Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PHILLIPS 66

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Management	71
Reports of Independent Registered Public Accounting Firm	72
Consolidated Financial Statements of Phillips 66:
Consolidated Statement of Income for the years ended December 31, 2017, 2016 and 2015	74
Consolidated Statement of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015	75
Consolidated Balance Sheet at December 31, 2017 and 2016	76
Consolidated Statement of Cash Flows for the years ended December 31, 2017, 2016 and 2015	77
Consolidated Statement of Changes in Equity for the years ended December 31, 2017, 2016 and 2015	78
Notes to Consolidated Financial Statements	80
Supplementary Information
Selected Quarterly Financial Data (Unaudited)	134

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 generally accepted accounting principles 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, 2017. 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, 2017.

Ernst & Young LLP has issued an audit report on the company’s internal control over financial reporting as of December 31, 2017, 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

Date: February 23, 2018

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Phillips 66

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Phillips 66 (the Company) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, 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) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, 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 23, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

Houston, Texas

February 23, 2018

We have served as the Company’s auditor since 2011.

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Phillips 66

Opinion on Internal Control over Financial Reporting

We have audited Phillips 66’s internal control over financial reporting as of December 31, 2017, 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). In our opinion, Phillips 66 (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, 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, 2017, and the related notes and our report dated February 23, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.

/s/ Ernst & Young LLP

Houston, Texas

February 23, 2018

Index to Financial Statements

Consolidated Statement of Income	Phillips 66

	Millions of Dollars
Years Ended December 31	2017				2016			2015
Revenues and Other Income
Sales and other operating revenues*	$	102,354			84,279			98,975
Equity in earnings of affiliates	1,732				1,414			1,573
Net gain on dispositions	15				10			283
Other income	521				74			118
Total Revenues and Other Income	104,622				85,777			100,949
Costs and Expenses
Purchased crude oil and products	79,409				62,468			73,399
Operating expenses	4,699				4,275			4,294
Selling, general and administrative expenses	1,695				1,638			1,670
Depreciation and amortization	1,318				1,168			1,078
Impairments	24				5			7
Taxes other than income taxes*	13,462				13,688			14,077
Accretion on discounted liabilities	22				21			21
Interest and debt expense	438				338			310
Foreign currency transaction (gains) losses	—				(15	)		49
Total Costs and Expenses	101,067				83,586			94,905
Income before income taxes	3,555				2,191			6,044
Income tax expense (benefit)	(1,693		)		547			1,764
Net Income	5,248				1,644			4,280
Less: net income attributable to noncontrolling interests	142				89			53
Net Income Attributable to Phillips 66	$	5,106			1,555			4,227
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
Basic	$	9.90			2.94			7.78
Diluted	9.85				2.92			7.73
Dividends Paid Per Share of Common Stock (dollars)	$	2.73			2.45			2.18
Weighted-Average Common Shares Outstanding (thousands)
Basic	515,090				527,531			542,355
Diluted	518,508				530,066			546,977
* Includes excise taxes on sales of petroleum products:	$	13,054			13,381			13,780
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Consolidated Statement of Comprehensive Income	Phillips 66
	Millions of Dollars
Years Ended December 31	2017				2016			2015
Net Income	$	5,248			1,644			4,280
Other comprehensive income (loss)
Defined benefit plans
Actuarial loss arising during the period	(1		)		(178	)		(138	)
Amortization to net income of net actuarial loss and settlements	176				94			174
Curtailment gain	—				31			—
Plans sponsored by equity affiliates	10				(11	)		11
Income taxes on defined benefit plans	(70		)		13			(13	)
Defined benefit plans, net of tax	115				(51	)		34
Foreign currency translation adjustments	268				(301	)		(163	)
Income taxes on foreign currency translation adjustments	(9		)		5			7
Foreign currency translation adjustments, net of tax	259				(296	)		(156	)
Cash flow hedges	6				8			—
Income taxes on hedging activities	(2		)		(3	)		—
Hedging activities, net of tax	4				5			—
Other Comprehensive Income (Loss), Net of Tax	378				(342	)		(122	)
Comprehensive Income	5,626				1,302			4,158
Less: comprehensive income attributable to noncontrolling interests	142				89			53
Comprehensive Income Attributable to Phillips 66	$	5,484			1,213			4,105
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Consolidated Balance Sheet	Phillips 66
	Millions of Dollars
At December 31	2017				2016
Assets
Cash and cash equivalents	$	3,119			2,711
Accounts and notes receivable (net of allowances of $29 million in 2017 and $34 million in 2016)	6,424				5,485
Accounts and notes receivable—related parties	1,082				912
Inventories	3,395				3,150
Prepaid expenses and other current assets	370				422
Total Current Assets	14,390				12,680
Investments and long-term receivables	13,941				13,534
Net properties, plants and equipment	21,460				20,855
Goodwill	3,270				3,270
Intangibles	876				888
Other assets	434				426
Total Assets	$	54,371			51,653
Liabilities
Accounts payable	$	7,242			6,395
Accounts payable—related parties	785				666
Short-term debt	41				550
Accrued income and other taxes	1,002				805
Employee benefit obligations	582				527
Other accruals	455				520
Total Current Liabilities	10,107				9,463
Long-term debt	10,069				9,588
Asset retirement obligations and accrued environmental costs	641				655
Deferred income taxes	5,008				6,743
Employee benefit obligations	884				1,216
Other liabilities and deferred credits	234				263
Total Liabilities	26,943				27,928
Equity
Common stock (2,500,000,000 shares authorized at $0.01 par value) Issued (2017—643,835,464 shares; 2016—641,593,854 shares)
Par value	6				6
Capital in excess of par	19,768				19,559
Treasury stock (at cost: 2017—141,565,145 shares; 2016—122,827,264 shares)	(10,378		)		(8,788	)
Retained earnings	16,306				12,608
Accumulated other comprehensive loss	(617		)		(995	)
Total Stockholders’ Equity	25,085				22,390
Noncontrolling interests	2,343				1,335
Total Equity	27,428				23,725
Total Liabilities and Equity	$	54,371			51,653
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Consolidated Statement of Cash Flows	Phillips 66
	Millions of Dollars
Years Ended December 31	2017				2016			2015
Cash Flows From Operating Activities
Net income	$	5,248			1,644			4,280
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	1,318				1,168			1,078
Impairments	24				5			7
Accretion on discounted liabilities	22				21			21
Deferred income taxes	(1,886		)		612			529
Undistributed equity earnings	(516		)		(815	)		185
Net gain on dispositions	(15		)		(10	)		(283	)
Gain on consolidation of business	(423		)		—			—
Other	(186		)		(163	)		117
Working capital adjustments
Decrease (increase) in accounts and notes receivable	(1,182		)		(1,258	)		2,129
Decrease (increase) in inventories	(176		)		216			(144	)
Decrease (increase) in prepaid expenses and other current assets	104				(147	)		324
Increase (decrease) in accounts payable	1,153				1,579			(2,300	)
Increase (decrease) in taxes and other accruals	163				111			(230	)
Net Cash Provided by Operating Activities	3,648				2,963			5,713
Cash Flows From Investing Activities
Capital expenditures and investments	(1,832		)		(2,844	)		(5,764	)
Proceeds from asset dispositions*	86				156			70
Advances/loans—related parties	(10		)		(432	)		(50	)
Collection of advances/loans—related parties	326				108			50
Restricted cash received from consolidation of business	318				—			—
Other	(34		)		(146	)		(44	)
Net Cash Used in Investing Activities	(1,146		)		(3,158	)		(5,738	)
Cash Flows From Financing Activities
Issuance of debt	3,508				2,090			1,169
Repayment of debt	(3,678		)		(833	)		(926	)
Issuance of common stock	35				34			31
Repurchase of common stock	(1,590		)		(1,042	)		(1,512	)
Dividends paid on common stock	(1,395		)		(1,282	)		(1,172	)
Distributions to noncontrolling interests	(120		)		(75	)		(46	)
Net proceeds from issuance of Phillips 66 Partners LP common and preferred units	1,205				972			384
Other	(76		)		(42	)		(45	)
Net Cash Used in Financing Activities	(2,111		)		(178	)		(2,117	)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	17				10			9
Net Change in Cash, Cash Equivalents and Restricted Cash	408				(363	)		(2,133	)
Cash, cash equivalents and restricted cash at beginning of year	2,711				3,074			5,207
Cash, Cash Equivalents and Restricted Cash at End of Year	$	3,119			2,711			3,074
* Includes return of investments in equity affiliates.
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 Loss		Noncontrolling Interests		Total
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	—			—		—		—		—		(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	—			—		—		—		—		(75	)	(75	)
December 31, 2016	6			19,559		(8,788	)	12,608		(995	)	1,335		23,725
Net income	—			—		—		5,106		—		142		5,248
Other comprehensive income	—			—		—		—		378		—		378
Cash dividends paid on common stock	—			—		—		(1,395	)	—		—		(1,395	)
Repurchase of common stock	—			—		(1,590	)	—		—		—		(1,590	)
Benefit plan activity	—			72		—		(13	)	—		—		59
Issuance of Phillips 66 Partners LP common and preferred units	—			137		—		—		—		986		1,123
Distributions to noncontrolling interests	—			—		—		—		—		(120	)	(120	)
December 31, 2017	$	6		19,768		(10,378	)	16,306		(617	)	2,343		27,428

Index to Financial Statements

			Shares in Thousands
			Common Stock Issued		Treasury Stock
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
Repurchase of common stock			—		18,738
Shares issued—share-based compensation			2,241		—
December 31, 2017			643,835		141,565
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 classified either as available-for-sale if fair value is readily determinable, or as 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.

▪	Recasted Financial Information—Certain prior period financial information has been recasted to reflect the current year’s presentation.

▪

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 generally accepted accounting principles 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 in the “Purchased crude oil and products” line on our consolidated statement of income (i.e., these transactions are recorded net).

▪	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 investments at cost plus accrued interest.

▪	Shipping and Handling Costs—We record shipping and handling costs in the “Purchased crude oil and products” line on 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. Materials and supplies inventories are valued using the weighted-average-cost method.

Index to Financial Statements

▪

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 other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability that are used to measure fair value to the extent that relevant observable inputs are not available, and that reflect the assumptions we believe market participants would use when pricing an asset or liability for which there is little, if any, market activity at the measurement date.

