxes, while other sales and value-added taxes are recorded net in taxes other than income taxes.

▪	Treasury Stock—We record treasury stock purchases at cost, which includes incremental direct transaction costs. Amounts are recorded as reductions in stockholders’ equity in the consolidated balance sheet.

Note 2—Changes in Accounting Principles

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

In June 2014, the FASB issued ASU No. 2014-10, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation.” This ASU removed the definition of a development stage entity from the Master Glossary of the Accounting Standard Codification (ASC) and the related financial reporting requirements specific to development stage entities. ASU 2014-10 is intended to reduce cost and complexity of financial reporting for entities that have not commenced planned principal operations. For financial reporting requirements other than the variable interest entity (VIE) guidance in ASC Topic 810, ASU No. 2014-10 was effective for annual and quarterly reporting periods of public entities beginning after December 15, 2014. For the financial reporting requirements related to VIEs in ASC Topic 810, ASU No. 2014-10 was effective for annual and quarterly reporting periods of public entities beginning after December 15, 2015. We adopted the provisions of this ASU related to the financial reporting requirements other than the VIE guidance effective January 1, 2015. We adopted the remaining provisions effective January 1, 2016, and updated our disclosures about the risks and uncertainties related to our joint venture entities that have not commenced their principal operations.

Index to Financial Statements

Note 3—Variable Interest Entities

Consolidated VIEs

In 2013, we formed Phillips 66 Partners LP, a master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and NGL pipelines and terminals, as well as other midstream assets. We consolidate Phillips 66 Partners as we determined that Phillips 66 Partners is a VIE and we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as well as the ability to direct the activities of Phillips 66 Partners that most significantly impact its economic performance. See Note 27—Phillips 66 Partners LP, for additional information.

The most significant assets of Phillips 66 Partners that are available to settle only its obligations at December 31 were:

	Millions of Dollars
	2016				2015
Equity investments*	$	1,142			945
Net properties, plants and equipment	2,675				2,437

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

The most significant liability of Phillips 66 Partners for which creditors do not have recourse to the general credit of its primary beneficiary was long-term debt, which was $2,396 million and $1,091 million at December 31, 2016 and 2015, respectively.

Non-consolidated VIEs

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

Merey Sweeny, L.P. (MSLP) is a limited partnership that owns a delayed coker and related facilities at the Sweeny Refinery. Under the agreements that governed the relationships between the co-venturers in MSLP, certain defaults by Petróleos de Venezuela S.A. (PDVSA) with respect to supply of crude oil to the Sweeny Refinery triggered the right to acquire PDVSA’s 50 percent ownership interest in MSLP. The call right was exercised in August 2009. The exercise of the call right was challenged, and the dispute was arbitrated in our favor and subsequently litigated. Through December 31, 2016, we continued to use the equity method of accounting for MSLP because the call right exercise remained subject to legal challenge. MSLP was a VIE because, in securing lender consents in connection with our separation from ConocoPhillips in 2012 (the Separation), we provided a 100 percent debt guarantee to the lender of MSLP’s 8.85% senior notes (MSLP Senior Notes). PDVSA did not participate in the debt guarantee. In our VIE assessment, this disproportionate debt guarantee, plus other liquidity support provided jointly by us and PDVSA independently of equity ownership, resulted in MSLP not being exposed to all potential losses. We determined we were not the primary beneficiary while the call exercise was subject to legal challenge, because under the partnership agreement, the co-venturers jointly directed the activities of MSLP that most significantly impacted economic performance. At December 31, 2016, our maximum exposure to loss was $326 million, which represented the outstanding principal balance of the MSLP Senior Notes of $123 million and our investment in MSLP of $203 million. As discussed more fully in Note 5—Business Combinations, the exercise of the call right ceased to be subject to legal challenge in February 2017. At that point, we began consolidating MSLP as a wholly owned subsidiary and MSLP was no longer considered a VIE.

We have a 25 percent ownership interest in Dakota Access, LLC (DAPL) and Energy Transfer Crude Oil Company, LLC (ETCOP), whose planned principal operations have not commenced. Until planned principal operations have commenced, these entities do not have sufficient equity at risk to fully fund the construction of all assets required for principal operations, and thus represent VIEs. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of DAPL and ETCOP that most significantly impact economic performance. We use the equity method of accounting for these investments. At December 31, 2016, our maximum exposure to loss was $1,057 million, which represents the aggregate book value of our equity investments of $532 million, our loans to DAPL and ETCOP for an aggregated balance of $250 million and our share of borrowings under the project financing facility of $275 million.

Index to Financial Statements

Note 4—Inventories

Inventories at December 31 consisted of the following:

	Millions of Dollars
	2016				2015
Crude oil and petroleum products	$	2,883			3,214
Materials and supplies	267				263
	$	3,150			3,477

Inventories valued on the LIFO basis totaled $2,772 million and $3,085 million at December 31, 2016 and 2015, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $3.3 billion and $1.3 billion at December 31, 2016 and 2015, respectively.

Excluding the disposition of the Whitegate Refinery, which occurred in September 2016, certain planned reductions in inventory caused liquidations of LIFO inventory values during each of the three years ended December 31, 2016. These liquidations decreased net income by approximately $68 million, $37 million and $8 million in 2016, 2015 and 2014, respectively.

In conjunction with the Whitegate Refinery disposition, the refinery’s LIFO inventory values were liquidated causing a

decrease in net income of $62 million during the year ended December 31, 2016. This LIFO liquidation impact was included in the net gain recognized on the disposition.

Note 5—Business Combinations

In November 2016, Phillips 66 Partners acquired NGL logistics assets located in southeast Louisiana, consisting of approximately 500 miles of pipelines and storage caverns connecting multiple fractionation facilities, refineries and a petrochemical facility. The acquisition provided an opportunity for fee-based growth in the Louisiana market within our Midstream segment. The acquisition was included in the “Capital expenditures and investments” line of our consolidated statement of cash flows. As of December 31, 2016, we provisionally recorded $183 million of PP&E in connection with the acquisition.

While we had no acquisitions in 2015, we completed the following acquisitions in 2014:

•	In August 2014, we acquired a 7.1 million-barrel-storage-capacity crude oil and petroleum products terminal located near Beaumont, Texas, to promote growth plans in our Midstream segment.

•	In July 2014, we acquired Spectrum Corporation, a private label and specialty lubricants business headquartered in Memphis, Tennessee. The acquisition supported our plans to selectively grow stable-return businesses in our M&S segment.

•	In March 2014, we acquired our co-venturer’s interest in an entity that operates a power and steam generation plant located in Texas that is included in our M&S segment. This acquisition provided us with full operational control over a key facility supplying utilities and other services to one of our refineries.

We funded each of these 2014 acquisitions with cash on hand. Total cash consideration paid in 2014 was $741 million, net of cash acquired. Cash consideration paid for acquisitions is included in the “Capital expenditures and investments” line of our consolidated statement of cash flows. Our acquisition accounting for these transactions was finalized in 2015.

MSLP owns a delayed coker and related facilities at the Sweeny Refinery, and its results are included in our Refining segment. MSLP processes long residue, which is produced from heavy sour crude oil, for a fee. Fuel-grade petroleum coke is produced as a by-product and becomes the property of MSLP. Prior to August 28, 2009, MSLP was owned 50/50

Index to Financial Statements

by ConocoPhillips and PDVSA. Under the agreements that governed the relationships between the partners, certain defaults by PDVSA with respect to supply of crude oil to the Sweeny Refinery triggered the right to acquire PDVSA’s 50 percent ownership interest in MSLP, which was exercised in August 2009. The exercise was challenged, and the dispute was arbitrated in our favor and subsequently litigated. While the dispute was being arbitrated and litigated, we continued to use the equity method of accounting for our 50 percent interest in MSLP. When the exercise of the call right ceased to be subject to legal challenge on February 7, 2017, we deemed that we had acquired PDVSA’s 50 percent share of MSLP and began accounting for MSLP as a wholly owned consolidated subsidiary.

Based on a preliminary third-party appraisal of the fair value of MSLP’s net assets, utilizing discounted cash flows and replacement costs, the acquisition of PDVSA’s 50 percent interest is expected to result in our recording a noncash, pre-tax gain of approximately $420 million in the first quarter of 2017. The preliminary fair value of our original equity interest in MSLP is approximately $190 million.

Note 6—Assets Held for Sale or Sold

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

In December 2014, we completed the sale of our ownership interests in the Malaysia Refining Company Sdn. Bdh. (MRC), which was included in our Refining segment. At the time of the disposition, the total carrying value of our investment in MRC was $334 million, including $76 million of allocated goodwill and currency translation adjustments. A before-tax gain of $145 million was recognized in 2014 from this disposition.

In July 2014, we entered into an agreement to sell the Bantry Bay terminal in Ireland, which was included in our Refining segment. Accordingly, the net assets of the terminal were classified as held for sale at that time, which resulted in a before-tax impairment in 2014 of $12 million from the reduction of the carrying value of the long-lived assets to estimated fair value less costs to sell. In February 2015, we completed the sale of the terminal. At the time of the disposition, the terminal had a net carrying value of $68 million, which primarily related to net PP&E. An immaterial gain was recognized in 2015 on this disposition.

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

In July 2013, we completed the sale of the Immingham Combined Heat and Power Plant (ICHP), which was included in our M&S segment. A gain on this disposal was deferred at the time of the sale due to an indemnity provided to the buyer. We recognized the deferred gain in earnings as our exposure under the indemnity declined, beginning in the third quarter of 2014 and ending in the second quarter of 2015 when the indemnity expired. We recognized $242 million and $126 million of the deferred gain during the years ended December 31, 2015 and 2014, respectively.

Index to Financial Statements

Note 7—Investments, Loans and Long-Term Receivables

Components of investments, loans and long-term receivables at December 31 were:

	Millions of Dollars
	2016				2015
Equity investments	$	13,102			11,977
Loans and long-term receivables	334				84
Other investments	98				82
	$	13,534			12,143

Equity Investments

Affiliated companies in which we had a significant equity investment at December 31, 2016, included:

•	WRB Refining LP (WRB)—50 percent owned business venture with Cenovus Energy Inc. (Cenovus)—owns the Wood River and Borger refineries.

•	DCP Midstream, LLC (DCP Midstream)—50 percent owned joint venture with Spectra Energy Corp—owns and operates gas plants, gathering systems, storage facilities and fractionation plants, including through its investment in DCP Midstream, LP (formerly named DCP Midstream Partners, LP).

•	Chevron Phillips Chemical Company LLC (CPChem)—50 percent owned joint venture with Chevron U.S.A. Inc., an indirect wholly owned subsidiary of Chevron Corporation—manufactures and markets petrochemicals and plastics.

•	Rockies Express Pipeline LLC (REX)—25 percent owned joint venture with Tallgrass Energy Partners L.P.—owns and operates a natural gas pipeline system from Meeker, Colorado to Clarington, Ohio.

•	DCP Sand Hills Pipeline, LLC (Sand Hills)—Phillips 66 Partners’ 33 percent owned joint venture with DCP Partners—owns and operates NGL pipeline systems from the Permian and Eagle Ford basins to Mont Belvieu, Texas.

•	DCP Southern Hills Pipeline, LLC (Southern Hills)—Phillips 66 Partners’ 33 percent owned joint venture with DCP Partners—owns and operates NGL pipeline systems from the Midcontinent region to Mont Belvieu, Texas.

•	DAPL/ETCOP—two 25 percent owned joint ventures with Energy Transfer Equity L.P. and Energy Transfer Partners L.P. (collectively “Energy Transfer”). DAPL is constructing a crude oil pipeline system from the Bakken/Three Forks production area in North Dakota to Patoka, Illinois, and ETCOP completed a connecting crude oil pipeline system from Patoka to Nederland, Texas.

Summarized 100 percent financial information for all equity method investments in affiliated companies, combined, was as follows:

	Millions of Dollars
	2016				2015			2014
Revenues	$	30,605			33,126			57,979
Income before income taxes	3,206				3,180			4,791
Net income	2,960				3,158			4,700
Current assets	7,097				6,024			7,402
Noncurrent assets	50,163				46,047			41,271
Current liabilities	5,173				4,130			6,854
Noncurrent liabilities	13,709				11,493			9,736
Noncontrolling interests	2,260				2,404			2,584

Index to Financial Statements

Our share of income taxes incurred directly by the equity companies is included in equity in earnings of affiliates, and as such is not included in the provision for income taxes in our consolidated financial statements.

