Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PHILLIPS 66

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Management	74
Reports of Independent Registered Public Accounting Firm	75
Consolidated Financial Statements of Phillips 66:
Consolidated Statement of Income for the years ended December 31, 2019, 2018 and 2017	78
Consolidated Statement of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017	79
Consolidated Balance Sheet at December 31, 2019 and 2018	80
Consolidated Statement of Cash Flows for the years ended December 31, 2019, 2018 and 2017	81
Consolidated Statement of Changes in Equity for the years ended December 31, 2019, 2018 and 2017	82
Notes to Consolidated Financial Statements	84
Supplementary Information
Selected Quarterly Financial Data (Unaudited)	146

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, 2019. 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, 2019.

Ernst & Young LLP has issued an audit report on the company’s internal control over financial reporting as of December 31, 2019, and their report is included herein.

/s/ Greg C. Garland		/s/ Kevin J. Mitchell
Greg C. Garland		Kevin J. Mitchell
Chairman of the Board of Directors and		Executive Vice President, Finance and
Chief Executive Officer		Chief Financial Officer

Date: February 21, 2020

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 sheet of Phillips 66 (the Company) as of December 31, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 21, 2020 expressed an unqualified opinion thereon.

Adoption of ASU No. 2014-09

As discussed in Note 1 to the consolidated financial statements, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” effective January 1, 2018. As a result, for the years ended December 31, 2019 and 2018, the Company changed its presentation of excise taxes collected from customers on sales of refined petroleum products.

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.

Index to Financial Statements

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

		Impairment review of equity method investments
Description of the Matter		As discussed in Note 7 to the consolidated financial statements, the Company has investments in nonconsolidated entities accounted for using the equity method, totaling $14.3 billion as of December 31, 2019. The carrying value of each equity method investment is evaluated for impairment when indicators of a loss in value below the carrying value exist, including, a lack of sustained earnings or a deterioration of market conditions, among others. When there are indicators of impairment, the fair value of the equity method investment is estimated. Fair value is determined using various methods, including quoted market prices and market multiples based on market analyses of comparable entities applied to current and forecasted earnings. When the determined fair value is lower than carrying value, the Company considers whether that impairment is other-than-temporary. Auditing the Company’s impairment assessments was complex and judgmental due to the estimation required in determining whether an investment had an indicator of impairment, the determination of fair value of the investment if an impairment was indicated, and to the extent that the estimated fair value is lower than carrying value, whether that impairment was other-than-temporary.
How We Addressed the Matter in Our Audit		We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s equity method impairment review process, including controls over the identification of factors that may indicate an equity method investment is impaired, and as necessary, the subsequent determination of fair value and assessment of whether indicated impairments are other-than-temporary. In order to test whether an impairment was indicated, we tested the Company’s evaluation of quoted market prices, if available, and the investments’ earnings history and sustainability under current and expected market conditions. When impairment indicators were present, we performed audit procedures that included, among others, assessing the methodologies used by management to determine fair value, testing the significant assumptions discussed above and the underlying data used by the Company in its analyses. For example, we compared the estimated cash flows used within the assessment to current operating results and future expected economic trends. We also performed sensitivity analyses of significant assumptions to evaluate the impact of changes in significant assumptions to management’s fair value estimate and recalculated management’s estimate. We involved our valuation specialists to assist us in analyzing management’s determination of the appropriate market multiples used in estimating fair value. Lastly, we evaluated management’s determination as to whether an indicated impairment was other than temporary, considering factors such as the duration and magnitude of the decline in value.

/s/ Ernst & Young LLP

Houston, Texas

February 21, 2020

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, 2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and the related notes and our report dated February 21, 2020 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 21, 2020

Index to Financial Statements

Consolidated Statement of Income	Phillips 66

	Millions of Dollars
Years Ended December 31	2019				2018			2017
Revenues and Other Income
Sales and other operating revenues*	$	107,293			111,461			102,354
Equity in earnings of affiliates	2,127				2,676			1,732
Net gain on dispositions	20				19			15
Other income	119				61			521
Total Revenues and Other Income	109,559				114,217			104,622
Costs and Expenses
Purchased crude oil and products	95,529				97,930			79,409
Operating expenses	5,074				4,880			4,699
Selling, general and administrative expenses	1,681				1,677			1,695
Depreciation and amortization	1,341				1,356			1,318
Impairments	861				8			24
Taxes other than income taxes*	409				425			13,462
Accretion on discounted liabilities	23				23			22
Interest and debt expense	458				504			438
Foreign currency transaction (gains) losses	5				(31	)		—
Total Costs and Expenses	105,381				106,772			101,067
Income before income taxes	4,178				7,445			3,555
Income tax expense (benefit)	801				1,572			(1,693		)
Net Income	3,377				5,873			5,248
Less: net income attributable to noncontrolling interests	301				278			142
Net Income Attributable to Phillips 66	$	3,076			5,595			5,106
Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)
Basic	$	6.80			11.87			9.90
Diluted	6.77				11.80			9.85
Weighted-Average Common Shares Outstanding (thousands)
Basic	451,364				470,708			515,090
Diluted	453,888				474,047			518,508
** Includes excise taxes on sales of refined petroleum products for the year ended December 31, 2017, prior to the adoption of Accounting Standards Update No. 2014-09 on January 1, 2018:*								$	13,054
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Consolidated Statement of Comprehensive Income	Phillips 66
	Millions of Dollars
Years Ended December 31	2019				2018			2017
Net Income	$	3,377			5,873			5,248
Other comprehensive income (loss)
Defined benefit plans
Net actuarial loss arising during the period	(156		)		(16	)		(1	)
Prior service credit arising during the period	2				—			—
Amortization to income of net actuarial loss, net prior service cost (credit) and settlements	63				148			176
Curtailment gain	—				5			—
Plans sponsored by equity affiliates	(21		)		22			10
Income taxes on defined benefit plans	21				(33	)		(70	)
Defined benefit plans, net of income taxes	(91		)		126			115
Foreign currency translation adjustments	94				(205	)		268
Income taxes on foreign currency translation adjustments	1				3			(9	)
Foreign currency translation adjustments, net of income taxes	95				(202	)		259
Cash flow hedges	(15		)		1			6
Income taxes on hedging activities	4				—			(2	)
Hedging activities, net of income taxes	(11		)		1			4
Other Comprehensive Income (Loss), Net of Income Taxes	(7		)		(75	)		378
Comprehensive Income	3,370				5,798			5,626
Less: comprehensive income attributable to noncontrolling interests	301				278			142
Comprehensive Income Attributable to Phillips 66	$	3,069			5,520			5,484
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Consolidated Balance Sheet	Phillips 66
	Millions of Dollars
At December 31	2019				2018
Assets
Cash and cash equivalents	$	1,614			3,019
Accounts and notes receivable (net of allowances of $41 million in 2019 and $22 million in 2018)	7,376				5,414
Accounts and notes receivable—related parties	1,134				759
Inventories	3,776				3,543
Prepaid expenses and other current assets	495				474
Total Current Assets	14,395				13,209
Investments and long-term receivables	14,571				14,421
Net properties, plants and equipment	23,786				22,018
Goodwill	3,270				3,270
Intangibles	869				869
Other assets	1,829				515
Total Assets	$	58,720			54,302
Liabilities
Accounts payable	$	8,043			6,113
Accounts payable—related parties	532				473
Short-term debt	547				67
Accrued income and other taxes	979				1,116
Employee benefit obligations	710				724
Other accruals	835				442
Total Current Liabilities	11,646				8,935
Long-term debt	11,216				11,093
Asset retirement obligations and accrued environmental costs	638				624
Deferred income taxes	5,553				5,275
Employee benefit obligations	1,044				867
Other liabilities and deferred credits	1,454				355
Total Liabilities	31,551				27,149
Equity
Common stock (2,500,000,000 shares authorized at $0.01 par value) Issued (2019—647,416,633 shares; 2018—645,691,761 shares)
Par value	6				6
Capital in excess of par	20,301				19,873
Treasury stock (at cost: 2019—206,390,806 shares; 2018—189,526,331 shares)	(16,673		)		(15,023	)
Retained earnings	22,064				20,489
Accumulated other comprehensive loss	(788		)		(692	)
Total Stockholders’ Equity	24,910				24,653
Noncontrolling interests	2,259				2,500
Total Equity	27,169				27,153
Total Liabilities and Equity	$	58,720			54,302
See Notes to Consolidated Financial Statements.

Index to Financial Statements

Consolidated Statement of Cash Flows	Phillips 66
	Millions of Dollars
Years Ended December 31	2019				2018			2017
Cash Flows From Operating Activities
Net income	$	3,377			5,873			5,248
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	1,341				1,356			1,318
Impairments	861				8			24
Accretion on discounted liabilities	23				23			22
Deferred income taxes	183				252			(1,886	)
Undistributed equity earnings	(143		)		221			(516	)
Net gain on dispositions	(20		)		(19	)		(15	)
Gain on consolidation of business	—				—			(423	)
Other	16				132			(186	)
Working capital adjustments
Accounts and notes receivable	(2,308		)		1,320			(1,182	)
Inventories	(204		)		(202	)		(176	)
Prepaid expenses and other current assets	(14		)		(113	)		104
Accounts payable	1,941				(1,546	)		1,153
Taxes and other accruals	(245		)		268			163
Net Cash Provided by Operating Activities	4,808				7,573			3,648
Cash Flows From Investing Activities
Capital expenditures and investments	(3,873		)		(2,639	)		(1,832	)
Proceeds from asset dispositions*	157				57			86
Advances/loans—related parties	(98		)		(1	)		(10	)
Collection of advances/loans—related parties	95				—			326
Restricted cash received from consolidation of business	—				—			318
Other	31				112			(34	)
Net Cash Used in Investing Activities	(3,688		)		(2,471	)		(1,146	)
Cash Flows From Financing Activities
Issuance of debt	1,783				2,184			3,508
Repayment of debt	(1,307		)		(1,144	)		(3,678	)
Issuance of common stock	32				39			35
Repurchase of common stock	(1,650		)		(4,645	)		(1,590	)
Dividends paid on common stock	(1,570		)		(1,436	)		(1,395	)
Distributions to noncontrolling interests	(241		)		(207	)		(120	)
Net proceeds from issuance of Phillips 66 Partners LP common and preferred units	173				128			1,205
Other	269				(86	)		(76	)
Net Cash Used in Financing Activities	(2,511		)		(5,167	)		(2,111	)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(14		)		(35	)		17
Net Change in Cash, Cash Equivalents and Restricted Cash	(1,405		)		(100	)		408
Cash, cash equivalents and restricted cash at beginning of year	3,019				3,119			2,711
Cash, Cash Equivalents and Restricted Cash at End of Year	$	1,614			3,019			3,119
** 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, 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
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
Cumulative effect of accounting changes	—			—		—		36		—		13		49
Net income	—			—		—		5,595		—		278		5,873
Other comprehensive loss	—			—		—		—		(75	)	—		(75	)
Dividends paid on common stock	—			—		—		(1,436	)	—		—		(1,436	)
Repurchase of common stock	—			—		(4,645	)	—		—		—		(4,645	)
Benefit plan activity	—			63		—		(12	)	—		—		51
Issuance of Phillips 66 Partners LP common units	—			42		—		—		—		73		115
Distributions to noncontrolling interests	—			—		—		—		—		(207	)	(207	)
December 31, 2018	6			19,873		(15,023	)	20,489		(692	)	2,500		27,153
Cumulative effect of accounting changes	—			—		—		81		(89	)	(1	)	(9	)
Net income	—			—		—		3,076		—		301		3,377
Other comprehensive loss	—			—		—		—		(7	)	—		(7	)
Dividends paid on common stock	—			—		—		(1,570	)	—		—		(1,570	)
Repurchase of common stock	—			—		(1,650	)	—		—		—		(1,650	)
Benefit plan activity	—			85		—		(12	)	—		—		73
Issuance of Phillips 66 Partners LP common units	—			68		—		—		—		73		141
Impacts from Phillips 66 Partners LP GP/IDR restructuring transaction	—			275		—		—		—		(373	)	(98	)
Distributions to noncontrolling interests	—			—		—		—		—		(241	)	(241	)
December 31, 2019	$	6		20,301		(16,673	)	22,064		(788	)	2,259		27,169

Index to Financial Statements

			Shares in Thousands
			Common Stock Issued		Treasury Stock
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
Repurchase of common stock			—		47,961
Shares issued—share-based compensation			1,857		—
December 31, 2018			645,692		189,526
Repurchase of common stock			—		16,865
Shares issued—share-based compensation			1,725		—
December 31, 2019			647,417		206,391

			Dollars
Years Ended December 31			Dividends Paid Per Share of Common Stock
2017			$	2.73
2018			3.10
2019			3.50
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 (VIEs) where we are the primary beneficiary. Undivided interests in pipelines, natural gas plants and terminals are consolidated on a proportionate basis. See Note 27—Phillips 66 Partners LP, for further discussion on our significant consolidated VIE.

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, including VIEs, of which we are not the primary beneficiary. Other securities and investments are generally carried at fair value, or cost less impairments, if any, adjusted up or down for price changes in similar financial instruments issued by the investee, when and if observed. See Note 7—Investments, Loans and Long-Term Receivables, for further discussion on our significant nonconsolidated VIEs.

•	Recast Financial Information—Certain prior period financial information has been recast to reflect the current year’s presentation.