▪	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. All realized and unrealized gains and losses from derivative instruments for which we do not apply hedge accounting are immediately recognized in our consolidated statement of income. Unrealized gains or losses from derivative instruments that qualify for and are designated as a cash flow hedge 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 fair value of a derivative instrument exceeds the change in the anticipated cash flows of the hedged transaction, the excess gain or loss is 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 related asset, and is amortized over the useful life of the related asset.

▪

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.

▪

Intangible Assets Other Than Goodwill—Intangible assets with finite useful lives are amortized using 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. Indefinite-lived intangible assets are considered impaired if their fair value is lower than their 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 for impairment annually 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, an impairment is recognized for the amount by which the book value exceeds the reporting unit’s fair value. A goodwill loss cannot exceed the total amount of goodwill allocated to that reporting unit. For purposes of testing goodwill for impairment, we have three reporting units with goodwill balances: Transportation, Refining, and Marketing and Specialties.

Index to Financial Statements

▪	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 depreciation provisions and reported in the “Impairments” line on 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 is usually 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 on 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 arises. 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. If our estimate of the liability changes after initial recognition, 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 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.

Index to Financial Statements

▪

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 for the excess amount above the guarantee’s book value, if it is reasonably estimable, based on the facts and circumstances at that time. We reverse the fair value liability only when there is no further exposure under the guarantee.

▪

Share-Based Compensation—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. Our equity-classified 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 (at age 55 with 5 years of service). 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, and elected to recognize forfeiture reversals of awards when they occur.

▪

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 income 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, 2017, we early adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminated the second step from the goodwill impairment test. Under the revised test, an entity should perform its goodwill impairment tests 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. This ASU was applied prospectively to goodwill impairment tests performed on or after January 1, 2017.

Effective January 1, 2017, we early adopted ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The update clarified the classification and presentation of changes in restricted cash. The ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Adoption of this ASU on a retrospective basis did not have a material impact on our financial statements. See Note 23—Cash Flow Information for more information.

Effective January 1, 2017, we early adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The update clarified how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. In addition, the ASU clarified that when cash receipts and cash

Index to Financial Statements

payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. Adoption of this ASU on a retrospective basis did not have a material impact on our financial statements.

Effective January 1, 2017, we adopted ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplified several aspects of the accounting for share-based payment award transactions, including accounting for income taxes and classification of excess tax benefits on the statement of cash flows, forfeitures and minimum statutory tax withholding requirements. Adoption of this ASU on a prospective basis did not materially impact our financial position, results of operations, or cash flows. We account for forfeitures of awards when they occur and excess tax benefits, which were previously reported in cash flows from financing activities, are now reported in cash flows from operating activities.

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 (VIE) Guidance in Topic 810, Consolidation.” This update 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. This update was 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 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 for 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.

Note 3—Variable Interest Entities

Consolidated VIEs

In 2013, we formed Phillips 66 Partners LP (Phillips 66 Partners), a master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum products and NGL pipelines and terminals, as well as other midstream assets. 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, along with its most significant liabilities for which its creditors do not have recourse to Phillips 66’s general credit at December 31 were:

	Millions of Dollars
	2017				2016
Cash and cash equivalents	$	185			2
Equity investments*	1,932				1,142
Net properties, plants and equipment	2,918				2,675
Long-term debt	2,920				2,396

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

Index to Financial Statements

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 former co-venturers in MSLP, certain defaults by Petróleos de Venezuela S.A. (PDVSA) with respect to supply of crude oil to the Sweeny Refinery triggered the right to acquire PDVSA’s 50 percent ownership interest in MSLP. The call right was exercised in August 2009. The exercise of the call right was challenged, and the dispute was arbitrated in our favor and subsequently litigated. Through February 7, 2017, we determined MSLP was a VIE and used the equity method of accounting because the exercise of the call right 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. 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. As discussed more fully in Note 5—Business Combinations, the exercise of the call right ceased to be subject to legal challenge in February 2017. At that point, we no longer considered MSLP a VIE and the entity became a consolidated subsidiary.

We own a 25 percent interest in both Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO), which collectively own the Bakken Pipeline. These entities did not have sufficient equity at risk to fully fund the construction of all assets required for principal operations, and thus represented VIEs until operations began. We determined we were not the primary beneficiary because we and our co-venturer at the time jointly directed the activities of Dakota Access and ETCO that most significantly impact economic performance. In June 2017, these entities started commercial operations and were no longer considered VIEs. We use the equity method of accounting for these investments.

Note 4—Inventories

Inventories at December 31 consisted of the following:

	Millions of Dollars
	2017				2016
Crude oil and petroleum products	$	3,106			2,883
Materials and supplies	289				267
	$	3,395			3,150

Inventories valued on the LIFO basis totaled $2,980 million and $2,772 million at December 31, 2017 and 2016, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $4.3 billion and $3.3 billion at December 31, 2017 and 2016, 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, 2017. These liquidations increased net income by approximately $13 million in 2017 and decreased net income by approximately $68 million and $37 million in 2016 and 2015, 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 2016. This LIFO liquidation impact was included in the net gain recognized on the disposition.

Index to Financial Statements

Note 5—Business Combinations

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

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

The results of MSLP were included in our Refining segment until October 2017, when we contributed our 100 percent interest in MSLP to Phillips 66 Partners, which is included in our Midstream segment. See Note 27—Phillips 66 Partners LP for further discussion regarding the contribution.

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 on our consolidated statement of cash flows. At the acquisition date, we recorded $183 million of PP&E and $3 million of goodwill. Our acquisition accounting was finalized during the first quarter of 2017, with no change to the provisional amounts recorded in 2016.

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 February 2015, we completed the sale of the Bantry Bay terminal, which was included in our Refining segment. 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 July 2013, we completed the sale of the Immingham Combined Heat and Power Plant (ICHP), which was included in our Marketing and Specialties 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 of the deferred gain during the year ended December 31, 2015.

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
	2017				2016
Equity investments	$	13,733			13,102
Loans and long-term receivables	94				334
Other investments	114				98
	$	13,941			13,534

Equity Investments

Affiliated companies in which we had a significant equity investment at December 31, 2017, 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, a wholly owned subsidiary of Enbridge Inc.—owns and operates gas plants, gathering systems, storage facilities and fractionation plants, including through its investment in DCP Midstream, LP (DCP Partners).

•	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 Colorado to 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.

•

Dakota Access and ETCO—Phillips 66 Partners’ two 25 percent owned joint ventures with Energy Transfer Partners L.P. (ETP) and MarEn Bakken Company LLC. Dakota Access owns a pipeline system that delivers crude oil from the Bakken/Three Forks production area in North Dakota to Patoka, Illinois, and ETCO owns a connecting crude oil pipeline system from Patoka, Illinois, to Nederland, Texas. Collectively, these two pipeline systems form the Bakken Pipeline, which is operated by ETP.

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

	Millions of Dollars
	2017				2016			2015
Revenues	$	35,523			30,605			33,126
Income before income taxes	3,956				3,206			3,180
Net income	3,764				2,960			3,158
Current assets	7,325				7,097			6,024
Noncurrent assets	49,950				50,163			46,047
Current liabilities	5,248				5,173			4,130
Noncurrent liabilities	13,743				13,709			11,493
Noncontrolling interests	2,549				2,260			2,404

Index to Financial Statements

At December 31, 2017, retained earnings included approximately $2,320 million related to the undistributed earnings of affiliated companies. Dividends received from affiliates were $1,270 million, $616 million, and $1,769 million in 2017, 2016 and 2015, 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, 2017, the book value of our investment in WRB was $2,269 million, and the basis difference was $2,787 million. Equity earnings in 2017, 2016 and 2015 were increased by $186 million, $185 million and $218 million, respectively, due to amortization of the basis difference.

In the first quarter of 2017, we received payment of the $75 million outstanding principal balance of a partner loan we made to WRB in 2016. This cash inflow was included in the “Collection of advances/loans—related parties” line on our consolidated statement of cash flows.

DCP Midstream

DCP Midstream owns and operates gas plants, gathering systems, storage facilities and fractionation plants, primarily 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. At December 31, 2017, the book value of our investment in DCP Midstream was $2,227 million, and the basis difference was $54 million.

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 capital contribution was included in the “Capital expenditures and investments” line on our consolidated statement of cash flows.

CPChem

CPChem manufactures and markets petrochemicals and plastics. 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. At December 31, 2017, the book value of our equity method investment in CPChem was $6,222 million.

REX

REX owns a natural gas pipeline that runs from Meeker, Colorado, to Clarington, Ohio. At December 31, 2017, the book value of our equity method investment in REX was $445 million, and the basis difference was $376 million. The basis difference was created by historical impairment charges we recorded to our investment.

In 2015, we contributed $112 million to REX to cover our 25 percent share of a $450 million debt repayment. Our capital contribution was included in the “Capital expenditures and investments” line on our consolidated statement of cash flows.

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. At December 31, 2017, the book value of Phillips 66 Partners’ equity investment in Sand Hills was $515 million.

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. At December 31, 2017, the book value of Phillips 66 Partners’ investment in Southern Hills was $209 million, and the basis difference was $94 million.

Index to Financial Statements

Dakota Access and ETCO

The Dakota Access and ETCO joint ventures were created to construct pipeline systems that collectively form the Bakken Pipeline. The Bakken Pipeline went into commercial service in June 2017, and delivers crude oil produced in the Bakken/Three Forks production area of North Dakota to market centers in the Midwest and the Gulf Coast. In October 2017, these investments were contributed to Phillips 66 Partners as discussed further in Note 27—Phillips 66 Partners LP. At December 31, 2017, the aggregate book value of Phillips 66 Partners’ investments in Dakota Access and ETCO was $621 million, and the basis difference was $53 million.

In May 2016, we and our co-venturer at the time, executed agreements under which we and our co-venturer would loan Dakota Access and ETCO 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, Dakota Access and ETCO 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, Dakota Access and ETCO 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 Dakota Access and $76 million for ETCO. At December 31, 2016, Dakota Access and ETCO 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. In February 2017, the Sponsor Loans were repaid in their entirety when draws resumed under the Facility. These cash inflows were included in the “Collection of advances/loans—related parties” line on our consolidated statement of cash flows.