At December 31, 2016, retained earnings included $1,945 million related to the undistributed earnings of affiliated companies. Dividends received from affiliates were $616 million, $1,769 million, and $3,305 million in 2016, 2015 and 2014, respectively.

WRB

WRB’s operating assets consist of the Wood River and Borger refineries, located in Roxana, Illinois, and Borger, Texas, respectively, for which we are the operator and managing partner. As a result of our contribution of these two assets to WRB, a basis difference was created because the fair value of the contributed assets recorded by WRB exceeded their historical book value. The difference is primarily amortized and recognized as a benefit evenly over a period of 26 years, which was the estimated remaining useful life of the refineries’ PP&E at the closing date. At December 31, 2016, the book value of our investment in WRB was $2,088 million, and the basis difference was $2,970 million. Equity earnings in 2016, 2015 and 2014 were increased by $185 million, $218 million and $184 million, respectively, due to amortization of the basis difference. Cenovus was obligated to contribute $7.5 billion, plus accrued interest, to WRB over a 10-year period that began in 2007. In the first quarter of 2014, Cenovus prepaid its remaining balance under this obligation. As a result, WRB declared a special dividend, which was distributed to the co-venturers in March 2014. Of the $1,232 million that we received, $760 million was considered a return on our investment in WRB (an operating cash inflow), and $472 million was considered a return of our investment in WRB (an investing cash inflow). The return of investment portion of the dividend was included in the “Proceeds from asset dispositions” line in our consolidated statement of cash flows.

DCP Midstream

DCP Midstream owns and operates gas plants, gathering systems, storage facilities and fractionation plants, including through its investment in DCP Partners. DCP Midstream markets a portion of its NGL to us and CPChem under supply agreements, the primary production commitment of which began a ratable wind-down period in December 2014 and expires in January 2019. This purchase commitment is on an “if-produced, will-purchase” basis. NGL is purchased under this agreement at various published market index prices, less transportation and fractionation fees.

In 2015, we contributed $1.5 billion in cash to DCP Midstream as a capital contribution. Our co-venturer contributed its interests in Sand Hills and Southern Hills as a capital contribution equal in value to ours. Our ownership percentage in DCP Midstream remained unchanged.

At December 31, 2016, the book value of our investment in DCP Midstream was $2,258 million, and the basis difference was $55 million.

CPChem

CPChem manufactures and markets petrochemicals and plastics. At December 31, 2016, the book value of our equity method investment in CPChem was $5,773 million. We have multiple supply and purchase agreements in place with CPChem, ranging in initial terms from one to 99 years, with extension options. These agreements cover sales and purchases of refined products, solvents, and petrochemical and NGL feedstocks, as well as fuel oils and gases. All products are purchased and sold under specified pricing formulas based on various published pricing indices.

REX

REX owns a natural gas pipeline that runs from Meeker, Colorado to Clarington, Ohio. In 2015, REX repaid $450 million of its debt, reducing its long-term debt to approximately $2.6 billion. REX funded the repayment through member cash contributions. Our 25 percent share was approximately $112 million, which we contributed to REX in 2015. At December 31, 2016, the book value of our equity method investment in REX was $455 million.

Sand Hills

The Sand Hills pipeline is a fee-based pipeline that transports NGL from the Permian Basin and Eagle Ford Shale to facilities along the Texas Gulf Coast and the Mont Belvieu market hub. This investment was contributed to Phillips 66 Partners LP in March 2015 as discussed further in Note 27—Phillips 66 Partners LP. At December 31, 2016, the book value of our equity investment in Sand Hills was $445 million.

Index to Financial Statements

Southern Hills

The Southern Hills pipeline is a fee-based pipeline that transports NGL from the Midcontinent to facilities along the Texas Gulf Coast and the Mont Belvieu market hub. This investment was contributed to Phillips 66 Partners LP in March 2015 as discussed further in Note 27—Phillips 66 Partners LP. At December 31, 2016, the book value of our investment in Southern Hills was $212 million, and the basis difference was $96 million.

DAPL/ETCOP

We own a 25 percent interest in the DAPL and ETCOP joint ventures, which were formed to construct pipelines to deliver crude oil produced in the Bakken/Three Forks production area of North Dakota to market centers in the Midwest and the Gulf Coast. In May 2016, we and our co-venturer executed agreements under which we and our co-venturer would loan DAPL and ETCOP up to a maximum of $2,256 million and $227 million, respectively, with the amounts loaned by us and our co-venturer being proportionate to our ownership interests (Sponsor Loans). In August 2016, DAPL and ETCOP secured a $2.5 billion facility (Facility) with a syndicate of financial institutions on a limited recourse basis with certain guarantees, and the outstanding Sponsor Loans were repaid. Allowable draws under the Facility were initially reduced and finally suspended in September 2016 pending resolution of permitting delays. As a result, DAPL and ETCOP resumed making draws under the Sponsor Loans. The maximum amounts that could be loaned under the Sponsor Loans were reduced in September 2016, to $1,411 million for DAPL and $76 million for ETCOP. At December 31, 2016, DAPL and ETCOP had $976 million and $22 million, respectively, outstanding under the Sponsor Loans. Our 25 percent share of those loans was $244 million and $6 million, respectively. The Sponsor Loans were repaid in their entirety in February 2017 when draws resumed under the Facility. At December 31, 2016, the book values of our investments in DAPL and ETCOP were $403 million and $129 million, respectively.

Loans and Long-term Receivables

We enter into agreements with other parties to pursue business opportunities, which may require us to provide loans or advances to certain affiliated and non-affiliated companies. Loans are recorded when cash is transferred or seller financing is provided to the affiliated or non-affiliated company pursuant to a loan agreement. The loan balance will increase as interest is earned on the outstanding loan balance and will decrease as interest and principal payments are received. Interest is earned at the loan agreement’s stated interest rate. Loans and long-term receivables are assessed for impairment when events indicate the loan balance may not be fully recovered.

Note 8—Properties, Plants and Equipment

Our investment in PP&E is recorded at cost. Investments in refining manufacturing facilities are generally depreciated on a straight-line basis over a 25-year life, pipeline assets over a 45-year life and terminal assets over a 33-year life. The company’s investment in PP&E, with the associated accumulated depreciation and amortization (Accum. D&A), at December 31 was:

	Millions of Dollars
	2016										2015
	Gross PP&E				Accum. D&A			Net PP&E			Gross PP&E			Accum. D&A			Net PP&E
Midstream	$	8,179			1,579			6,600			6,978			1,293			5,685
Chemicals	—				—			—			—			—			—
Refining	21,152				8,197			12,955			20,850			8,046			12,804
Marketing and Specialties	1,451				776			675			1,422			746			676
Corporate and Other	1,207				582			625			1,060			504			556
	$	31,989			11,134			20,855			30,310			10,589			19,721

Index to Financial Statements

Note 9—Goodwill and Intangibles

Goodwill

The carrying amount of goodwill was as follows:

	Millions of Dollars
	Midstream				Refining			Marketing and Specialties			Total
Balance at January 1, 2015	$	623			1,813			838			3,274
Goodwill assigned to acquisitions	—				—			1			1
Balance at December 31, 2015	623				1,813			839			3,275
Goodwill assigned to acquisitions	3				—			—			3
Goodwill allocated to dispositions	—				(8	)		—			(8	)
Balance at December 31, 2016	$	626			1,805			839			3,270

Intangible Assets

Information relating to the carrying value of intangible assets at December 31 follows:

	Millions of Dollars
	Gross Carrying Amount
	2016				2015
Indefinite-Lived Intangible Assets
Trade names and trademarks	$	503			503
Refinery air and operating permits	260				266
Other	1				1
	$	764			770

At year-end 2016, the net book value of our amortized intangible assets was $124 million, which included accumulated amortization of $152 million. At year-end 2015, the net book value of our amortized intangible assets was $136 million, which included accumulated amortization of $135 million. Amortization expense was not material for 2016 and 2015, and is not expected to be material in future years.

Note 10—Impairments

During 2016, 2015 and 2014, we recognized the following before-tax impairment charges:

	Millions of Dollars
	2016				2015			2014
Midstream	$	3			1			—
Refining	2				3			147
Marketing and Specialties	—				3			3
	$	5			7			150

Index to Financial Statements

In 2014, we recorded a $131 million held-for-use impairment in our Refining segment related to the Whitegate Refinery in Ireland, due to the then current and forecasted negative market conditions in that region. In addition, we also recorded a $12 million held-for-sale impairment in our Refining segment related to the Bantry Bay terminal. See Note 6—Assets Held for Sale or Sold for additional information.

Note 11—Asset Retirement Obligations and Accrued Environmental Costs

Asset retirement obligations and accrued environmental costs at December 31 were:

	Millions of Dollars
	2016				2015
Asset retirement obligations	$	244			251
Accrued environmental costs	496				485
Total asset retirement obligations and accrued environmental costs	740				736
Asset retirement obligations and accrued environmental costs due within one year*	(85		)		(71	)
Long-term asset retirement obligations and accrued environmental costs	$	655			665

*Classified as a current liability on the consolidated balance sheet, under the caption “Other accruals.”

Asset Retirement Obligations

We have asset retirement obligations that we are required to perform under law or contract once an asset is permanently taken out of service. Most of these obligations are not expected to be paid until many years in the future and are expected to be funded from general company resources at the time of removal. Our largest individual obligations involve asbestos abatement at refineries.

During 2016 and 2015, our overall asset retirement obligation changed as follows:

	Millions of Dollars
	2016				2015
Balance at January 1	$	251			279
Accretion of discount	9				9
Changes in estimates of existing obligations	10				(7	)
Spending on existing obligations	(15		)		(20	)
Property dispositions	(5		)		(2	)
Foreign currency translation	(6		)		(8	)
Balance at December 31	$	244			251

Accrued Environmental Costs

Total accrued environmental costs at December 31, 2016 and 2015, were $496 million and $485 million, respectively. The 2016 increase in total accrued environmental costs is due to new accruals, accrual adjustments and accretion exceeding payments and settlements during the year.

Index to Financial Statements

We had accrued environmental costs at December 31, 2016 and 2015 of $268 million and $270 million, respectively, primarily related to cleanup at domestic refineries and underground storage tanks at U.S. service stations; $178 million and $168 million, respectively, associated with nonoperator sites; and $50 million and $47 million, respectively, where the company has been named a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act, or similar state laws. Accrued environmental liabilities will be paid over periods extending up to 30 years. Because a large portion of the accrued environmental costs were acquired in various business combinations, the obligations are recorded at a discount. Expected expenditures for acquired environmental obligations are discounted using a weighted-average 5 percent discount factor, resulting in an accrued balance for acquired environmental liabilities of $248 million at December 31, 2016. The expected future undiscounted payments related to the portion of the accrued environmental costs that have been discounted are: $25 million in 2017, $26 million in 2018, $22 million in 2019, $16 million in 2020, $15 million in 2021, and $212 million for all future years after 2021.

Note 12—Earnings Per Share

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

	2016						2015					2014
	Basic			Diluted			Basic		Diluted			Basic		Diluted
Amounts Attributed to Phillips 66 Common Stockholders (millions):
Income from continuing operations attributable to Phillips 66	$	1,555		1,555			4,227		4,227			4,056		4,056
Income allocated to participating securities	(6		)	(5	)		(6	)	—			(7	)	—
Income from continuing operations available to common stockholders	1,549			1,550			4,221		4,227			4,049		4,056
Discontinued operations	—			—			—		—			706		706
Net income available to common stockholders	$	1,549		1,550			4,221		4,227			4,755		4,762
Weighted-average common shares outstanding (thousands):	523,250			527,531			537,602		542,355			561,859		565,902
Effect of stock-based compensation	4,281			2,535			4,753		4,622			4,043		5,602
Weighted-average common shares outstanding—EPS	527,531			530,066			542,355		546,977			565,902		571,504
Earnings Per Share of Common Stock (dollars):
Income from continuing operations attributable to Phillips 66	$	2.94		2.92			7.78		7.73			7.15		7.10
Discontinued operations	—			—			—		—			1.25		1.23
Earnings Per Share	$	2.94		2.92			7.78		7.73			8.40		8.33

Index to Financial Statements

Note 13—Debt

Long-term debt at December 31 was:

	Millions of Dollars
	2016				2015
2.95% Senior Notes due 2017	$	1,500			1,500
4.30% Senior Notes due 2022	2,000				2,000
4.65% Senior Notes due 2034	1,000				1,000
5.875% Senior Notes due 2042	1,500				1,500
4.875% Senior Notes due 2044	1,500				1,500
Phillips 66 Partners 2.646% Senior Notes due 2020	300				300
Phillips 66 Partners 3.605% Senior Notes due 2025	500				500
Phillips 66 Partners 3.55% Senior Notes due 2026	500				—
Phillips 66 Partners 4.680% Senior Notes due 2045	300				300
Phillips 66 Partners 4.90% Senior Notes due 2046	625				—
Industrial Development Bonds due 2018 through 2021 at 0.57%-0.81% at year-end 2016 and 0.02%-0.05% at year-end 2015	50				50
Sweeny Cogeneration, L.P. notes due 2020 at 7.54%	—				41
Note payable to Merey Sweeny, L.P. due 2020 at 7% (related party)	68				83
Phillips 66 Partners revolving credit facility due 2021 at 1.98% at year-end 2016	210				—
Other	1				1
Debt at face value	10,054				8,775
Capitalized leases	188				208
Net unamortized discounts and debt issuance costs	(104		)		(96	)
Total debt	10,138				8,887
Short-term debt	(550		)		(44	)
Long-term debt	$	9,588			8,843

Maturities of borrowings outstanding at December 31, 2016, inclusive of net unamortized discounts and debt issuance costs, for each of the years from 2017 through 2021 are $1,550 million, $43 million, $31 million, $335 million and $231 million, respectively. At December 31, 2016, we classified $1 billion of debt maturing in 2017 as long-term debt on our consolidated balance sheet, based on our ability and intent to refinance the obligation on a long-term basis, with such ability demonstrated by our revolving credit facility.

