FORM 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

    

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended   September 30, 2012                                                     

or

 

[    ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

    

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                                                               to                                                                                         

 

Commission file number:   001-35349                                                      

Phillips 66

(Exact name of registrant as specified in its charter)

 

Delaware   45-3779385

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3010 Briarpark Drive, Houston, Texas 77042

(Address of principal executive offices) (Zip Code)

281-293-6600

(Registrant’s telephone number, including area code)

600 North Dairy Ashford, Houston, Texas 77079

(Former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [X]    No  [    ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [X]    No  [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   [X]        Accelerated filer   [    ]        Non-accelerated filer   [    ]        Smaller reporting company  [    ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  [    ]    No  [X]

The registrant had 625,806,484 shares of common stock, $.01 par value, outstanding as of September 30, 2012.


Table of Contents

PHILLIPS 66

TABLE OF CONTENTS

 

     Page  

Part I – Financial Information

  

Item 1. Financial Statements

  

Consolidated Statement of Income

     1   

Consolidated Statement of Comprehensive Income

     2   

Consolidated Balance Sheet

     3   

Consolidated Statement of Cash Flows

     4   

Consolidated Statement of Changes in Equity

     5   

Notes to Consolidated Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and
    Results of Operations

     30   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     46   

Item 4. Controls and Procedures

     46   

Part II – Other Information

  

Item 1. Legal Proceedings

     46   

Item 1A. Risk Factors

     47   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     47   

Item 5. Other Information

     48   

Item 6. Exhibits

     49   

Signature

     50   


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

              

 

Consolidated Statement of Income    Phillips 66

 

                                                           
     Millions of Dollars  
     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2012     2011     2012     2011  
  

 

 

   

 

 

 

Revenues and Other Income

        

Sales and other operating revenues*

   $ 42,945        50,610        135,475        147,983   

Equity in earnings of affiliates

     959        856        2,508        2,330   

Net gain (loss) on dispositions

     (1     (221     189        (175

Other income

     4        18        82        28   

 

 

Total Revenues and Other Income

     43,907        51,263        138,254        150,166   

 

 

Costs and Expenses

        

Purchased crude oil and products

     36,189        43,905        116,915        129,853   

Operating expenses

     884        1,027        2,960        3,087   

Selling, general and administrative expenses

     432        372        1,261        1,042   

Depreciation and amortization

     229        222        669        667   

Impairments

     248        486        566        488   

Taxes other than income taxes*

     3,410        3,674        10,305        10,785   

Accretion on discounted liabilities

     7        5        18        16   

Interest and debt expense

     74        4        170        11   

Foreign currency transaction (gains) losses

     (15     18        (22     (56

 

 

Total Costs and Expenses

     41,458        49,713        132,842        145,893   

 

 

Income before income taxes

     2,449        1,550        5,412        4,273   

Provision for income taxes

     848        499        1,991        1,505   

 

 

Net income

     1,601        1,051        3,421        2,768   

Less: net income attributable to noncontrolling interests

     2        2        5        4   

 

 

Net Income Attributable to Phillips 66

   $ 1,599        1,049        3,416        2,764   

 

 

Net Income Attributable to Phillips 66 Per Share of Common Stock (dollars)**

        

Basic

   $ 2.53        1.67        5.43        4.40   

Diluted

     2.51        1.65        5.37        4.36   

 

 

Dividends Paid Per Share of Common Stock (dollars)

   $ 0.20               0.20          

 

 

Average Common Shares Outstanding (in thousands)**

        

Basic

     630,672        627,628        628,940        627,628   

Diluted

     637,913        634,645        636,585        634,645   

 

 
  * Includes excise taxes on petroleum products sales:    $ 3,312        3,596        10,022        10,533   

** See Note 10–Earnings Per Share.

See Notes to Consolidated Financial Statements.

 

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Table of Contents
              

 

 
Consolidated Statement of Comprehensive Income      Phillips 66   

 

                                                           
     Millions of Dollars  
    

Three Months Ended

September 30

   

Nine Months Ended

September 30

 
  

 

 

   

 

 

 
     2012     2011     2012     2011  
  

 

 

   

 

 

 

Net Income

   $ 1,601        1,051        3,421        2,768   

 

 

Other comprehensive income (loss)

        

Defined benefit plans

        

Prior service cost:

        

Amortization to net income of prior service cost

                   1          

Actuarial gain/loss:

        

Amortization to net income of net actuarial loss

     22               37        2   

Actuarial gain arising during the period

                   90          

Plans sponsored by equity affiliates

     6        6        14        16   

Income taxes on defined benefit plans

     (10     (2     (52     (7

 

 

Defined benefit plans, net of tax

     18        4        90        11   

 

 

Foreign currency translation adjustments

     210        (15     151        2   

Income taxes on foreign currency translation adjustments

            (21     48        (81

 

 

Foreign currency translation adjustments, net of tax

     210        (36     199        (79

 

 

Hedging activities

     1               1        2   

Income taxes on hedging activities

                          (1

 

 

Hedging activities, net of tax

     1               1        1   

 

 

Other Comprehensive Income (Loss), Net of Tax

     229        (32     290        (67

 

 

Comprehensive Income

     1,830        1,019        3,711        2,701   

Less: comprehensive income attributable to noncontrolling interests

     2        2        5        4   

 

 

Comprehensive Income Attributable to Phillips 66

   $ 1,828        1,017        3,706        2,697   

 

 

See Notes to Consolidated Financial Statements.

 

2


Table of Contents
              

 

 
Consolidated Balance Sheet      Phillips 66   

 

                             
     Millions of Dollars  
     September 30
2012
    December 31
2011
 
  

 

 

 

Assets

    

Cash and cash equivalents

   $ 4,430          

Accounts and notes receivable (net of allowance of $52 million in 2012 and $13 million in 2011)

     9,136        8,354   

Accounts and notes receivable—related parties

     1,657        1,671   

Inventories

     5,743        3,466   

Prepaid expenses and other current assets

     907        457   

 

 

Total Current Assets

     21,873        13,948   

Investments and long-term receivables

     10,800        10,306   

Net properties, plants and equipment

     15,311        14,771   

Goodwill

     3,344        3,332   

Intangibles

     726        732   

Other assets

     176        122   

 

 

Total Assets

   $ 52,230        43,211   

 

 

Liabilities

    

Accounts payable

   $ 12,267        10,007   

Accounts payable—related parties

     1,185        785   

Short-term debt

     585        30   

Accrued income and other taxes

     1,392        1,087   

Employee benefit obligations

     350        64   

Other accruals

     607        411   

 

 

Total Current Liabilities

     16,386        12,384   

Long-term debt

     7,393        361   

Asset retirement obligations and accrued environmental costs

     766        787   

Deferred income taxes

     5,436        5,803   

Employee benefit obligations

     1,081        117   

Other liabilities and deferred credits

     562        466   

 

 

Total Liabilities

     31,624        19,918   

 

 

Equity

    

Common stock (2,500,000,000 shares authorized at $.01 par value)

    

Issued (2012—628,400,884 shares)

    

Par value

     6          

Capital in excess of par

     18,643          

Treasury stock (at cost: 2012—2,594,400 shares)

     (111       

Retained earnings

     2,164          

Net parent company investment

            23,142   

Accumulated other comprehensive income (loss)

     (129     122   

 

 

Total Stockholders’ Equity

     20,573        23,264   

Noncontrolling interests

     33        29   

 

 

Total Equity

     20,606        23,293   

 

 