Note 8—Properties, Plants and Equipment

Our investment in PP&E is recorded at cost. Investments in refining and processing 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
	2017										2016
	Gross PP&E				Accum. D&A			Net PP&E			Gross PP&E			Accum. D&A			Net PP&E
Midstream	$	8,849			1,853			6,996			8,179			1,579			6,600
Chemicals	—				—			—			—			—			—
Refining	22,144				8,987			13,157			21,152			8,197			12,955
Marketing and Specialties	1,658				909			749			1,451			776			675
Corporate and Other	1,091				533			558			1,207			582			625
	$	33,742			12,282			21,460			31,989			11,134			20,855

Index to Financial Statements

Note 9—Goodwill and Intangibles

Goodwill

The carrying amount of goodwill by segment at December 31 was:

	Millions of Dollars
	Midstream				Refining			Marketing and Specialties			Total
Balance at January 1, 2016	$	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
Adjustments	—				—			—			—
Balance at December 31, 2017	$	626			1,805			839			3,270

Intangible Assets

The gross carrying value of indefinite-lived intangible assets at December 31 consisted of the following:

	Millions of Dollars
	2017				2016
Trade names and trademarks	$	503			503
Refinery air and operating permits	252				260
Other	1				1
	$	756			764

At December 31, 2017, the net book value of our amortized intangible assets was $120 million, which included accumulated amortization of $173 million. At December 31, 2016, the net book value of our amortized intangible assets was $124 million, which included accumulated amortization of $152 million. Amortization expense was $21 million, $18 million and $13 million in 2017, 2016 and 2015, respectively, and is expected to be less than $20 million per year in future years.

Index to Financial Statements

Note 10—Asset Retirement Obligations and Accrued Environmental Costs

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

	Millions of Dollars
	2017				2016
Asset retirement obligations	$	268			244
Accrued environmental costs	458				496
Total asset retirement obligations and accrued environmental costs	726				740
Asset retirement obligations and accrued environmental costs due within one year*	(85		)		(85	)
Long-term asset retirement obligations and accrued environmental costs	$	641			655

• 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 2017 and 2016, our overall asset retirement obligation changed as follows:

	Millions of Dollars
	2017				2016
Balance at January 1	$	244			251
Accretion of discount	10				9
Changes in estimates of existing obligations	17				10
Spending on existing obligations	(14		)		(15	)
Property dispositions	—				(5	)
Foreign currency translation	11				(6	)
Balance at December 31	$	268			244

Accrued Environmental Costs

The $38 million decrease in total accrued environmental costs in 2017 was due to payments and settlements during the year, which exceeded new accruals, accrual adjustments and accretion.

Of our total accrued environmental costs at December 31, 2017, $222 million was primarily related to cleanup at domestic refineries and underground storage tanks at U.S. service stations; $187 million was associated with nonoperator sites; and $49 million was related to sites at which we have been named a potentially responsible party under federal or state laws. A large portion of our expected environmental expenditures have been discounted as these obligations were acquired in various business combinations. Expected expenditures for acquired environmental obligations were discounted using a weighted-average 5 percent discount factor, resulting in an accrued balance for acquired environmental liabilities of $268 million at December 31, 2017. The expected future undiscounted payments related to the portion of the accrued environmental costs that have been discounted are: $18 million in 2018, $46 million in 2019, $30 million in 2020, $16 million in 2021, $16 million in 2022, and $216 million for all future years after 2022.

Index to Financial Statements

Note 11—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.

	2017						2016					2015
	Basic			Diluted			Basic		Diluted			Basic		Diluted
Amounts Attributed to Phillips 66 Common Stockholders (millions):
Net income attributable to Phillips 66	$	5,106		5,106			1,555		1,555			4,227		4,227
Income allocated to participating securities	(6		)	—			(6	)	(5	)		(6	)	—
Net income available to common stockholders	$	5,100		5,106			1,549		1,550			4,221		4,227
Weighted-average common shares outstanding (thousands):	511,268			515,090			523,250		527,531			537,602		542,355
Effect of share-based compensation	3,822			3,418			4,281		2,535			4,753		4,622
Weighted-average common shares outstanding—EPS	515,090			518,508			527,531		530,066			542,355		546,977
Earnings Per Share of Common Stock (dollars)	$	9.90		9.85			2.94		2.92			7.78		7.73

Index to Financial Statements

Note 12—Debt

Long-term debt at December 31 was:

	Millions of Dollars
	2017				2016
2.950% Senior Notes due 2017	$	—			1,500
4.300% Senior Notes due 2022	2,000				2,000
4.650% 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 3.550% Senior Notes due 2026	500				500
Phillips 66 Partners 3.750% Senior Notes due 2028	500				—
Phillips 66 Partners 4.680% Senior Notes due 2045	450				300
Phillips 66 Partners 4.900% Senior Notes due 2046	625				625
Floating-rate notes due 2019 at 2.009% at year-end 2017	300				—
Floating-rate notes due 2020 at 2.109% at year-end 2017	300				—
Term loan due 2020 at 2.469% at year-end 2017	450				—
Note payable to MSLP due 2020 at 7.00%*	—				68
Industrial Development Bonds due 2018 through 2021 at 0.80%-2.09% at year-end 2017 and 0.57%-0.81% at year-end 2016*	100				50
Phillips 66 Partners revolving credit facility due 2021 at 1.98% at year-end 2016	—				210
Other	1				1
Debt at face value	10,026				10,054
Capitalized leases	192				188
Net unamortized discounts and debt issuance costs	(108		)		(104	)
Total debt	10,110				10,138
Short-term debt	(41		)		(550	)
Long-term debt	$	10,069			9,588
* In February 2017, MSLP became a consolidated subsidiary, see Note 5—Business Combinations.

Maturities of borrowings outstanding at December 31, 2017, inclusive of net unamortized discounts and debt issuance costs, for each of the years from 2018 through 2022 are $41 million, $314 million, $1,084 million, $62 million and $2,003 million, respectively.

Debt Issuances

In October 2017, Phillips 66 Partners closed on a public offering of $650 million aggregate principal amount of senior notes, consisting of $500 million of 3.750% Senior Notes due 2028 and $150 million of 4.680% Senior Notes due 2045. Interest on the 3.750% Senior Notes due 2028 is payable semiannually in arrears on March 1 and September 1 of each year, commencing on March 1, 2018. Interest on the 4.680% Senior Notes due 2045 is payable semiannually in arrears on February 15 and August 15 of each year.

Index to Financial Statements

In April 2017, Phillips 66 completed a private offering of $600 million aggregate principal amount of unsecured notes, consisting of $300 million of Notes due 2019 and $300 million of Notes due 2020. Interest on these notes is a floating rate equal to three-month London Interbank Offered Rate (LIBOR) plus 0.65% per annum for the 2019 Notes and three-month LIBOR plus 0.75% per annum for the 2020 Notes. Interest on both series of notes is payable quarterly in arrears on January 15, April 15, July 15 and October 15, commencing in July 2017. The 2019 Notes mature on April 15, 2019, and the 2020 Notes mature on April 15, 2020. The notes are guaranteed by Phillips 66 Company, a 100-percent-owned subsidiary.

Also in April 2017, Phillips 66 entered into term loan facilities with an aggregate borrowing amount of $900 million, consisting of a $450 million 364-day facility and a $450 million three-year facility. Interest on the term loans is a floating rate based on either the Eurodollar rate or the reference rate, plus a margin determined by our long-term credit ratings.

In February 2017, as part of the consolidation of MSLP, Phillips 66 assumed $135 million of 8.85% Senior Notes due in 2019 and $100 million of tax-exempt bonds due between 2018 and 2021. See Note 5—Business Combinations for additional information regarding the consolidation of MSLP.

Debt Repayments

In October 2017, as part of a contribution of assets to Phillips 66 Partners, Phillips 66 Partners assumed the $450 million term loan outstanding under the 364-day facility originally issued in April 2017, and subsequently repaid the loan. See Note 27—Phillips 66 Partners LP for additional information.

In May 2017, we repaid $1,500 million of 2.950% Senior Notes upon maturity with the funding from the April 2017 debt issuances discussed above. In addition, we repaid $135 million of MSLP 8.85% Senior Notes due in 2019 originally recorded in February 2017 as part of the consolidation of MSLP. See Note 5—Business Combinations for additional information regarding MSLP.

During 2017, Phillips 66 Partners repaid all outstanding borrowings under its $750 million revolving credit facility.

Credit Facilities and Commercial Paper

Phillips 66 has a $5.0 billion revolving credit facility that extends until 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 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. At December 31, 2017, no amount had been drawn under this revolving credit agreement.

We have a $5.0 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. At December 31, 2017, we had no borrowings under our commercial paper program.

Phillips 66 Partners has a $750 million revolving credit facility that extends until October 2021. The Phillips 66 Partners facility is with a broad syndicate of financial institutions. At December 31, 2017, Phillips 66 Partners had no borrowings outstanding under this facility.

Index to Financial Statements

Note 13—Guarantees

At December 31, 2017, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence.

Guarantees of Joint-Venture Debt

In December 2016, as part of the restructuring within DCP Midstream, we issued a guarantee, effective January 1, 2017, to support the debt DCP Midstream issued in the first quarter of 2017. At December 31, 2017, the maximum potential amount of future payments to third parties under the guarantee is estimated to be $175 million. Payment would be required if DCP Midstream defaults on this debt obligation, which matures in 2019.

At December 31, 2017, we had other guarantees outstanding for our portion of certain joint-venture debt obligations, which have remaining terms of up to 8 years. The maximum potential amount of future payments to third parties under these guarantees is approximately $133 million. Payment would be required if a joint venture defaults on its debt obligations.

Other Guarantees

Under the operating lease agreement on our headquarters facility in Houston, Texas, we have a residual value guarantee with a maximum future exposure of $554 million. The operating lease 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 also have residual value guarantees associated with railcar and airplane leases with maximum future exposures totaling $305 million. Based on third-party appraisals of the railcars’ fair value at the end of their lease terms, we estimated a total residual value deficiency of $109 million and recognized $28 million as expense in 2016. During 2017, we recognized an additional $45 million of expense related to the residual value deficiency. In October 2017, upon maturity of one of our railcar leases, $53 million of the total residual value deficiency of $109 million was settled. The remaining residual value deficiency of $36 million remaining at December 31, 2017, will be recognized on a straight-line basis through May 2019.