Debt Issuances

In October 2016, Phillips 66 Partners closed on a public offering of $1.125 billion aggregate principal amount of unsecured senior notes, consisting of:

•	$500 million of 3.55% Senior Notes due 2026.

•	$625 million of 4.90% Senior Notes due 2046.

In February 2015, Phillips 66 Partners closed on a public offering of $1.1 billion aggregate principal amount of unsecured

senior notes, consisting of:

•	$300 million of 2.646% Senior Notes due 2020.

•	$500 million of 3.605% Senior Notes due 2025.

•	$300 million of 4.680% Senior Notes due 2045.

Index to Financial Statements

Credit Facilities and Commercial Paper

In October 2016, Phillips 66 amended its $5 billion revolving credit facility, primarily to extend the term from December 2019 to October 2021. This facility may be used for direct bank borrowings, as support for issuances of letters of credit, or as support for our commercial paper program. The facility is with a broad syndicate of financial institutions and contains covenants that we consider usual and customary for an agreement of this type for comparable commercial borrowers, including a maximum consolidated net debt-to-capitalization ratio of 60 percent. The agreement has customary events of default, such as nonpayment of principal when due; nonpayment of interest, fees or other amounts; violation of covenants; cross-payment default and cross-acceleration (in each case, to indebtedness in excess of a threshold amount); and a change of control. Borrowings under the facility will incur interest at the London Interbank Offered Rate (LIBOR) plus a margin based on the credit rating of our senior unsecured long-term debt as determined from time to time by Standard & Poor’s Ratings Services and Moody’s Investors Service. The facility also provides for customary fees, including administrative agent fees and commitment fees. As of December 31, 2016, no amount had been directly drawn under this revolving credit agreement, while $51 million in letters of credit had been issued that were supported by it.

We have a $5 billion commercial paper program for short-term working capital needs that is supported by our revolving credit facility. Commercial paper maturities are generally limited to 90 days. As of December 31, 2016, we had no borrowings under our commercial paper program.

Phillips 66 Partners also amended its $500 million revolving credit facility in October 2016, primarily to increase borrowing capacity to $750 million and to extend the term from November 2019 to October 2021. The Phillips 66 Partners facility is with a broad syndicate of financial institutions. As of December 31, 2016, Phillips 66 Partners had $210 million outstanding under this facility.

Note 14—Guarantees

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

Guarantees of Joint Venture Debt

In 2012, in connection with the Separation, we issued a guarantee for 100 percent of MSLP Senior Notes issued in July 1999. At December 31, 2016, the maximum potential amount of future payments to third parties under the guarantee was estimated to be $123 million, which could become payable if MSLP fails to meet its obligations under the senior notes agreement. The MSLP Senior Notes mature in 2019.

In December 2016, as part of the restructuring within DCP Midstream which occurred effective January 1, 2017, we issued a guarantee in support of DCP Midstream, LLC’s newly issued debt. At December 31, 2016, the maximum potential amount of future payments to third parties under the guarantee is estimated to be $212 million. Payment would be required if DCP Midstream, LLC defaults on this debt obligation. DCP Midstream, LLC’s debt matures in 2019.

Other Guarantees

In the second quarter of 2016, the operating lease commenced on our new headquarters facility in Houston, Texas, after construction was deemed substantially complete. Under this lease agreement, we have a residual value guarantee with a maximum future exposure of $554 million. The operating lease has a term of five years and provides us the option, at the end of the lease term, to request to renew the lease, purchase the facility, or assist the lessor in marketing it for resale.

We have residual value guarantees associated with railcar and airplane leases with maximum future potential payments of $363 million. We estimated a $94 million residual value guarantee obligation for our railcars in the fourth quarter of 2016. This residual value guarantee reflects the negative impact of new safety regulations issued by the U.S. Department of Transportation on the fair value of crude-oil railcars. The amount was based on an outside appraisal of the estimated fair value of the railcars at their lease termination dates. Of the total $94 million residual value guarantee obligation, $28

Index to Financial Statements

million was recognized as expense in 2016, with $20 million of that amount related to railcars permanently taken out of service. The remaining $66 million estimated obligation at year-end 2016 will be recognized on a straight-line basis through the applicable lease termination dates in either late-2017 or 2019. For railcars taken out of service in 2016, we also recognized remaining executory lease costs of $12 million.

Indemnifications

Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses, and employee claims; and real estate indemnity against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues with generally indefinite terms, and the maximum amount of future payments is generally unlimited. The carrying amount recorded for indemnifications at December 31, 2016, was $193 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the recorded carrying amount were $102 million of environmental accruals for known contamination that were primarily included in “Asset retirement obligations and accrued environmental costs” at December 31, 2016. For additional information about environmental liabilities, see Note 15—Contingencies and Commitments.

Indemnification and Release Agreement

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

Note 15—Contingencies and Commitments

A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for financial recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain. See Note 21—Income Taxes, for additional information about income-tax-related contingencies.

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

Index to Financial Statements

Environmental

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

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

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings. See Note 11—Asset Retirement Obligations and Accrued Environmental Costs, for a summary of our accrued environmental liabilities.

Legal Proceedings

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

Other Contingencies

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

At December 31, 2016, we had performance obligations secured by letters of credit and bank guarantees of $541 million (of which $51 million was issued under the provisions of our revolving credit facility, and the remainder was issued as direct bank letters of credit and bank guarantees) related to various purchase and other commitments incident to the ordinary conduct of business.

Long-Term Throughput Agreements and Take-or-Pay Agreements

We have certain throughput agreements and take-or-pay agreements in support of third-party financing arrangements. The agreements typically provide for crude oil transportation to be used in the ordinary course of our business. The aggregate amounts of estimated payments under these various agreements are $319 million annually for each of the years

Index to Financial Statements

from 2017 through 2021 and $2,902 million in the aggregate for years 2022 and thereafter. Total payments under the agreements were $325 million in 2016, $328 million in 2015 and $331 million in 2014.

Note 16—Derivatives and Financial Instruments

Derivative Instruments

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

Purchase and sales contracts with fixed minimum notional volumes for commodities that are readily convertible to cash (e.g., crude oil and gasoline) are recorded on the balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception (i.e., contracts to purchase or sell quantities we expect to use or sell over a reasonable period in the normal course of business). We generally apply this normal purchases and normal sales exception to eligible crude oil, refined product, NGL, natural gas and power commodity purchase and sales contracts; however, we may elect not to apply this exception (e.g., when another derivative instrument will be used to mitigate the risk of the purchase or sales contract but hedge accounting will not be applied, in which case both the purchase or sales contract and the derivative contract mitigating the resulting risk will be recorded on the balance sheet at fair value). Our derivative instruments are held at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 17—Fair Value Measurements.

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

The following table indicates the balance sheet line items that include the fair values of commodity derivative assets and liabilities. The balances in the following table are presented on a gross basis, before the effects of counterparty and collateral netting. However, we have elected to present our commodity derivative assets and liabilities with the same counterparty on a net basis on the balance sheet when the right of setoff exists. For information on the impact of counterparty netting and collateral netting, and reconciliation of the balances presented below to the balance sheet, see Note 17—Fair Value Measurements.

	Millions of Dollars
	2016				2015
Assets
Prepaid expenses and other current assets	$	741			2,607
Other assets	5				5
Liabilities
Other accruals	766				2,425
Other liabilities and deferred credits	2				5

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

Index to Financial Statements

The gains (losses) incurred from commodity derivatives, and the line items where they appear on our consolidated statement of income, were:

	Millions of Dollars
	2016				2015			2014
Sales and other operating revenues	$	(451	)		162			658
Equity in earnings of affiliates	—				—			66
Other income	29				58			20
Purchased crude oil and products	(62		)		121			136

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

The following table summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from non-derivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was at least 98 percent at December 31, 2016 and 2015.

	Open Position Long / (Short)
	2016			2015
Commodity
Crude oil, refined products and NGL (millions of barrels)	(18	)		(17	)

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

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

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

We estimate that pre-tax losses of $3 million will be reclassified from accumulated other comprehensive income/loss into general and administrative expenses during the next twelve months as the hedged transaction settles; however, the actual amounts that will be reclassified will vary based on changes in interest rates throughout the year 2017.

Credit Risk

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

The credit risk from our OTC derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps

Index to Financial Statements

and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements until settled; however, we are exposed to the credit risk of those exchange brokers for receivables arising from daily margin cash calls, as well as for cash deposited to meet initial margin requirements.

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

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

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

Note 17—Fair Value Measurements

Fair Values of Financial Instruments

We used the following methods and assumptions to estimate the fair value of financial instruments:

•	Cash and cash equivalents: The carrying amount reported on the consolidated balance sheet approximates fair value.

•	Accounts and notes receivable: The carrying amount reported on the consolidated balance sheet approximates fair value.

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

•	Commodity swaps: Fair value is estimated based on forward market prices and approximates the exit price at period end. When forward market prices are not available, we estimate fair value using the forward price of a similar commodity, adjusted for the difference in quality or location.

•	Interest-rate swaps: We determine fair value based upon observed market valuations for interest-rate swaps that have notionals, durations, and pay and reset frequencies similar to ours.

•	Futures: Fair values are based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange, or other traded exchanges.

•	Forward-exchange contracts: Fair value is estimated by comparing the contract rate to the forward rate in effect at the end of the reporting period, which approximates the exit price at that date.

Index to Financial Statements

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

•	Level 1: Fair value measured with unadjusted quoted prices from an active market for identical assets or liabilities.

•	Level 2: Fair value measured either with: (1) adjusted quoted prices from an active market for similar assets or liabilities; or (2) other valuation inputs that are directly or indirectly observable.

•	Level 3: Fair value measured with unobservable inputs that are significant to the measurement.

We classify the fair value of an asset or liability based on the lowest level of input significant to its measurement; however, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable. For the year ended December 31, 2016, derivative assets with an aggregate value of $201 million and derivative liabilities with an aggregate value of $156 million were transferred into Level 1, as measured from the beginning of the reporting period. The measurements were reclassified within the fair value hierarchy due to the availability of unadjusted quoted prices from an active market.