Total Liabilities and Equity

   $ 52,230        43,211   

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents
              

 

Consolidated Statement of Cash Flows    Phillips 66

 

                             
     Millions of Dollars  
     Nine Months Ended
September 30
 
     2012     2011  
  

 

 

 

Cash Flows From Operating Activities

    

Net income

   $ 3,421        2,768   

Adjustments to reconcile net income to net cash provided by operating activities

    

Depreciation and amortization

     669        667   

Impairments

     566        488   

Accretion on discounted liabilities

     18        16   

Deferred taxes

     111        573   

Undistributed equity earnings

     (928     (1,100

Net loss (gain) on dispositions

     (189     175   

Other

     81        17   

Working capital adjustments

    

Decrease (increase) in accounts and notes receivable

     (677     (897

Decrease (increase) in inventories

     (2,253     (2,042

Decrease (increase) in prepaid expenses and other current assets

     (266     (332

Increase (decrease) in accounts payable

     1,912        1,863   

Increase (decrease) in taxes and other accruals

     526        79   

 

 

Net Cash Provided by Operating Activities

     2,991        2,275   

 

 

Cash Flows From Investing Activities

    

Capital expenditures and investments

     (827     (653

Proceeds from asset dispositions

     259        204   

Advances/loans—related parties

     (100       

Collection of advances/loans—related parties

            550   

Other

            56   

 

 

Net Cash Provided by (Used in) Investing Activities

     (668     157   

 

 

Cash Flows From Financing Activities

    

Distributions to ConocoPhillips

     (5,255     (2,411

Issuance of debt

     7,794          

Repayment of debt

     (206     (20

Issuance of common stock

     23          

Repurchase of common stock

     (111       

Dividends paid on common stock

     (125       

Other

     (40     (1

 

 

Net Cash Provided by (Used in) Financing Activities

     2,080        (2,432

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     27          

 

 

Net Change in Cash and Cash Equivalents

     4,430          

Cash and cash equivalents at beginning of period

              

 

 

Cash and Cash Equivalents at End of Period

   $ 4,430          

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents
                             

 

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
    Net Parent
Company
Investment
    Accum. Other
Comprehensive
Income (Loss)
   

Non-

controlling
Interests

    Total  
  

 

 

 

December 31, 2010

   $                              25,787        214        25        26,026   

Net income

                                  2,764               4        2,768   

Net transfers to ConocoPhillips

                                  (2,354                   (2,354

Other comprehensive loss

                                         (67            (67

Distributions to noncontrolling interests and other

                                                (1     (1

 

 

September 30, 2011

   $                              26,197        147        28        26,372   

 

 

December 31, 2011

   $                              23,142        122        29        23,293   

Net income

                           2,291        1,125               5        3,421   

Net transfers to/from ConocoPhillips

                                  (5,707     (541            (6,248

Other comprehensive income

                                         290               290   

Reclassification of net parent company investment to capital in excess of par

             18,560                      (18,560                     

Issuance of common stock at the separation

     6         (6                                          

Cash dividends paid on common stock

                           (125                          (125

Repurchase of common stock

                    (111                                 (111

Benefit plan activity

             89               (2                          87   

Distributions to noncontrolling interests and other

                                                (1     (1

 

 

September 30, 2012

   $ 6         18,643        (111     2,164               (129     33        20,606   

 

 

 

                             
     Shares in Thousands  
    

Common

Stock
Issued

    

Treasury

Stock

 
  

 

 

 

December 31, 2011

               

Issuance of common stock at the separation

     625,272           

Repurchase of common stock

             2,594   

Shares issued—stock-based compensation

     3,129           

 

 

September 30, 2012

     628,401         2,594   

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

 

Notes to Consolidated Financial Statements    Phillips 66

Note 1—Separation and Basis of Presentation

The Separation

On April 4, 2012, the ConocoPhillips Board of Directors approved the separation of its downstream businesses into an independent, publicly traded company named Phillips 66. In accordance with a separation and distribution agreement, the two companies were separated by ConocoPhillips distributing to its stockholders all 625,272,302 shares of common stock of Phillips 66 after the market closed on April 30, 2012. Each ConocoPhillips shareholder received one share of Phillips 66 stock for every two shares of ConocoPhillips stock held at the close of business on the record date of April 16, 2012. Fractional shares of Phillips 66 common stock were not distributed and any fractional shares of Phillips 66 common stock otherwise issuable to a ConocoPhillips shareholder were sold in the open market on such shareholder’s behalf, and such shareholder received a cash payment with respect to that fractional share. In conjunction with the separation, ConocoPhillips received a private letter ruling from the Internal Revenue Service to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the ruling, for U.S. federal income tax purposes, the distribution of Phillips 66 stock was not taxable to ConocoPhillips or U.S. holders of ConocoPhillips common stock, except in respect to cash received in lieu of fractional share interests. Following the separation, ConocoPhillips retained no ownership interest in Phillips 66, and each company now has separate public ownership, boards of directors and management. A registration statement on Form 10, as amended through the time of its effectiveness, describing the separation was filed by Phillips 66 with the U.S. Securities and Exchange Commission (SEC) and was declared effective on April 12, 2012 (the Form 10).

On May 1, 2012, Phillips 66 stock began trading the “regular-way” on the New York Stock Exchange under the “PSX” stock symbol. Pursuant to the separation and distribution agreement with ConocoPhillips, on April 30, 2012, we made a special cash distribution to ConocoPhillips of $5.95 billion. After subsequent working capital and inventory determinations, an additional cash distribution of $1.87 billion was made to ConocoPhillips in June 2012. After consideration of the cash retained by Phillips 66 at separation, as well as cash flow impacts of the four months ended April 30, 2012, the net distribution to ConocoPhillips was $5.3 billion.

Basis of Presentation

Prior to the separation on April 30, 2012, our results of operations, financial position and cash flows consisted of ConocoPhillips’ refining, marketing and transportation operations; its natural gas gathering, processing, transmission and marketing operations, primarily conducted through its equity investment in DCP Midstream, LLC (DCP Midstream); its petrochemical operations, conducted through its equity investment in Chevron Phillips Chemical Company LLC (CPChem); its power generation operations; and an allocable portion of its corporate costs (together, the “downstream businesses”). These financial statements have been presented as if the downstream businesses had been combined for all periods presented. All intercompany transactions and accounts within the downstream businesses were eliminated. The assets and liabilities have been reflected on a historical cost basis, as all of the assets and liabilities presented were wholly owned by ConocoPhillips and were transferred within the ConocoPhillips consolidated group. The statement of income for periods prior to the separation includes expense allocations for certain corporate functions historically performed by ConocoPhillips and not allocated to its operating segments, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, procurement and information technology. These allocations were based primarily on specific identification of time and/or activities associated with the downstream businesses, employee headcount or capital expenditures, and our management believes the assumptions underlying the allocations were reasonable. The combined financial statements may not necessarily reflect all of the actual expenses that would have been incurred had we been a stand-alone company during the periods presented prior to the separation.

 

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Table of Contents

All financial information presented after the separation represents the consolidated results of operations, financial position and cash flows of Phillips 66. Accordingly:

 

   

Our consolidated statements of income and comprehensive income for the three months ended September 30, 2012, consist entirely of the consolidated results of Phillips 66. Our consolidated statements of income and comprehensive income for the nine months ended September 30, 2012, consist of the consolidated results of Phillips 66 for the five months ended September 30, 2012, and of the combined results of the downstream businesses for the four months ended April 30, 2012. Our consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2011, consist entirely of the combined results of the downstream businesses.