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

•

Foreign Currency Translation—Adjustments resulting from the process of translating financial statements with foreign functional currencies 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.

•	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.

•

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.

•

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.

Index to Financial Statements

•

Derivative Instruments—Derivative instruments are recorded on the balance sheet at fair value. We have master netting agreements with our exchange-cleared instrument counterparties and certain of our counterparties to other commodity instrument contracts (e.g., physical commodity forward contracts). We have elected to net derivative assets and liabilities with the same counterparty on the balance sheet if the legal right of offset exists and certain other criteria are met. We also net collateral payables and 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 cash flow hedges are recognized in other comprehensive income (loss) and appear on the balance sheet in accumulated other comprehensive income (loss) until the hedged transactions are 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.

•

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 nonaffiliated companies. Loans are recorded when cash is transferred or seller financing is provided to the affiliated or nonaffiliated 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 evaluated for impairment based on an expected credit loss assessment.

•

Impairment of Investments in Nonconsolidated Entities—Investments in nonconsolidated entities accounted for under the equity method 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 determined 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 observed market earnings multiples of comparable companies.

•	Depreciation and Amortization—Depreciation and amortization of properties, plants and equipment (PP&E) 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).

•	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.

Index to Financial Statements

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Impairment of 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 expected future pre-tax cash flows of an asset group 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 and the write down is reported in the “Impairments” line item on our consolidated statement of income in the period in which the impairment determination is made. Individual assets are grouped for impairment purposes at the lowest level for which identifiable cash flows are available (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 including 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, estimated replacement cost, 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.

•

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 (loss) on dispositions” line item 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.

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Goodwill—Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in a business combination. Goodwill 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.

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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 intangible assets with indefinite useful lives to determine whether events and circumstances continue to support this classification. 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.

Index to Financial Statements

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Asset Retirement Obligations and Environmental Costs—The fair values of legal obligations to retire and remove long-lived assets are recorded in the period in which the obligations arise. When the liabilities are initially recorded, we capitalize these costs by increasing the carrying amount of the related PP&E. Over time, the liabilities are increased for the change in present value, and the capitalized costs in PP&E are depreciated over the useful life of the related assets. If our estimate of the liability changes after initial recognition, we record an adjustment to the liabilities 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. When environmental assessments or cleanups are probable and the costs can be reasonably estimated, environmental expenditures are accrued on an undiscounted basis (unless acquired in a business combination). Recoveries of environmental remediation costs from other parties, such as state reimbursement funds, are recorded as a reduction to environmental expenditures.

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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. We amortize the guarantee liability to the related income statement line item based on the nature of the guarantee. In cases where the guarantee term is indefinite, we reverse the liability when we have information to support the reversal. When the performance on the guarantee becomes probable and the liability can be reasonably estimated, we accrue a separate liability for the excess amount above the guarantee’s book value 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.

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

•

Revenue Recognition—Our revenues are primarily associated with sales of refined petroleum products, crude oil and natural gas liquids (NGL). Each gallon, or other unit of measure of product, is separately identifiable and represents a distinct performance obligation to which a transaction price is allocated. The transaction prices of our contracts with customers are either fixed or variable, with variable pricing based upon various market indices. For our contracts that include variable consideration, we utilize the variable consideration allocation exception, whereby the variable consideration is only allocated to the performance obligations that are satisfied during the period. The related revenue is recognized at a point in time when control passes to the customer, which is when title and the risk of ownership passes to the customer and physical delivery of goods occurs, either immediately or within a fixed delivery schedule that is reasonable and customary in the industry. The payment terms with our customers vary based on the product or service provided, but usually are 30 days or less.

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

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 item on our consolidated statement of income (i.e., these transactions are recorded net).

Index to Financial Statements

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Taxes Collected from Customers and Remitted to Governmental Authorities—Effective for reporting periods ending after our adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” on January 1, 2018, excise taxes on sales of refined petroleum products charged to our customers are presented net of taxes on sales of refined petroleum products payable to governmental authorities in the “Taxes other than income taxes” line item on our consolidated statement of income. For reporting periods ending prior to January 1, 2018, excise taxes on sales of refined petroleum products charged to our customers are presented in the “Sales and other operating revenues” line item on our consolidated statement of income, and excise taxes on sales of refined petroleum products payable to governmental authorities are presented in the “Taxes other than income taxes” line item on our consolidated statement of income.

Other sales and value-added taxes are recorded net in the “Taxes other than income taxes” line item on our consolidated statement of income.

•	Shipping and Handling Costs—We have elected to account for shipping and handling costs as fulfillment activities and include these activities in the “Purchased crude oil and products” line item on our consolidated statement of income. Freight costs billed to customers are recorded in “Sales and other operating revenues.”

•	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.

•

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 have elected to recognize forfeitures of awards when they occur.

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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 temporary 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 or selling, general and administrative expenses.

Index to Financial Statements

**Note 2—**Changes in Accounting Principles

Effective January 1, 2019, we elected to adopt ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU permits the deferred income tax effects stranded in accumulated other comprehensive income (AOCI) resulting from the U.S. Tax Cuts and Jobs Act (the Tax Act) enacted in December 2017 to be reclassified to retained earnings. As of January 1, 2019, we recorded a cumulative effect adjustment to our opening consolidated balance sheet to reclassify an aggregate income tax benefit of $89 million, primarily related to our pension plans, from accumulated other comprehensive loss to retained earnings.

Effective January 1, 2019, we early adopted ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” using the modified retrospective transition method. This ASU amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables, and off-balance sheet credit exposures. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. We recorded a noncash cumulative effect adjustment to retained earnings of $9 million, net of $3 million of income taxes, on our opening consolidated balance sheet as of January 1, 2019. See Note 4—Credit Losses, for more information on our presentation of credit losses.

Effective January 1, 2019, we adopted ASU No. 2016-02, “Leases (Topic 842),” using the modified retrospective transition method. 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 consolidated 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 consolidated income statement.

We elected the package of practical expedients that allowed us to carry forward our determination of whether an arrangement contained a lease and lease classification, as well as our accounting for initial direct costs for existing contracts. We recorded a noncash cumulative effect adjustment, reflecting an aggregate operating lease ROU asset and corresponding lease liability of $1,415 million and immaterial adjustments to retained earnings and noncontrolling interests, on our opening consolidated balance sheet as of January 1, 2019. See Note 18—Leases, for the new lease disclosures required by this ASU.

Index to Financial Statements

**Note 3—**Sales and Other Operating Revenues

Disaggregated Revenues

The following tables present our disaggregated sales and other operating revenues:

	Millions of Dollars
	2019				2018			2017*
Product Line and Services
Refined petroleum products	$	87,902			87,967			85,405
Crude oil resales	14,125				16,419			11,808
NGL	4,814				6,161			4,670
Services and other**	452				914			471
Consolidated sales and other operating revenues	$	107,293			111,461			102,354
Geographic Location***
United States	$	83,512			86,401			75,684
United Kingdom	9,863				11,054			10,626
Germany	4,053				4,352			6,692
Other foreign countries	9,865				9,654			9,352
Consolidated sales and other operating revenues	$	107,293			111,461			102,354

** Sales and other operating revenues for the year ended December 31, 2017, are presented in accordance with accounting standards in effect prior to our adoption of ASU No. 2014-09 on January 1, 2018.*

*** Includes derivatives-related activities. See* Note 15—Derivatives and Financial Instruments*, for additional information.*

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

Contract-Related Assets and Liabilities

At December 31, 2019 and 2018, receivables from contracts with customers were $6,902 million and $4,993 million, respectively. Significant noncustomer balances, such as buy/sell receivables and excise tax receivables, were excluded from these amounts.

Our contract-related assets also include payments we make to our marketing customers related to incentive programs. An incentive payment is initially recognized as an asset and subsequently amortized as a reduction to revenue over the contract term, which generally ranges from 5 to 15 years. At December 31, 2019 and 2018, our asset balances related to such payments were $336 million and $248 million, respectively.

Our contract liabilities represent advances from our customers prior to product or service delivery. At December 31, 2019 and 2018, contract liabilities were not material.

Remaining Performance Obligations

Most of our contracts with customers are spot contracts or term contracts with only variable consideration. We do not disclose remaining performance obligations for these contracts as the expected duration is one year or less or because the variable consideration has been allocated entirely to an unsatisfied performance obligation. We also have certain contracts in our Midstream segment that include minimum volume commitments with fixed pricing, which mostly expire by 2021. At December 31, 2019, the remaining performance obligations related to these minimum volume commitment contracts were not material.

Index to Financial Statements

**Note 4—**Credit Losses

We are exposed to credit losses primarily through our sales of refined petroleum products, crude oil and NGL. We assess each counterparty’s ability to pay for the products we sell by conducting a credit review. The credit review considers our expected billing exposure and timing for payment and the counterparty’s established credit rating or our assessment of the counterparty’s creditworthiness based on our analysis of their financial statements when a credit rating is not available. We also consider contract terms and conditions, country and political risk, and business strategy in our evaluation. A credit limit is established for each counterparty based on the outcome of this review. We may require collateralized asset support or a prepayment to mitigate credit risk.

We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliations, dispute resolution and payment confirmations. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

At December 31, 2019, we reported $8,510 million of accounts and notes receivable, net of allowances of $41 million. Changes in the allowance were not material for the year ended December 31, 2019. Based on an aging analysis at December 31, 2019, 99% of our accounts receivable were outstanding less than 60 days.

We are also exposed to credit losses from off-balance sheet exposures, such as guarantees of joint venture debt and standby letters of credit. See Note 13—Guarantees, and Note 14—Contingencies and Commitments, for more information on these off-balance sheet exposures.

**Note 5—**Inventories

Inventories at December 31 consisted of the following:

	Millions of Dollars
	2019				2018
Crude oil and petroleum products	$	3,452			3,238
Materials and supplies	324				305
	$	3,776			3,543

Inventories valued on the LIFO basis totaled $3,331 million and $3,123 million at December 31, 2019 and 2018, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $4.3 billion and $2.9 billion at December 31, 2019 and 2018, respectively.

LIFO inventory liquidations did not have a material impact on net income for the years ended December 31, 2019, 2018 and 2017.

Index to Financial Statements

**Note 6—**Business Combinations

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

Based on a third-party appraisal of the fair value of Merey Sweeny’s net assets, utilizing discounted cash flows and replacement costs, the acquisition of PDVSA’s 50% interest resulted in the recognition of a pre-tax gain of $423 million in the first quarter of 2017. This gain was included in the “Other income” line item on our consolidated statement of income. The fair value of our original equity interest in Merey Sweeny 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 Merey Sweeny and net intercompany payables. The restrictions on cash were fully removed in May 2017. Our acquisition accounting was finalized in the first quarter of 2017.

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

**Note 7—**Investments, Loans and Long-Term Receivables

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

	Millions of Dollars
	2019				2018
Equity investments	$	14,284			14,218
Other investments	130				106
Loans and long-term receivables	157				97
	$	14,571			14,421

Equity Investments

Significant affiliated companies accounted for under the equity method, including nonconsolidated VIEs, at December 31, 2019 and 2018, included:

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Chevron Phillips Chemical Company LLC (CPChem)—50 percent-owned joint venture that 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 petroleum 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, 2019 and 2018, the book value of our investment in CPChem was $6,229 million and $6,233 million, respectively.

Index to Financial Statements

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WRB Refining LP (WRB)—50 percent-owned joint venture that owns the Wood River and Borger refineries located in Roxana, Illinois, and Borger, Texas, respectively, for which we are the operator and managing partner. We have a basis difference for our investment in WRB because the carrying value of our investment is lower than our share of WRB’s recorded net assets. This basis difference was primarily the result of our contribution of these refineries to WRB. On the contribution closing date, a basis difference was created because the fair value of the contributed assets recorded by WRB exceeded our historical book value. The contribution-related basis difference is primarily being amortized and recognized as a benefit to equity earnings over a period of 26 years, which was the estimated remaining useful life of the refineries’ PP&E at the contribution closing date. At December 31, 2019, the aggregate remaining basis difference for this investment was $2,428 million. Equity earnings for the years ended December 31, 2019, 2018 and 2017, were increased by $182 million, $177 million and $186 million, respectively, due to the amortization of our aggregate basis difference. At December 31, 2019 and 2018, the book value of our investment in WRB was $2,183 million and $2,108 million, respectively.

•	DCP Midstream, LLC (DCP Midstream)—50 percent-owned joint venture that owns and operates NGL and gas pipelines, gas plants, gathering systems, storage facilities and fractionation plants, through its subsidiary DCP Midstream, LP (DCP Partners). DCP Midstream markets a portion of its NGL to us and our equity affiliates.

At September 30, 2019, we estimated the fair value of our investment in DCP Midstream was below our book value, and we concluded the decline in fair value was not temporary due to the duration and magnitude of the decline. At that time, the fair value of our investment in DCP Midstream depended on the market value of DCP Midstream’s general partner interest in DCP Partners and the market value of DCP Partners’ common units. Accordingly, we recorded an $853 million impairment in the third quarter of 2019. The impairment is included in the “Impairments” line item on our consolidated statement of income. See Note 16—Fair Value Measurements, for additional information on the techniques used to determine the fair value of our investment in DCP Midstream. The impairment resulted in a basis difference for our investment in DCP Midstream because the carrying value of our investment is lower than our share of DCP Midstream’s recorded net assets. The basis difference is being amortized and recognized as a benefit to equity earnings over a period of 22 years, which was the estimated remaining useful life of DCP Midstream’s PP&E at September 30, 2019. Equity earnings for the year ended December 31, 2019, were increased by $10 million due to the amortization of the basis difference in the fourth quarter of 2019. At December 31, 2019, the aggregate remaining basis difference for this investment was $877 million.