Recurring Fair Value Measurements

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

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

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

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

Index to Financial Statements

	Millions of Dollars
	December 31, 2016
	Fair Value Hierarchy										Total Fair Value of Gross Assets & Liabilities		Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value		Net Carrying Value Presented on the Balance Sheet
	Level 1				Level 2			Level 3
Commodity Derivative Assets
Exchange-cleared instruments	$	273			371			—			644		(628	)	—		—		16
OTC instruments	—				6			—			6		(1	)	—		—		5
Physical forward contracts*	—				94			2			96		—		—		—		96
Interest-rate derivatives	—				8			—			8		—		—		—		8
Rabbi trust assets	97				—			—			97		N/A		N/A		—		97
	$	370			479			2			851		(629	)	—		—		222
Commodity Derivative Liabilities
Exchange-cleared instruments	$	249			452			—			701		(628	)	(73	)	—		—
OTC instruments	—				1			—			1		(1	)	—		—		—
Physical forward contracts*	—				61			5			66		—		—		—		66
Floating-rate debt	50				210			—			260		N/A		N/A		—		260
Fixed-rate debt, excluding capital leases**	—				10,260			—			10,260		N/A		N/A		(570	)	9,690
	$	299			10,984			5			11,288		(629	)	(73	)	(570	)	10,016

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

**We carry fixed-rate debt on the balance sheet at amortized cost.

	Millions of Dollars
	December 31, 2015
	Fair Value Hierarchy										Total Fair Value of Gross Assets & Liabilities		Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value		Net Carrying Value Presented on the Balance Sheet
	Level 1				Level 2			Level 3
Commodity Derivative Assets
Exchange-cleared instruments	$	1,851			703			—			2,554		(2,389	)	(100	)	—		65
OTC instruments	—				13			—			13		(12	)	—		—		1
Physical forward contracts*	3				40			2			45		—		—		—		45
Rabbi trust assets	83				—			—			83		N/A		N/A		—		83
	$	1,937			756			2			2,695		(2,401	)	(100	)	—		194
Commodity Derivative Liabilities
Exchange-cleared instruments	$	1,745			646			—			2,391		(2,389	)	—		—		2
OTC instruments	—				17			—			17		(12	)	—		—		5
Physical forward contracts*	—				22			—			22		—		—		—		22
Floating-rate debt	50				—			—			50		N/A		N/A		—		50
Fixed-rate debt, excluding capital leases**	—				8,434			—			8,434		N/A		N/A		195		8,629
	$	1,795			9,119			—			10,914		(2,401	)	—		195		8,708

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

**We carry fixed-rate debt on the balance sheet at amortized cost.

At December 31, 2016 and 2015, there were no material cash collateral received or paid that were not offset on the balance sheet.

Index to Financial Statements

The rabbi trust assets appear on our consolidated balance sheet in the “Investments and long-term receivables” line, while the floating-rate and fixed-rate debt appear in the “Short-term debt” and “Long-term debt” lines. For information regarding where our commodity derivative assets and liabilities appear on the balance sheet, see the first table in Note 16—Derivatives and Financial Instruments.

Nonrecurring Fair Value Remeasurements

During the years ended December 31, 2016 and 2015, there were no material nonrecurring fair value remeasurements of assets subsequent to their initial recognition.

Note 18—Equity

Preferred Stock

We have 500 million shares of preferred stock authorized, with a par value of $0.01 per share. No shares of preferred stock were outstanding as of December 31, 2016 or 2015.

Treasury Stock

Since July 2012, our Board of Directors has, at various times, authorized repurchases of our outstanding common stock which aggregate to a total authorization of up to $9 billion. The share repurchases are expected to be funded primarily through available cash. The shares will be repurchased from time to time in the open market at 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. Since the inception of our share repurchases in 2012, through December 31, 2016, we have repurchased a total of 105,404,649 shares at a cost of $7.4 billion. Shares of stock repurchased are held as treasury shares.

In 2014 we completed the exchange of our flow improvers business for shares of Phillips 66 common stock owned by the other party to the transaction. We received 17,422,615 shares of our common stock with a fair value at the time of the exchange of $1.35 billion.

Common Stock Dividends

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

Noncontrolling Interests

See Note 27—Phillips 66 Partners LP for information on Phillips 66 Partners issuances of common units to the public during 2016.

Index to Financial Statements

Note 19—Leases

We lease ocean transport vessels, tugboats, barges, pipelines, railcars, service station sites, computers, office buildings, corporate aircraft, land and other facilities and equipment. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices, as well as renewal options and/or options to purchase the leased property. There are no significant restrictions imposed on us by the leasing agreements with regard to dividends, asset dispositions or borrowing ability. Our capital lease obligations relate primarily to the lease of an oil terminal in the United Kingdom. The lease obligation is subject to foreign currency translation adjustments each reporting period. The total net PP&E recorded for capital leases was $208 million and $231 million at December 31, 2016 and 2015, respectively.

Future minimum lease payments as of December 31, 2016, for operating and capital lease obligations were:

	Millions of Dollars
	Capital Lease Obligations				Operating Lease Obligations
2017	$	26			404
2018	19				362
2019	18				276
2020	14				200
2021	14				85
Remaining years	150				229
Total	241				1,556
Less: income from subleases	—				60
Net minimum lease payments	$	241			1,496
Less: amount representing interest	53
Capital lease obligations	$	188

Operating lease rental expense for the years ended December 31 was:

	Millions of Dollars
	2016				2015			2014
Minimum rentals	$	641			641			570
Contingent rentals	6				6			8
Less: sublease rental income	95				136			135
	$	552			511			443

Index to Financial Statements

Note 20—Employee Benefit Plans

Pension and Postretirement Plans

The following table provides a reconciliation of the projected benefit obligations and plan assets for our pension plans and accumulated benefit obligations for our other postretirement benefit plans:

	Millions of Dollars
	Pension Benefits													Other Benefits
	2016							2015						2016			2015
	U.S.				Int’l.			U.S.			Int’l.
Change in Benefit Obligation
Benefit obligation at January 1	$	2,791			912			2,895			941			219			203
Service cost	127				32			124			38			7			7
Interest cost	116				28			109			28			8			7
Plan participant contributions	—				3			—			3			2			1
Actuarial loss (gain)	62				237			(25	)		(10	)		(6	)		13
Benefits paid	(215		)		(19	)		(312	)		(20	)		(13	)		(12	)
Curtailment gain	—				(31	)		—			—			—			—
Acquisition of a business	—				—			—			—			8			—
Foreign currency exchange rate change	—				(107	)		—			(68	)		—			—
Benefit obligation at December 31	$	2,881			1,055			2,791			912			225			219
Change in Fair Value of Plan Assets
Fair value of plan assets at January 1	$	2,023			742			2,124			724			—			—
Actual return on plan assets	136				148			(10	)		18			—			—
Company contributions	330				40			221			63			11			11
Plan participant contributions	—				3			—			3			2			1
Benefits paid	(215		)		(19	)		(312	)		(20	)		(13	)		(12	)
Foreign currency exchange rate change	—				(118	)		—			(46	)		—			—
Fair value of plan assets at December 31	$	2,274			796			2,023			742			—			—
Funded Status at December 31	$	(607	)		(259	)		(768	)		(170	)		(225	)		(219	)

Amounts recognized in the consolidated balance sheet for our pension and other postretirement benefit plans at December 31, 2016 and 2015, include:

	Millions of Dollars
	Pension Benefits													Other Benefits
	2016							2015						2016			2015
	U.S.				Int’l.			U.S.			Int’l.
Amounts Recognized in the Consolidated Balance Sheet at December 31
Noncurrent assets	$	—			—			—			20			—			—
Current liabilities	(10		)		—			(10	)		—			(10	)		(10	)
Noncurrent liabilities	(597		)		(259	)		(758	)		(190	)		(215	)		(209	)
Total recognized	$	(607	)		(259	)		(768	)		(170	)		(225	)		(219	)

Index to Financial Statements

Included in accumulated other comprehensive income/loss at December 31 were the following before-tax amounts that had not been recognized in net periodic benefit cost:

	Millions of Dollars
	Pension Benefits													Other Benefits
	2016							2015						2016			2015
	U.S.				Int’l.			U.S.			Int’l.
Unrecognized net actuarial loss (gain)	$	684			227			710			143			(5	)		2
Unrecognized prior service cost (credit)	3				(5	)		6			(7	)		(9	)		(10	)

	Millions of Dollars
	Pension Benefits													Other Benefits
	2016							2015						2016			2015
	U.S.				Int’l.			U.S.			Int’l.
Sources of Change in Other Comprehensive Income/Loss
Net gain (loss) arising during the period	$	(54	)		(129	)		(124	)		7			7			(14	)
Curtailment gain	—				31			—			—			—			—
Amortization of (gain) loss and settlements included in income	80				14			155			15			—			(1	)
Net change during the period	$	26			(84	)		31			22			7			(15	)
Prior service cost arising during the period	$	—			—			—			—			—			—
Amortization of prior service cost (credit) included in income	3				(1	)		3			(1	)		(1	)		(2	)
Net change during the period	$	3			(1	)		3			(1	)		(1	)		(2	)

The accumulated benefit obligations for all U.S. and international pensions plans were $2,601 million and $880 million, respectively at December 31, 2016, and $2,485 million and $712 million, respectively, at December 31, 2015.

Index to Financial Statements

Information for U.S. and international pension plans with an accumulated benefit obligation in excess of plan assets at December 31 were:

	Millions of Dollars
	Pension Benefits
	2016							2015
	U.S.				Int’l.			U.S.			Int’l.
Projected benefit obligations	$	2,881			1,055			2,791			351
Accumulated benefit obligations	2,601				880			2,485			303
Fair value of plan assets	2,274				796			2,023			160

Components of net periodic benefit cost for all defined benefit plans are presented in the table below:

	Millions of Dollars
	Pension Benefits																			Other Benefits
	2016							2015						2014						2016			2015			2014
	U.S.				Int’l.			U.S.			Int’l.			U.S.			Int’l.
Components of Net Periodic Benefit Cost
Service cost	$	127			32			124			38			121			38			7			7			7
Interest cost	116				28			109			28			108			35			8			7			8
Expected return on plan assets	(128		)		(38	)		(138	)		(37	)		(142	)		(37	)		—			—			—
Amortization of prior service cost (credit)	3				(1	)		3			(1	)		3			(2	)		(1	)		(2	)		(1	)
Recognized net actuarial loss (gain)	72				14			75			15			40			12			—			(1	)		(2	)
Settlements	8				—			80			—			—			—			—			—			—
Total net periodic benefit cost	$	198			35			253			43			130			46			14			11			12

In determining net periodic benefit cost, we amortize prior service costs on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. For net actuarial gains and losses, we amortize 10 percent of the unamortized balance each year. The amount subject to amortization is determined on a plan-by-plan basis. Amounts included in accumulated other comprehensive income at December 31, 2016, that are expected to be amortized into net periodic benefit cost during 2017 are provided below:

	Millions of Dollars
	Pension Benefits							Other Benefits
	U.S.				Int’l.
Unrecognized net actuarial loss	$	70			23			—
Unrecognized prior service cost (credit)	3				(1	)		(1	)

Index to Financial Statements

The following weighted-average assumptions were used to determine benefit obligations and net periodic benefit costs for years ended December 31:

	Pension Benefits									Other Benefits
	2016					2015				2016		2015
	U.S.			Int’l.		U.S.		Int’l.
Assumptions Used to Determine Benefit Obligations:
Discount rate	3.95	%		2.42		4.35		3.35		3.65		4.00
Rate of compensation increase	4.00			3.78		4.00		3.65		—		—
Assumptions Used to Determine Net Periodic Benefit Cost:
Discount rate	4.35	%		3.35		3.90		3.10		4.00		3.70
Expected return on plan assets	6.75			5.31		7.00		5.15		—		—
Rate of compensation increase	4.00			3.65		4.00		3.20		—		—

For both U.S. and international pension plans, the overall expected long-term rate of return is developed from the expected future return of each asset class, weighted by the expected allocation of pension assets to that asset class. We rely on a variety of independent market forecasts in developing the expected rate of return for each class of assets.

Our other postretirement benefit plans for health insurance are contributory. Effective December 31, 2012, we terminated the subsidy for retiree medical plans. Since January 1, 2013, eligible employees have been able to utilize notional amounts credited to an account during their period of service with the company to pay all, or a portion, of their cost to participate in postretirement health insurance through the company. In general, employees hired after December 31, 2012, will not receive credits to an account, but will have unsubsidized access to health insurance through the plan. The cost of health insurance will be adjusted annually by the company’s actuary to reflect actual experience and expected health care cost trends. The measurement of the accumulated benefit obligation assumes a health care cost trend rate of 6.50 percent in 2017 that declines to 5.00 percent by 2023. A one percentage-point change in the assumed health care cost trend rate would be immaterial to Phillips 66.

Plan Assets

The investment strategy for managing pension plan assets is to seek a reasonable rate of return relative to an appropriate level of risk and provide adequate liquidity for benefit payments and portfolio management. We follow a policy of diversifying pension plan assets across asset classes, investment managers, and individual holdings. As a result, our plan assets have no significant concentrations of credit risk. Asset classes that are considered appropriate include equities, fixed income, cash, real estate and insurance contracts. Plan fiduciaries may consider and add other asset classes to the investment program from time to time. The target allocations for plan assets are approximately 62 percent equity securities, 37 percent debt securities and 1 percent in all other types of investments. Generally, the investments in the plans are publicly traded, therefore minimizing the liquidity risk in the portfolio.

The following is a description of the valuation methodologies used for the pension plan assets.