 

   

Our consolidated balance sheet at September 30, 2012, consists of the consolidated balances of Phillips 66, while at December 31, 2011, it consists of the combined balances of the downstream businesses.

 

   

Our consolidated statement of cash flows for the nine months ended September 30, 2012, consists of the consolidated results of Phillips 66 for the five months ended September 30, 2012, and the combined results of the downstream businesses for the four months ended April 30, 2012. Our consolidated statement of cash flows for the nine months ended September 30, 2011, consists entirely of the combined results of the downstream businesses.

 

   

Our consolidated statement of changes in equity for the nine months ended September 30, 2012, consists of both the combined activity for the downstream businesses prior to April 30, 2012, and the consolidated activity for Phillips 66 completed at and subsequent to the separation on April 30, 2012. Our consolidated statement of changes in equity for the nine months ended September 30, 2011, consists entirely of the combined activity of the downstream businesses.

Note 2—Interim Financial Information

The interim-period financial information presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments necessary, in the opinion of management, for a fair presentation of the consolidated financial position of Phillips 66 and its results of operations and cash flows for the periods presented. Unless otherwise specified, all such adjustments are of a normal and recurring nature. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these interim financial statements should be read in conjunction with the audited combined financial statements and notes thereto for the year ended December 31, 2011, included in our Form 10, as well as in conjunction with the interim financial information in our reports on Form 10-Q for the quarterly periods ended March 31, 2012, and June 30, 2012. The results of operations for the three and nine months ended September 30, 2012, are not necessarily indicative of the results to be expected for the full year.

Note 3—Variable Interest Entities (VIEs)

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

Merey Sweeny, L.P. (MSLP) is a limited partnership that owns a delayed coker and related facilities at the Sweeny Refinery. As discussed more fully in Note 6—Investments, Loans and Long-Term Receivables, in August 2009 we exercised our call right to acquire the 50 percent ownership interest in MSLP of our co-venturer, Petróleos de Venezuela S.A. (PDVSA). That exercise has been challenged, and the dispute is being arbitrated. Because our exercise has been challenged by PDVSA, we continue to use the equity method of accounting for MSLP, and the VIE analysis below is based on the ownership and governance structure in place prior to the exercise of our call right. MSLP is a VIE because, in securing lender consents in connection with the separation, we provided a 100 percent debt guarantee to the lender of the 8.85% senior notes issued by

 

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Table of Contents

MSLP. PDVSA did not participate in the debt guarantee. In our VIE assessment, this disproportionate debt guarantee, plus other liquidity support provided jointly by us and PDVSA independently of equity ownership, results in MSLP not being exposed to all potential losses. We have determined we are not the primary beneficiary while our call exercise is in dispute because under the partnership agreement the co-venturers jointly direct the activities of MSLP that most significantly impact economic performance. At September 30, 2012, our maximum exposure represented the outstanding principal debt balance of $242 million. Our book value in MSLP at September 30, 2012, was $92 million.

We have a 50 percent ownership interest with a 50 percent governance interest in Excel Paralubes, L.P. (Excel). Excel is a VIE because, in securing lender consents in connection with the separation, ConocoPhillips provided a 50 percent debt guarantee to the lender of the 7.43% senior secured bonds issued by Excel. We provided a full indemnity to ConocoPhillips for this debt guarantee. Our co-venturer did not participate in the debt guarantee. In our assessment of the VIE, this debt guarantee, plus other liquidity support up to $60 million provided jointly by us and our co-venturer independently of equity ownership, results in Excel not being exposed to all potential losses. We have determined we are not the primary beneficiary because we and our co-venturer jointly direct the activities of Excel that most significantly impact economic performance. We continue to use equity method accounting for this investment. At September 30, 2012, our maximum exposure represented 50 percent of the outstanding principal debt balance of $187 million, or $94 million, plus half of the $60 million liquidity support, or $30 million. Our book value in Excel at September 30, 2012, was $159 million.

Note 4—Inventories

Inventories consisted of the following:

 

                             
     Millions of Dollars  
    

September 30

2012

    

December 31

2011

 
  

 

 

 

Crude oil and petroleum products

   $ 5,454         3,193   

Materials and supplies

     289         273   

 

 
   $ 5,743         3,466   

 

 

Inventories valued on the last-in, first-out (LIFO) basis totaled $5,303 million and $3,046 million at September 30, 2012, and December 31, 2011, respectively. The estimated excess of current replacement cost over LIFO cost of inventories amounted to approximately $7,900 million and $8,600 million at September 30, 2012, and December 31, 2011, respectively. Planned year-to-date inventory LIFO liquidations increased net income in the nine-month period ended September 30, 2012, by $86 million, all of which was attributable to the Refining and Marketing (R&M) segment.

Note 5—Assets Held for Sale or Sold

On June 22, 2012, we sold our refinery located on the Delaware River in Trainer, Pennsylvania, for $229 million. The refinery and associated terminal and pipeline assets were included in our R&M segment and at the time of the disposition had a net carrying value of $38 million, which included $37 million of properties, plants and equipment (PP&E), $25 million of allocated goodwill and a $53 million asset retirement obligation. The $189 million before-tax gain on this disposition was included in the “Net gain (loss) on dispositions” line in the consolidated income statement.

In the first quarter of 2012, equipment formerly associated with the cancelled Wilhelmshaven Refinery upgrade project was classified as held for sale. At September 30, 2012, the equipment had a net carrying value of $30 million, primarily PP&E. See Note 8—Impairments, for additional information.

 

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Note 6—Investments, Loans and Long-Term Receivables

Equity Investments

Summarized 100 percent financial information for WRB Refining LP (WRB) was as follows:

 

                                                           
     Millions of Dollars  
     Three Months Ended
September  30
     Nine Months Ended
September  30
 
     2012      2011      2012      2011  
  

 

 

    

 

 

 

Revenues

   $ 4,996         4,615         14,904         13,109   

Income before income taxes

     980         640         2,287         1,481   

Net income

     976         638         2,279         1,476   

 

 

Loans and Long-Term Receivables

In July 2012, we entered into a market-based shareholder financing agreement for up to $100 million with the Malaysian Refining Company Sdn. Bhd. (MRC). During the third quarter of 2012, MRC drew down $100 million against the facility. The advance was recorded as a short-term related party advance with interest income recorded in equity earnings to offset the corresponding interest expense by MRC.

Other

MSLP is a limited partnership that owns a delayed coker and related facilities at the Sweeny Refinery. Prior to August 28, 2009, MSLP was owned 50/50 by ConocoPhillips and PDVSA. Under the agreements that govern the relationships between the partners, certain defaults by PDVSA with respect to supply of crude oil to the Sweeny Refinery gave ConocoPhillips the right to acquire PDVSA’s 50 percent ownership interest in MSLP, which was exercised on August 28, 2009. PDVSA has initiated arbitration with the International Chamber of Commerce challenging the exercise of the call right and claiming it was invalid. The arbitral tribunal is scheduled to hold hearings on the merits of the dispute in December 2012. We continue to use the equity method of accounting for our investment in MSLP.

Note 7—Properties, Plants and Equipment

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

 

                                                                                         
     Millions of Dollars  
     September 30, 2012      December 31, 2011*  
    

Gross

PP&E

    

Accum.

D&A

    

Net

PP&E

    

Gross

PP&E

    

Accum.