On November 6, 2019, DCP Partners completed a transaction to eliminate all general partner economic interests in DCP Partners and incentive distribution rights (IDRs) in exchange for 65 million newly issued DCP Partners common units. With completion of the transaction, DCP Midstream held a noneconomic general partner interest and approximately 118 million common units, representing approximately 57% of DCP Partners’ outstanding common units.

At December 31, 2019 and 2018, the book value of our investment in DCP Midstream was $1,374 million and $2,240 million, respectively.

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Gray Oak Pipeline, LLC—Phillips 66 Partners’ consolidated subsidiary, Gray Oak Holdings LLC (Holdings LLC), owns a 65% interest in a joint venture formed to develop and construct the Gray Oak Pipeline system that will transport crude oil from the Permian and Eagle Ford to Texas Gulf Coast destinations that include Corpus Christi, the Sweeny area, including our Sweeny Refinery, as well as access to the Houston market. The pipeline system is expected to reach full service in the second quarter of 2020. In February 2019, Holdings LLC transferred a 10% ownership interest in Gray Oak Pipeline, LLC to a third party that exercised a purchase option, for proceeds of $81 million. This transfer was accounted for as a sale and resulted in a decrease in Holdings LLC’s ownership interest in Gray Oak Pipeline, LLC from 75% to 65% and the recognition of an immaterial gain. The proceeds received from this sale are presented as an investing cash inflow in the “Proceeds from asset dispositions” line item on our consolidated statement of cash flows. At December 31, 2019, Phillips 66 Partners’ effective ownership interest in the Gray Oak Pipeline was 42.25%. See Note 27—Phillips 66 Partners LP, for additional information regarding Phillips 66 Partners’ ownership in Holdings LLC and Gray Oak Pipeline, LLC.

Index to Financial Statements

Phillips 66 Partners accounts for the investment in Gray Oak Pipeline, LLC under the equity method because it does not have sufficient voting rights over key governance provisions to assert control over Gray Oak Pipeline, LLC. Gray Oak Pipeline, LLC is considered a VIE because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. Phillips 66 Partners has determined it is not the primary beneficiary because it and its co-venturers jointly direct the activities of Gray Oak Pipeline, LLC that most significantly impact Gray Oak Pipeline, LLC’s economic performance.

In June 2019, Gray Oak Pipeline, LLC entered into a third-party term loan facility with an initial borrowing capacity of $1,230 million, which was increased to $1,317 million in July 2019, and $1,379 million in January 2020, inclusive of accrued interest. Borrowings under the facility are due on June 3, 2022. Phillips 66 Partners and its co-venturers provided a guarantee through an equity contribution agreement requiring proportionate equity contributions to Gray Oak Pipeline, LLC up to the total outstanding loan amount. Under the agreement, Phillips 66 Partners’ maximum potential amount of future obligations is $583 million, plus any additional accrued interest and associated fees, which would be required if the term loan facility is fully utilized and Gray Oak Pipeline, LLC defaults on certain of its obligations thereunder. At December 31, 2019, Gray Oak Pipeline, LLC had outstanding borrowings of $1,170 million, and Phillips 66 Partners’ 42.25% proportionate exposure under the equity contribution agreement was $494 million. The net proceeds from the term loan were used by Gray Oak Pipeline, LLC for construction of the Gray Oak Pipeline and repayment of amounts borrowed under a related party loan agreement that Phillips 66 Partners and its co-venturers executed in March 2019 and terminated upon the repayment by Gray Oak Pipeline, LLC in June 2019. The total related party loan to and repayment from Gray Oak Pipeline, LLC was $95 million. These cash flows are included in the “Advances/loans—related parties” and “Collection of advances/loans—related parties” line items on our consolidated statement of cash flows.

At December 31, 2019, Phillips 66 Partners’ maximum exposure to loss was $1,253 million, which represented the book value of the investment in Gray Oak Pipeline, LLC of $759 million and the term loan guarantee of $494 million. At December 31, 2018, the book value of Phillips 66 Partners’ investment in Gray Oak Pipeline, LLC was $288 million.

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DCP Sand Hills Pipeline, LLC (Sand Hills)—Phillips 66 Partners’ 33 percent-owned joint venture that owns an NGL pipeline system that extends from the Permian Basin and Eagle Ford to facilities on the Texas Gulf Coast and to the Mont Belvieu, Texas market hub. The Sand Hills Pipeline system is operated by DCP Partners. At December 31, 2019 and 2018, the book value of Phillips 66 Partners’ investment in Sand Hills was $595 million and $601 million, respectively.

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Dakota Access, LLC (Dakota Access) and Energy Transfer Crude Oil Company, LLC (ETCO)—Two Phillips 66 Partners 25 percent-owned joint ventures. Dakota Access owns a pipeline system that transports 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. These two pipeline systems collectively form the Bakken Pipeline system, which is operated by a co-venturer. The Bakken Pipeline system went into service in June 2017.

In March 2019, a wholly owned subsidiary of Dakota Access closed on an offering of $2,500 million aggregate principal amount of unsecured senior notes. The net proceeds from the issuance of these notes were used to repay amounts outstanding under existing credit facilities of Dakota Access and ETCO. Dakota Access and ETCO have guaranteed repayment of the notes. In addition, Phillips 66 Partners and its co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking (CECU) in conjunction with the notes offering. Under the CECU, if Dakota Access receives an unfavorable court ruling related to certain disputed construction permits and Dakota Access determines that an equity contribution trigger event has occurred, the venturers may be severally required to make proportionate equity contributions to Dakota Access and ETCO up to an aggregate maximum of approximately $2,525 million. Phillips 66 Partners’ share of the maximum potential equity contributions under the CECU is approximately $631 million. At December 31, 2019 and 2018, the aggregate book value of Phillips 66 Partners’ investments in Dakota Access and ETCO was $592 million and $608 million, respectively.

Index to Financial Statements

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Rockies Express Pipeline LLC (REX)—25 percent-owned joint venture that owns a natural gas pipeline system that extends from Wyoming and Colorado to Ohio with a bidirectional section that extends from Ohio to Illinois. The REX Pipeline system is operated by our co-venturer. In July 2018, we contributed $138 million to REX to cover our 25% share of a $550 million debt repayment. Our capital contribution was included in the “Capital expenditures and investments” line item on our consolidated statement of cash flows.

We have a basis difference for our investment in REX because the carrying value of our investment is lower than our share of REX’s recorded net assets. This basis difference was created by historical impairment charges we recorded for this investment and is being amortized and recognized as a benefit to equity earnings over a period of 25 years, which was the estimated remaining useful life of REX’s PP&E when the impairment charges were recorded. At December 31, 2019, the remaining basis difference for this investment was $338 million. Equity earnings for each of the years ended December 31, 2019, 2018 and 2017, were increased by $19 million due to the amortization of our basis difference. At December 31, 2019 and 2018, the book value of our investment in REX was $590 million and $600 million, respectively.

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Bayou Bridge Pipeline, LLC (Bayou Bridge)—Phillips 66 Partners’ 40 percent-owned joint venture that owns a pipeline that transports crude oil from Nederland, Texas, to St. James, Louisiana. A segment of the pipeline from Lake Charles to St. James, Louisiana, was completed on April 1, 2019. The Bayou Bridge Pipeline is operated by our co-venturer. At December 31, 2019 and 2018, the book value of Phillips 66 Partners’ investment in Bayou Bridge was $294 million and $277 million, respectively.

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CF United LLC (United)—In the fourth quarter of 2019, we acquired a 50% voting interest and a 48% economic interest in United, a retail marketing joint venture with operations primarily on the U.S. West Coast. United is considered a VIE, because our co-venturer has an option to sell its interest to us based on a fixed multiple. The put option is viewed as a variable interest as the purchase price on the exercise date may not represent the then-current fair value of United. We have determined that we are not the primary beneficiary because we and our co-venturer jointly direct the activities of United that most significantly impact economic performance. At December 31, 2019, our maximum exposure was comprised of our $265 million investment in United and any potential loss resulting from the put option.

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DCP Southern Hills Pipeline, LLC (Southern Hills)—Phillips 66 Partners’ 33 percent-owned joint venture that owns an NGL pipeline system that extends from the Midcontinent region to the Mont Belvieu, Texas market hub. The Southern Hills Pipeline system is operated by DCP Partners. At December 31, 2019 and 2018, the book value of Phillips 66 Partners’ investment in Southern Hills was $215 million and $206 million, respectively.

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OnCue Holdings, LLC (OnCue)—50 percent-owned joint venture that owns and operates retail convenience stores. We fully guaranteed various debt agreements of OnCue, and our co-venturer did not participate in the guarantees. This entity is considered a VIE because our debt guarantees resulted in OnCue not being exposed to all potential losses. We have determined we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact economic performance. At December 31, 2019, our maximum exposure to loss was $144 million, which represented the book value of our investment in OnCue of $77 million and guaranteed debt obligations of $67 million. At December 31, 2018, the book value of our investment in OnCue was $69 million.

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Liberty Pipeline LLC (Liberty)—We hold a 50% interest in a joint venture formed to develop and construct the Liberty Pipeline system which, upon completion, will transport crude oil from the Rockies and Bakken production areas to Cushing, Oklahoma. Liberty is supported by long-term shipper commitments, and service is expected in the first half of 2021. Liberty is considered a VIE because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of Liberty that most significantly impact economic performance. At December 31, 2019, our maximum exposure to loss was $184 million, which represented the book value of our investment in Liberty of $33 million and a vendor guarantee of $151 million.

Index to Financial Statements

•

Red Oak Pipeline LLC (Red Oak)—We hold a 50% interest in a joint venture formed to develop and construct the Red Oak Pipeline system which, upon completion, will transport crude oil from Cushing, Oklahoma, and the Permian to multiple destinations along the Texas Gulf Coast, including Corpus Christi, Ingleside, Houston, and Beaumont, Texas. Red Oak is supported by long-term shipper commitments, and initial service is expected in the first half of 2021. Red Oak is considered a VIE because it does not have sufficient equity at risk to fully fund the construction of all assets required for principal operations. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of Red Oak that most significantly impact economic performance. At December 31, 2019, our maximum exposure to loss was $23 million, which represented the book value of our investment in Red Oak of $20 million and a member loan of $3 million.

Total distributions received from affiliates were $2,055 million, $2,942 million, and $1,270 million for the years ended December 31, 2019, 2018 and 2017, respectively. In addition, at December 31, 2019, retained earnings included approximately $2,360 million related to the undistributed earnings of affiliated companies.

In 2017, we received payment of the $250 million outstanding sponsor loans to the Dakota Access and ETCO joint ventures. We also received payment of the $75 million partner loan we made to WRB in 2016. These cash inflows, totaling $325 million, are included in the “Collection of advances/loans—related parties” line item on our consolidated statement of cash flows.

Summarized 100% financial information for all affiliated companies accounted for under the equity method, on a combined basis, was:

	Millions of Dollars
	2019				2018			2017
Revenues	$	38,156			43,627			35,523
Income before income taxes	4,976				6,066			3,956
Net income	4,787				5,926			3,764
Current assets	6,654				6,791			7,325
Noncurrent assets	56,163				52,649			49,950
Current liabilities	6,094				8,047			5,248
Noncurrent liabilities	15,740				10,695			13,743
Noncontrolling interests	2,145				2,550			2,549

Index to Financial Statements

**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
	2019										2018
	Gross PP&E				Accum. D&A			Net PP&E			Gross PP&E			Accum. D&A			Net PP&E
Midstream	$	11,221			2,391			8,830			9,663			2,100			7,563
Chemicals	—				—			—			—			—			—
Refining	23,692				10,336			13,356			22,640			9,531			13,109
Marketing and Specialties	1,847				959			888			1,671			926			745
Corporate and Other	1,311				599			712			1,223			622			601
	$	38,071			14,285			23,786			35,197			13,179			22,018

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, 2018	$	626			1,805			839			3,270
Adjustments	—				—			—			—
Balance at December 31, 2018	626				1,805			839			3,270
Adjustments	—				—			—			—
Balance at December 31, 2019	$	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
	2019				2018
Trade names and trademarks	$	503			503
Refinery air and operating permits	249				250
	$	752			753

The net book value of our amortized intangible assets was $117 million and $116 million at December 31, 2019 and 2018, respectively. Acquisitions of amortized intangible assets were not material in 2019 and 2018. For the years ended December 31, 2019, 2018 and 2017, amortization expense was $17 million, $14 million and $21 million, 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
	2019				2018
Asset retirement obligations	$	280			261
Accrued environmental costs	441				447
Total asset retirement obligations and accrued environmental costs	721				708
Asset retirement obligations and accrued environmental costs due within one year*	(83		)		(84	)
Long-term asset retirement obligations and accrued environmental costs	$	638			624

** 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 the years ended December 31, 2019 and 2018, our overall asset retirement obligation changed as follows:

	Millions of Dollars
	2019				2018
Balance at January 1	$	261			268
Accretion of discount	10				10
Changes in estimates of existing obligations	31				3
Spending on existing obligations	(22		)		(15	)
Foreign currency translation	—				(5	)
Balance at December 31	$	280			261

Accrued Environmental Costs

For the year ended December 31, 2019, the $6 million decrease in total accrued environmental costs 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, 2019, $240 million was primarily related to cleanup at domestic refineries and underground storage tanks at U.S. service stations; $147 million was associated with nonoperator sites; and $54 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 discount rate of approximately 5%. At December 31, 2019, the accrued balance for acquired environmental liabilities was $246 million. The expected future undiscounted payments related to the portion of the accrued environmental costs that have been discounted are: $26 million in 2020, $24 million in 2021, $23 million in 2022, $19 million in 2023, $16 million in 2024, and $206 million in the aggregate for all years after 2024.