•	Fair values of equity securities and government debt securities are based on quoted market prices.

•	Fair values of mutual funds are valued based on quoted market prices, which represent the net asset value of shares held.

•	Cash and cash equivalents are valued at cost, which approximates fair value.

Index to Financial Statements

•	Fair values of insurance contracts are valued at the present value of the future benefit payments owed by the insurance company to the plans’ participants.

•	Fair values of real estate investments are valued using real estate valuation techniques and other methods that include reference to third-party sources and sales comparables where available.

•	Fair values of investments in common/collective trusts are valued at net asset value (NAV) as determined by the issuer of each fund. Certain investments that are measured at fair value using the NAV value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

The fair values of our pension plan assets at December 31, by asset class, were as follows:

	Millions of Dollars
	U.S.													International
	Level 1				Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
2016
Equity securities	$	533			—			—			533			—			—			—			—
Mutual funds	47				—			—			47			—			—			—			—
Cash and cash equivalents	21				—			—			21			5			—			—			5
Insurance contracts	—				—			—			—			—			—			13			13
Real estate	—				—			—			—			—			—			6			6
Total assets in the fair value hierarchy	601				—			—			601			5			—			19			24
Common/collective trusts measured at NAV											1,673												772
Total	$	601			—			—			2,274			5			—			19			796

	Millions of Dollars
	U.S.													International
	Level 1				Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
2015
Equity securities	$	447			—			—			447			235			—			—			235
Government debt securities	—				—			—			—			144			—			—			144
Mutual funds	41				—			—			41			—			—			—			—
Cash and cash equivalents	22				—			—			22			3			—			—			3
Insurance contracts	—				—			—			—			—			—			13			13
Real estate	—				—			—			—			—			—			6			6
Total assets in the fair value hierarchy	510				—			—			510			382			—			19			401
Common/collective trusts measured at NAV											1,513												339
Other receivables											—												2
Total	$	510			—			—			2,023			382			—			19			742

As reflected in the table above, Level 3 activity was not material.

Index to Financial Statements

Our funding policy for U.S. plans is to contribute at least the minimum required by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986, as amended. Contributions to international plans are subject to local laws and tax regulations. Actual contribution amounts are dependent upon plan asset returns, changes in pension obligations, regulatory environments, and other economic factors. In 2017, we expect to contribute approximately $130 million to our U.S. pension plans and other postretirement benefit plans and $35 million to our international pension plans.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by us in the years indicated:

	Millions of Dollars
	Pension Benefits							Other Benefits
	U.S.				Int’l.
2017	$	301			18			25
2018	294				20			26
2019	278				20			26
2020	272				21			24
2021	279				23			23
2022-2025	1,278				140			98

Defined Contribution Plans

Most U.S. employees are eligible to participate in the Phillips 66 Savings Plan (Savings Plan). Employees can contribute up to 75 percent of their eligible pay, subject to certain statutory limits, in the thrift feature of the Savings Plan to a choice of investment funds. Phillips 66 provides a company match of participant thrift contributions up to 5 percent of eligible pay. In addition, participants who contribute at least 1 percent to the Savings Plan are eligible for “Success Share,” a semi-annual discretionary company contribution to the Savings Plan that can range from 0 to 6 percent of eligible pay, with a target of 2 percent. The total expense related to participants in the Savings Plan was $99 million, $134 million and $112 million in 2016, 2015 and 2014, respectively.

Share-Based Compensation Plans

In accordance with the Employee Matters Agreement related to the Separation, compensation awards based on ConocoPhillips stock and granted before April 30, 2012 (the Separation Date) were converted to compensation awards based on both ConocoPhillips and Phillips 66 stock if, on the Separation Date, the awards were: (1) options outstanding and exercisable; or (2) restricted stock or restricted stock units (RSUs) awarded for completed performance periods under the ConocoPhillips Performance Share Program. Phillips 66 restricted stock, RSUs and options issued in this conversion became subject to the “Omnibus Stock and Performance Incentive Plan of Phillips 66” (the 2012 Plan) on the Separation Date, whether held by grantees working for the company or grantees that remained employees of ConocoPhillips. Some of these awards based on Phillips 66 stock and held by employees of ConocoPhillips are still outstanding and appear in the activity tables for the Stock Option and the Performance Share Programs presented later in this footnote.

In May 2013, shareholders approved the 2013 Omnibus Stock and Performance Incentive Plan of Phillips 66 (the P66 Omnibus Plan). Subsequent to this approval, all new share-based awards are granted under the P66 Omnibus Plan, which authorizes the Human Resources and Compensation Committee of our Board of Directors (the Committee) to grant stock options, stock appreciation rights, stock awards (including restricted stock and RSU awards), cash awards, and performance awards to our employees, non-employee directors and other plan participants. The number of shares that may be issued under the P66 Omnibus Plan to settle share-based awards may not exceed 45 million.

Index to Financial Statements

Our share-based compensation programs generally provide accelerated vesting (i.e., a waiver of the remaining period of service required to earn an award) for awards held by employees at the time they become eligible for retirement. We recognize share-based compensation expense over the shorter of: (1) the service period (i.e., the stated period of time required to earn the award); or (2) the period beginning at the start of the service period and ending when an employee first becomes eligible for retirement, but not less than six months as this is the minimum period of time required for an award not to be subject to forfeiture.

Some of our share-based awards vest ratably (i.e., portions of the award vest at different times) while some of our awards cliff vest (i.e., all of the award vests at the same time). The company made a policy election to recognize expense on a straight-line basis over the service period for the entire award, whether the award was granted with ratable or cliff vesting.

Total share-based compensation expense recognized in income and the associated tax benefits for the years ended December 31 were as follows:

	Millions of Dollars
	2016				2015			2014
Share-based compensation expense	$	156			144			134
Tax benefit	(59		)		(54	)		(50	)

Stock Options

Stock options granted under the provisions of the P66 Omnibus Plan and earlier plans permit purchase of our common stock at exercise prices equivalent to the average market price of the stock on the date the options were granted. The options have terms of 10 years and generally vest ratably, with one-third of the options awarded vesting and becoming exercisable on each anniversary date for the three years following the date of grant. Options awarded to employees already eligible for retirement vest within six months of the grant date, but those options do not become exercisable until the end of the normal vesting period.

The following table summarizes our stock option activity from January 1, 2016, to December 31, 2016:

												Millions of Dollars
	Options			Weighted- Average Exercise Price				Weighted-Average Grant-Date Fair Value				Aggregate Intrinsic Value
Outstanding at January 1, 2016	5,431,739			$	41.27
Granted	818,100			78.86				$	16.94
Forfeited	(24,465	)		77.85
Exercised	(1,122,244	)		30.53								$	58
Expired or canceled	—			—
Outstanding at December 31, 2016	5,103,130			$	49.48
Vested at December 31, 2016	4,625,221			$	46.60							$	185
Exercisable at December 31, 2016	3,684,109			$	39.06							$	175

The weighted-average remaining contractual terms of vested options and exercisable options at December 31, 2016, were 5.36 years and 4.56 years, respectively. During 2016, we received $34 million in cash and realized a tax benefit of $16 million from the exercise of options. At December 31, 2016, the remaining unrecognized compensation expense from

Index to Financial Statements

unvested options was $5 million, which will be recognized over a weighted-average period of 21 months, the longest period being 27 months. The calculations of realized tax benefit and weighted-average periods include awards based on both Phillips 66 and ConocoPhillips stock held by Phillips 66 employees.

During 2015 and 2014, we granted options with a weighted-average grant-date fair value of $18.84 and $18.95, respectively. During 2015 and 2014, employees exercised options with an aggregate intrinsic value of $60 million and $89 million, respectively.

The following table provides the significant assumptions used to calculate the grant date fair market values of options granted over the years shown below, as calculated using the Black-Scholes-Merton option-pricing model:

	2016			2015		2014
Assumptions used
Risk-free interest rate	1.71	%		1.60		1.96
Dividend yield	3.00	%		3.00		3.00
Volatility factor	28.68	%		34.17		34.97
Expected life (years)	7.08			6.66		6.23

After the Separation and through 2015, we calculated the volatility of options granted using a formula that adjusts the pre-Separation historical volatility of ConocoPhillips by the ratio of Phillips 66 implied market volatility on the grant date divided by the pre-Separation implied market volatility of ConocoPhillips. In 2016, we started calculating the volatility using historical Phillips 66 end-of-week closing stock prices from the Separation date.

We calculate the average period of time elapsed between grant dates and exercise dates of past grants to estimate the expected life of new option grants.

Restricted Stock Unit Program

Generally, RSUs are granted annually under the provisions of the P66 Omnibus Plan and cliff vest at the end of three years. Most RSU awards granted prior to the Separation vested ratably over five years, with one-third of the units vesting in 36 months, one-third vesting in 48 months, and the final third vesting 60 months from the date of grant. In addition to the regularly scheduled annual awards, RSUs are also granted ad hoc to attract or retain key personnel, and the terms and conditions under which these RSUs vest vary by award. Upon vesting, RSUs are settled by issuing one share of Phillips 66 common stock per RSU. RSUs awarded to employees already eligible for retirement vest within six months of the grant date, but those units are not issued as shares until the end of the normal vesting period. Until issued as stock, most recipients of RSUs receive a quarterly cash payment of a dividend equivalent, and for this reason the grant date fair value of these units is deemed equal to the average Phillips 66 stock price on the date of grant. The grant date fair market value of RSUs that do not receive a dividend equivalent while unvested is deemed equal to the average Phillips 66 common stock price on the grant date, less the net present value of the dividend equivalents that will not be received.

Index to Financial Statements

The following table summarizes our RSU activity from January 1, 2016, to December 31, 2016:

								Millions of Dollars
	Stock Units			Weighted-Average Grant-Date Fair Value				Total Fair Value
Outstanding at January 1, 2016	3,134,615			$	60.19
Granted	955,923			78.56
Forfeited	(48,877	)		75.33
Issued	(1,398,522	)		51.27				$	109
Outstanding at December 31, 2016	2,643,139			$	71.28
Not Vested at December 31, 2016	1,656,407			$	72.06

At December 31, 2016, the remaining unrecognized compensation cost from the unvested RSU awards was $48 million, which will be recognized over a weighted-average period of 21 months, the longest period being 49 months.

During 2015 and 2014, we granted RSUs with a weighted-average grant-date fair value of $74.09 and $73.28, respectively. During 2015 and 2014, we issued shares with an aggregate fair value of $107 million and $116 million, respectively, to settle RSUs.

Performance Share Program

Under the P66 Omnibus Plan, we also annually grant to senior management restricted performance share units (PSUs) that vest: (1) with respect to awards for performance periods beginning before 2009, when the employee becomes eligible for retirement by reaching age 55 with five years of service; or (2) with respect to awards for performance periods beginning in 2009, five years after the grant date of the award (although recipients can elect to defer the lapsing of restrictions until retirement after reaching age 55 with five years of service); or (3) with respect to awards for performance periods beginning in 2013 or later, on the grant date.

For PSU awards with performance periods beginning before 2013, we recognize compensation expense beginning on the date authorized and ending on the date the PSUs are scheduled to vest; however, since these awards are authorized three years prior to the grant date, we recognize compensation expense for employees that will become eligible for retirement by or shortly after the grant date over the period beginning on the date of authorization and ending on the date of grant. Since PSU awards with performance periods beginning in 2013 or later vest on the grant date, we recognize compensation expense beginning on the date of authorization and ending on the grant date for all employees participating in the PSU grant.

We settle PSUs with performance periods beginning before 2013 by issuing one share of Phillips 66 common stock for each PSU. Recipients of these PSUs receive a quarterly cash payment of a dividend equivalent beginning on the grant date and ending on the settlement date.

We settle PSUs with performance periods beginning in 2013 or later by paying cash equal to the fair value of the PSU on the grant date, which is also the date the PSU vests. Since these PSUs vest and settle on the grant date, dividend equivalents are never paid on these awards.

Index to Financial Statements

The following table summarizes our PSU activity from January 1, 2016, to December 31, 2016:

								Millions of Dollars
	Performance Share Units			Weighted-Average Grant-Date Fair Value				Total Fair Value
Outstanding at January 1, 2016	3,556,826			$	50.11
Granted	767,561			78.62
Forfeited	—			—
Issued	(317,329	)		50.03				$	26
Cash settled	(767,561	)		78.62				60
Outstanding at December 31, 2016	3,239,497			$	50.12
Not Vested at December 31, 2016	561,376			$	52.45

At December 31, 2016, the remaining unrecognized compensation cost from unvested PSU awards held by employees of Phillips 66 was $9 million, which will be recognized over a weighted-average period of 29 months, the longest period being 10 years. The calculations of unamortized expense and weighted-average periods include awards based on both Phillips 66 and ConocoPhillips stock held by Phillips 66 employees.