D&A

    

Net

PP&E

 
  

 

 

    

 

 

 

R&M

                 

Refining

   $ 18,751         5,988         12,763         19,333         6,630         12,703   

Transportation

     2,458         1,015         1,443         2,359         931         1,428   

Marketing and other

     1,418         813         605         1,386         766         620   

 

 

Total R&M

     22,627         7,816         14,811         23,078         8,327         14,751   

 

 

Midstream

     63         49         14         64         51         13   

Chemicals

     —           —           —           —           —           —     

Corporate and Other

     877         391         486         14         7         7   

 

 
   $ 23,567         8,256         15,311         23,156         8,385         14,771   

 

 

* Certain PP&E within the R&M segment have been reclassified between “Refining” and “Marketing and other.”

 

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Note 8—Impairments

The three- and nine-month periods ended September 30, 2012 and 2011, included the following before-tax impairment charges:

 

                                                           
     Millions of Dollars  
     Three Months Ended
September  30
     Nine Months Ended
September  30
 
     2012      2011      2012      2011  
  

 

 

    

 

 

 

R&M

           

United States

   $ 43         486         44         487   

International

     —           —           42         1   

 

 
     43         486         86         488   

 

 

Midstream

     205         —           480         —     

 

 
   $ 248         486         566         488   

 

 

We have a 25 percent interest in Rockies Express Pipeline LLC (REX), which is included in our Midstream segment. During the second quarter of 2012, our co-venturer recognized a fair value adjustment of a disposal group that included its investment in REX, based on information gathered from its marketing process. After identifying this impairment indicator, we performed our own assessment of the carrying amount of our investment in REX, considering expected future cash flows and the discount rate. Based on this updated information, our internal assessment concluded our investment in REX was impaired, and the decline in fair value was other than temporary. Accordingly, our investment was written down to its fair value, and we recognized a $275 million impairment in the second quarter of 2012. During the third quarter, we were notified of a “right of first refusal” purchase price from the co-venturer as part of its disposal process that indicated a fair value substantially lower than our second-quarter estimate. After considering this additional impairment indicator, we updated our internal assessment of REX’s carrying amount. As a result, we recorded an impairment of $205 million in the third quarter of 2012.

During the third quarter of 2012, we recorded an impairment of $43 million on the Riverhead Terminal in our R&M segment. In addition, the nine-month period of 2012 included a held-for-sale impairment of $42 million in our R&M segment related to equipment formerly associated with the cancelled Wilhelmshaven Refinery upgrade project. See Note 5—Assets Held for Sale or Sold, for additional information.

During the third quarter and nine-month period of 2011, we recorded a $484 million impairment of Trainer Refinery and associated terminal and pipeline assets, due to the idling of the facility.

Note 9—Debt

During March 2012, we issued, through a private placement, $5.8 billion of Senior Notes. The notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary. In connection with the private placement, we and Phillips 66 Company granted the holders of the notes certain registration rights under a Registration Rights Agreement. We have agreed for the benefit of the holders of the notes to use our commercially reasonable efforts to file and cause to be effective a registration statement with the SEC on an appropriate form with respect to a registered offer to exchange each series of notes for new notes that are guaranteed by Phillips 66 Company with terms substantially identical in all material respects to such series of notes. Generally, we have one year from the issuance of the Senior Notes to complete the exchange offer.

 

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In the second quarter of 2012, we retired approximately $185 million of previously existing debt and closed the financing of $2.0 billion of new debt as a three-year amortizing term loan. The term loan incurs interest at a variable rate based on referenced rates plus a margin dependent upon the credit rating of our senior unsecured long-term debt as determined from time to time by Standard & Poor’s Ratings Services (S&P) and Moody’s Investors Service (Moody’s).

Credit Facilities

In February 2012, we entered into a five-year revolving credit agreement with a syndicate of financial institutions. Under the terms of the revolving credit agreement, we have a borrowing capacity of up to $4.0 billion. No amount has been drawn under this facility. However, as of September 30, 2012, $51 million in letters of credit had been issued that were supported by this facility.

The revolving credit agreement contains covenants that we consider usual and customary for an agreement of this type for comparable commercial borrowers, including a maximum consolidated net debt-to-capitalization ratio of 60 percent. The agreement has customary events of default, such as nonpayment of principal when due; nonpayment of interest, fees or other amounts; violation of covenants; cross-payment default and cross-acceleration (in each case, to indebtedness in excess of a threshold amount); and a change of control.

Borrowings under the credit agreement will incur interest at London Interbank Offered Rate (LIBOR) plus a margin based on the credit rating of our senior unsecured long-term debt as determined from time to time by S&P and Moody’s. The revolving credit agreement also provides for customary fees, including administrative agent fees and commitment fees.

Trade Receivables Securitization Facility

In the second quarter of 2012, we established a wholly owned subsidiary to hold trade receivables that will be used as collateral for the subsidiary’s new borrowing facility with an aggregate capacity of $1.2 billion, which has a term of three years. As of September 30, 2012, no cash had been borrowed under the facility, but we had obtained $166 million in letters of credit under the facility that were collateralized by $166 million of the trade receivables held by the subsidiary.

Note 10—Earnings Per Share

Basic earnings per share (EPS) is based on net income attributable to Phillips 66, reduced by dividends paid on unvested share-based employee awards that receive non-cancellable dividends during the vesting period, divided by 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. Diluted EPS is also based on net income attributable to Phillips 66, which is reduced only by dividend equivalents paid on unvested share-based awards for which the dividends are more dilutive than the participation of the awards in the earnings of the periods presented; otherwise, net income attributable to Phillips 66 is not reduced by the dividends. 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.

On April 30, 2012, 625,272,302 shares of our common stock were distributed to ConocoPhillips stockholders in conjunction with the separation. For comparative purposes, and to provide a more meaningful calculation of weighted-average shares outstanding, we have assumed this amount to be outstanding as of the beginning of each period prior to the separation presented in the calculation of weighted-average shares. In addition, we have assumed the dilutive securities outstanding at April 30, 2012, were also outstanding for each of the periods presented prior to the separation.

 

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Table of Contents
                                                           
     Three Months
Ended September 30
     Nine Months
Ended September 30
 
     2012     2011      2012     2011  
  

 

 

    

 

 

 

Basic EPS Calculation

         

Allocation of earnings:

         

Net income attributable to Phillips 66 (millions)

   $ 1,599        1,049         3,416        2,764   

Income allocated to participating securities (millions)

     (1 )     —           (1 )     —     

 

 

Income available to common stockholders (millions)

   $ 1,598        1,049         3,415        2,764   

 

 

Weighted-average common shares outstanding—basic (thousands)

     630,672        627,628         628,940        627,628   

 

 

Earnings per share—basic

   $ 2.53        1.67         5.43        4.40   

 

 

Diluted EPS Calculation

         

Allocation of earnings:

         

Net income attributable to Phillips 66 (millions)

   $ 1,599        1,049         3,416        2,764   

Income allocated to participating securities (millions)

     —          —           —          —     

 

 

Income available to common stockholders (millions)

   $ 1,599        1,049         3,416        2,764   

 

 

Weighted-average common shares outstanding—basic (thousands)

     630,672        627,628         628,940        627,628   

Dilutive effect of stock-based compensation (thousands)

     7,241        7,017         7,645        7,017   

 

 

Weighted-average common shares outstanding—diluted (thousands)

     637,913        634,645         636,585        634,645   

 

 

Earnings per share—diluted

   $ 2.51        1.65         5.37        4.36   

 

 

Note 11—Guarantees

At September 30, 2012, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence.