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.

	2019						2018					2017
	Basic			Diluted			Basic		Diluted			Basic		Diluted
Amounts Attributed to Phillips 66 Common Stockholders (millions):
Net income attributable to Phillips 66	$	3,076		3,076			5,595		5,595			5,106		5,106
Income allocated to participating securities	(6		)	(2	)		(6	)	—			(6	)	—
Net income available to common stockholders	$	3,070		3,074			5,589		5,595			5,100		5,106
Weighted-average common shares outstanding (thousands):	448,787			451,364			467,483		470,708			511,268		515,090
Effect of share-based compensation	2,577			2,524			3,225		3,339			3,822		3,418
Weighted-average common shares outstanding—EPS	451,364			453,888			470,708		474,047			515,090		518,508
Earnings Per Share of Common Stock (dollars)	$	6.80		6.77			11.87		11.80			9.90		9.85

Index to Financial Statements

**Note 12—**Debt

Short-term and long-term debt at December 31 was:

	Millions of Dollars
	2019				2018
Phillips 66
4.300% Senior Notes due April 2022	$	2,000			2,000
3.900% Senior Notes due March 2028	800				800
4.650% Senior Notes due November 2034	1,000				1,000
5.875% Senior Notes due May 2042	1,500				1,500
4.875% Senior Notes due November 2044	1,700				1,700
Floating-rate notes due April 2020 at 2.751% and 3.186% at year-end 2019 and 2018, respectively	300				300
Term loan due April 2020 at 2.699% and 3.422% at year-end 2019 and 2018, respectively	200				200
Floating-rate Senior Notes due February 2021 at 2.517% and 3.289% at year-end 2019 and 2018, respectively	500				500
Floating-rate Advance Term Loan due December 2034 at 2.392%—related party	25				—
Other	1				1
Phillips 66 Partners
2.646% Senior Notes due February 2020	—				300
2.450% Senior Notes due December 2024	300				—
3.605% Senior Notes due February 2025	500				500
3.550% Senior Notes due October 2026	500				500
3.750% Senior Notes due March 2028	500				500
3.150% Senior Notes due December 2029	600				—
4.680% Senior Notes due February 2045	450				450
4.900% Senior Notes due October 2046	625				625
Tax-exempt bonds due April 2020 and April 2021 at 1.850% and 1.885% at year-end 2019 and 2018, respectively	75				75
Revolving credit facility due January 2019 and October 2021 at weighted-average rate of 3.669% at year-end 2018	—				125
Debt at face value	11,576				11,076
Finance leases	277				184
Software obligations	10				—
Net unamortized discounts and debt issuance costs	(100		)		(100	)
Total debt	11,763				11,160
Short-term debt	(547		)		(67	)
Long-term debt	$	11,216			11,093

Maturities of borrowings outstanding at December 31, 2019, inclusive of net unamortized discounts and debt issuance costs, for each of the years from 2020 through 2024 are $547 million, $568 million, $2,012 million, $17 million and $312 million, respectively.

Index to Financial Statements

During the year ended December 31, 2019, our debt at face value increased $500 million due to:

•	Phillips 66 Partners’ issuance of $900 million of Senior Notes due December 2024 and December 2029.

•	Phillips 66 Partners’ repayment of the $300 million outstanding principal balance of its 2.646% Senior Notes due February 2020.

•	Phillips 66 Partners’ repayment of the $125 million outstanding under its revolving credit facility.

•	Borrowing of $25 million under our floating-rate Advance Term Loan due December 2034.

2019 Debt Issuances and Repayments

On October 15, 2019, Phillips 66 Partners repaid the aggregate $300 million outstanding principal balance of its 2.646% Senior Notes due February 2020.

On September 13, 2019, Phillips 66 Partners repaid the aggregate $400 million outstanding principal balance of the senior unsecured term loan facility that was drawn during the first half of 2019.

On September 6, 2019, Phillips 66 Partners closed on a public offering of $900 million aggregate principal amount of unsecured notes consisting of:

•	$300 million aggregate principal amount of 2.450% Senior Notes due December 15, 2024.

•	$600 million aggregate principal amount of 3.150% Senior Notes due December 15, 2029.

Interest on each series of senior notes is payable semiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2020. Net proceeds from the Senior Notes offering were used for the September 13, 2019 and October 15, 2019 debt repayments noted above and general business purposes.

On March 22, 2019, Phillips 66 Partners entered into a senior unsecured term loan facility with a borrowing capacity of $400 million due March 20, 2020. Phillips 66 Partners borrowed an aggregate amount of $400 million under the facility during the first half of 2019. Net proceeds from the term loan facility were used for the repayment of the outstanding balance under the Phillips 66 Partners’ revolving credit facility and general business purposes.

2018 Debt Issuances and Repayments

In December 2018, Phillips 66 repaid the $300 million floating-rate notes due April 2019.

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

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

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

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

•	An additional $200 million of our 4.875% Senior Notes due November 2044. Interest on these notes is payable semiannually on May 15 and November 15 of each year, beginning on May 15, 2018.

Index to Financial Statements

These notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary. Phillips 66 used the net proceeds from the issuance of these notes and cash on hand to repay commercial paper borrowings during the three months ended March 31, 2018, and for general corporate purposes. The commercial paper borrowings during the three months ended March 31, 2018, were primarily used to repurchase shares of our common stock. See Note 17—Equity, for additional information.

Credit Facilities and Commercial Paper

Phillips 66 has a revolving credit facility that may be used for direct bank borrowings, as support for issuances of letters of credit, or as support for our commercial paper program. On July 30, 2019, this revolving credit agreement was amended and restated to extend the scheduled maturity from October 3, 2021, to July 30, 2024. No other material amendments were made to the agreement, and the overall capacity remains at $5 billion with an option to increase the overall capacity to $6 billion, subject to certain conditions. The facility is with a broad syndicate of financial institutions and contains covenants that are usual and customary for an agreement of this type for comparable commercial borrowers, including a maximum consolidated net debt-to-capitalization ratio of 65%. 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 Financial Services LLC and Moody’s Investors Service, Inc. The facility also provides for customary fees, including administrative agent fees and commitment fees. At December 31, 2019 and 2018, no amount had been drawn under this revolving credit agreement.

Phillips 66 has a $5 billion commercial paper program for short-term working capital needs that is supported by our revolving credit facility. Commercial paper maturities are generally limited to 90 days. At December 31, 2019 and 2018, no borrowings were outstanding under the commercial paper program. At February 21, 2020, there was approximately $650 million in borrowings outstanding under the program.

Phillips 66 Partners has a revolving credit facility with a broad syndicate of financial institutions. The revolving credit facility contains covenants that are usual and customary for an agreement of this type for comparable commercial borrowers. At Phillips 66 Partners’ option, outstanding borrowings under this facility bear interest at either i) the Eurodollar rate plus a margin based on its credit rating; or ii) the base rate (as described in the facility agreement) plus a margin based on its credit rating. Eurodollar rate borrowings are due on the facility’s termination date, while base rate borrowings are due the earlier of the facility’s termination date or the fourteenth business day after such borrowings were made. On July 30, 2019, Phillips 66 Partners amended and restated its revolving credit agreement. The agreement extended the scheduled maturity from October 3, 2021, to July 30, 2024. No other material amendments were made to the agreement, and the overall capacity remains at $750 million with an option to increase the overall capacity to $1 billion, subject to certain conditions. At December 31, 2019, Phillips 66 Partners had no borrowings outstanding under this facility; however, $1 million in letters of credit had been issued that were supported by this facility. There was $125 million outstanding under this facility at December 31, 2018.

We had approximately $5.7 billion and $5.6 billion of total committed capacity available under our revolving credit facilities at December 31, 2019 and 2018, respectively.

Index to Financial Statements

**Note 13—**Guarantees

At December 31, 2019, 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 guarantees and expect future performance to be either immaterial or have only a remote chance of occurrence.

Lease Residual Value 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 at December 31, 2019. The operating lease term ends in June 2021 and provides us the option, at the end of the lease term, to request to renew the lease, purchase the facility or assist the lessor in marketing it for resale. We also have residual value guarantees associated with railcar and airplane leases with maximum potential future payments totaling $372 million. These leases have remaining terms of up to four years. For the years ended December 31, 2019, 2018 and 2017, we recognized incremental operating lease rental expense of $1 million, $20 million and $45 million, respectively, for residual value deficiencies for certain aircraft and railcar leases based on third‑party appraisals of expected fair value at the end of the lease terms. The railcar leases were amended in November 2018 and October 2017 resulting in residual value deficiency settlement payments of $40 million and $53 million, respectively. At December 31, 2019 and 2018, we did not have any liabilities recorded for residual value deficiencies under our railcar leases.

Contingent Equity Contribution Undertaking

In March 2019, Phillips 66 Partners and its co-venturers in Dakota Access provided a Contingent Equity Contribution Undertaking in conjunction with an unsecured senior notes offering. See Note 7—Investments, Loans and Long-Term Receivables, for additional information on Dakota Access.

Guarantees of Joint Venture Obligations

In June 2019, Phillips 66 Partners issued a guarantee through an equity contribution agreement for 42.25% of Gray Oak Pipeline, LLC’s third-party term loan facility. See Note 7—Investments, Loans and Long-Term Receivables, for additional information on Gray Oak Pipeline, LLC.

In addition, at December 31, 2019, we had other guarantees outstanding for our portion of certain joint venture debt obligations and purchase obligations that have remaining terms of up to six years. The maximum potential amount of future payments to third parties under these guarantees was approximately $263 million. Payment would be required if a joint venture defaults on its obligations.

Indemnifications

Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to indemnification. Agreements associated with these sales include indemnifications for taxes, litigation, environmental liabilities, permits and licenses and employee claims, as well as real estate indemnity against tenant defaults. The provisions of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, which generally have indefinite terms and potentially unlimited exposure. At December 31, 2019 and 2018, the carrying amount of recorded indemnifications was $153 million and $171 million, respectively.

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 the reversal. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. At December 31, 2019 and 2018, environmental accruals for known contamination of $105 million and $101 million, respectively, were included in the carrying amount of the recorded indemnifications noted above. These environmental accruals were primarily included in the “Asset retirement obligations and accrued environmental costs” line item on our consolidated balance sheet. For additional information about environmental liabilities, see Note 14—Contingencies and Commitments.

Index to Financial Statements

Indemnification and Release Agreement

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

**Note 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 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, 2019, we had performance obligations secured by letters of credit and bank guarantees of $1,111 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. At December 31, 2019, the estimated aggregate future payments under these agreements were $321 million per year for each year from 2020 through 2024 and $1,983 million in aggregate for all years after 2024. For the years ended December 31, 2019, 2018 and 2017, total payments under these agreements were $321 million, $323 million and $323 million, respectively.

Index to Financial Statements

**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 item 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 petroleum product, 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.

Commodity Derivative Contracts—We sell into or receive supply from the worldwide crude oil, refined petroleum product, 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 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 legal right of offset exists.

	Millions of Dollars
	December 31, 2019										December 31, 2018
	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	$	23		—		—		23			1,257		(1,070	)	(89	)	98
Other assets	3			—		—		3			2		—		—		2
Liabilities
Other accruals	1,188			(1,281	)	80		(13	)		—		(23	)	—		(23	)
Other liabilities and deferred credits	—			(1	)	—		(1	)		5		(7	)	—		(2	)
Total	$	1,214		(1,282	)	80		12			1,264		(1,100	)	(89	)	75

At December 31, 2019 and 2018, there was no material cash collateral received or paid that was not offset on our consolidated balance sheet.

Index to Financial Statements

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
	2019				2018			2017
Sales and other operating revenues	$	(150	)		192			(247	)
Other income	33				(15	)		27
Purchased crude oil and products	(161		)		(64	)		(18	)
Net gain (loss) from commodity derivative activity	$	(278	)		113			(238	)

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 nonderivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward purchase and sales contracts. The percentage of our derivative contract volumes expiring within the next 12 months was at least 98% at December 31, 2019 and 2018.

	Open Position Long / (Short)
	2019			2018
Commodity
Crude oil, refined petroleum products and NGL (millions of barrels)	(16	)		(17	)

Interest Rate Derivative Contracts—In 2016, we entered into interest rate swaps to hedge the variability of lease payments on our headquarters facility. These monthly lease payments vary based on monthly changes in the one-month LIBOR and changes, if any, in our credit rating over the five-year term of the lease. The pay-fixed, receive-floating interest rate swaps have an aggregate notional value of $650 million and end in April 2021. We have designated these swaps as cash flow hedges.

The aggregate net fair value of these swaps, which is included in the “Prepaid expenses and other current assets” and “Other assets” line items on our consolidated balance sheet, totaled $1 million and $15 million at December 31, 2019 and 2018, respectively.