Indemnifications

Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnification. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses, and employee claims, as well as real estate indemnity against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. The carrying amount recorded for indemnifications at December 31, 2017, 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 to support that the liability was essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the recorded carrying amount were $104 million of environmental accruals for known contamination at December 31, 2017. For additional information about environmental liabilities, see Note 10—Asset Retirement Obligations and Accrued Environmental Costs and Note 14—Contingencies and Commitments.

Index to Financial Statements

Indemnification and Release Agreement

In 2012, in connection with the Separation, 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 14—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.

Environmental

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

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

Index to Financial Statements

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those pertaining to sites acquired in a business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. 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 10—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, 2017, we had performance obligations secured by letters of credit and bank guarantees of $773 million 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 $327 million annually for each of the years from 2018 through 2022 and $2,644 million in the aggregate for years 2023 and thereafter. Total payments under the agreements were $323 million in 2017, $325 million in 2016 and $328 million in 2015.

Note 15—Derivatives and Financial Instruments

Derivative Instruments

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

Purchase and sales contracts with firm minimum notional volumes for commodities that are readily convertible to cash are recorded on our consolidated balance sheet as derivatives unless the contracts are eligible for, and we elect, the normal purchases and normal sales exception, whereby the contracts are recorded on an accrual basis. We generally apply the normal purchases and normal sales exception to eligible crude oil, refined products, NGL, natural gas and power commodity contracts to purchase or sell quantities we expect to use or sell in the normal course of business. All other derivative instruments are recorded at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 16—Fair Value Measurements.

Index to Financial Statements

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

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

	Millions of Dollars
	December 31, 2017										December 31, 2016
	Commodity Derivatives					Effect of Collateral Netting		Net Carrying Value Presented on the Balance Sheet			Commodity Derivatives				Effect of Collateral Netting		Net Carrying Value Presented on the Balance Sheet
	Assets			Liabilities		Assets		Liabilities
Assets
Prepaid expenses and other current assets	$	43		(19	)	—		24			267		(154	)	—		113
Other assets	7			(3	)	—		4			5		(1	)	—		4
Liabilities
Other accruals	699			(746	)	21		(26	)		474		(612	)	73		(65	)
Other liabilities and deferred credits	—			(1	)	—		(1	)		—		(1	)	—		(1	)
Total	$	749		(769	)	21		1			746		(768	)	73		51

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

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

	Millions of Dollars
	2017				2016			2015
Sales and other operating revenues	$	(247	)		(451	)		162
Other income	27				29			58
Purchased crude oil and products	(18		)		(62	)		121
Net gain (loss) from commodity derivative activity	$	(238	)		(484	)		341

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, 2017 and 2016.

Index to Financial Statements

	Open Position Long / (Short)
	2017			2016
Commodity
Crude oil, refined products and NGL (millions of barrels)	(11	)		(18	)

Interest Rate Derivative Contracts—In 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 our credit rating over the five-year term of the lease. The pay-fixed, receive-floating interest rate swaps have an aggregate notional value of $650 million and end on April 25, 2021. They qualify for and are designated as cash-flow hedges.

The aggregate net fair value of these swaps, which is included in the “Prepaid expenses and other current assets,” “Other assets” and “Other accruals” lines of our consolidated balance sheet, totaled $14 million and $8 million at December 31, 2017 and 2016, respectively.

We report the effective portion of the mark-to-market gain or loss on our interest rate swaps designated as cash-flow hedges as a component of other comprehensive income (loss), and reclassify such gains and losses into earnings in the same period during which the hedged forecasted transaction affects earnings. Gains and losses due to ineffectiveness are recognized in general and administrative expenses. We did not have any material hedge ineffectiveness gain or loss for the years ended December 31, 2017 and 2016. Net realized losses from settlements of the swaps were immaterial for the years ended December 31, 2017 and 2016.

We currently estimate that pre-tax gains of $2 million will be reclassified from accumulated other comprehensive income (loss) into general and administrative expenses during the next twelve months as the hedged transactions settle; however, the actual amounts that will be reclassified will vary based on changes in interest rates throughout 2018.

Credit Risk

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

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

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

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

Index to Financial Statements

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, 2017 and 2016.

Note 16—Fair Value Measurements

Recurring Fair Value Measurements

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

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

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

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

We classify the fair value of an asset or liability based on the significance of its observable or unobservable inputs to the measurement. However, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable. For the year ended December 31, 2017, derivative assets with an aggregate value of $131 million and derivative liabilities with an aggregate value of $134 million were transferred to Level 1 from Level 2, as measured from the beginning of the reporting period. The measurements were reclassified within the fair value hierarchy due to the availability of unadjusted quoted prices from an active market.

Index to Financial Statements

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

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

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

•

Derivative instruments—We fair value our exchange-traded contracts based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange or other exchanges, and classify them as Level 1 in the fair value hierarchy. When exchange-cleared contracts lack sufficient liquidity or are valued using either adjusted exchange-provided prices or non-exchange quotes, we classify those contracts as Level 2.

OTC financial swaps and physical commodity forward purchase and sales contracts are generally valued using forward quotes provided by brokers and price index developers, such as Platts and Oil Price Information Service. We corroborate these quotes with market data and classify the resulting fair values as Level 2. When forward market prices are not available, we estimate fair value using the forward price of a similar commodity, adjusted for the difference in quality or location. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, OTC swaps and physical commodity purchase and sales contracts are valued using internally developed methodologies that consider historical relationships among various commodities that result in management’s best estimate of fair value. We classify these contracts as Level 3. Financial OTC and physical commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines whether the options are classified as Level 2 or 3. We use a mid-market pricing convention (the mid-point between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.

We determine the fair value of our interest rate swaps based on observed market valuations for interest rate swaps that have notionals, terms and pay and reset frequencies similar to ours.

•	Rabbi trust assets—These deferred compensation investments are measured at fair value using unadjusted quoted prices available from national securities exchanges and are therefore categorized as Level 1 in the fair value hierarchy.

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

The following tables display the fair value hierarchy for our material financial assets and liabilities either accounted for or disclosed at fair value on a recurring basis. These values are determined by treating each contract as the fundamental unit of account; therefore, derivative assets and liabilities with the same counterparty are shown on a gross basis in the hierarchy sections of these tables, before the effects of counterparty and collateral netting. These tables also show that our Level 3 activity was not material.

We have master netting agreements for all of our exchange-cleared derivative instruments, the majority of our OTC derivative instruments, and certain physical commodity forward contracts (primarily pipeline crude oil deliveries). The following tables show the impact of these contracts in the column “Effect of Counterparty Netting.”

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

Index to Financial Statements

	Millions of Dollars
	December 31, 2017
	Fair Value Hierarchy										Total Fair Value of Gross Assets & Liabilities		Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value		Net Carrying Value Presented on the Balance Sheet
	Level 1				Level 2			Level 3
Commodity Derivative Assets
Exchange-cleared instruments	$	333			395			—			728		(721	)	—		—		7
Physical forward contracts	—				20			1			21		—		—		—		21
Interest rate derivatives	—				14			—			14		—		—		—		14
Rabbi trust assets	112				—			—			112		N/A		N/A		—		112
	$	445			429			1			875		(721	)	—		—		154
Commodity Derivative Liabilities
Exchange-cleared instruments	$	369			373			—			742		(721	)	(21	)	—		—
Physical forward contracts	—				23			4			27		—		—		—		27
Floating-rate debt	—				1,150			—			1,150		N/A		N/A		—		1,150
Fixed-rate debt, excluding capital leases	—				9,746			—			9,746		N/A		N/A		(978	)	8,768
	$	369			11,292			4			11,665		(721	)	(21	)	(978	)	9,945

	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	—				260			—			260		N/A		N/A		—		260
Fixed-rate debt, excluding capital leases	—				10,260			—			10,260		N/A		N/A		(570	)	9,690
	$	249			11,034			5			11,288		(629	)	(73	)	(570	)	10,016

The rabbi trust assets are recorded in the “Investments and long-term receivables” line and floating-rate and fixed-rate debt are recorded in the “Short-term debt” and “Long-term debt” lines on our consolidated balance sheet. For information regarding the location of our commodity derivative assets and liabilities on our consolidated balance sheet, see the first table in Note 15—Derivatives and Financial Instruments.

Index to Financial Statements

Nonrecurring Fair Value Measurements

See Note 5—Business Combinations for information on the remeasurement of our investment in MSLP to fair value. During the years ended December 31, 2017, and 2016, there were no other material nonrecurring fair value remeasurements of assets subsequent to their initial recognition.

Note 17—Equity

Preferred Stock

We have 500 million shares of preferred stock authorized, with a par value of $0.01 per share, none of which have been issued.

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 $12.0 billion. 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, 2017, we have repurchased a total of 124,142,530 shares at an aggregate cost of $9.0 billion. Shares of stock repurchased are held as treasury shares.

In 2014, we completed the exchange of our flow improver 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 7, 2018, our Board of Directors declared a quarterly cash dividend of $0.70 per common share, payable March 1, 2018, to holders of record at the close of business on February 20, 2018.

Noncontrolling Interests

Our noncontrolling interests primarily represent issuances of common and preferred units to the public by Phillips 66 Partners. See Note 27—Phillips 66 Partners LP, for information on Phillips 66 Partners.

Note 18—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 $210 million and $208 million at December 31, 2017 and 2016, respectively.

Index to Financial Statements

Future minimum lease payments at December 31, 2017, for operating and capital lease obligations were:

	Millions of Dollars
	Capital Lease Obligations				Operating Lease Obligations*
2018	$	22			533
2019	22				420
2020	18				306
2021	18				141
2022	15				100
Remaining years	148				326
Total	243				1,826
Less: income from subleases	—				71
Net minimum lease payments	$	243			1,755
Less: amount representing interest	51
Capital lease obligations	$	192
* Includes the remaining residual value deficiency on our railcar leases. See Note 13—Guarantees, for additional information.

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

	Millions of Dollars
	2017				2016			2015
Minimum rentals*	$	680			669			641
Contingent rentals	6				6			6
Less: sublease rental income	73				95			136
	$	613			580			511
* Includes expenses related to the residual value deficiency on our railcar leases. See Note 13—Guarantees, for additional information.