Guarantees of Joint Venture Debt

In April 2012, in connection with the separation, we issued a guarantee for 100 percent of the 8.85% senior notes issued by MSLP in July 1999. At September 30, 2012, the maximum potential amount of future payments to third parties under the guarantee is estimated to be $242 million, which could become payable if MSLP fails to meet its obligations under the senior note agreement.

 

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At September 30, 2012, we had other guarantees outstanding for our portion of certain joint venture debt obligations, which have remaining terms of up to 14 years. The maximum potential amount of future payments under these other guarantees is approximately $115 million. Payment would be required if a joint venture defaults on its debt obligations.

Other Guarantees

We have other guarantees with maximum future potential payment amounts totaling $167 million, which consist primarily of guarantees to fund the short-term cash liquidity deficits of certain joint ventures and guarantees of the lease payment obligations of a joint venture. These guarantees generally have remaining terms of up to 13 years or life of the venture.

Indemnifications

Over the years, we have entered into various agreements to sell ownership interests in certain corporations, joint ventures and assets that gave rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, environmental liabilities, permits and licenses, employee claims, real estate indemnity against tenant defaults, and litigation. The terms of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, relative to which the term is generally indefinite and the maximum amount of future payments is generally unlimited. The carrying amount recorded for indemnifications at September 30, 2012, was $356 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the recorded carrying amount were $143 million of environmental accruals for known contamination that are included in asset retirement obligations and accrued environmental costs at September 30, 2012. For additional information about environmental liabilities, see Note 12—Contingencies and Commitments.

Indemnification and Release Agreement

In conjunction with, and effective as of, the separation, we entered into an Indemnification and Release Agreement with ConocoPhillips. This agreement governs the treatment between ConocoPhillips and us of all aspects 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 12—Contingencies and Commitments

A number of lawsuits involving a variety of claims have been made against Phillips 66 that arose in the ordinary course of business. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for accounting recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we record receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position

 

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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 responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

Environmental

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

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

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. At September 30, 2012, our consolidated balance sheet included a total environmental accrual of $533 million, compared with $542 million at December 31, 2011. We expect to incur a substantial amount of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

Legal Proceedings

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

 

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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 September 30, 2012, we had performance obligations secured by letters of credit of $1,482 million (of which $166 million were issued under the trade receivables securitization facility, $51 million were issued under the provisions of our revolving credit facility, and the remainder were issued as direct bank letters of credit) related to various purchase and other commitments incident to the ordinary conduct of business.

Note 13—Derivatives and Financial Instruments

Derivative Instruments

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

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

Our derivative instruments are held at fair value on our consolidated balance sheet. For further information on the fair value of derivatives, see Note 14—Fair Value Measurements.

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

 

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The following table indicates the balance sheet line items that include the fair values of commodity derivative assets and liabilities presented net (i.e., commodity derivative assets and liabilities with the same counterparty are netted where the right of setoff exists); however, the balances in the following table are presented gross:

 

                             
     Millions of Dollars  
    

September 30

2012

     December 31
2011
 
  

 

 

 

Assets

     

Prepaid expenses and other current assets

   $ 1,691         665   

Other assets

     20         5   

Liabilities

     

Other accruals

     1,696         703   

Other liabilities and deferred credits

     33         1   

 

 

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

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

 

                                                           
     Millions of Dollars  
     Three Months Ended
September  30
     Nine Months Ended
September  30
 
     2012     2011      2012     2011  
  

 

 

    

 

 

 

Sales and other operating revenue

   $ (232     162         (48     (484

Equity in earnings of affiliates

     5                5          

Other income

     (9     7         44        (6

Purchased crude oil and products

     (86     178         7        339   

 

 

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

The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts. These financial and physical derivative contracts are primarily used to manage price exposure on our underlying operations. The underlying exposures may be from non-derivative positions such as inventory volumes. Financial derivative contracts may also offset physical derivative contracts, such as forward sales contracts. As of September 30, 2012, and December 31, 2011, the percentage of our derivative contract volume expiring within the next 12 months was 99 percent for both periods.

 

                             
     Open Position
Long/(Short)
 
    

September 30

2012

   

December 31

2011

 
  

 

 

 

Commodity

    

Crude oil, refined products and natural gas liquids (millions of barrels)

     (27     (13

 

 

Credit Risk

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

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

 

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

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

The aggregate fair values of all derivative instruments with such credit-risk-related contingent features that were in a liability position were not material at September 30, 2012, or at December 31, 2011.

Note 14—Fair Value Measurements

We carry a portion of our assets and liabilities at fair value that are measured at the reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability) and disclosed according to the quality of valuation inputs under the following hierarchy:

 

   

Level 1: Quoted prices (unadjusted) in an active market for identical assets or liabilities.

 

   

Level 2: Inputs other than quoted prices that are directly or indirectly observable.

 

   

Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities.

The classification of an asset or liability is based on the lowest level of input significant to its fair value. Those that are initially classified as Level 3 are subsequently reported as Level 2 when the fair value derived from unobservable inputs is inconsequential to the overall fair value, or if corroborated market data becomes available. Assets and liabilities that are initially reported as Level 2 are subsequently reported as Level 3 if corroborated market data is no longer available. There were no material transfers in or out of Level 1.

Recurring Fair Value Measurements

Financial assets and liabilities reported at fair value on a recurring basis primarily include derivative instruments and certain investments to support nonqualified deferred compensation plans. The deferred compensation investments are measured at fair value using unadjusted prices available from national securities exchanges; therefore, these assets are categorized as Level 1 in the fair value hierarchy. We value our exchange-traded derivatives using closing prices provided by the exchange as of the balance sheet date, and these are classified as Level 1 in the fair value hierarchy. Where exchange-provided prices are adjusted, non-exchange quotes are used or when the instrument lacks sufficient liquidity, we generally classify those exchange-cleared contracts as Level 2. OTC financial swaps and physical commodity forward purchase and sales contracts are generally valued using quotations provided by brokers and price index developers such as Platts and Oil Price Information Service. These quotes are corroborated with market data and are classified as Level 2. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, OTC swaps and physical commodity purchase and sales contracts are valued using internally developed methodologies that consider historical relationships among various commodities that result in management’s best estimate of fair value. These contracts are classified as Level 3. Financial OTC and physical commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are

 

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observable in the forward markets determines whether the options are classified as Level 2 or 3. We use a mid-market pricing convention (the mid-point between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.

The fair value hierarchy for our derivative assets and liabilities accounted for at fair value on a recurring basis was:

 

                                                                                                                       
     Millions of Dollars  
     September 30, 2012      December 31, 2011  
     Level 1      Level 2     Level 3      Total      Level 1     Level 2      Level 3      Total  
  

 

 

    

 

 

 

Assets

                     

Commodity derivatives

   $ 1,165         535        3         1,703         389        270         6         665   

Rabbi trust assets

     48                        48                                  

 

 

Total assets

     1,213         535        3         1,751         389        270         6         665   

 

 

Liabilities

                     

Commodity derivatives

     1,178         542        1         1,721         428        267         4         699   

 

 

Total liabilities

     1,178         542        1         1,721         428        267         4         699   

 

 

Net assets (liabilities)

   $ 35         (7     2         30         (39     3         2         (34

 

 

The derivative values above are based on analysis of each contract as the fundamental unit of account; therefore, derivative assets and liabilities with the same counterparty are not reflected net where the legal right of setoff exists. Gains or losses from contracts in one level may be offset by gains or losses on contracts in another level or by changes in values of physical contracts or positions that are not reflected in the table above.