We report the mark-to-market gains or losses on our interest rate swaps designated as highly effective cash flow hedges as a component of other comprehensive income (loss), and reclassify such gains and losses into earnings in the same period during which the hedged transaction affects earnings. Net realized gains and losses from settlements of the swaps were immaterial for the years ended December 31, 2019 and 2018.

We currently estimate that pre-tax gains of $1 million will be reclassified from accumulated other comprehensive loss into general and administrative expenses during the next 12 months as the hedged transactions settle; however, the actual amounts that will be reclassified will vary based on changes in interest rates.

Index to Financial Statements

Credit Risk from Derivative Instruments

Financial instruments potentially exposed to concentrations of credit risk consist primarily of trade receivables and derivative contracts.

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 a probability assessment of credit loss. 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 to others to be offset against amounts owed to us.

The credit risk from our 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, typically on a daily basis, until settled.

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

The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were immaterial at December 31, 2019 and 2018.

Index to Financial Statements

**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 the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price), 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.

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 nonexchange quotes, we classify those contracts as Level 2.

Physical commodity forward purchase and sales contracts and over-the-counter (OTC) financial swaps 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, physical commodity purchase and sales contracts and OTC swaps 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. Physical and OTC 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 midmarket pricing convention (the midpoint between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.

We determine the fair value of our interest rate swaps based on observed market valuations for interest rate swaps that have notional amounts, 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.

Index to Financial Statements

The following tables display the fair value hierarchy for our 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. The following tables also reflect the effect of netting derivative assets and liabilities with the same counterparty for which we have the legal right of offset and collateral netting.

The carrying values and fair values by hierarchy of our financial assets and liabilities, either carried or disclosed at fair value, including any effects of counterparty and collateral netting, were:

	Millions of Dollars
	December 31, 2019
	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	$	820			368			—			1,188		(1,188	)	—		—		—
Physical forward contracts	—				26			—			26		—		—		—		26
Interest rate derivatives	—				1			—			1		—		—		—		1
Rabbi trust assets	127				—			—			127		N/A		N/A		—		127
	$	947			395			—			1,342		(1,188	)	—		—		154
Commodity Derivative Liabilities
Exchange-cleared instruments	$	884			385			—			1,269		(1,188	)	(80	)	—		1
OTC instruments	—				1			—			1		—		—		—		1
Physical forward contracts	—				12			—			12		—		—		—		12
Floating-rate debt	—				1,100			—			1,100		N/A		N/A		—		1,100
Fixed-rate debt, excluding finance leases	—				11,813			—			11,813		N/A		N/A		(1,438	)	10,375
	$	884			13,311			—			14,195		(1,188	)	(80	)	(1,438	)	11,489

	Millions of Dollars
	December 31, 2018
	Fair Value Hierarchy										Total Fair Value of Gross Assets & Liabilities		Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value		Net Carrying Value Presented on the Balance Sheet
	Level 1				Level 2			Level 3
Commodity Derivative Assets
Exchange-cleared instruments	$	674			547			—			1,221		(1,075	)	(89	)	—		57
Physical forward contracts	—				39			4			43		—		—		—		43
Interest rate derivatives	—				15			—			15		—		—		—		15
Rabbi trust assets	104				—			—			104		N/A		N/A		—		104
	$	778			601			4			1,383		(1,075	)	(89	)	—		219
Commodity Derivative Liabilities
Exchange-cleared instruments	$	605			472			—			1,077		(1,075	)	—		—		2
Physical forward contracts	—				20			—			20		—		—		—		20
OTC instruments	—				3			—			3		—		—		—		3
Floating-rate debt	—				1,200			—			1,200		N/A		N/A		—		1,200
Fixed-rate debt, excluding finance leases	—				9,727			—			9,727		N/A		N/A		49		9,776
	$	605			11,422			—			12,027		(1,075	)	—		49		11,001

Index to Financial Statements

The rabbi trust assets are recorded in the “Investments and long-term receivables” line item, and floating-rate and fixed-rate debt are recorded in the “Short-term debt” and “Long-term debt” line items on our consolidated balance sheet. See Note 15—Derivatives and Financial Instruments, for information regarding where the assets and liabilities related to our commodity and interest rate derivatives are recorded on our consolidated balance sheet.

Nonrecurring Fair Value Measurements

The nonrecurring fair value measurement used to record an impairment of our DCP Midstream investment in 2019 consisted of two valuations:

•	The fair value of our share of DCP Midstream’s limited partner interest in DCP Partners was estimated based on an average market price of DCP Partners’ common units for a 20-day trading period encompassing September 30, 2019.

•	The fair value of our share of DCP Midstream’s general partner interest in DCP Partners was estimated using two primary inputs: 1) estimated future cash distributions from DCP Partners attributable to the IDRs, and 2) a multiple of those cash flows based on internal estimates and observation of IDR conversion transactions by other master limited partnerships.

Taken together, we concluded the two valuations above resulted in an overall Level 3 nonrecurring fair value measurement. See Note 7—Investments, Loans and Long-Term Receivables, for additional information on the impairment.

For the year ended December 31, 2018, there were no material nonrecurring fair value measurements of assets subsequent to their initial recognition.

Index to Financial Statements

**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 under our share repurchase programs. The shares are 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.

On October 4, 2019, our Board of Directors approved a new share repurchase program that authorizes us to repurchase up to $3 billion of our common stock, bringing the total amount of share repurchases authorized by our Board of Directors since July 2012 to an aggregate of $15 billion. Since the inception of our share repurchase programs in 2012 through December 31, 2019, we have repurchased a total of 153,968,191 shares at an aggregate cost of $12 billion.

In February 2018, we entered into a Stock Purchase and Sale Agreement (Purchase Agreement) with Berkshire Hathaway Inc. and National Indemnity Company, a wholly owned subsidiary of Berkshire Hathaway, to repurchase 35,000,000 shares of Phillips 66 common stock for an aggregate purchase price of $3,280 million. Pursuant to the Purchase Agreement, the purchase price per share of $93.725 was based on the volume-weighted-average price of our common stock on the New York Stock Exchange on February 13, 2018. The transaction closed in February 2018. We funded the repurchase with cash of $1,880 million and borrowings of $1,400 million under our commercial paper program. These borrowings were subsequently refinanced through a public offering of senior notes. This specific share repurchase transaction was separately authorized by our Board of Directors and therefore did not impact previously announced authorizations under our share repurchase programs.

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 $1,350 million. This specific share repurchase transaction was also separately authorized by our Board of Directors and therefore did not impact previously announced authorizations under our share repurchase programs.

Common Stock Dividends

On February 5, 2020, our Board of Directors declared a quarterly cash dividend of $0.90 per common share, payable March 2, 2020, to holders of record at the close of business on February 18, 2020.

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.

Index to Financial Statements

**Note 18—**Leases

We lease marine vessels, tugboats, barges, pipelines, storage tanks, railcars, service station sites, office buildings, corporate aircraft, land and other facilities and equipment. In determining whether an agreement contains a lease, we consider our ability to control the asset and whether third-party participation or vendor substitution rights limit our control. 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. Renewal options have been included only when reasonably certain of exercise. There are no significant restrictions imposed on us in our lease agreements with regards to dividend payments, asset dispositions or borrowing ability. Certain leases have residual value guarantees, which may require additional payments at the end of the lease term if future fair values decline below contractual lease balances.

In our implementation of ASU No. 2016-02, we elected to discount lease obligations using our incremental borrowing rate. Furthermore, we elected to separate costs for lease and service components for contracts involving the following asset types: marine vessels, tugboats, barges and consignment service stations. For these contracts, we allocate the consideration payable between the lease and service components using the relative standalone prices of each component. For contracts involving all other asset types, we elected the practical expedient to account for the lease and service components on a combined basis. Our right of way agreements in effect prior to January 1, 2019, were not accounted for as leases as they were not initially determined to be leases at their commencement dates. However, modifications to these agreements or new agreements will be assessed and accounted for accordingly under ASU No. 2016-02. For short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that is reasonably certain to exercise, we elected to not recognize the ROU asset and corresponding lease liability on our consolidated balance sheet.

The following table indicates the consolidated balance sheet line items that include the ROU assets and lease liabilities for our finance and operating leases:

	Millions of Dollars
	December 31, 2019
	Finance Leases				Operating Leases
Right-of-Use Assets
Net properties, plants and equipment	$	284			—
Other assets	—				1,312
Total right-of-use assets	$	284			1,312
Lease Liabilities
Short-term debt	$	18			—
Other accruals	—				455
Long-term debt	259				—
Other liabilities and deferred credits	—				806
Total lease liabilities	$	277			1,261

Index to Financial Statements

Future minimum lease payments at December 31, 2019, for finance and operating lease liabilities were:

	Millions of Dollars
	Finance Leases				Operating Leases
2020	$	26			488
2021	25				260
2022	23				167
2023	23				111
2024	23				84
Remaining years	243				299
Future minimum lease payments	363				1,409
Amount representing interest or discounts	(86		)		(148	)
Total lease liabilities	$	277			1,261

Our finance lease liabilities relate primarily to consignment agreements with United and an oil terminal in the United Kingdom. The lease liability for the oil terminal finance lease is subject to foreign currency translation adjustments each reporting period.

Components of net lease cost for the year ended December 31, 2019, were:

	Millions of Dollars
Finance lease cost
Amortization of right-of-use assets	$	20
Interest on lease liabilities	6
Total finance lease cost	26
Operating lease cost	531
Short-term lease cost	118
Variable lease cost	12
Sublease income	(16		)
Total net lease cost	$	671

Cash paid for amounts included in the measurement of our lease liabilities for the year ended December 31, 2019, was:

	Millions of Dollars
Operating cash outflows—finance leases	$	6
Operating cash outflows—operating leases	553
Financing cash outflows—finance leases	21

During the year ended December 31, 2019, we recorded additional noncash ROU assets and corresponding operating lease liabilities totaling $342 million related to new and modified lease agreements.

Index to Financial Statements

At December 31, 2019, the weighted-average remaining lease terms and discount rates for our lease liabilities were:

Weighted-average remaining lease term—finance leases (years)	11.1
Weighted-average remaining lease term—operating leases (years)	5.6
Weighted-average discount rate—finance leases	3.1	%
Weighted-average discount rate—operating leases	3.8	%

**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
	2019							2018						2019			2018
	U.S.				Int’l.			U.S.			Int’l.
Change in Benefit Obligations
Benefit obligations at January 1	$	2,730			1,007			3,043			1,209			220			232
Service cost	127				23			136			29			5			6
Interest cost	109				26			104			28			9			7
Plan participant contributions	—				2			—			2			5			4
Plan amendments	—				—			—			—			(2	)		—
Net actuarial loss (gain)	380				186			(167	)		(165	)		6			(9	)
Benefits paid	(198		)		(31	)		(386	)		(27	)		(17	)		(20	)
Curtailment gain	—				—			—			(5	)		—			—
Foreign currency exchange rate change	—				15			—			(64	)		—			—
Benefit obligations at December 31	$	3,148			1,228			2,730			1,007			226			220
Change in Fair Value of Plan Assets
Fair value of plan assets at January 1	$	2,377			902			2,751			972			—			—
Actual return on plan assets	478				121			(122	)		(29	)		—			—
Company contributions	45				28			134			34			12			16
Plan participant contributions	—				2			—			2			5			4
Benefits paid	(198		)		(31	)		(386	)		(27	)		(17	)		(20	)
Foreign currency exchange rate change	—				24			—			(50	)		—			—
Fair value of plan assets at December 31	$	2,702			1,046			2,377			902			—			—
Funded Status at December 31	$	(446	)		(182	)		(353	)		(105	)		(226	)		(220	)

Index to Financial Statements

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

	Millions of Dollars
	Pension Benefits													Other Benefits
	2019							2018						2019			2018
	U.S.				Int’l.			U.S.			Int’l.
Amounts Recognized in the Consolidated Balance Sheet
Noncurrent assets	$	—			29			—			78			—			—
Current liabilities	(25		)		—			(25	)		—			(15	)		(16	)
Noncurrent liabilities	(421		)		(211	)		(328	)		(183	)		(211	)		(204	)
Total recognized	$	(446	)		(182	)		(353	)		(105	)		(226	)		(220	)

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

	Millions of Dollars
	Pension Benefits													Other Benefits
	2019							2018						2019			2018
	U.S.				Int’l.			U.S.			Int’l.
Unrecognized net actuarial loss (gain)	$	523			164			539			64			—			(8	)
Unrecognized prior service credit	—				(2	)		—			(3	)		(6	)		(6	)

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):

	Millions of Dollars
	Pension Benefits													Other Benefits
	2019							2018						2019			2018
	U.S.				Int’l.			U.S.			Int’l.
Sources of Change in Other Comprehensive Income (Loss)
Net actuarial gain (loss) arising during the period	$	(45	)		(106	)		(125	)		102			(7	)		9
Curtailment gain	—				—			—			5			—			—
Amortization of net actuarial loss (gain) and settlements	61				6			131			19			(1	)		—
Prior service credit arising during the period	—				—			—			—			2			—
Amortization of prior service credit	—				(1	)		—			(1	)		(2	)		(1	)
Total recognized in other comprehensive income (loss)	$	16			(101	)		6			125			(8	)		8

The accumulated benefit obligations for all U.S. and international pension plans were $2,855 million and $1,068 million, respectively, at December 31, 2019, and $2,466 million and $878 million, respectively, at December 31, 2018.