Index to Financial Statements

Note 19—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
	2017							2016						2017			2016
	U.S.				Int’l.			U.S.			Int’l.
Change in Benefit Obligation
Benefit obligation at January 1	$	2,881			1,055			2,791			912			225			219
Service cost	132				32			127			32			6			7
Interest cost	108				27			116			28			8			8
Plan participant contributions	—				2			—			3			3			2
Actuarial loss (gain)	267				(5	)		62			237			6			(6	)
Benefits paid	(345		)		(20	)		(215	)		(19	)		(16	)		(13	)
Curtailment gain	—				—			—			(31	)		—			—
Acquisition of a business	—				—			—			—			—			8
Foreign currency exchange rate change	—				118			—			(107	)		—			—
Benefit obligation at December 31	$	3,043			1,209			2,881			1,055			232			225
Change in Fair Value of Plan Assets
Fair value of plan assets at January 1	$	2,274			796			2,023			742			—			—
Actual return on plan assets	399				71			136			148			—			—
Company contributions	423				35			330			40			13			11
Plan participant contributions	—				2			—			3			3			2
Benefits paid	(345		)		(20	)		(215	)		(19	)		(16	)		(13	)
Foreign currency exchange rate change	—				88			—			(118	)		—			—
Fair value of plan assets at December 31	$	2,751			972			2,274			796			—			—
Funded Status at December 31	$	(292	)		(237	)		(607	)		(259	)		(232	)		(225	)

Amounts recognized in the consolidated balance sheet for our pension and other postretirement benefit plans at December 31, 2017 and 2016, include:

	Millions of Dollars
	Pension Benefits													Other Benefits
	2017							2016						2017			2016
	U.S.				Int’l.			U.S.			Int’l.
Amounts Recognized in the Consolidated Balance Sheet at December 31
Current liabilities	$	(25	)		—			(10	)		—			(16	)		(10	)
Noncurrent liabilities	(267		)		(237	)		(597	)		(259	)		(216	)		(215	)
Total recognized	$	(292	)		(237	)		(607	)		(259	)		(232	)		(225	)

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
	2017							2016						2017			2016
	U.S.				Int’l.			U.S.			Int’l.
Unrecognized net actuarial loss (gain)	$	545			190			684			227			1			(5	)
Unrecognized prior service cost (credit)	—				(4	)		3			(5	)		(7	)		(9	)

	Millions of Dollars
	Pension Benefits													Other Benefits
	2017							2016						2017			2016
	U.S.				Int’l.			U.S.			Int’l.
Sources of Change in Other Comprehensive Income (Loss)
Net gain (loss) arising during the period	$	(14	)		14			(54	)		(129	)		(6	)		7
Curtailment gain	—				—			—			31			—			—
Amortization of loss and settlements included in income	153				23			80			14			—			—
Net change in unrecognized net actuarial loss (gain) during the period	$	139			37			26			(84	)		(6	)		7
Prior service cost arising during the period	$	—			—			—			—			—			—
Amortization of prior service cost (credit) included in income	3				(1	)		3			(1	)		(2	)		(1	)
Net change in unrecognized prior service cost (credit) during the period	$	3			(1	)		3			(1	)		(2	)		(1	)

The accumulated benefit obligations for all U.S. and international pension plans were $2,743 million and $1,006 million, respectively, at December 31, 2017, and $2,601 million and $880 million, respectively, at December 31, 2016.

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
	2017							2016
	U.S.				Int’l.			U.S.			Int’l.
Projected benefit obligations	$	172			389			2,881			355
Accumulated benefit obligations	143				368			2,601			334
Fair value of plan assets	—				196			2,274			166

Index to Financial Statements

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

	Millions of Dollars
	Pension Benefits																			Other Benefits
	2017							2016						2015						2017			2016			2015
	U.S.				Int’l.			U.S.			Int’l.			U.S.			Int’l.
Components of Net Periodic Benefit Cost
Service cost	$	132			32			127			32			124			38			6			7			7
Interest cost	108				27			116			28			109			28			8			8			7
Expected return on plan assets	(146		)		(40	)		(128	)		(38	)		(138	)		(37	)		—			—			—
Amortization of prior service cost (credit)	3				(1	)		3			(1	)		3			(1	)		(2	)		(1	)		(2	)
Recognized net actuarial loss (gain)	70				23			72			14			75			15			—			—			(1	)
Settlements	83				—			8			—			80			—			—			—			—
Total net periodic benefit cost	$	250			41			198			35			253			43			12			14			11

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 (loss) at December 31, 2017, that are expected to be amortized into net periodic benefit cost during 2018 are provided below:

	Millions of Dollars
	Pension Benefits							Other Benefits
	U.S.				Int’l.
Unrecognized net actuarial loss	$	59			19			—
Unrecognized prior service credit	—				(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
	2017					2016				2017		2016
	U.S.			Int’l.		U.S.		Int’l.
Assumptions Used to Determine Benefit Obligations:
Discount rate	3.60	%		2.36		3.95		2.42		3.35		3.65
Rate of compensation increase	4.00			3.74		4.00		3.78		—		—
Assumptions Used to Determine Net Periodic Benefit Cost:
Discount rate	3.95	%		2.46		4.35		3.35		3.65		4.00
Expected return on plan assets	6.75			4.74		6.75		5.31		—		—
Rate of compensation increase	4.00			3.78		4.00		3.65		—		—

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 6.25 percent in 2018 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 57 percent equity securities, 41 percent debt securities and 2 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.

•	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.

Index to Financial Statements

•	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:

	Millions of Dollars
	U.S.													International
	Level 1				Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
2017
Equity securities	$	589			—			—			589			—			—			—			—
Government debt securities	632				—			—			632			—			—			—			—
Mutual funds	129				—			—			129			—			—			—			—
Cash and cash equivalents	90				—			—			90			6			—			—			6
Insurance contracts	—				—			—			—			—			—			14			14
Real estate	—				—			—			—			—			—			8			8
Total assets in the fair value hierarchy	1,440				—			—			1,440			6			—			22			28
Common/collective trusts measured at NAV											1,311												944
Total	$	1,440			—			—			2,751			6			—			22			972

	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

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

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 2018, we expect to contribute approximately $60 million to our U.S. pension plans and other postretirement benefit plans and $35 million to our international pension plans.

Index to Financial Statements

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.
2018	$	329			22			27
2019	302				22			28
2020	294				24			27
2021	290				26			26
2022	292				27			24
2023-2026	1,298				162			101

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 $101 million, $99 million and $134 million in 2017, 2016 and 2015, respectively.

Note 20—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 Phillips 66 or grantees that remained employees of ConocoPhillips. Some of these awards based on Phillips 66 stock and held by employees of ConocoPhillips are 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 (HRCC) of our Board of Directors 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 new shares that may be issued under the P66 Omnibus Plan to settle share-based awards may not exceed 45 million.

Index to Financial Statements

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

	Millions of Dollars
	2017				2016			2015
Share-based compensation expense	$	142			156			144
Income tax benefit	(74		)		(59	)		(54	)

Stock Options

Stock options granted under the provisions of the P66 Omnibus Plan and earlier plans permit purchases of our common stock at exercise prices equivalent to the average of the high and low market price of our stock on the date the options were granted. The options have terms of 10 years and vest ratably, with one-third of the options becoming exercisable on each anniversary date for the three years following the date of grant. Options awarded to employees eligible for retirement are not subject to forfeiture six months after the grant date.

The following table summarizes our stock option activity from January 1, 2017, to December 31, 2017:

												Millions of Dollars
	Options			Weighted- Average Exercise Price				Weighted-Average Grant-Date Fair Value				Aggregate Intrinsic Value
Outstanding at January 1, 2017	5,103,130			$	49.48
Granted	864,100			78.48				$	16.95
Forfeited	(32,500	)		78.48
Exercised	(1,095,875	)		32.38								$	62
Outstanding at December 31, 2017	4,838,855			$	58.34
Vested at December 31, 2017	4,191,679			$	55.25							$	195
Exercisable at December 31, 2017	3,258,015			$	48.79							$	172

The weighted-average remaining contractual terms of vested options and exercisable options at December 31, 2017, were 5.48 years and 4.62 years, respectively. During 2017, we received $35 million in cash and realized an income tax benefit of $9 million from the exercise of options. At December 31, 2017, the remaining unrecognized compensation expense from unvested options was $6 million, which will be recognized over a weighted-average period of 20 months, the longest period being 27 months. The calculations of realized income tax benefits and weighted-average periods include awards based on both Phillips 66 and ConocoPhillips stock held by Phillips 66 employees.

Index to Financial Statements

During 2016 and 2015, we granted options with a weighted-average grant-date fair value of $16.94 and $18.84, respectively. During 2016 and 2015, employees exercised options with an aggregate intrinsic value of $58 million and $60 million, respectively.

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

	2017			2016		2015
Risk-free interest rate	2.28	%		1.71		1.60
Dividend yield	2.90	%		3.00		3.00
Volatility factor	26.91	%		28.68		34.17
Expected life (years)	7.22			7.08		6.66

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 began calculating the volatility using historical Phillips 66 end-of-week closing stock prices from the Separation date.

We use 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 Units

Generally, RSUs are granted annually under the provisions of the P66 Omnibus Plan and cliff vest at the end of three years. The grant date fair value is equal to the average of the high and low market price of our stock on the grant date. The recipients receive a quarterly cash payment of a dividend equivalent until the RSU is settled by issuing one share of our common stock for each RSU at the end of the service period. RSUs granted to retirement eligible employees are not subject to forfeiture six months after the grant date. Special RSUs are granted to attract or retain key personnel and the terms and conditions may vary by award.

The following table summarizes our RSU activity from January 1, 2017, to December 31, 2017:

								Millions of Dollars
	Stock Units			Weighted-Average Grant-Date Fair Value				Total Fair Value
Outstanding at January 1, 2017	2,643,139			$	71.28
Granted	975,164			78.49
Forfeited	(58,171	)		77.18
Issued	(1,063,707	)		63.67				$	85
Outstanding at December 31, 2017	2,496,425			$	77.20
Not Vested at December 31, 2017	1,615,668			$	77.32

At December 31, 2017, the remaining unrecognized compensation cost from the unvested RSU awards was $50 million, which will be recognized over a weighted-average period of 20 months, the longest period being 37 months.