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

Nonrecurring Fair Value Remeasurements

There were no material fair value impairments for the nine-month period ended September 30, 2011. The following table shows the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition during the nine-month period ended September 30, 2012:

 

                                                           
     Millions of Dollars  
     Fair Value*      Fair Value Measurements Using     

Before-

Tax Loss

 
     

Level 1

Inputs

    

Level 3

Inputs

    
  

 

 

 

September 30, 2012

           

Net properties, plants and equipment (held for use)

   $ 33         33                 43   

Net properties, plants and equipment (held for sale)

     32         32                 42   

Equity method investment

     283                 283         480   

 

 

* Represents the fair value at the time of the impairment.

 

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Table of Contents

During the nine-month period ended September 30, 2012, net PP&E held for use related to a terminal and storage facility with a carrying amount of $76 million, was written down to its fair value of $33 million, resulting in a before-tax loss of $43 million. Net PP&E held for sale related to equipment formerly associated with a cancelled refinery upgrade project with a carrying amount of $74 million, was written down to its fair value of $32 million, resulting in a before-tax loss of $42 million. The fair values in each case were primarily determined by negotiated selling prices with third parties. During this same period, our investment in a natural gas transmission pipeline was written down to a fair value of $283 million, resulting in a before-tax loss of $480 million. Fair value was based on an internal assessment of expected discounted future cash flows.

Fair Values of Financial Instruments

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

 

   

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

 

   

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

 

   

Debt: The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on quoted market prices as a Level 2 fair value.

 

   

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

 

   

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

 

   

Forward-exchange contracts: Fair values are estimated by comparing the contract rate to the forward rate in effect at the end of the respective reporting periods and approximating the exit price at those dates.

Our commodity derivative and financial instruments were:

 

     Millions of Dollars  
     Carrying Amount      Fair Value  
    

September 30

2012

    

December 31

2011

    

September 30

2012

    

December 31

2011

 
  

 

 

    

 

 

 

Financial Assets

           

Commodity derivatives

   $ 133         73         133         73   

Rabbi trust assets

     48                 48           

Financial Liabilities

           

Commodity derivatives

     88         52         88         52   

Total debt, excluding capital leases

     7,970         377         8,551         406   

 

 

The amounts shown for derivatives in the preceding table are presented net (i.e., assets and liabilities with the same counterparty are netted where the right of setoff exists). In addition, the September 30, 2012, commodity derivative assets and liabilities appear net of $33 million of obligations to return cash collateral and $96 million of rights to reclaim cash collateral, respectively. The December 31, 2011, commodity derivative liabilities appear net of $55 million of rights to reclaim cash collateral.

 

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Table of Contents

Note 15—Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) in the equity section of the balance sheet included:

 

                                                           
     Millions of Dollars  
    

Defined

Benefit

Plans

   

Foreign

Currency

Translation

     Hedging    

Accumulated

Other

Comprehensive

Income (Loss)

 
  

 

 

 

December 31, 2011

   $ (145     270         (3     122   

Other comprehensive income

     90        199         1        290   

Net transfer from ConocoPhillips*

     (541                    (541

 

 

September 30, 2012

   $ (596     469         (2     (129

 

 

* See Consolidated Statement of Changes in Equity.

Note 16—Employee Benefit Plans

Pension Plans

Prior to the separation, certain of our U.S. and U.K. employees participated in defined benefit pension plans and postretirement health and life insurance plans (Shared Plans) sponsored by ConocoPhillips, which included participants of other ConocoPhillips subsidiaries. Through the separation date, we accounted for such Shared Plans as multiemployer benefit plans. Accordingly, we did not record an asset or liability to recognize the funded status of the Shared Plans on our consolidated balance sheet until the separation date. At the separation date, the assets and liabilities of certain defined benefit plans and postretirement benefit plans, allocable to Phillips 66 employees, were transferred to Phillips 66. Plan assets of $2,092 million, benefit obligations of $3,072 million and $870 million of accumulated other comprehensive loss ($541 million net of tax) were recorded for the plans transferred to us. The amount of plan assets transferred was adjusted during the third quarter of 2012 based on the final actuarial analyses. As a result, $2,063 million of plan assets was ultimately received from ConocoPhillips.

 

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Table of Contents

The table below presents the allocated benefit cost from Shared Plans, as well as the net periodic benefit cost associated with plans sponsored by us, for the three and nine months ended September 30, 2012 and 2011:

 

                                                                                         
     Millions of Dollars  
     Pension Benefits     Other Benefits  
     2012     2011     2012     2011  
  

 

 

   

 

 

   

 

 

 
     U.S.     Int’l.     U.S.      Int’l.              
  

 

 

   

 

 

     

Components of Net Periodic Benefit Cost

             

Three Months Ended September 30

             

Service cost

   $ 30        7                1        1          

Interest cost

     25        8                4        2          

Expected return on plan assets

     (30     (7             (2              

Amortization of prior service cost

                                           

Recognized net actuarial loss

     19        2                       (1       

 

 

Subtotal net periodic benefit cost

     44        10                3        2          

 

 

Allocated benefit cost from ConocoPhillips

                   54         10               5   

 

 

Total net periodic benefit cost

   $ 44        10        54         13        2        5   

 

 

Nine Months Ended September 30

             

Service cost

   $ 51        14                4        2          

Interest cost

     41        17                10        3          

Expected return on plan assets

     (50     (14             (6              

Amortization of prior service cost

     1                                       

Recognized net actuarial loss

     31        5                2        (1       

 

 

Subtotal net periodic benefit cost

     74        22                10        4          

 

 

Allocated benefit cost from ConocoPhillips

     71        13        160         30        7        15   

 

 

Total net periodic benefit cost

   $ 145        35        160         40        11        15   

 

 

During the first nine months of 2012, we contributed $37 million to our U.S. plans and $24 million to our international plans. Total contributions for the remainder of the year are currently estimated to be $13 million for our international plans. No further contributions are expected this year for our U.S. plans due to new funding relief rules enacted during the third quarter of 2012.

 

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Table of Contents

Note 17—Related Party Transactions

Significant transactions with related parties were:

 

                                                           
     Millions of Dollars  
     Three Months Ended
September  30
     Nine Months Ended
September  30
 
     2012      2011      2012      2011  
  

 

 

    

 

 

 

Operating revenues and other income (a)

   $ 1,883         2,107         6,119         6,515   

Purchases (b)

     4,176         8,938         18,984         25,354   

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

     32         97         175         288   

Interest expense (d)

     2         3         6         7   

 

 

 

(a) We sold crude oil to MRC. Natural gas liquids, solvents and petrochemical feedstocks were sold to CPChem, and gas oil and hydrogen feedstocks were sold to Excel. Crude oil, blendstock and other intermediate products were sold to WRB. In addition, we charged several of our affiliates, including CPChem and MSLP, for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities.

 

(b) We purchased refined products from WRB. We purchased natural gas and natural gas liquids from DCP Midstream and CPChem for use in our refinery processes and other feedstocks from various affiliates. We purchased refined products from MRC. We also paid fees to various pipeline equity companies for transporting finished refined products. In addition, we paid a price upgrade to MSLP for heavy crude processing. We purchased base oils and fuel products from Excel for use in our refining and marketing businesses.

 

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

 

(d) We incurred interest expense on a note payable to MSLP. See Note 6—Investments, Loans and Long-Term Receivables, for additional information on loans to affiliated companies.