Index to Financial Statements

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

	Millions of Dollars
	Pension Benefits
	2019							2018
	U.S.				Int’l.			U.S.			Int’l.
Accumulated benefit obligations	$	2,855			396			123			345
Fair value of plan assets	2,702				207			—			182

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

	Millions of Dollars
	Pension Benefits
	2019							2018
	U.S.				Int’l.			U.S.			Int’l.
Projected benefit obligations	$	3,148			419			2,730			365
Fair value of plan assets	2,702				207			2,377			182

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

	Millions of Dollars
	Pension Benefits																			Other Benefits
	2019							2018						2017						2019			2018			2017
	U.S.				Int’l.			U.S.			Int’l.			U.S.			Int’l.
Components of Net Periodic Benefit Cost
Service cost	$	127			23			136			29			132			32			5			6			6
Interest cost	109				26			104			28			108			27			9			7			8
Expected return on plan assets	(143		)		(44	)		(169	)		(46	)		(146	)		(40	)		—			—			—
Amortization of prior service cost (credit)	—				(1	)		—			(1	)		3			(1	)		(2	)		(1	)		(2	)
Amortization of net actuarial loss (gain)	53				6			59			19			70			23			(1	)		—			—
Settlements	8				—			72			—			83			—			—			—			—
Total net periodic benefit cost*	$	154			10			202			29			250			41			11			12			12

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

Index to Financial Statements

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% of the unamortized balance each year. The amount subject to amortization is determined on a plan-by-plan basis.

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
	2019					2018				2019		2018
	U.S.			Int’l.		U.S.		Int’l.
Assumptions Used to Determine Benefit Obligations:
Discount rate	3.30	%		1.81		4.30		2.59		3.05		4.15
Rate of compensation increase	4.00			3.34		4.00		3.34		—		—
Interest crediting rate on cash balance plan	2.70			—		3.25		—		—		—
Assumptions Used to Determine Net Periodic Benefit Cost:
Discount rate	4.30	%		2.59		3.60		2.36		4.15		3.35
Expected return on plan assets	6.50			4.93		6.50		4.78		—		—
Rate of compensation increase	4.00			3.34		4.00		3.74		—		—
Interest crediting rate on cash balance plan	3.25			—		3.00		—		—		—

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.

For the year ended December 31, 2019, actuarial losses resulted in increases in our U.S. and international pension benefit obligations of $380 million and $186 million, respectively. The primary drivers for the actuarial losses were decreases in the discount rates and changes to the census data demographics. For the year ended December 31, 2018, actuarial gains resulted in decreases in our U.S. and international pension benefit obligations of $167 million and $165 million, respectively. The primary drivers for the actuarial gains were increases in the discount rates and changes to the census data demographics.

For the year ended December 31, 2019, the weighted-average actual return on plan assets for our U.S. pension plans was 20%, which resulted in a $478 million increase in plan assets. For the year ended December 31, 2018, the weighted-average actual return on plan assets for our U.S. pension plans was negative 4%, which resulted in a $122 million reduction in plan assets. The primary driver of the return on plan assets in 2019 and 2018 was fluctuations in the equity and fixed income markets.

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 6.75% in 2020 that declines to 5.00% by 2027.

Index to Financial Statements

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, infrastructure 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 43% equity securities, 41% debt securities, 8% real estate investments and 8% in all other types of investments as of December 31, 2019. 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 corporate debt securities are estimated using recently executed transactions and market price quotations. If there have been no market transactions in a particular fixed income security, its fair value is calculated by pricing models that benchmark the security against other securities with actual market prices.

•	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.

•

Fair values of investments in common/collective trusts and real estate funds are valued at the net asset value (NAV) as a practical expedient. The NAV is based on the underlying net assets owned by the fund and the relative interest of each participating investor in the fair value of the underlying assets. These investments valued at NAV are not classified within the fair value hierarchy, but are presented in the fair value table to permit reconciliation of total plan assets to the amounts presented in the notes to consolidated financial statements.

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
2019
Equity securities	$	437			—			—			437			—			—			—			—
Government debt securities	475				—			—			475			—			—			—			—
Corporate debt securities	—				134			—			134			—			—			—			—
Cash and cash equivalents	136				—			—			136			4			—			—			4
Insurance contracts	—				—			—			—			—			—			14			14
Total assets in the fair value hierarchy	1,048				134			—			1,182			4			—			14			18
Common/collective trusts measured at NAV											1,364												938
Real estate funds measured at NAV											156												90
Total	$	1,048			134			—			2,702			4			—			14			1,046

Index to Financial Statements

	Millions of Dollars
	U.S.													International
	Level 1				Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
2018
Equity securities	$	421			—			—			421			—			—			—			—
Government debt securities	610				—			—			610			—			—			—			—
Corporate debt securities	—				129			—			129			—			—			—			—
Cash and cash equivalents	50				—			—			50			7			—			—			7
Insurance contracts	—				—			—			—			—			—			14			14
Total assets in the fair value hierarchy	1,081				129			—			1,210			7			—			14			21
Common/collective trusts measured at NAV											1,048												873
Real estate funds measured at NAV											119												8
Total	$	1,081			129			—			2,377			7			—			14			902

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 2020, we expect to contribute approximately $50 million to our U.S. pension plans and other postretirement benefit plans and $25 million to our international pension plans.

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

	Millions of Dollars
	Pension Benefits							Other Benefits
	U.S.				Int’l.
2020	$	538			21			26
2021	309				23			27
2022	320				25			27
2023	284				27			26
2024	289				29			24
2025-2029	1,198				176			96

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% of their eligible pay, subject to certain statutory limits, in the Savings Plan to a choice of investment funds. Phillips 66 provides a company match of participant contributions up to 6% of eligible pay. Prior to January 1, 2019, the match was up to 5% of eligible pay. In addition, eligible participants receive an additional discretionary Success Share contribution from the company. The target for the Success Share contribution is 2% of eligible pay, but the Success Share contribution can range from 0% to 6% based on management discretion.

For the years ended December 31, 2019, 2018 and 2017, we recorded expense of $192 million, $178 million and $101 million, respectively, related to our contributions to the Savings Plan.

Index to Financial Statements

**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, nonemployee 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.

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 have elected to recognize forfeitures of awards when they occur.

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

	Millions of Dollars
	2019				2018			2017
Share-based compensation expense	$	169			100			142
Income tax benefit	(53		)		(45	)		(74	)

Index to Financial Statements

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, 2019, to December 31, 2019:

												Millions of Dollars
	Options			Weighted- Average Exercise Price				Weighted-Average Grant-Date Fair Value				Aggregate Intrinsic Value
Outstanding at January 1, 2019	4,752,808			$	63.11
Granted	830,900			94.97				$	17.58
Forfeited	(553	)		94.85
Exercised	(803,751	)		39.90								$	51
Outstanding at December 31, 2019	4,779,404			$	72.55
Vested at December 31, 2019	3,603,296			$	65.69							$	162
Exercisable at December 31, 2019	3,267,111			$	63.57							$	154

The weighted-average remaining contractual terms of vested options and exercisable options at December 31, 2019, were 4.83 years and 4.49 years, respectively. During 2019, we received $32 million in cash and realized an income tax benefit of $6 million from the exercise of options. At December 31, 2019, the remaining unrecognized compensation expense from unvested options was $6 million, which will be recognized over a weighted-average period of 21 months, the longest period being 25 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.

During 2018 and 2017, we granted options with a weighted-average grant-date fair value of $20.69 and $16.95, respectively. During 2018 and 2017, employees exercised options with an aggregate intrinsic value of $37 million and $62 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:

	2019			2018		2017
Risk-free interest rate	2.68	%		2.81		2.28
Dividend yield	3.70	%		2.80		2.90
Volatility factor	25.61	%		25.41		26.91
Expected life (years)	7.06			7.18		7.22

We calculate the volatility factor using historical Phillips 66 end-of-week closing stock prices since the Separation Date. We periodically calculate the average period of time elapsed between grant dates and exercise dates of past grants to estimate the expected life of new option grants.

Index to Financial Statements

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 dividend equivalent cash payment 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, 2019, to December 31, 2019:

								Millions of Dollars
	Stock Units			Weighted-Average Grant-Date Fair Value				Total Fair Value
Outstanding at January 1, 2019	2,259,829			$	84.52
Granted	1,001,899			95.16
Forfeited	(50,192	)		95.21
Issued	(836,952	)		79.73				$	80
Outstanding at December 31, 2019	2,374,584			$	90.47
Not Vested at December 31, 2019	1,619,720			$	91.04

At December 31, 2019, the remaining unrecognized compensation cost from unvested RSU awards was $64 million, which will be recognized over a weighted-average period of 22 months, the longest period being 35 months.

During 2018 and 2017, we granted RSUs with a weighted-average grant-date fair value of $96.16 and $78.49, respectively. During 2018 and 2017, we issued shares with an aggregate fair value of $102 million and $85 million, respectively, to settle RSUs.

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 when the HRCC approves the three-year performance results on the grant date. PSUs granted under the P66 Omnibus Plan are classified as liability awards and compensation expense is recognized beginning on the authorization date and ending on the vesting date.

PSUs granted under the P66 Omnibus Plan are settled by cash payments equal to the fair value of the awards, which is based on the 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.

PSUs granted under prior incentive compensation plans were classified as equity awards. These equity awards are settled upon an employee’s retirement by issuing one share of our common stock for each PSU held. Dividend equivalents are paid on these awards.

Index to Financial Statements

The following table summarizes our PSU activity from January 1, 2019, to December 31, 2019:

								Millions of Dollars
	Performance Share Units			Weighted-Average Grant-Date Fair Value				Total Fair Value
Outstanding at January 1, 2019	1,902,502			$	49.52
Granted	287,914			87.42
Forfeited	—			—
Issued	(461,942	)		59.12				$	44
Cash settled	(287,914	)		87.42				25
Outstanding at December 31, 2019	1,440,560			$	46.44
Not Vested at December 31, 2019	73,271			$	69.63

At December 31, 2019, the remaining unrecognized compensation cost from unvested PSU awards was $0.1 million, which will be recognized over a weighted-average period of 13 months, with the longest period being 3 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 2018 and 2017, we granted PSUs with a weighted-average grant-date fair value of $99.74 and $86.88, respectively. During 2018 and 2017, we issued shares with an aggregate fair value of $70 million and $54 million, respectively, to settle PSUs. During 2018 and 2017, we cash settled PSUs with an aggregate fair value of $49 million and $56 million, respectively.

**Note 21—**Income Taxes

In December 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% to 21% 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%, which resulted in the recognition of a provisional deferred tax benefit of $2,870 million in the year ended December 31, 2017. 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 the recognition of a provisional income tax expense of $149 million in the year ended December 31, 2017.

During the year ended December 31, 2018, we recorded adjustments to finalize our accounting for the income tax effects of the Tax Act, which increased our income tax expense by $36 million. The adjustments were primarily due to the revision of our estimated deferred income tax balances in conjunction with the filing of our 2017 income tax return and the issuance of additional guidance by the U.S. Internal Revenue Service related to the calculation of the one-time deemed repatriation tax.

During the year ended December 31, 2019, we recorded adjustments to the one-time deemed repatriation tax, which decreased our income tax expense by $42 million. The adjustments were due to the issuance of additional guidance by the U.S. Internal Revenue Service.

Index to Financial Statements

Components of income tax expense (benefit) were:

	Millions of Dollars
	2019				2018			2017
Income Tax Expense (Benefit)
Federal
Current	$	354			739			9
Deferred	177				257			(1,960	)
Foreign
Current	204				326			126
Deferred	(50		)		53			3
State and local
Current	61				255			61
Deferred	55				(58	)		68
	$	801			1,572			(1,693	)

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

	Millions of Dollars
	2019				2018
Deferred Tax Liabilities
Properties, plants and equipment, and intangibles	$	3,297			3,074
Investment in joint ventures	2,137				2,041
Investment in subsidiaries	794				602
Inventory	—				66
Other	263				14
Total deferred tax liabilities	6,491				5,797
Deferred Tax Assets
Benefit plan accruals	460				395
Asset retirement obligations and accrued environmental costs	115				109
Loss and credit carryforwards	54				59
Other financial accruals and deferrals	70				16
Inventory	28				—
Other	281				—
Total deferred tax assets	1,008				579
Less: valuation allowance	22				8
Net deferred tax assets	986				571
Net deferred tax liabilities	$	5,505			5,226

At December 31, 2019, the loss and credit carryforward deferred tax assets were primarily related to a German interest deduction carryforward of $33 million, a foreign tax credit carryforward in the United States of $15 million, and capital loss and net operating loss carryforwards in the United Kingdom of $5 million. Foreign tax credit carryforwards, which have a full valuation allowance against them, expire in 2029. The other loss and credit carryforwards, all of which relate to foreign operations, have indefinite lives.