During 2016 and 2015, we granted RSUs with a weighted-average grant-date fair value of $78.56 and $74.09, respectively. During 2016 and 2015, we issued shares with an aggregate fair value of $109 million and $107 million, respectively, to settle RSUs.

Index to Financial Statements

Performance Share Units

Under the P66 Omnibus Plan, we annually grant to senior management restricted performance share units (PSUs) with three-year performance periods that vest: (1) with respect to awards for performance periods beginning before 2009, when the employee becomes eligible for retirement; or (2) with respect to awards for performance periods beginning in 2009, the shorter of: (a) the participant’s retirement eligibility date; or (b) five years after the grant date of the award; or (3) with respect to awards for performance periods beginning in 2013 or later, at the end of the performance period 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 vest date. 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.

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

PSUs with performance periods beginning in 2013 or later are settled by paying cash equal to the fair value of the awards, which is based on the average of the high and low market prices of our stock near the end of the performance periods. The HRCC must approve the three-year performance results prior to payout. Dividend equivalents are not paid on these awards.

The following table summarizes our PSU activity from January 1, 2017, to December 31, 2017:

								Millions of Dollars
	Performance Share Units			Weighted-Average Grant-Date Fair Value				Total Fair Value
Outstanding at January 1, 2017	3,239,497			$	50.12
Granted	642,212			86.88
Issued	(681,219	)		42.85				$	54
Cash settled	(642,212	)		86.88				56
Outstanding at December 31, 2017	2,558,278			$	52.06
Not Vested at December 31, 2017	286,031			$	66.65

At December 31, 2017, the remaining unrecognized compensation cost from unvested PSU awards held by employees of Phillips 66 was $4 million, which will be recognized over a weighted-average period of 23 months, with the longest period being 9 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 2016 and 2015, we granted PSUs with a weighted-average grant-date fair value of $78.62 and $74.14, respectively. During 2016 and 2015, we issued shares with an aggregate fair value of $26 million and $37 million, respectively, to settle PSUs. We cash settled PSUs with an aggregate fair value of $60 million in 2016. No PSUs were cash settled in 2015.

Index to Financial Statements

Note 21—Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive income tax legislation, referred to as the Tax Cuts and Jobs Act (the Tax Act). The material provisions of the Tax Act i) reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent beginning January 1, 2018, ii) required companies to reflect on their 2017 corporate income tax return a liability for a one-time deemed repatriation tax on foreign-sourced earnings that were previously tax deferred, and iii) created a new tax regime for post-2017 foreign-sourced earnings.

To account for the reduction in the U.S. federal corporate income tax rate, we remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, generally 21 percent, which resulted in a provisional deferred tax benefit of $2,870 million. To account for the one-time deemed repatriation income tax, we calculated our provisional liability in accordance with the Tax Act and considered previously accrued current and deferred tax liabilities on undistributed earnings of our foreign subsidiaries and foreign joint ventures. The effects of the one-time deemed repatriation tax resulted in a provisional income tax expense of $149 million.

The provisions in the Tax Act are broad and complex. We have not yet completed our accounting for the income tax effects of the Tax Act as of December 31, 2017, but have made reasonable estimates of those effects on our existing deferred income tax balances and the one-time deemed repatriation tax. The final financial statement impact of the Tax Act may differ from the above estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, and changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the provisional impacts. The Securities and Exchange Commission (SEC) has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related income tax impacts.

Components of income tax expense (benefit) were:

	Millions of Dollars
	2017				2016			2015
Income Tax Expense (Benefit)
Federal
Current	$	9			(105	)		1,128
Deferred	(1,960		)		645			444
Foreign
Current	126				66			(74	)
Deferred	3				(84	)		42
State and local
Current	61				(24	)		227
Deferred	68				49			(3	)
	$	(1,693	)		547			1,764

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:

Index to Financial Statements

	Millions of Dollars
	2017				2016
Deferred Tax Liabilities
Properties, plants and equipment, and intangibles	$	2,942			4,525
Investment in joint ventures	1,923				2,442
Investment in subsidiaries	594				803
Inventory	—				154
Other	18				19
Total deferred tax liabilities	5,477				7,943
Deferred Tax Assets
Benefit plan accruals	314				669
Inventory	10				—
Asset retirement obligations and accrued environmental costs	121				211
Other financial accruals and deferrals	44				188
Loss and credit carryforwards	96				261
Other	3				1
Total deferred tax assets	588				1,330
Less: valuation allowance	28				38
Net deferred tax assets	560				1,292
Net deferred tax liabilities	$	4,917			6,651

The loss and credit carryforwards deferred tax assets are primarily related to a German interest deduction carryforward of $77 million, a U.S. alternative minimum tax credit of $10 million and a capital loss and net operating loss carryforward in the United Kingdom of $7 million. All losses may be carried forward indefinitely and the alternative minimum credit of $10 million, if not utilized sooner, will become refundable with the filing of the 2021 U.S. federal income tax return.

Valuation allowances have been established to reduce deferred tax assets to an amount that will, more likely than not, be realized. During 2017, valuation allowances decreased by a total of $10 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.

At December 31, 2017, all undistributed earnings of our foreign subsidiaries and foreign joint ventures have been included in our provisional computation of the one-time deemed repatriation tax associated with the enactment of the Tax Act. After considering the effects of the Tax Act described above, we have not provided a deferred tax liability related to any remaining difference in the book and tax investment in our foreign subsidiaries or foreign joint ventures because such differences are essentially permanent in duration. Based on our preliminary analysis, which is not yet complete, the temporary difference and associated unrecorded deferred tax liability are not material.

As a result of the Separation and pursuant to the Tax Sharing Agreement with ConocoPhillips, the unrecognized income 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. Following is a reconciliation of the changes in our unrecognized income tax benefits balance:

	Millions of Dollars
	2017				2016			2015
Balance at January 1	$	70			82			142
Additions for tax positions of prior years	1				5			6
Reductions for tax positions of prior years	(5		)		(17	)		(17	)
Settlements	(32		)		—			(49	)
Balance at December 31	$	34			70			82

Index to Financial Statements

Included in the balance of unrecognized income tax benefits for 2017, 2016 and 2015 were $5 million, $13 million and $34 million, respectively, which, if recognized, would affect our effective income tax rate. With respect to various unrecognized income tax benefits and the related accrued liability, approximately $2 million may be recognized or paid within the next twelve months due to completion of audits.

At December 31, 2017, 2016 and 2015, accrued liabilities for interest and penalties, net of accrued income taxes, totaled $8 million, $12 million and $19 million, respectively. As a result of reversing certain of these accruals, earnings increased by $1 million, $7 million and $3 million in 2017, 2016 and 2015, respectively.

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 (2014), Germany (2011) and United States (2010). Certain issues remain in dispute for audited years, and unrecognized income tax benefits for years still subject to or currently undergoing an audit are subject to change. As a consequence, the balance in unrecognized income tax benefits can be expected to fluctuate from period to period. Although it is reasonably possible such changes could be significant when compared with our total unrecognized income tax benefits, the amount of change is not estimable.

The amounts of U.S. and foreign income before income taxes, with a reconciliation of income tax at the federal statutory rate to the recorded income tax expense (benefit), were:

	Millions of Dollars										Percentage of Income Before Income Taxes
	2017				2016			2015			2017			2016			2015
Income before income taxes
United States	$	2,799			1,713			4,983			78.7	%		78.2			82.4
Foreign	756				478			1,061			21.3			21.8			17.6
	$	3,555			2,191			6,044			100.0	%		100.0			100.0
Federal statutory income tax	$	1,244			767			2,115			35.0	%		35.0			35.0
State income tax, net of federal benefit	79				12			150			2.2			0.6			2.5
Tax Cuts and Jobs Act	(2,721		)		—			—			(76.5	)		—			—
Foreign rate differential	(210		)		(152	)		(239	)		(5.9	)		(6.9	)		(3.9	)
Noncontrolling interests	(46		)		(26	)		(13	)		(1.3	)		(1.2	)		(0.2	)
Federal manufacturing deduction	(18		)		—			(77	)		(0.5	)		—			(1.3	)
Change in valuation allowance	(4		)		(81	)		(17	)		(0.1	)		(3.7	)		(0.2	)
Goodwill allocated to assets sold	—				—			41			—			—			0.7
German tax legislation	—				—			(103	)		—			—			(1.7	)
Sale of foreign subsidiaries	—				—			(125	)		—			—			(2.1	)
Other	(17		)		27			32			(0.5	)		1.2			0.4
	$	(1,693	)		547			1,764			(47.6	)%		25.0			29.2

Included in the line item “Sale of foreign subsidiaries” is a $72 million income tax benefit realized in 2015 attributable to the nontaxable gain from the sale of ICHP.

Income tax expense of $81 million and $150 million in 2017 and 2016, respectively, and an income tax benefit of $34 million in 2015 are reflected in the “Capital in Excess of Par” column on our consolidated statement of changes in 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 Loss
December 31, 2014	$	(696	)		167			(2	)		(531	)
Other comprehensive loss before reclassification	(78		)		(156	)		—			(234	)
Amounts reclassified from accumulated other comprehensive 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 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	)
Other comprehensive income before reclassifications	3				259			4			266
Amounts reclassified from accumulated other comprehensive loss*
Amortization of defined benefit plan items**
Actuarial losses and settlements	112				—			—			112
Net current period other comprehensive income	115				259			4			378
December 31, 2017	$	(598	)		(26	)		7			(617	)

• There were no significant reclassifications related to foreign currency translation or hedging.

** Included in the computation of net periodic benefit cost. See Note 19—Pension and Postretirement Plans, for additional information.

Note 23—Cash Flow Information

Supplemental Cash Flow Information

	Millions of Dollars
	2017				2016			2015
Cash Payments (Receipts)
Interest	$	421			311			275
Income taxes*	(257		)		(375	)		1,560

• 2017 and 2016 reflected a net cash refund position; cash payments for income taxes were $102 million and $385 million in 2017 and 2016, respectively.

Index to Financial Statements

Restricted Cash

At December 31, 2017 and 2016, the company did not have any restricted cash. The restrictions on the cash acquired in February 2017, as a result of the consolidation of MSLP, were fully removed in May 2017 when MSLP’s outstanding debt that contained lender restrictions on the use of cash was paid in full. See Note 5—Business Combinations and Note 12—Debt for additional information regarding MSLP.