Also included in the table above are transactions with ConocoPhillips through April 30, 2012, the effective date of the separation. These transactions include crude oil purchased from ConocoPhillips as feedstock for our refineries and power sold to ConocoPhillips from our power generation facilities. Sales to ConocoPhillips prior to the separation were $381 million in 2012 and $869 million for the nine months ended September 30, 2011. For the three months ended September 30, 2011, sales to ConocoPhillips were $305 million. Purchases from ConocoPhillips prior to the separation were $5,328 million in 2012 and $11,592 million for the nine months ended September 30, 2011. For the three months ended September 30, 2011, purchases from ConocoPhillips were $4,005 million.

For periods prior to the separation, the consolidated statement of income includes expense allocations for certain corporate functions historically performed by ConocoPhillips and not allocated to its operating segments, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, procurement and information technology. Net charges from ConocoPhillips for these services, reflected in selling, general and administrative expenses, were $70 million in 2012 and $144 million for the nine months ended September 30, 2011, and $46 million for the three months ended September 30, 2011.

 

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Table of Contents

Supplemental Cash Flow Information

In accordance with the separation and distribution agreement with ConocoPhillips, certain assets and liabilities were transferred to us at separation that were not included in the historical financial statements for periods prior to the separation. These noncash capital contributions included:

 

   

$374 million of PP&E; primarily office buildings and facilities.

 

   

$1,230 million of employee benefit liabilities; primarily related to U.S. and U.K. pension plans.

 

   

$340 million of deferred taxes associated with the employee benefit liabilities.

Note 18—Segment Disclosures and Related Information

We have organized our reporting structure based on the grouping of similar products and services, resulting in three operating segments:

 

  1) R&M—This segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia. This segment also includes power generation operations. The R&M segment’s United States and international operations are disclosed separately for reporting purposes.

 

  2) Midstream—This segment gathers, processes, transports and markets natural gas and fractionates and markets natural gas liquids in the United States. The Midstream segment primarily consists of our 50 percent equity investment in DCP Midstream.

 

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

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

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

 

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Table of Contents

Analysis of Results by Operating Segment

 

                                                           
     Millions of Dollars  
     Three Months Ended
September  30
    Nine Months Ended
September  30
 
     2012     2011     2012     2011  
  

 

 

   

 

 

 

Sales and Other Operating Revenues

        

R&M

        

United States

   $ 27,618        32,216        87,064        96,991   

International

     14,018        16,315        44,011        45,249   

Intersegment eliminations

     (53     (87     (217     (400

 

 

R&M

     41,583        48,444        130,858        141,840   

 

 

Midstream

        

Total sales

     1,390        2,259        4,795        6,512   

Intersegment eliminations

     (36     (95     (195     (380

 

 

Midstream

     1,354        2,164        4,600        6,132   

 

 

Chemicals

     2        2        8        8   

Corporate and Other

     6               9        3   

 

 

Consolidated sales and other operating revenues

   $ 42,945        50,610        135,475        147,983   

 

 

Net Income (Loss) Attributable to Phillips 66

        

R&M

        

United States

   $ 1,401        795        2,932        1,913   

International

     247        (10     300        134   

 

 

Total R&M

     1,648        785        3,232        2,047   

 

 

Midstream

     (77     118        (79     290   

Chemicals

     153        193        577        568   

Corporate and Other

     (125     (47     (314     (141

 

 

Consolidated net income attributable to Phillips 66

   $ 1,599        1,049        3,416        2,764   

 

 

 

                             
     Millions of Dollars  
     September 30
2012
     December 31
2011
 

Total Assets

     

R&M

     

United States

   $ 26,098         25,056   

International

     11,511         8,902   

Goodwill

     3,344         3,332   

 

 

Total R&M

     40,953         37,290   

 

 

Midstream

     2,144         2,900   

Chemicals

     3,858         2,999   

Corporate and Other

     5,275         22   

 

 

Consolidated total assets

   $ 52,230         43,211   

 

 

 

24


Table of Contents

Note 19—Income Taxes

Our effective tax rate for the third quarter and first nine months of 2012 was 35 percent and 37 percent, respectively, compared with 32 percent and 35 percent for the corresponding periods of 2011. The effective tax rate for the nine-month period of 2012 differs from the federal statutory rate of 35 percent primarily due to state income taxes (net of federal benefit), partially offset by the domestic manufacturing deduction. The provision for income taxes for periods prior to the separation has been computed as if we were a stand-alone company.

Note 20—Condensed Consolidating Financial Information

Our $5.8 billion of Senior Notes were issued by Phillips 66, and are guaranteed by Phillips 66 Company, a 100-percent-owned subsidiary. Phillips 66 Company has fully and unconditionally guaranteed the payment obligations of Phillips 66 with respect to these debt securities. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:

 

   

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

 

   

All other nonguarantor subsidiaries.

 

   

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

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

 

25


Table of Contents
                                                                          
     Millions of Dollars  
     Nine Months Ended September 30, 2012  
Income Statement    Phillips 66     Phillips 66
Company
    All Other
Subsidiaries
    Consolidating
Adjustments
    Total
Consolidated
 
  

 

 

 

Revenues and Other Income

          

Sales and other operating revenues

   $        89,075        46,400               135,475   

Equity in earnings of affiliates

     3,514        2,786        346        (4,138     2,508   

Net gain (loss) on dispositions

            190        (1            189   

Other income (loss)

            (40     122               82   

Intercompany revenues

     1        2,047        18,474        (20,522       

 

 

Total Revenues and Other Income

     3,515        94,058        65,341        (24,660     138,254   

 

 

Costs and Expenses

          

Purchased crude oil and products

            80,833        56,541        (20,459     116,915   

Operating expenses

            2,448        555        (43     2,960   

Selling, general and administrative expenses

     3        963        318        (23     1,261   

Depreciation and amortization

            490        179               669   

Impairments

            45        521               566   

Taxes other than income taxes

            3,922        6,384        (1     10,305   

Accretion on discounted liabilities

            13        5               18   

Interest and debt expense

     140        24        2        4        170   

Foreign currency transaction gains

                   (22            (22

 

 

Total Costs and Expenses

     143        88,738        64,483        (20,522     132,842   

 

 

Income before income taxes

     3,372        5,320        858        (4,138     5,412   

Provision (benefit) for income taxes

     (44     1,806        229               1,991   

 

 

Net income

     3,416        3,514        629        (4,138     3,421   

Less: net income attributable to noncontrolling interests

                   5               5   

 

 

Net Income Attributable to Phillips 66

   $ 3,416        3,514        624        (4,138     3,416   

 

 

Comprehensive Income

   $ 3,026        3,632        617        (3,564     3,711   

 

 

 

                                                                          
     Millions of Dollars  
     Nine Months Ended September 30, 2011  
Income Statement    Phillips 66      Phillips 66
Company
    All Other
Subsidiaries
    Consolidating
Adjustments
    Total
Consolidated
 
  

 

 

 

Revenues and Other Income

           

Sales and other operating revenues

   $         100,428        47,555               147,983   

Equity in earnings of affiliates

     2,764         2,261        572        (3,267     2,330   

Net gain (loss) on dispositions

             48        (223            (175

Other income (loss)

             (1     29               28   

Intercompany revenues

             3,430        21,314        (24,744       

 

 

Total Revenues and Other Income

     2,764         106,166        69,247        (28,011     150,166   

 

 

Costs and Expenses

           