Index to Financial Statements

Valuation allowances have been established to reduce deferred tax assets to an amount that will, more likely than not, be realized. During the year ended December 31, 2019, our total valuation allowance balance increased by $14 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 were included in our computation of the one-time deemed repatriation tax associated with the enactment of the Tax Act. Earnings of our foreign subsidiaries and foreign joint ventures after December 31, 2017, are generally not subject to incremental income taxes in the United States or withholding taxes in foreign countries upon repatriation. As such, we only assert that the earnings of one of our foreign subsidiaries are permanently reinvested. At December 31, 2019 and 2018, the unrecorded deferred tax liability related to the undistributed earnings of this foreign subsidiary was 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 the periods for which ConocoPhillips was the taxpayer remain the responsibility of ConocoPhillips, and we have indemnified ConocoPhillips for such amounts. We file tax returns in the U.S. federal jurisdiction and in many foreign and state jurisdictions. Unrecognized tax benefits reflect the difference between positions taken on income tax returns and the amounts recognized in the financial statements. The following table is a reconciliation of the changes in our unrecognized income tax benefits balance:

	Millions of Dollars
	2019				2018			2017
Balance at January 1	$	23			34			70
Additions for tax positions of current year	2				—			—
Additions for tax positions of prior years	29				1			1
Reductions for tax positions of prior years	(14		)		(2	)		(5	)
Settlements	—				(10	)		(32	)
Balance at December 31	$	40			23			34

Included in the balance of unrecognized income tax benefits at December 31, 2019, 2018 and 2017 were $15 million, $1 million and $5 million, respectively, which, if recognized, would affect our effective income tax rate. With respect to various unrecognized income tax benefits and the related accrued liabilities, we do not expect any to be recognized or paid within the next twelve months.

At December 31, 2019, 2018 and 2017, accrued liabilities for interest and penalties, net of accrued income taxes, totaled $10 million, $5 million and $8 million, respectively. As a result of these accruals, net income decreased by $3 million for the year ended December 31, 2019, and increased by $1 million for the year ended December 31, 2017.

Audits in significant jurisdictions are generally complete as follows: United Kingdom (2017), Germany (2014) and United States (2013). 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.

Index to Financial Statements

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
	2019				2018			2017			2019			2018			2017
Income before income taxes
United States	$	3,267			5,716			2,799			78.2	%		76.8			78.7
Foreign	911				1,729			756			21.8			23.2			21.3
	$	4,178			7,445			3,555			100.0	%		100.0			100.0
Federal statutory income tax	$	877			1,563			1,244			21.0	%		21.0			35.0
State income tax, net of federal benefit	92				155			79			2.2			2.1			2.2
Tax Cuts and Jobs Act	(42		)		36			(2,721	)		(1.0	)		0.5			(76.5	)
Foreign rate differential	(31		)		(3	)		(137	)		(0.7	)		—			(3.9	)
Noncontrolling interests	(61		)		(58	)		(46	)		(1.5	)		(0.8	)		(1.3	)
Change in valuation allowance	14				(20	)		(4	)		0.3			(0.3	)		(0.1	)
Other*	(48		)		(101	)		(108	)		(1.1	)		(1.4	)		(3.0	)
	$	801			1,572			(1,693	)		19.2	%		21.1			(47.6	)

** Other includes individually immaterial items but is primarily attributable to foreign operations.*

Income tax expense of $123 million, $13 million and $81 million for the years ended December 31, 2019, 2018 and 2017, respectively, is 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 Loss

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

	Millions of Dollars
	Defined Benefit Plans				Foreign Currency Translation			Hedging			Accumulated Other Comprehensive Loss
December 31, 2016	$	(713	)		(285	)		3			(995	)
Other comprehensive income before reclassifications	3				259			4			266
Amounts reclassified from accumulated other comprehensive loss*
Defined benefit plans**
Amortization of net actuarial loss, prior service cost (credit) and settlements	112				—			—			112
Net current period other comprehensive income	115				259			4			378
December 31, 2017	(598		)		(26	)		7			(617	)
Other comprehensive income (loss) before reclassifications	14				(192	)		4			(174	)
Amounts reclassified from accumulated other comprehensive loss
Defined benefit plans**
Amortization of net actuarial loss, prior service credit and settlements	112				—			—			112
Foreign currency translation	—				(10	)		—			(10	)
Hedging	—				—			(3	)		(3	)
Net current period other comprehensive income (loss)	126				(202	)		1			(75	)
December 31, 2018	(472		)		(228	)		8			(692	)
Other comprehensive income (loss) before reclassifications	(140		)		95			(5	)		(50	)
Amounts reclassified from accumulated other comprehensive loss
Defined benefit plans**
Amortization of net actuarial loss, prior service credit and settlements	49				—			—			49
Foreign currency translation	—				—			—			—
Hedging	—				—			(6	)		(6	)
Net current period other comprehensive income (loss)	(91		)		95			(11	)		(7	)
Income taxes reclassified to retained earnings***	(93		)		2			2			(89	)
December 31, 2019	$	(656	)		(131	)		(1	)		(788	)

** There were no significant reclassifications related to foreign currency translation or hedging in the year ended December 31,* 2017*.*

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

**** As of January 1, 2019, stranded income taxes related to the enactment of the Tax Act in December 2017 were reclassified to retained earnings upon adoption of ASU No. 2018-02. See* Note 2—Changes in Accounting Principles*, for additional information on our adoption of this ASU.*

Index to Financial Statements

**Note 23—**Cash Flow Information

Supplemental Cash Flow Information

	Millions of Dollars
	2019				2018			2017
Cash Payments (Receipts)
Interest	$	426			465			421
Income taxes*	955				984			(257	)

• 2017 reflected a net cash refund position; cash payments for income taxes were $102 million in 2017.

Restricted Cash

At December 31, 2019, 2018 and 2017, the company did not have any restricted cash. The restrictions on the cash acquired in February 2017, as a result of the consolidation of Merey Sweeny, were fully removed in May 2017 when Merey Sweeny’s outstanding debt that contained lender restrictions on the use of cash was paid in full. See Note 6—Business Combinations, for additional information regarding our consolidation of Merey Sweeny.

**Note 24—**Other Financial Information

	Millions of Dollars
	2019				2018			2017
Interest and Debt Expense
Incurred
Debt	$	504			493			432
Other	31				28			21
	535				521			453
Capitalized	(77		)		(17	)		(15	)
Expensed	$	458			504			438
Other Income
Interest income	$	43			45			31
Gain on consolidation of business*	—				—			423
Other, net**	76				16			67
	$	119			61			521
** See Note 6—Business Combinations, for more information regarding the gain recognized in 2017.*
*** Includes derivatives-related activities. See Note 15—Derivatives and Financial Instruments, for additional information.*
Research and Development Expenses	$	54			55			60
Advertising Expenses	$	63			68			76
Foreign Currency Transaction (Gains) Losses
Midstream	$	—			—			—
Chemicals	—				—			—
Refining	—				(24	)		(2	)
Marketing and Specialties	—				1			1
Corporate and Other	5				(8	)		1
	$	5			(31	)		—

Index to Financial Statements

**Note 25—**Related Party Transactions

Significant transactions with related parties were:

	Millions of Dollars
	2019				2018			2017
Operating revenues and other income (a)	$	2,977			3,514			2,596
Purchases (b)	11,726				12,755			10,468
Operating expenses and selling, general and administrative expenses (c)	96				59			79

(a)

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

(b)

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

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

As discussed more fully in Note 6—Business Combinations, in February 2017, we began accounting for Merey Sweeny as a consolidated subsidiary. Accordingly, the table above only includes processing fees paid to Merey Sweeny through the consolidation date.

Index to Financial Statements

**Note 26—**Segment Disclosures and Related Information

Our operating segments are:

1)	**Midstream—**Provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and NGL transportation, storage, fractionation, processing and marketing services, mainly in the United States. The Midstream segment includes our master limited partnership (MLP), Phillips 66 Partners, as well as our 50% equity investment in DCP Midstream.

2)	**Chemicals—**Consists of our 50% 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.

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

Intersegment sales are at prices that we believe approximate market.

Index to Financial Statements

Analysis of Results by Operating Segment

	Millions of Dollars
	2019				2018			2017*
Sales and Other Operating Revenues**
Midstream
Total sales	$	7,103			8,293			6,620
Intersegment eliminations	(2,122		)		(2,176	)		(1,842	)
Total Midstream	4,981				6,117			4,778
Chemicals	3				5			5
Refining
Total sales	76,792				83,140			65,494
Intersegment eliminations	(45,871		)		(49,343	)		(40,284	)
Total Refining	30,921				33,797			25,210
Marketing and Specialties
Total sales	73,616				73,414			73,565
Intersegment eliminations	(2,256		)		(1,899	)		(1,233	)
Total Marketing and Specialties	71,360				71,515			72,332
Corporate and Other	28				27			29
Consolidated sales and other operating revenues	$	107,293			111,461			102,354
** Sales and other operating revenues for the year ended December 31, 2017, are presented in accordance with accounting standards in effect prior to our adoption of ASU No. 2014-09 on January 1, 2018. See Note 1—Summary of Significant Accounting Policies, for further discussion regarding our adoption of ASU No. 2014-09.*
*** See Note 3—Sales and Other Operating Revenues, for further details on our disaggregated sales and other operating revenues.*
Equity in Earnings of Affiliates
Midstream	$	754			676			454
Chemicals	870				1,025			713
Refining	318				796			322
Marketing and Specialties	185				164			243
Corporate and Other	—				15			—
Consolidated equity in earnings of affiliates	$	2,127			2,676			1,732
Depreciation, Amortization and Impairments
Midstream	$	1,162			326			299
Chemicals	—				—			—
Refining	857				841			838
Marketing and Specialties	103				114			116
Corporate and Other	80				83			89
Consolidated depreciation, amortization and impairments	$	2,202			1,364			1,342

Index to Financial Statements

	Millions of Dollars
	2019				2018			2017
Interest Income and Expense
Interest income
Midstream	$	—			—			1
Chemicals	—				—			—
Refining	—				—			—
Marketing and Specialties	—				—			—
Corporate and Other	43				45			30
Consolidated interest income	$	43			45			31
Interest and debt expense
Corporate and Other	$	458			504			438
Income (Loss) Before Income Taxes
Midstream	$	684			1,181			638
Chemicals	879				1,025			716
Refining	1,986				4,535			2,076
Marketing and Specialties	1,433				1,557			1,020
Corporate and Other	(804		)		(853	)		(895	)
Consolidated income before income taxes	$	4,178			7,445			3,555
Investments In and Advances To Affiliates
Midstream	$	5,131			5,423			4,734
Chemicals	6,229				6,233			6,222
Refining	2,290				2,226			2,398
Marketing and Specialties	650				349			390
Corporate and Other	—				—			—
Consolidated investments in and advances to affiliates	$	14,300			14,231			13,744
Total Assets*
Midstream	$	15,716			14,329			13,231
Chemicals	6,249				6,235			6,226
Refining	25,150				23,230			23,780
Marketing and Specialties	8,659				6,572			7,052
Corporate and Other	2,946				3,936			4,082
Consolidated total assets	$	58,720			54,302			54,371
** 2017 segment information has been recast to include all income tax-related assets in Corporate and Other.*

Index to Financial Statements

	Millions of Dollars
	2019				2018			2017
Capital Expenditures and Investments
Midstream	$	2,292			1,548			771
Chemicals	—				—			—
Refining	1,001				826			853
Marketing and Specialties	374				125			108
Corporate and Other	206				140			100
Consolidated capital expenditures and investments	$	3,873			2,639			1,832

Geographic Information

Long-lived assets, defined as net PP&E plus investments and long-term receivables, by geographic location at December 31 were:

	Millions of Dollars
	2019				2018			2017
United States	$	36,407			34,587			33,457
United Kingdom	1,256				1,191			1,254
Germany	601				570			593
Other foreign countries	93				91			97
Worldwide consolidated	$	38,357			36,439			35,401

Index to Financial Statements

**Note 27—**Phillips 66 Partners LP

Phillips 66 Partners, headquartered in Houston, Texas, is a publicly traded MLP formed in 2013 to own, operate, develop and acquire primarily fee-based midstream assets. Phillips 66 Partners’ operations currently consist of crude oil, refined petroleum product and NGL transportation, fractionation, processing, terminaling and storage assets.

On August 1, 2019, Phillips 66 Partners completed a restructuring transaction to eliminate the IDRs held by us and convert our 2% economic general partner interest into a noneconomic general partner interest in exchange for 101 million Phillips 66 Partners common units. As a result of the restructuring transaction, the balance of “Noncontrolling interests” in our consolidated balance sheet decreased $373 million, with a $275 million increase to “Capital in excess of par,” a $91 million increase in “Deferred income taxes” and $7 million of transaction costs. No distributions were made for the general partner interest after August 1, 2019.

At December 31, 2019, we owned 170 million Phillips 66 Partners common units, representing a 74% limited partner interest in Phillips 66 Partners, while the public owned a 26% limited partner interest and 13.8 million perpetual convertible preferred units. Holders of the preferred units are entitled to receive cumulative quarterly distributions equal to $0.678375 per unit. Beginning in October 2020, holders will be entitled to receive quarterly distributions equal to the greater of $0.678375 per unit or the per-unit distribution paid to common unitholders.

We consolidate Phillips 66 Partners because we determined it is a VIE of which we are the primary beneficiary. As general partner of Phillips 66 Partners, we have the ability to control its financial interests, as well as the ability to direct the activities that most significantly impact its economic performance. As a result of this consolidation, the public common and perpetual convertible preferred unitholders’ ownership interests in Phillips 66 Partners are reflected as noncontrolling interests of $2,228 million and $2,469 million on our consolidated balance sheet at December 31, 2019 and 2018, respectively. Generally, drop down transactions with 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.