During 2015 and 2014, we granted PSUs with a weighted-average grant-date fair value of $74.14 and $72.26, respectively. During 2015 and 2014, we issued shares with an aggregate fair value of $37 million and $13 million, respectively, to settle PSUs. No PSUs were cash settled in 2015 or 2014.

Index to Financial Statements

Note 21—Income Taxes

Income taxes charged to income were:

	Millions of Dollars
	2016				2015			2014
Income Taxes
Federal
Current	$	(105	)		1,128			1,661
Deferred	645				444			(378	)
Foreign
Current	66				(74	)		22
Deferred	(84		)		42			80
State and local
Current	(24		)		227			274
Deferred	49				(3	)		(5	)
	$	547			1,764			1,654

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax liabilities and assets at December 31 were:

	Millions of Dollars
	2016				2015
Deferred Tax Liabilities
Properties, plants and equipment, and intangibles	$	4,525			4,361
Investment in joint ventures	2,442				2,292
Investment in subsidiaries	803				236
Inventory	154				176
Other	19				24
Total deferred tax liabilities	7,943				7,089
Deferred Tax Assets
Benefit plan accruals	669				751
Asset retirement obligations and accrued environmental costs	211				215
Other financial accruals and deferrals	188				175
Loss and credit carryforwards	261				227
Other	1				1
Total deferred tax assets	1,330				1,369
Less: valuation allowance	38				160
Net deferred tax assets	1,292				1,209
Net deferred tax liabilities	$	6,651			5,880

Index to Financial Statements

The loss and credit carryforwards deferred tax assets are primarily related to a German interest deduction carryforward of $295 million, an alternative minimum tax credit of $59 million and a foreign tax credit of $89 million. The German interest deduction carryforward and the alternative minimum tax credit may be carried forward indefinitely. The foreign tax credit expires in 2026.

Valuation allowances have been established to reduce deferred tax assets to an amount that will, more likely than not, be realized. During 2016, valuation allowances decreased by a total of $122 million. This decrease was primarily attributable to the reversal of valuation allowances related to interest deduction carryforwards in Germany and the sale of the Whitegate Refinery. During 2016, certain German intercompany loans were refinanced at lower interest rates. As a result of reduced interest rates, as well as increased earnings (current and forecasted), the likelihood of realizing approximately $68 million in tax benefits associated with interest deduction carryforwards is now considered more likely than not. The sale of the Whitegate Refinery resulted in the elimination of a net deferred tax asset and corresponding valuation allowance of approximately $45 million. Based on our historical taxable income, expectations for the future, and available tax-planning strategies, management expects the remaining net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and the tax consequences of future taxable income.

As of December 31, 2016, we had undistributed earnings related to foreign subsidiaries and foreign corporate joint ventures of approximately $3 billion for which deferred income taxes have not been provided. We plan to reinvest these earnings for the foreseeable future. If these amounts were distributed to the United States, we would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liability is not practicable due to the number of unknown variables inherent in the calculation.

As a result of the Separation and pursuant to the Tax Sharing Agreement with ConocoPhillips, the unrecognized tax benefits related to our operations for which ConocoPhillips was the taxpayer remain the responsibility of ConocoPhillips, and we have indemnified ConocoPhillips for such amounts. Those unrecognized tax benefits are included in the following table which shows a reconciliation of the beginning and ending unrecognized tax benefits.

	Millions of Dollars
	2016				2015			2014
Balance at January 1	$	82			142			202
Additions based on tax positions related to the current year	—				—			13
Additions for tax positions of prior years	5				6			14
Reductions for tax positions of prior years	(17		)		(17	)		(68	)
Settlements	—				(49	)		(19	)
Lapse of statute	—				—			—
Balance at December 31	$	70			82			142

Included in the balance of unrecognized tax benefits for 2016, 2015 and 2014 were $13 million, $34 million and $98 million, respectively, which, if recognized, would affect our effective tax rate. With respect to various unrecognized tax benefits and the related accrued liability, approximately $32 million may be recognized or paid within the next twelve months due to completion of audits.

At December 31, 2016, 2015 and 2014, accrued liabilities for interest and penalties totaled $12 million, $19 million and $16 million, respectively, net of accrued income taxes. As a result of reversing certain of these accruals, earnings increased by $7 million and $3 million in 2016 and 2015, respectively. Neither interest nor penalties had an impact on earnings in 2014.

We file tax returns in the U.S. federal jurisdiction and in many foreign and state jurisdictions. Audits in significant jurisdictions are generally complete as follows: United Kingdom (2011), Germany (2011) and United States (2008). Certain issues remain in dispute for audited years, and unrecognized tax benefits for years still subject to or currently undergoing an audit are subject to change. As a consequence, the balance in unrecognized tax benefits can be expected to

Index to Financial Statements

fluctuate from period to period. Although it is reasonably possible such changes could be significant when compared with our total unrecognized tax benefits, the amount of change is not estimable.

The amounts of U.S. and foreign income (loss) before income taxes, with a reconciliation of tax at the federal statutory rate with the provision for income taxes, were:

	Millions of Dollars										Percent of Pre-tax Income
	2016				2015			2014			2016			2015			2014
Income from continuing operations before income taxes
United States	$	1,713			4,983			5,121			78.2	%		82.4			89.1
Foreign	478				1,061			624			21.8			17.6			10.9
	$	2,191			6,044			5,745			100.0	%		100.0			100.0
Federal statutory income tax	$	767			2,115			2,011			35.0	%		35.0			35.0
Goodwill allocated to assets sold	—				41			18			—			0.7			0.3
Sale of foreign subsidiaries	—				(125	)		(293	)		—			(2.1	)		(5.1	)
Foreign rate differential	(152		)		(239	)		(184	)		(6.9	)		(3.9	)		(3.2	)
German tax legislation	—				(103	)		—			—			(1.7	)		—
Change in valuation allowance	(81		)		(17	)		(14	)		(3.7	)		(0.2	)		(0.2	)
Federal manufacturing deduction	—				(77	)		(81	)		—			(1.3	)		(1.4	)
State income tax, net of federal benefit	12				150			180			0.6			2.5			3.1
Other	1				19			17			—			0.2			0.3
	$	547			1,764			1,654			25.0	%		29.2			28.8

Included in the line item “Sale of foreign subsidiaries” is a $224 million tax benefit attributable to the realization of excess tax basis during the fourth quarter of 2014 resulting from the sale of MRC and a $72 million benefit realized in 2015 attributable to the nontaxable gain from the sale of ICHP.

Income tax expenses of $150 million in 2016, and income tax benefits of $34 million and $37 million, for the years 2015 and 2014, respectively, are reflected in the “Capital in Excess of Par” column of the consolidated statement of equity.

Index to Financial Statements

Note 22—Accumulated Other Comprehensive Income (Loss)

Changes in the balances of each component of accumulated other comprehensive income (loss) were as follows:

	Millions of Dollars
	Defined Benefit Plans				Foreign Currency Translation			Hedging			Accumulated Other Comprehensive Income (Loss)
December 31, 2013	$	(404	)		443			(2	)		37
Other comprehensive income (loss) before reclassification	(330		)		(276	)		—			(606	)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of defined benefit plan items*
Actuarial losses	38				—			—			38
Net current period other comprehensive loss	(292		)		(276	)		—			(568	)
December 31, 2014	(696		)		167			(2	)		(531	)
Other comprehensive income (loss) before reclassifications	(78		)		(156	)		—			(234	)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of defined benefit plan items*
Actuarial losses and settlements	112				—			—			112
Net current period other comprehensive income (loss)	34				(156	)		—			(122	)
December 31, 2015	(662		)		11			(2	)		(653	)
Other comprehensive income (loss) before reclassifications	(112		)		(296	)		5			(403	)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of defined benefit plan items*
Actuarial losses and settlements	61				—			—			61
Net current period other comprehensive income (loss)	(51		)		(296	)		5			(342	)
December 31, 2016	$	(713	)		(285	)		3			(995	)

*Included in the computation of net periodic benefit cost. See Note 20—Employee Benefit Plans, for additional information.

Note 23—Cash Flow Information

	Millions of Dollars
	2016				2015			2014
Cash Payments (Receipts)
Interest	$	311			275			238
Income taxes*	(375		)		1,560			2,185

*2016 reflects a net cash refund position; cash payments for income taxes were $385 million.

Index to Financial Statements

PSPI Noncash Stock Exchange

As discussed more fully in Note 6—Assets Held for Sale or Sold, in 2014, we completed the exchange of our flow improvers business for shares of Phillips 66 common stock owned by the other party to the transaction. The noncash portion of the net assets surrendered by us in the exchange was $204 million, and we received approximately 17.4 million shares of our common stock, with a fair value at the time of the exchange of $1.35 billion.

Note 24—Other Financial Information

	Millions of Dollars
	2016				2015			2014
Interest and Debt Expense
Incurred
Debt	$	402			389			265
Other	17				27			22
	419				416			287
Capitalized	(81		)		(106	)		(20	)
Expensed	$	338			310			267
Other Income
Interest income	$	18			27			21
Other, net*	56				91			99
	$	74			118			120
*Includes derivatives-related activities.
Research and Development Expenditures—expensed	$	60			65			62
Advertising Expenses	$	80			73			70
Foreign Currency Transaction (Gains) Losses—after-tax
Midstream	$	—			—			—
Chemicals	—				—			—
Refining	(10		)		34			6
Marketing and Specialties	1				4			8
Corporate and Other	(2		)		—			—
	$	(11	)		38			14

Index to Financial Statements

Note 25—Related Party Transactions

Significant transactions with related parties were:

	Millions of Dollars
	2016				2015			2014
Operating revenues and other income (a)	$	2,174			2,452			6,514
Purchases (b)	8,109				8,142			15,647
Operating expenses and selling, general and administrative expenses (c)	125				129			133

In December 2014, we completed the sale of our interest in MRC. Accordingly, sales of crude oil to MRC and purchases of refined products from MRC are only included in the 2014 amounts in the table above.

(a)

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

(b)

We purchased crude oil and refined products from WRB. We also acted as agent for WRB in distributing asphalt and solvents for a fee. We purchased natural gas and NGL from DCP Midstream and CPChem, as well as other feedstocks from various affiliates, for use in our refinery and fractionation processes. We paid NGL fractionation fees to CPChem. We also paid fees to various pipeline equity companies for transporting crude oil, finished refined products and NGL. We purchased base oils and fuel products from Excel for use in our refining and specialty businesses.

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

Note 26—Segment Disclosures and Related Information

Our operating segments are:

1)

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

2)	Chemicals—Consists of our 50 percent equity investment in CPChem, which manufactures and markets petrochemicals and plastics on a worldwide basis.

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

4)	Marketing and Specialties (M&S)—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, as well as power generation operations.