Note 24—Other Financial Information

	Millions of Dollars
	2017				2016			2015
Interest and Debt Expense
Incurred
Debt	$	432			402			389
Other	21				17			27
	453				419			416
Capitalized	(15		)		(81	)		(106	)
Expensed	$	438			338			310
Other Income
Interest income	$	31			18			27
Gain on consolidation of business*	423				—			—
Other, net**	67				56			91
	$	521			74			118
* See Note 5—Business Combinations regarding the gain recognized in 2017.
** Includes derivatives-related activities.
Research and Development Expenditures—expensed	$	60			60			65
Advertising Expenses	$	76			80			73
Foreign Currency Transaction (Gains) Losses—after-tax
Midstream	$	—			—			—
Chemicals	—				—			—
Refining	(1		)		(10	)		34
Marketing and Specialties	1				1			4
Corporate and Other	—				(2	)		—
	$	—			(11	)		38

Index to Financial Statements

Note 25—Related Party Transactions

Significant transactions with related parties were:

	Millions of Dollars
	2017				2016			2015
Operating revenues and other income (a)	$	2,596			2,174			2,452
Purchases (b)	10,468				8,109			8,142
Operating expenses and selling, general and administrative expenses (c)	79				125			129

As discussed more fully in Note 5—Business Combinations, in February 2017, we began accounting for MSLP as a consolidated subsidiary. Accordingly, the table above only includes processing fees paid to MSLP through the consolidation date.

(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 refined products to our OnCue Holdings, LLC joint venture. 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. In addition, we charged several of our affiliates, including CPChem, for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities.

(b)

We purchased crude oil and refined products from WRB and also acted as agent for WRB in distributing solvents. We 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, 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—Provides crude oil and refined products transportation, terminaling and processing services, as well as natural gas, NGL and liquefied petroleum gas (LPG) transportation, storage, processing and marketing services, mainly in the United States. The Midstream segment includes our master limited partnership, Phillips 66 Partners, as well as our 50 percent equity investment in DCP Midstream.

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

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

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

Index to Financial Statements

Corporate and Other includes general corporate overhead, interest expense, our investments in new technologies and various other corporate activities. Corporate assets include all cash and cash equivalents. In addition, Corporate and Other includes the provisional income tax benefit from the enactment of the Tax Act on December 22, 2017. See Note 21—Income Taxes for further discussion.

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

Analysis of Results by Operating Segment

	Millions of Dollars
	2017				2016			2015
Sales and Other Operating Revenues
Midstream
Total sales	$	6,620			4,226			3,676
Intersegment eliminations	(1,842		)		(1,299	)		(1,034	)
Total Midstream	4,778				2,927			2,642
Chemicals	5				5			5
Refining
Total sales	65,494				52,068			63,470
Intersegment eliminations	(40,284		)		(34,120	)		(40,317	)
Total Refining	25,210				17,948			23,153
Marketing and Specialties
Total sales	73,565				64,476			74,591
Intersegment eliminations	(1,233		)		(1,109	)		(1,446	)
Total Marketing and Specialties	72,332				63,367			73,145
Corporate and Other	29				32			30
Consolidated sales and other operating revenues	$	102,354			84,279			98,975
Depreciation, Amortization and Impairments
Midstream	$	299			218			128
Chemicals	—				—			—
Refining	838				770			741
Marketing and Specialties	116				107			100
Corporate and Other	89				78			116
Consolidated depreciation, amortization and impairments	$	1,342			1,173			1,085

Index to Financial Statements

	Millions of Dollars
	2017				2016			2015
Equity in Earnings of Affiliates
Midstream	$	454			184			(268	)
Chemicals	713				834			1,316
Refining	322				164			325
Marketing and Specialties	243				232			207
Corporate and Other	—				—			(7	)
Consolidated equity in earnings of affiliates	$	1,732			1,414			1,573
Income Tax Expense (Benefit)
Midstream	$	174			123			73
Chemicals	191				256			353
Refining	672				61			1,104
Marketing and Specialties	334				370			466
Corporate and Other	(3,064		)		(263	)		(232	)
Consolidated income tax expense (benefit)	$	(1,693	)		547			1,764
Net Income (Loss)
Midstream	$	464			280			74
Chemicals	525				583			962
Refining	1,404				374			2,555
Marketing and Specialties	686				891			1,187
Corporate and Other	2,169				(484	)		(498	)
Consolidated net income	$	5,248			1,644			4,280

Index to Financial Statements

	Millions of Dollars
	2017				2016			2015
Investments In and Advances To Affiliates
Midstream	$	4,734			4,769			4,198
Chemicals	6,222				5,773			5,177
Refining	2,398				2,420			2,262
Marketing and Specialties	390				391			342
Corporate and Other	—				1			1
Consolidated investments in and advances to affiliates	$	13,744			13,354			11,980
Total Assets
Midstream	$	13,231			12,832			11,043
Chemicals	6,226				5,802			5,237
Refining	23,820				22,825			21,993
Marketing and Specialties	7,103				6,227			5,631
Corporate and Other	3,991				3,967			4,676
Consolidated total assets	$	54,371			51,653			48,580
Capital Expenditures and Investments
Midstream	$	771			1,453			4,457
Chemicals	—				—			—
Refining	853				1,149			1,069
Marketing and Specialties	108				98			122
Corporate and Other	100				144			116
Consolidated capital expenditures and investments	$	1,832			2,844			5,764
Interest Income and Expense
Interest income
Midstream	$	1			2			—
Marketing and Specialties	—				—			2
Corporate and Other	30				16			25
Consolidated interest income	$	31			18			27
Interest and debt expense
Corporate and Other	$	438			338			310

Sales and Other Operating Revenues by Product Line
Refined products	$	85,405			73,385			86,249
Crude oil resales	11,808				7,594			8,993
NGL	4,670				3,107			2,998
Other	471				193			735
Consolidated sales and other operating revenues by product line	$	102,354			84,279			98,975

Index to Financial Statements

Geographic Information

	Millions of Dollars
	Sales and Other Operating Revenues*										Long-Lived Assets**
	2017				2016			2015			2017			2016			2015
United States	$	75,684			59,742			69,578			33,264			32,442			29,624
United Kingdom	10,626				9,895			12,120			1,254			1,177			1,459
Germany	6,692				6,128			6,584			591			503			502
Other foreign countries	9,352				8,514			10,693			95			87			116
Worldwide consolidated	$	102,354			84,279			98,975			35,204			34,209			31,701

• 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 crude oil and NGL processing facilities.

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 common and perpetual convertible preferred unitholders’ ownership interests in Phillips 66 Partners are reflected as noncontrolling interests of $2,314 million and $1,306 million on our consolidated balance sheet as of December 31, 2017, and 2016, respectively. Generally, drop down transactions to Phillips 66 Partners will eliminate in consolidation, except for third-party debt and third-party equity offerings made by Phillips 66 Partners to finance such transactions.

At December 31, 2017, we owned a 55 percent limited partner interest and a 2 percent general partner interest in Phillips 66 Partners, while the public owned a 43 percent limited partner interest and 13.8 million perpetual convertible preferred units.

2017 Activities

In October 2017, we contributed to Phillips 66 Partners our 25 percent interests in both Dakota Access and ETCO and our 100 percent interest in MSLP. Total consideration for the transaction was $1.65 billion, which consisted of $372 million in cash at closing, the assumption of $588 million of promissory notes payable to us, the assumption of a $450 million term loan payable to a third party, and the issuance to us of common and general partner units with a fair value of $240 million. Shortly after closing, Phillips 66 Partners repaid the $588 million of promissory notes payable to us, resulting in total cash received by us for the transaction of $960 million.

Phillips 66 Partners financed the consideration paid with the proceeds from the following third-party equity and debt offerings:

•

Net proceeds of $737 million from a private placement of 13,819,791 perpetual convertible preferred units, at a price of $54.27 per unit. Holders of the preferred units are entitled to receive cumulative quarterly distributions equal to $0.678375 per unit. Beginning in October 2020, holders are entitled to receive quarterly distributions equal to the greater of $0.678375 per unit or the per-unit distribution paid to common unitholders.

•	Net proceeds of $295 million from a private placement of 6,304,204 common units, at a price of $47.59 per unit.

•	A portion of the $643 million of net proceeds from a public offering of $650 million of Senior Notes. See Note 12—Debt for additional information on the Senior Notes.

Index to Financial Statements

In June 2016, Phillips 66 Partners began issuing common units under a continuous offering program, which allows for the issuance of up to an aggregate of $250 million of Phillips 66 Partners’ common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the time of the offerings (such continuous offering program, or at-the-market program, is referred to as the ATM program). For year ended December 31, 2017, on a settlement-date basis, Phillips 66 Partners issued 3,372,716 common units under the ATM program, which generated net proceeds of $173 million. From inception through December 31, 2017, Phillips 66 Partners has issued an aggregate of 3,718,868 common units under the ATM program, which generated net proceeds of $192 million.

Phillips 66 Partners filed a new shelf registration statement for Phillips 66 Partners’ second continuous offering program that became effective with the SEC on January 23, 2018, 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.

Note 28—New Accounting Standards

In February 2017, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20).” This ASU clarifies the scope and accounting for the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. This ASU will eliminate the use of carryover basis for most nonmonetary exchanges, including contributions of assets to equity method joint ventures. These amendments could result in the entity recognizing a gain or loss on the sale or transfer of nonfinancial assets. Public entities should apply the guidance in ASU No. 2017-05 to annual periods beginning after December 15, 2017, including interim periods within those periods. There was no impact on our financial statements from adopting this ASU on January 1, 2018.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amendment provides a screen for determining when a transaction involves an acquisition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset, or a group of similar identifiable assets, then the transaction is not considered an 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. There was no impact on our financial statements from adopting this ASU on January 1, 2018.