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

	Millions of Dollars
	December 31 2019				December 31 2018
Cash and cash equivalents	$	286			1
Equity investments*	2,961				2,448
Net properties, plants and equipment	3,349				3,052
Short-term debt	25				50
Long-term debt	3,491				2,998

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

Phillips 66 Partners has authorized an aggregate of $750 million under three $250 million continuous offerings of common units, or at-the-market (ATM) programs. The first two programs concluded in June 2018 and December 2019, respectively, leaving $250 million available under the third program. For the years ended December 31, 2019, 2018 and 2017, on a settlement-date basis, Phillips 66 Partners generated net proceeds of $173 million, $128 million and $173 million, respectively, from common units issued under the ATM programs. Since inception in June 2016 and through December 31, 2019, the ATM programs have generated net proceeds of $492 million.

Index to Financial Statements

Phillips 66 Partners’ investment in the Gray Oak Pipeline development is held through Holdings LLC. In December 2018, a third party exercised its option to acquire a 35% interest in Holdings LLC. Because Holdings LLC’s sole asset was its ownership interest in Gray Oak Pipeline, LLC, which is considered a financial asset, and because certain restrictions were placed on the third party’s ability to transfer or sell its interest in Holdings LLC during the construction of the Gray Oak Pipeline, the legal sale of the 35% interest did not qualify as a sale under GAAP. As such, the contributions the third party is making to Holdings LLC to cover its share of previously incurred and future construction costs plus a premium to Phillips 66 Partners will be reflected as a long-term obligation in the “Other liabilities and deferred credits” line item on our consolidated balance sheet and financing cash inflows in the “Other” line item on our consolidated statement of cash flows. After construction of the Gray Oak Pipeline is fully completed, these restrictions expire, and the sale will be recognized under GAAP. Phillips 66 Partners will continue to control and consolidate Holdings LLC after sale recognition, and therefore the third party’s 35% interest will be recharacterized from a long-term obligation to a noncontrolling interest in our consolidated balance sheet at that time. Also at that time, the premium paid will be recharacterized from a long-term obligation to a gain in our consolidated statement of income. For the year ended December 31, 2019, the third party contributed an aggregate of $342 million to Holdings LLC, and Holdings LLC used these contributions to fund its portion of Gray Oak Pipeline, LLC’s cash calls. See Note 7—Investments, Loans and Long-Term Receivables, for further discussion regarding Phillip 66 Partners’ investment in Gray Oak Pipeline, LLC.

**Note 28—**Condensed Consolidating Financial Information

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

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

•	All other nonguarantor subsidiaries.

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

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

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2019
Statement of Income	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—		82,857		24,436		—		107,293
Equity in earnings of affiliates	3,342			2,163		738		(4,116	)	2,127
Net gain on dispositions	—			—		20		—		20
Other income	—			76		43		—		119
Intercompany revenues	—			3,804		14,370		(18,174	)	—
Total Revenues and Other Income	3,342			88,900		39,607		(22,290	)	109,559
Costs and Expenses
Purchased crude oil and products	—			78,244		35,067		(17,782	)	95,529
Operating expenses	—			4,005		1,141		(72	)	5,074
Selling, general and administrative expenses	6			1,299		386		(10	)	1,681
Depreciation and amortization	—			918		423		—		1,341
Impairments	—			3		858		—		861
Taxes other than income taxes	—			293		116		—		409
Accretion on discounted liabilities	—			18		5		—		23
Interest and debt expense	347			145		276		(310	)	458
Foreign currency transaction losses	—			—		5		—		5
Total Costs and Expenses	353			84,925		38,277		(18,174	)	105,381
Income before income taxes	2,989			3,975		1,330		(4,116	)	4,178
Income tax expense (benefit)	(87		)	633		255		—		801
Net Income	3,076			3,342		1,075		(4,116	)	3,377
Less: net income attributable to noncontrolling interests	—			—		301		—		301
Net Income Attributable to Phillips 66	$	3,076		3,342		774		(4,116	)	3,076
Comprehensive Income	$	3,069		3,335		1,098		(4,132	)	3,370

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2018
Statement of Income	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Revenues and Other Income
Sales and other operating revenues	$	—		85,486		25,975		—		111,461
Equity in earnings of affiliates	5,918			4,030		747		(8,019	)	2,676
Net gain on dispositions	—			8		11		—		19
Other income	—			33		28		—		61
Intercompany revenues	—			3,493		14,085		(17,578	)	—
Total Revenues and Other Income	5,918			93,050		40,846		(25,597	)	114,217
Costs and Expenses
Purchased crude oil and products	—			79,559		35,563		(17,192	)	97,930
Operating expenses	—			3,769		1,193		(82	)	4,880
Selling, general and administrative expenses	7			1,297		383		(10	)	1,677
Depreciation and amortization	—			926		430		—		1,356
Impairments	—			3		5		—		8
Taxes other than income taxes	—			321		104		—		425
Accretion on discounted liabilities	—			18		5		—		23
Interest and debt expense	402			146		250		(294	)	504
Foreign currency transaction gains	—			—		(31	)	—		(31	)
Total Costs and Expenses	409			86,039		37,902		(17,578	)	106,772
Income before income taxes	5,509			7,011		2,944		(8,019	)	7,445
Income tax expense (benefit)	(86		)	1,093		565		—		1,572
Net Income	5,595			5,918		2,379		(8,019	)	5,873
Less: net income attributable to noncontrolling interests	—			—		278		—		278
Net Income Attributable to Phillips 66	$	5,595		5,918		2,101		(8,019	)	5,595
Comprehensive Income	$	5,520		5,843		2,291		(7,856	)	5,798

Index to Financial Statements

	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, 2019
Balance Sheet	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Assets
Cash and cash equivalents	$	—		136		1,478		—		1,614
Accounts and notes receivable	86			6,334		4,148		(2,058	)	8,510
Inventories	—			2,594		1,182		—		3,776
Prepaid expenses and other current assets	2			362		131		—		495
Total Current Assets	88			9,426		6,939		(2,058	)	14,395
Investments and long-term receivables	33,082			25,039		10,989		(54,539	)	14,571
Net properties, plants and equipment	—			13,676		10,110		—		23,786
Goodwill	—			2,853		417		—		3,270
Intangibles	—			732		137		—		869
Other assets	14			4,290		714		(3,189	)	1,829
Total Assets	$	33,184		56,016		29,306		(59,786	)	58,720
Liabilities and Equity
Accounts payable	$	—		7,024		3,609		(2,058	)	8,575
Short-term debt	500			16		31		—		547
Accrued income and other taxes	—			386		593		—		979
Employee benefit obligations	—			648		62		—		710
Other accruals	65			850		249		(329	)	835
Total Current Liabilities	565			8,924		4,544		(2,387	)	11,646
Long-term debt	7,434			155		3,627		—		11,216
Asset retirement obligations and accrued environmental costs	—			460		178		—		638
Deferred income taxes	—			3,727		1,828		(2	)	5,553
Employee benefit obligations	—			825		219		—		1,044
Other liabilities and deferred credits	245			8,975		5,465		(13,231	)	1,454
Total Liabilities	8,244			23,066		15,861		(15,620	)	31,551
Common stock	3,634			25,838		9,516		(35,354	)	3,634
Retained earnings	22,094			7,900		1,940		(9,870	)	22,064
Accumulated other comprehensive loss	(788		)	(788	)	(270	)	1,058		(788	)
Noncontrolling interests	—			—		2,259		—		2,259
Total Liabilities and Equity	$	33,184		56,016		29,306		(59,786	)	58,720

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2018
Balance Sheet	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Assets
Cash and cash equivalents	$	—		1,648		1,371		—		3,019
Accounts and notes receivable	9			4,255		3,202		(1,293	)	6,173
Inventories	—			2,489		1,054		—		3,543
Prepaid expenses and other current assets	2			373		99		—		474
Total Current Assets	11			8,765		5,726		(1,293	)	13,209
Investments and long-term receivables	32,712			22,799		9,829		(50,919	)	14,421
Net properties, plants and equipment	—			13,218		8,800		—		22,018
Goodwill	—			2,853		417		—		3,270
Intangibles	—			726		143		—		869
Other assets	9			335		173		(2	)	515
Total Assets	$	32,732		48,696		25,088		(52,214	)	54,302
Liabilities and Equity
Accounts payable	$	—		5,415		2,464		(1,293	)	6,586
Short-term debt	—			11		56		—		67
Accrued income and other taxes	—			458		658		—		1,116
Employee benefit obligations	—			663		61		—		724
Other accruals	66			227		149		—		442
Total Current Liabilities	66			6,774		3,388		(1,293	)	8,935
Long-term debt	7,928			54		3,111		—		11,093
Asset retirement obligations and accrued environmental costs	—			458		166		—		624
Deferred income taxes	1			3,541		1,735		(2	)	5,275
Employee benefit obligations	—			676		191		—		867
Other liabilities and deferred credits	55			4,611		4,287		(8,598	)	355
Total Liabilities	8,050			16,114		12,878		(9,893	)	27,149
Common stock	4,856			24,960		8,754		(33,714	)	4,856
Retained earnings	20,518			8,314		1,249		(9,592	)	20,489
Accumulated other comprehensive loss	(692		)	(692	)	(293	)	985		(692	)
Noncontrolling interests	—			—		2,500		—		2,500
Total Liabilities and Equity	$	32,732		48,696		25,088		(52,214	)	54,302

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2019
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	$	3,541		2,923		2,298		(3,954	)	4,808
Cash Flows From Investing Activities
Capital expenditures and investments*	—			(1,493	)	(2,640	)	260		(3,873	)
Proceeds from asset dispositions**	—			354		153		(350	)	157
Intercompany lending activities	(297		)	567		(270	)	—		—
Advances/loans—related parties	—			—		(98	)	—		(98	)
Collection of advances/loans—related parties	—			—		95		—		95
Other	—			(8	)	39		—		31
Net Cash Used in Investing Activities	(297		)	(580	)	(2,721	)	(90	)	(3,688	)
Cash Flows From Financing Activities
Issuance of debt	—			—		1,783		—		1,783
Repayment of debt	—			(15	)	(1,292	)	—		(1,307	)
Issuance of common stock	32			—		—		—		32
Repurchase of common stock	(1,650		)	—		—		—		(1,650	)
Dividends paid on common stock	(1,570		)	(3,836	)	(118	)	3,954		(1,570	)
Distributions to noncontrolling interests	—			—		(241	)	—		(241	)
Net proceeds from issuance of Phillips 66 Partners LP common units	—			—		173		—		173
Other*	(56		)	(4	)	239		90		269
Net Cash Provided by (Used in) Financing Activities	(3,244		)	(3,855	)	544		4,044		(2,511	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	—			—		(14	)	—		(14	)
Net Change in Cash and Cash Equivalents	—			(1,512	)	107		—		(1,405	)
Cash and cash equivalents at beginning of period	—			1,648		1,371		—		3,019
Cash and Cash Equivalents at End of Period	$	—		136		1,478		—		1,614
** Includes intercompany capital contributions.*
*** Includes return of investments in equity affiliates.*

Index to Financial Statements

	Millions of Dollars
	Year Ended December 31, 2018
Statement of Cash Flows	Phillips 66			Phillips 66 Company		All Other Subsidiaries		Consolidating Adjustments		Total Consolidated
Cash Flows From Operating Activities
Net Cash Provided by Operating Activities	$	2,955		6,962		2,642		(4,986	)	7,573
Cash Flows From Investing Activities
Capital expenditures and investments	—			(998	)	(1,641	)	—		(2,639	)
Proceeds from asset dispositions*	—			462		50		(455	)	57
Intercompany lending activities	2,214			(3,031	)	817		—		—
Advances/loans—related parties	—			—		(1	)	—		(1	)
Other	—			27		85		—		112
Net Cash Provided by (Used in) Investing Activities	2,214			(3,540	)	(690	)	(455	)	(2,471	)
Cash Flows From Financing Activities
Issuance of debt	1,509			—		675		—		2,184
Repayment of debt	(550		)	(11	)	(583	)	—		(1,144	)
Issuance of common stock	39			—		—		—		39
Repurchase of common stock	(4,645		)	—		—		—		(4,645	)
Dividends paid on common stock	(1,436		)	(3,174	)	(1,812	)	4,986		(1,436	)
Distributions to noncontrolling interests	—			—		(207	)	—		(207	)
Net proceeds from issuance of Phillips 66 Partners LP common units	—			—		128		—		128
Other	(86		)	—		(455	)	455		(86	)
Net Cash Used in Financing Activities	(5,169		)	(3,185	)	(2,254	)	5,441		(5,167	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	—			—		(35	)	—		(35	)
Net Change in Cash and Cash Equivalents	—			237		(337	)	—		(100	)
Cash and cash equivalents at beginning of period	—			1,411		1,708		—		3,119
Cash and Cash Equivalents at End of Period	$	—		1,648		1,371		—		3,019
** Includes return of investments in equity affiliates.*

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 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

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
2019
First	$	23,103		340		270		204			0.44		0.44
Second	27,847			1,829		1,504		1,424			3.13		3.12
Third	27,218			943		793		712			1.58		1.58
Fourth	29,125			1,066		810		736			1.65		1.64
2018
First	$	23,595		717		585		524			1.07		1.07
Second	28,980			1,835		1,404		1,339			2.86		2.84
Third	29,788			1,975		1,568		1,492			3.20		3.18
Fourth	29,098			2,918		2,316		2,240			4.85		4.82

Index to Financial Statements