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

Index to Financial Statements

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

Analysis of Results by Operating Segment

	Millions of Dollars
	2016				2015			2014
Sales and Other Operating Revenues
Midstream
Total sales	$	4,226			3,676			6,222
Intersegment eliminations	(1,299		)		(1,034	)		(1,104	)
Total Midstream	2,927				2,642			5,118
Chemicals	5				5			7
Refining
Total sales	52,068				63,470			115,326
Intersegment eliminations	(34,120		)		(40,317	)		(68,263	)
Total Refining	17,948				23,153			47,063
Marketing and Specialties
Total sales	64,476				74,591			110,540
Intersegment eliminations	(1,109		)		(1,446	)		(1,548	)
Total Marketing and Specialties	63,367				73,145			108,992
Corporate and Other	32				30			32
Consolidated sales and other operating revenues	$	84,279			98,975			161,212
Depreciation, Amortization and Impairments
Midstream	$	218			128			92
Chemicals	—				—			—
Refining	770				741			850
Marketing and Specialties	107				100			97
Corporate and Other	78				116			106
Consolidated depreciation, amortization and impairments	$	1,173			1,085			1,145

Index to Financial Statements

	Millions of Dollars
	2016				2015			2014
Equity in Earnings of Affiliates
Midstream	$	184			(268	)		360
Chemicals	834				1,316			1,634
Refining	164				325			311
Marketing and Specialties	232				207			162
Corporate and Other	—				(7	)		(1	)
Consolidated equity in earnings of affiliates	$	1,414			1,573			2,466
Income Taxes from Continuing Operations
Midstream	$	123			73			310
Chemicals	256				353			495
Refining	61				1,104			696
Marketing and Specialties	370				466			440
Corporate and Other	(263		)		(232	)		(287	)
Consolidated income taxes from continuing operations	$	547			1,764			1,654
Net Income Attributable to Phillips 66
Midstream	$	178			13			507
Chemicals	583				962			1,137
Refining	374				2,555			1,771
Marketing and Specialties	891				1,187			1,034
Corporate and Other	(471		)		(490	)		(393	)
Discontinued Operations	—				—			706
Consolidated net income attributable to Phillips 66	$	1,555			4,227			4,762

Index to Financial Statements

	Millions of Dollars
	2016				2015			2014
Investments In and Advances To Affiliates
Midstream	$	4,769			4,198			2,461
Chemicals	5,773				5,177			5,183
Refining	2,420				2,262			2,103
Marketing and Specialties	391				342			290
Corporate and Other	1				1			1
Consolidated investments in and advances to affiliates	$	13,354			11,980			10,038
Total Assets
Midstream	$	12,832			11,043			7,295
Chemicals	5,802				5,237			5,209
Refining	22,825				21,993			22,808
Marketing and Specialties	6,227				5,631			7,051
Corporate and Other	3,967				4,676			6,329
Consolidated total assets	$	51,653			48,580			48,692
Capital Expenditures and Investments
Midstream	$	1,453			4,457			2,173
Chemicals	—				—			—
Refining	1,149				1,069			1,038
Marketing and Specialties	98				122			439
Corporate and Other	144				116			123
Consolidated capital expenditures and investments	$	2,844			5,764			3,773
Interest Income and Expense
Interest income
Midstream	$	2			—			—
Marketing and Specialties	—				2			—
Corporate and Other	16				25			21
Consolidated interest income	$	18			27			21
Interest and debt expense
Corporate and Other	$	338			310			267

Sales and Other Operating Revenues by Product Line
Refined products	$	73,385			86,249			133,625
Crude oil resales	7,594				8,993			19,832
NGL	3,107				2,998			6,447
Other	193				735			1,308
Consolidated sales and other operating revenues by product line	$	84,279			98,975			161,212

Index to Financial Statements

Geographic Information

	Millions of Dollars
	Sales and Other Operating Revenues*										Long-Lived Assets**
	2016				2015			2014			2016			2015			2014
United States	$	59,742			69,578			110,713			32,442			29,624			25,255
United Kingdom	9,895				12,120			20,131			1,177			1,459			1,469
Germany	6,128				6,584			9,424			503			502			534
Other foreign countries	8,514				10,693			20,944			87			116			126
Worldwide consolidated	$	84,279			98,975			161,212			34,209			31,701			27,384

*Sales and other operating revenues are attributable to countries based on the location of the operations generating the revenues.

**Defined as net properties, plants and equipment plus investments in and advances to affiliated companies.

Note 27—Phillips 66 Partners LP

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

2016 Activities

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

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

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

In June 2016, Phillips 66 Partners began issuing common units under a continuous offering program, which allows for the issuance of up to an aggregate of $250 million of Phillips 66 Partners’ common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the time of the offerings. We refer to this as an at-the-market, or ATM, program. Through December 31, 2016, on a settlement-date basis, Phillips 66 Partners issued an aggregate of 346,152 common units under the ATM program, generating net proceeds of approximately $19 million.

In August 2016, Phillips 66 Partners completed a public offering of 6,000,000 common units representing limited partner interests, at a price of $50.22 per unit. The net proceeds at closing were $299 million. The net proceeds from the offering were used to repay the note assumed in the March 2016 transaction discussed above, as well as short-term borrowings incurred to fund Phillips 66 Partners’ acquisition of an additional interest in Explorer Pipeline Company and its contribution to a recently formed pipeline joint venture.

Index to Financial Statements

In October 2016, we contributed to Phillips 66 Partners certain crude oil, refined product and NGL pipeline and terminal assets supporting four of our operated refineries. Total consideration for the transaction was $1.3 billion, consisting of $1,109 million in cash and the issuance of common and general partner units to us with a fair value of $196 million. Phillips 66 Partners funded the cash portion of the transaction with proceeds from a public debt offering of unsecured senior notes of $1,125 million in the aggregate. See Note 13—Debt for additional information on the notes offering.

In November 2016, Phillips 66 Partners acquired a third-party NGL logistics system in southeast Louisiana. Consideration was financed with cash and borrowings under Phillips 66 Partners’ revolving credit facility. The system includes approximately 500 miles of pipeline and a storage cavern connecting multiple fractionation facilities, refineries and a petrochemical facility.

Ownership

At December 31, 2016, we owned a 59 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, while the public owned a 39 percent limited partner interest. We consolidate Phillips 66 Partners as a variable interest entity for financial reporting purposes. See Note 3—Variable Interest Entities for additional information on why we consolidate the partnership. As a result of this consolidation, the public unitholders’ ownership interest in Phillips 66 Partners is reflected as a noncontrolling interest of $1,306 million and $809 million in our consolidated balance sheet as of December 31, 2016, and 2015, respectively. Generally, drop down transactions to Phillips 66 Partners will eliminate in consolidation, except for third-party debt or equity offerings made by Phillips 66 Partners to finance such transactions. For contributions in 2016 together with the public offerings of common units and senior notes discussed above, our consolidated cash increased by $2.1 billion, consolidated debt increased by $1.1 billion and consolidated equity increased by $791 million as a result of the transactions.

Note 28—New Accounting Standards

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other—Simplifying the Test for Goodwill Impairment,” which eliminates Step 2 from the goodwill impairment test. Under the revised test, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Public business entities should apply the guidance in ASU No. 2017-04 for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the provisions of ASU No. 2017-04.

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

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which clarifies the classification and presentation of changes in restricted cash. The amendment requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Public business entities should apply the guidance in ASU No. 2016-18 on a retrospective basis for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. We do not expect the adoption of this ASU to have a material impact on our financial statements.

Index to Financial Statements

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which clarifies the treatment of several cash flow categories. In addition, ASU No. 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. Public business entities should apply the guidance in ASU No. 2016-15 on a retrospective basis for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. We are currently evaluating the provisions of ASU No. 2016-15 and assessing the impact on our financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The new standard amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. Public business entities should apply the guidance in ASU No. 2016-13 for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption will be permitted for annual periods beginning after December 15, 2018. We are currently evaluating the provisions of ASU No. 2016-13 and assessing the impact on our financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment award transactions including accounting for income taxes and classification of excess tax benefits on the statement of cash flows, forfeitures and minimum statutory tax withholding requirements. Public business entities should apply the guidance in ASU No. 2016-09 for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the provisions of ASU No. 2016-09 and assessing the impact on our financial statements.

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

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

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new standard converged guidance on recognizing revenues in contracts with customers under GAAP and International Financial Reporting Standards. This ASU is intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets and expand disclosure requirements. In August 2015, the FASB

Index to Financial Statements

issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. Retrospective or modified retrospective application of the accounting standard is required. ASU No. 2014-09 was further amended in March 2016 by the provisions of ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” in April 2016 by the provisions of ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” in May 2016 by the provisions of ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and in December 2016 by the provisions of ASU No. 2016-20, “Technical Corrections to Topic 606, Revenue from Contracts with Customers.” As part of our assessment work-to-date, we have formed an implementation work team, completed training on the new ASU’s revenue recognition model and are continuing our contract review and documentation. Our expectation is to adopt the standard on January 1, 2018, using the modified retrospective application. In addition, we expect to present revenue net of sales-based taxes collected from our customers resulting in no impact to earnings. Sales-based taxes include excise taxes on petroleum product sales as noted on our consolidated statement of income. Our evaluation of the new ASU is ongoing, which includes understanding the impact of adoption on earnings from equity method investments.

Note 29—Condensed Consolidating Financial Information

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

•	Phillips 66 and Phillips 66 Company (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).

•	All other nonguarantor subsidiaries.

•	The consolidating adjustments necessary to present Phillips 66’s results on a consolidated basis.

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

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2016
Statement of Income	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—		58,822		25,457		—		84,279
Equity in earnings of affiliates	1,797			1,839		296		(2,518	)	1,414
Net gain (loss) on dispositions	—			(9	)	19		—		10
Other income	—			42		32		—		74
Intercompany revenues	—			864		9,160		(10,024	)	—
Total Revenues and Other Income	1,797			61,558		34,964		(12,542	)	85,777
Costs and Expenses
Purchased crude oil and products	—			48,171		24,102		(9,805	)	62,468
Operating expenses	—			3,465		846		(36	)	4,275
Selling, general and administrative expenses	6			1,236		406		(10	)	1,638
Depreciation and amortization	—			821		347		—		1,168
Impairments	—			1		4		—		5
Taxes other than income taxes	—			5,477		8,211		—		13,688
Accretion on discounted liabilities	—			16		5		—		21
Interest and debt expense	366			21		124		(173	)	338
Foreign currency transaction gains	—			—		(15	)	—		(15	)
Total Costs and Expenses	372			59,208		34,030		(10,024	)	83,586
Income from continuing operations before income taxes	1,425			2,350		934		(2,518	)	2,191
Provision (benefit) for income taxes	(130		)	553		124		—		547
Income from Continuing Operations	1,555			1,797		810		(2,518	)	1,644
Income from discontinued operations	—			—		—		—		—
Net income	1,555			1,797		810		(2,518	)	1,644
Less: net income attributable to noncontrolling interests	—			—		89		—		89
Net Income Attributable to Phillips 66	$	1,555		1,797		721		(2,518	)	1,555
Comprehensive Income	$	1,213		1,455		451		(1,817	)	1,302

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2015
Statement of Income	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—		68,478		30,497		—		98,975
Equity in earnings (losses) of affiliates	4,470			2,812		(134	)	(5,575	)	1,573
Net gain (loss) on dispositions	—			(115	)	398		—		283
Other income	—			81		37		—		118
Intercompany revenues	—			1,071		9,845		(10,916	)	—
Total Revenues and Other Income	4,470			72,327		40,643		(16,491	)	100,949
Costs and Expenses
Purchased crude oil and products	—			54,925		29,221		(10,747	)	73,399
Operating expenses	4			3,412		917		(39	)	4,294
Selling, general and administrative expenses	5			1,265		416		(16	)	1,670
Depreciation and amortization	—			818		260		—		1,078
Impairments	—			4		3		—		7
Taxes other than income taxes	—			5,505		8,572		—		14,077
Accretion on discounted liabilities	—			16		5		—		21
Interest and debt expense	365			25		34		(114	)	310
Foreign currency transaction losses	—			1		48		—		49
Total Costs and Expenses	374			65,971		39,476		(10,916	)	94,905
Income from continuing operations before income taxes	4,096			6,356		1,167		(5,575	)	6,044
Provision (benefit) for income taxes	(131		)	1,886		9		—		1,764
Income from Continuing Operations	4,227			4,470		1,158		(5,575	)	4,280
Income from discontinued operations	—			—		—		—		—
Net income	4,227			4,470		1,158		(5,575	)	4,280
Less: net income attributable to noncontrolling interests	—			—		53		—		53
Net Income Attributable to Phillips 66	$	4,227		4,470		1,105		(5,575	)	4,227
Comprehensive Income	$	4,105		4,348		1,032		(5,327	)	4,158

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2014
Statement of Income	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—		109,078		52,134		—		161,212
Equity in earnings of affiliates	4,257			3,021		444		(5,256	)	2,466
Net gain (loss) on dispositions	—			(46	)	341		—		295
Other income	—			105		15		—		120
Intercompany revenues	—			2,411		18,772		(21,183	)	—
Total Revenues and Other Income	4,257			114,569		71,706		(26,439	)	164,093
Costs and Expenses
Purchased crude oil and products	—			97,783		58,984		(21,019	)	135,748
Operating expenses	2			3,600		870		(37	)	4,435
Selling, general and administrative expenses	6			1,224		502		(69	)	1,663
Depreciation and amortization	—			761		234		—		995
Impairments	—			3		147		—		150
Taxes other than income taxes	—			5,478		9,563		(1	)	15,040
Accretion on discounted liabilities	—			18		6		—		24
Interest and debt expense	286			18		20		(57	)	267
Foreign currency transaction losses	—			—		26		—		26
Total Costs and Expenses	294			108,885		70,352		(21,183	)	158,348
Income from continuing operations before income taxes	3,963			5,684		1,354		(5,256	)	5,745
Provision (benefit) for income taxes	(103		)	1,427		330		—		1,654
Income from Continuing Operations	4,066			4,257		1,024		(5,256	)	4,091
Income from discontinued operations*	696			—		10		—		706
Net income	4,762			4,257		1,034		(5,256	)	4,797
Less: net income attributable to noncontrolling interests	—			—		35		—		35
Net Income Attributable to Phillips 66	$	4,762		4,257		999		(5,256	)	4,762
Comprehensive Income	$	4,194		3,689		721		(4,375	)	4,229
*Net of provision for income taxes on discontinued operations:	$	—		—		5		—		5