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

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will continue to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. Public business entities should apply the guidance in ASU No. 2016-02 for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. Entities are required to adopt the ASU using a modified retrospective approach, subject to certain optional practical expedients, and apply the provisions of ASU No. 2016-02 to leasing arrangements existing at or entered into

Index to Financial Statements

after the earliest comparative period presented in the financial statements. We are currently evaluating the provisions of ASU No. 2016-02 and assessing its impact on our financial statements. As part of our assessment to-date, we have formed an implementation team, commenced identification of our lease population and selected a lease software package. We expect the adoption of ASU 2016-02 will materially gross up our consolidated balance sheet with the recognition of the ROU assets and operating lease liabilities. The impact to our consolidated statements of income and cash flows is not expected to be material. The new standard will also require additional disclosures for financing and operating leases.

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).” This ASU and other related updates are intended to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets and expand disclosure requirements. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Our assessment work primarily included the formation of an implementation work team, training on the new ASU’s revenue recognition model, contract review and documentation and the monitoring of industry interpretative issues. We adopted the standard on January 1, 2018, using the modified retrospective application. Our evaluation of the new ASU is near completion, which includes understanding the impact of adoption on earnings from equity method investments. Based upon our analysis to-date, the primary impact of adoption of the new standard is the netting of sales-based taxes collected from our customers against revenue. Sales-based taxes include excise taxes on sales of petroleum products as noted on our consolidated statement of income. We have not identified any other material impact on our financial statements other than disclosures.

Note 29—Condensed Consolidating Financial Information

Phillips 66 has $6.0 billion of senior notes outstanding, the payment obligations of which are fully and unconditionally guaranteed by Phillips 66 Company, a 100-percent-owned subsidiary. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:

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

•	All other nonguarantor subsidiaries.

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

Index to Financial Statements

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

	Millions of Dollars
	Year Ended December 31, 2017
Statement of Income	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—		74,640		27,714		—		102,354
Equity in earnings of affiliates	5,336			3,256		559		(7,419	)	1,732
Net gain on dispositions	—			1		14		—		15
Other income	3			471		47		—		521
Intercompany revenues	—			1,610		13,457		(15,067	)	—
Total Revenues and Other Income	5,339			79,978		41,791		(22,486	)	104,622
Costs and Expenses
Purchased crude oil and products	—			63,812		30,379		(14,782	)	79,409
Operating expenses	—			3,672		1,085		(58	)	4,699
Selling, general and administrative expenses	7			1,300		399		(11	)	1,695
Depreciation and amortization	—			892		426		—		1,318
Impairments	—			20		4		—		24
Taxes other than income taxes	—			5,784		7,678		—		13,462
Accretion on discounted liabilities	—			17		5		—		22
Interest and debt expense	348			70		236		(216	)	438
Total Costs and Expenses	355			75,567		40,212		(15,067	)	101,067
Income before income taxes	4,984			4,411		1,579		(7,419	)	3,555
Income tax benefit	(122		)	(925	)	(646	)	—		(1,693	)
Net Income	5,106			5,336		2,225		(7,419	)	5,248
Less: net income attributable to noncontrolling interests	—			—		142		—		142
Net Income Attributable to Phillips 66	$	5,106		5,336		2,083		(7,419	)	5,106
Comprehensive Income	$	5,484		5,714		2,498		(8,070	)	5,626

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 before income taxes	1,425			2,350		934		(2,518	)	2,191
Income tax expense (benefit)	(130		)	553		124		—		547
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 before income taxes	4,096			6,356		1,167		(5,575	)	6,044
Income tax expense (benefit)	(131		)	1,886		9		—		1,764
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
	At December 31, 2017
Balance Sheet	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Assets
Cash and cash equivalents	$	—		1,411		1,708		—		3,119
Accounts and notes receivable	10			5,317		4,476		(2,297	)	7,506
Inventories	—			2,386		1,009		—		3,395
Prepaid expenses and other current assets	2			276		92		—		370
Total Current Assets	12			9,390		7,285		(2,297	)	14,390
Investments and long-term receivables	32,125			23,483		9,959		(51,626	)	13,941
Net properties, plants and equipment	—			13,117		8,343		—		21,460
Goodwill	—			2,853		417		—		3,270
Intangibles	—			722		154		—		876
Other assets	12			266		158		(2	)	434
Total Assets	$	32,149		49,831		26,316		(53,925	)	54,371
Liabilities and Equity
Accounts payable	$	—		7,272		3,052		(2,297	)	8,027
Short-term debt	—			9		32		—		41
Accrued income and other taxes	—			451		551		—		1,002
Employee benefit obligations	—			513		69		—		582
Other accruals	55			298		102		—		455
Total Current Liabilities	55			8,543		3,806		(2,297	)	10,107
Long-term debt	6,972			50		3,047		—		10,069
Asset retirement obligations and accrued environmental costs	—			467		174		—		641
Deferred income taxes	—			3,349		1,661		(2	)	5,008
Employee benefit obligations	—			639		245		—		884
Other liabilities and deferred credits	8			4,700		3,814		(8,288	)	234
Total Liabilities	7,035			17,748		12,747		(10,587	)	26,943
Common stock	9,396			24,952		10,125		(35,077	)	9,396
Retained earnings	16,335			7,748		1,306		(9,083	)	16,306
Accumulated other comprehensive loss	(617		)	(617	)	(205	)	822		(617	)
Noncontrolling interests	—			—		2,343		—		2,343
Total Liabilities and Equity	$	32,149		49,831		26,316		(53,925	)	54,371

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
	Year Ended December 31, 2017
Statement of Cash Flows	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Cash Flows From Operating Activities
Net Cash Provided by Operating Activities	$	2,619		2,702		1,747		(3,420	)	3,648
Cash Flows From Investing Activities
Capital expenditures and investments*	—			(1,133	)	(839	)	140		(1,832	)
Proceeds from asset dispositions**	—			265		84		(263	)	86
Intercompany lending activities	401			1,453		(1,854	)	—		—
Advances/loans—related parties	—			(10	)	—		—		(10	)
Collection of advances/loans—related parties	—			75		251		—		326
Restricted cash received from consolidation of business	—			—		318		—		318
Other	—			(26	)	(8	)	—		(34	)
Net Cash Provided by (Used in) Investing Activities	401			624		(2,048	)	(123	)	(1,146	)
Cash Flows From Financing Activities
Issuance of debt	1,500			—		2,008		—		3,508
Repayment of debt	(1,500		)	(17	)	(2,161	)	—		(3,678	)
Issuance of common stock	35			—		—		—		35
Repurchase of common stock	(1,590		)	—		—		—		(1,590	)
Dividends paid on common stock	(1,395		)	(2,752	)	(668	)	3,420		(1,395	)
Distributions to noncontrolling interests	—			—		(120	)	—		(120	)
Net proceeds from issuance of Phillips 66 Partners LP common and preferred units	—			—		1,205		—		1,205
Other*	(70		)	—		(129	)	123		(76	)
Net Cash Provided by (Used in) Financing Activities	(3,020		)	(2,769	)	135		3,543		(2,111	)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	—			—		17		—		17
Net Change in Cash, Cash Equivalents and Restricted Cash	—			557		(149	)	—		408
Cash, cash equivalents and restricted cash at beginning of period	—			854		1,857		—		2,711
Cash, Cash Equivalents and Restricted Cash at End of Period	$	—		1,411		1,708		—		3,119
* Includes intercompany capital contributions.
** Includes return of investments in equity affiliates.

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 Operating Activities	$	3,491		2,307		1,552		(4,387	)	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) 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	34			—		—		—		34
Repurchase of common stock	(1,042		)	—		—		—		(1,042	)
Dividends paid on common stock	(1,282		)	(3,604	)	(783	)	4,387		(1,282	)
Distributions to noncontrolling interests	—			—		(75	)	—		(75	)
Net proceeds from issuance of Phillips 66 Partners LP common units	—			—		972		—		972
Other**	(62		)	31		(980	)	969		(42	)
Net Cash Provided by (Used in) Financing Activities	(2,352		)	(3,599	)	417		5,356		(178	)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	—			—		10		—		10
Net Change in Cash, Cash Equivalents and Restricted Cash	—			279		(642	)	—		(363	)
Cash, cash equivalents and restricted cash at beginning of period	—			575		2,499		—		3,074
Cash, Cash Equivalents and Restricted Cash at End of Period	$	—		854		1,857		—		2,711
* Revised to eliminate a purchase and sale transaction between two entities consolidated within the column. This revision increased net cash provided by operating activities by $1,049 million, with an offsetting decrease of $1,049 million in net cash provided by financing activities. The revision did not impact any issuer or guarantor column, nor did it impact our consolidated cash flows.
** Includes intercompany capital contributions.
*** Includes return of investments in equity affiliates.

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 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) 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	31			—		—		—		31
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*	(68		)	34		1,585		(1,596	)	(45	)
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, Cash Equivalents and Restricted Cash	—			—		9		—		9
Net Change in Cash, Cash Equivalents and Restricted Cash	—			(1,470	)	(663	)	—		(2,133	)
Cash, cash equivalents and restricted cash at beginning of period	—			2,045		3,162		—		5,207
Cash, Cash Equivalents and Restricted Cash at End of Period	$	—		575		2,499		—		3,074
* Includes intercompany capital contributions.
** Includes return of investments in equity affiliates.

Note 30—Subsequent Event

On February 13, 2018, we entered into a Stock Purchase and Sale Agreement (Purchase Agreement) with Berkshire Hathaway Inc. and National Indemnity Company, a wholly owned subsidiary of Berkshire Hathaway, to repurchase 35 million shares of Phillips 66 common stock for an aggregate purchase price of approximately $3.3 billion. Pursuant to the Purchase Agreement, the purchase price per share of $93.725 was based on the volume-weighted-average price of our common stock on the New York Stock Exchange on February 13, 2018. The transaction closed on February 14, 2018. We funded the repurchase with cash on hand of approximately $1.9 billion and borrowings of approximately $1.4 billion under our commercial paper program. This specific share repurchase transaction was separately authorized by our Board of Directors and therefore does not impact previously announced authorizations which total up to $12.0 billion.

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
2017
First	$	22,894		797		563		535			1.02		1.02
Second	24,087			848		581		550			1.06		1.06
Third	25,627			1,256		849		823			1.60		1.60
Fourth**	29,746			654		3,255		3,198			6.29		6.25
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

• Includes excise taxes on sales of petroleum products.

** Includes a $2,721 million provisional income tax benefit from the enactment of the U.S. Tax Cuts and Jobs Act on December 22, 2017.

Index to Financial Statements