Index to Financial Statements

	Millions of Dollars
	At December 31, 2016
Balance Sheet	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Assets
Cash and cash equivalents	$	—		854		1,857		—		2,711
Accounts and notes receivable	13			4,336		3,276		(1,228	)	6,397
Inventories	—			2,198		952		—		3,150
Prepaid expenses and other current assets	2			317		103		—		422
Total Current Assets	15			7,705		6,188		(1,228	)	12,680
Investments and long-term receivables	31,165			22,733		8,588		(48,952	)	13,534
Net properties, plants and equipment	—			13,044		7,811		—		20,855
Goodwill	—			2,853		417		—		3,270
Intangibles	—			719		169		—		888
Other assets	15			245		168		(2	)	426
Total Assets	$	31,195		47,299		23,341		(50,182	)	51,653
Liabilities and Equity
Accounts payable	$	—		5,626		2,663		(1,228	)	7,061
Short-term debt	500			30		20		—		550
Accrued income and other taxes	—			348		457		—		805
Employee benefit obligations	—			475		52		—		527
Other accruals	59			371		90		—		520
Total Current Liabilities	559			6,850		3,282		(1,228	)	9,463
Long-term debt	6,920			150		2,518		—		9,588
Asset retirement obligations and accrued environmental costs	—			501		154		—		655
Deferred income taxes	—			4,391		2,354		(2	)	6,743
Employee benefit obligations	—			948		268		—		1,216
Other liabilities and deferred credits	1,297			3,337		4,060		(8,431	)	263
Total Liabilities	8,776			16,177		12,636		(9,661	)	27,928
Common stock	10,777			25,403		10,117		(35,520	)	10,777
Retained earnings	12,637			6,714		(269	)	(6,474	)	12,608
Accumulated other comprehensive loss	(995		)	(995	)	(478	)	1,473		(995	)
Noncontrolling interests	—			—		1,335		—		1,335
Total Liabilities and Equity	$	31,195		47,299		23,341		(50,182	)	51,653

Index to Financial Statements

	Millions of Dollars
	At December 31, 2015
Balance Sheet	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Assets
Cash and cash equivalents	$	—		575		2,499		—		3,074
Accounts and notes receivable	14			3,643		2,217		(701	)	5,173
Inventories	—			2,171		1,306		—		3,477
Prepaid expenses and other current assets	2			382		148		—		532
Total Current Assets	16			6,771		6,170		(701	)	12,256
Investments and long-term receivables	33,315			24,068		7,395		(52,635	)	12,143
Net properties, plants and equipment	—			12,651		7,070		—		19,721
Goodwill	—			3,040		235		—		3,275
Intangibles	—			726		180		—		906
Other assets	16			154		113		(4	)	279
Total Assets	$	33,347		47,410		21,163		(53,340	)	48,580
Liabilities and Equity
Accounts payable	$	—		4,015		2,341		(701	)	5,655
Short-term debt	—			25		19		—		44
Accrued income and other taxes	—			320		558		—		878
Employee benefit obligations	—			528		48		—		576
Other accruals	59			240		79		—		378
Total Current Liabilities	59			5,128		3,045		(701	)	7,531
Long-term debt	7,413			158		1,272		—		8,843
Asset retirement obligations and accrued environmental costs	—			496		169		—		665
Deferred income taxes	—			4,500		1,545		(4	)	6,041
Employee benefit obligations	—			1,094		191		—		1,285
Other liabilities and deferred credits	2,746			2,765		3,734		(8,968	)	277
Total Liabilities	10,218			14,141		9,956		(9,673	)	24,642
Common stock	11,405			25,404		10,688		(36,092	)	11,405
Retained earnings	12,377			8,518		(200	)	(8,347	)	12,348
Accumulated other comprehensive loss	(653		)	(653	)	(119	)	772		(653	)
Noncontrolling interests	—			—		838		—		838
Total Liabilities and Equity	$	33,347		47,410		21,163		(53,340	)	48,580

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2016
Statement of Cash Flows	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Cash Flows From Operating Activities
Net cash provided by continuing operating activities	$	3,491		2,307		503		(3,338	)	2,963
Net cash provided by discontinued operations	—			—		—		—		—
Net Cash Provided by Operating Activities	3,491			2,307		503		(3,338	)	2,963
Cash Flows From Investing Activities
Capital expenditures and investments*	—			(1,425	)	(1,457	)	38		(2,844	)
Proceeds from asset dispositions**	—			1,007		156		(1,007	)	156
Intercompany lending activities	(1,139		)	2,046		(907	)	—		—
Advances/loans—related parties	—			(75	)	(357	)	—		(432	)
Collection of advances/loans—related parties	—			—		108		—		108
Other	—			18		(164	)	—		(146	)
Net cash provided by (used in) continuing investing activities	(1,139		)	1,571		(2,621	)	(969	)	(3,158	)
Net cash provided by (used in) discontinued operations	—			—		—		—		—
Net Cash Provided by (Used in) Investing Activities	(1,139		)	1,571		(2,621	)	(969	)	(3,158	)
Cash Flows From Financing Activities
Issuance of debt	—			—		2,090		—		2,090
Repayment of debt	—			(26	)	(807	)	—		(833	)
Issuance of common stock	(12		)	—		—		—		(12	)
Repurchase of common stock	(1,042		)	—		—		—		(1,042	)
Dividends paid on common stock	(1,282		)	(3,604	)	(783	)	4,387		(1,282	)
Distributions to controlling interests	—			—		1,049		(1,049	)	—
Distributions to noncontrolling interests	—			—		(75	)	—		(75	)
Net proceeds from issuance of Phillips 66 Partners LP common units	—			—		972		—		972
Other*	(16		)	31		(980	)	969		4
Net cash provided by (used in) continuing financing activities	(2,352		)	(3,599	)	1,466		4,307		(178	)
Net cash provided by (used in) discontinued operations	—			—		—		—		—
Net Cash Provided by (Used in) Financing Activities	(2,352		)	(3,599	)	1,466		4,307		(178	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	—			—		10		—		10
Net Change in Cash and Cash Equivalents	—			279		(642	)	—		(363	)
Cash and cash equivalents at beginning of period				575		2,499		—		3,074
Cash and Cash Equivalents at End of Period	$	—		854		1,857		—		2,711
* Includes intercompany capital contributions.
** Includes return of investments in equity affiliates and working capital true-ups on dispositions.

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2015
Statement of Cash Flows	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Cash Flows From Operating Activities
Net cash provided by continuing operating activities	$	1,060		4,879		2,564		(2,790	)	5,713
Net cash provided by discontinued operations	—			—		—		—		—
Net Cash Provided by Operating Activities	1,060			4,879		2,564		(2,790	)	5,713
Cash Flows From Investing Activities
Capital expenditures and investments*	—			(2,815	)	(5,283	)	2,334		(5,764	)
Proceeds from asset dispositions**	—			774		178		(882	)	70
Intercompany lending activities	2,461			(3,153	)	692		—		—
Advances/loans—related parties	—			(50	)	—		—		(50	)
Collection of advances/loans—related parties	—			50		—		—		50
Other	—			6		(50	)	—		(44	)
Net cash provided by (used in) continuing investing activities	2,461			(5,188	)	(4,463	)	1,452		(5,738	)
Net cash provided by (used in) discontinued operations	—			—		—		—		—
Net Cash Provided by (Used in) Investing Activities	2,461			(5,188	)	(4,463	)	1,452		(5,738	)
Cash Flows From Financing Activities
Issuance of debt	—			—		1,169		—		1,169
Repayment of debt	(800		)	(23	)	(103	)	—		(926	)
Issuance of common stock	(19		)	—		—		—		(19	)
Repurchase of common stock	(1,512		)	—		—		—		(1,512	)
Dividends paid on common stock	(1,172		)	(1,172	)	(1,576	)	2,748		(1,172	)
Distributions to controlling interests	—			—		(186	)	186		—
Distributions to noncontrolling interests	—			—		(46	)	—		(46	)
Net proceeds from issuance of Phillips 66 Partners LP common units	—			—		384		—		384
Other*	(18		)	34		1,585		(1,596	)	5
Net cash provided by (used in) continuing financing activities	(3,521		)	(1,161	)	1,227		1,338		(2,117	)
Net cash provided by (used in) discontinued operations	—			—		—		—		—
Net Cash Provided by (Used in) Financing Activities	(3,521		)	(1,161	)	1,227		1,338		(2,117	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	—			—		9		—		9
Net Change in Cash and Cash Equivalents	—			(1,470	)	(663	)	—		(2,133	)
Cash and cash equivalents at beginning of period	—			2,045		3,162		—		5,207
Cash and Cash Equivalents at End of Period	$	—		575		2,499		—		3,074
* Includes intercompany capital contributions.
** Includes return of investments in equity affiliates and working capital true-ups on dispositions.

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2014
Statement of Cash Flows	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Cash Flows From Operating Activities
Net cash provided by (used in) continuing operating activities	$	(47	)	2,551		1,527		(504	)	3,527
Net cash provided by discontinued operations	—			—		2		—		2
Net Cash Provided by (Used in) Operating Activities	(47		)	2,551		1,529		(504	)	3,529
Cash Flows From Investing Activities
Capital expenditures and investments*	—			(2,230	)	(2,532	)	989		(3,773	)
Proceeds from asset dispositions	—			960		687		(403	)	1,244
Intercompany lending activities**	1,397			(1,402	)	5		—		—
Advances/loans—related parties	—			—		(3	)	—		(3	)
Other	—			(13	)	251		—		238
Net cash provided by (used in) continuing investing activities	1,397			(2,685	)	(1,592	)	586		(2,294	)
Net cash used in discontinued operations	—			—		(2	)	—		(2	)
Net Cash Provided by (Used in) Investing Activities	1,397			(2,685	)	(1,594	)	586		(2,296	)
Cash Flows From Financing Activities
Issuance of debt	2,459			—		28		—		2,487
Repayment of debt	—			(20	)	(29	)	—		(49	)
Issuance of common stock	1			—		—		—		1
Repurchase of common stock	(2,282		)	—		—		—		(2,282	)
Share exchange—PSPI transaction	(450		)	—		—		—		(450	)
Dividends paid on common stock	(1,062		)	—		(443	)	443		(1,062	)
Distributions to controlling interests	—			—		(323	)	323		—
Distributions to noncontrolling interests	—			—		(30	)	—		(30	)
Other*	(16		)	37		850		(848	)	23
Net cash provided by (used in) continuing financing activities	(1,350		)	17		53		(82	)	(1,362	)
Net cash provided by (used in) discontinued operations	—			—		—		—		—
Net Cash Provided by (Used in) Financing Activities	(1,350		)	17		53		(82	)	(1,362	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	—			—		(64	)	—		(64	)
Net Change in Cash and Cash Equivalents	—			(117	)	(76	)	—		(193	)
Cash and cash equivalents at beginning of period	—			2,162		3,238		—		5,400
Cash and Cash Equivalents at End of Period	$	—		2,045		3,162		—		5,207
* Includes intercompany capital contributions.
** Non-cash investing activity: In the fourth quarter of 2014, Phillips 66 Company declared and distributed $6.1 billion of its Phillips 66 intercompany receivables to Phillips 66.

Index to Financial Statements

Selected Quarterly Financial Data (Unaudited)

	Millions of Dollars										Per Share of Common Stock
	Sales and Other Operating Revenues*			Income Before Income Taxes		Net Income		Net Income Attributable to Phillips 66			Net Income Attributable to Phillips 66
		Basic		Diluted
2016
First	$	17,409		596		398		385			0.72		0.72
Second	21,849			720		516		496			0.94		0.93
Third	21,624			813		536		511			0.97		0.96
Fourth	23,397			62		194		163			0.31		0.31
2015
First	$	22,778		1,388		997		987			1.80		1.79
Second	28,512			1,465		1,025		1,012			1.85		1.84
Third	25,792			2,359		1,592		1,578			2.92		2.90
Fourth	21,893			832		666		650			1.21		1.20

*Includes excise taxes on petroleum products sales.

Index to Financial Statements