Purchased crude oil and products

             94,382        60,184        (24,713     129,853   

Operating expenses

             2,467        651        (31     3,087   

Selling, general and administrative expenses

             740        302               1,042   

Depreciation and amortization

             480        187               667   

Impairments

             486        2               488   

Taxes other than income taxes

             3,610        7,175               10,785   

Accretion on discounted liabilities

             10        6               16   

Interest and debt expense

             10        1               11   

Foreign currency transaction gains

             (1     (55            (56

 

 

Total Costs and Expenses

             102,184        68,453        (24,744     145,893   

 

 

Income before income taxes

     2,764         3,982        794        (3,267     4,273   

Provision for income taxes

             1,218        287               1,505   

 

 

Net income

     2,764         2,764        507        (3,267     2,768   

Less: net income attributable to noncontrolling interests

                    4               4   

 

 

Net Income Attributable to Phillips 66

   $ 2,764         2,764        503        (3,267     2,764   

 

 

Comprehensive Income

   $ 2,697         2,697        497        (3,190     2,701   

 

 

 

26


Table of Contents
                                                                          
     Millions of Dollars  
     September 30, 2012  
Balance Sheet    Phillips 66     Phillips 66
Company
    All Other
Subsidiaries
     Consolidating
Adjustments
    Total
Consolidated
 
  

 

 

 

Assets

           

Cash and cash equivalents

   $        2,891        1,539                4,430   

Accounts and notes receivable

     11        2,423        9,784         (1,425     10,793   

Inventories

            3,290        2,453                5,743   

Prepaid expenses and other current assets

     13        483        411                907   

 

 

Total Current Assets

     24        9,087        14,187         (1,425     21,873   

Investments and long-term receivables

     28,302        19,429        4,370         (41,301     10,800   

Net properties, plants and equipment

            11,640        3,671                15,311   

Goodwill

            3,344                       3,344   

Intangibles

            710        16                726   

Other assets

     47        112        17                176   

 

 

Total Assets

   $ 28,373        44,322        22,261         (42,726     52,230   

 

 

Liabilities and Equity

           

Accounts payable

   $ 2        7,276        7,599         (1,425     13,452   

Short-term debt

     571        14                       585   

Accrued income and other taxes

            628        764                1,392   

Employee benefit obligations

            306        44                350   

Other accruals

     137        297        173                607   

 

 

Total Current Liabilities

     710        8,521        8,580         (1,425     16,386   

Long-term debt

     7,224        168        1                7,393   

Asset retirement obligations and accrued environmental costs

            577        189                766   

Deferred income taxes

     (72     4,535        973                5,436   

Employee benefit obligations

            924        157                1,081   

Other liabilities and deferred credits

     77        1,637        3,551         (4,703     562   

 

 

Total Liabilities

     7,939        16,362        13,451         (6,128     31,624   

Common stock

     18,538        25,853        8,286         (34,139     18,538   

Retained earnings

     2,164        2,375        244         (2,619     2,164   

Accumulated other comprehensive income (loss)

     (268     (268     247         160        (129

Noncontrolling interests

                   33                33   

 

 

Total Liabilities and Equity

   $ 28,373        44,322        22,261         (42,726     52,230   

 

 

 

27


Table of Contents
                                                                          
     Millions of Dollars  
     December 31, 2011  
Balance Sheet    Phillips 66      Phillips 66
Company
     All Other
Subsidiaries
     Consolidating
Adjustments
    Total
Consolidated
 
  

 

 

 

Assets

             

Cash and cash equivalents

   $                                  

Accounts and notes receivable

             6,497         4,307         (779     10,025   

Inventories

             2,048         1,418                3,466   

Prepaid expenses and other current assets

             110         347                457   

 

 

Total Current Assets

             8,655         6,072         (779     13,948   

Investments and long-term receivables

     23,264         12,810         3,623         (29,391     10,306   

Net properties, plants and equipment

             11,304         3,467                14,771   

Goodwill

             3,332                        3,332   

Intangibles

             713         19                732   

Other assets

             105         17                122   

 

 

Total Assets

   $ 23,264         36,919         13,198         (30,170     43,211   

 

 

Liabilities and Net Investment

             

Accounts payable

   $         6,845         4,726         (779     10,792   

Short-term debt

             23         7                30   

Accrued income and other taxes

             427         660                1,087   

Employee benefit obligations

             13         51                64   

Other accruals

             332         79                411   

 

 

Total Current Liabilities

             7,640         5,523         (779     12,384   

Long-term debt

             361                        361   

Asset retirement obligations and accrued environmental costs

             606         181                787   

Deferred income taxes

             4,814         989                5,803   

Employee benefit obligations

                     117                117   

Other liabilities and deferred credits

             234         2,631         (2,399     466   

 

 

Total Liabilities

             13,655         9,441         (3,178     19,918   

Net ConocoPhillips investment

     23,142         23,142         3,436         (26,578     23,142   

Accumulated other comprehensive income

     122         122         292         (414     122   

Noncontrolling interests

                     29                29   

 

 

Total Liabilities and Net Investment

   $ 23,264         36,919         13,198         (30,170     43,211   

 

 

 

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Table of Contents
                                                                          
     Millions of Dollars  
     Nine Months Ended September 30, 2012  
Statement of Cash Flows    Phillips 66     Phillips 66
Company
    All Other
Subsidiaries
    Consolidating
Adjustments
    Total
Consolidated
 
  

 

 

 

Cash Flows From Operating Activities

          

Net Cash Provided by (Used in) Operating Activities

   $ (44     7,300        (4,265            2,991   

 

 

Cash Flows From Investing Activities

          

Capital expenditures and investments

            (606     (231     10        (827

Proceeds from asset dispositions

            210        49               259   

Advances/loans—related parties

                   (100            (100

Collection of advances/loans—related parties

                   7        (7       

Other

                                   

 

 

Net Cash Used in Investing Activities

            (396     (275     3        (668

 

 

Cash Flows From Financing Activities

          

Contributions from (distributions to) ConocoPhillips

     (7,469     (3,837     6,051               (5,255

Issuance of debt

     7,794                             7,794   

Repayment of debt

            (204     (9     7        (206

Issuance of common stock

     23                             23   

Repurchase of common stock

     (111                          (111

Dividends paid on common stock

     (125                          (125

Other

     (68     28        10        (10     (40

 

 

Net Cash Provided by (Used in) Financing Activities

     44        (4,013     6,052        (3     2,080   

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

                   27               27   

 

 

Net Change in Cash and Cash Equivalents

            2,891        1,539               4,430   

Cash and cash equivalents at beginning of period

                                   

 

 

Cash and Cash Equivalents at End of Period

   $        2,891        1,539               4,430   

 

 

 

                                                                          
     Millions of Dollars  
     Nine Months Ended September 30, 2011  
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

   $         643        1,632                2,275   

 

 

Cash Flows From Investing Activities

            

Capital expenditures and investments

             (477     (176             (653

Proceeds from asset dispositions

             110        94                204   

Collection of advances/loans—related parties

             550                       550   

Other

             2        54                56   

 

 

Net Cash Provided by (Used in) Investing Activities

             185        (28             157   

 

 

Cash Flows From Financing Activities

            

Distributions to ConocoPhillips

             (814     (1,597             (2,411

Repayment of debt

             (14     (6             (20

Other

                    (1             (1

 

 

Net Cash Used in Financing Activities

             (828     (1,604             (2,432

 

 

Net Change in Cash and Cash Equivalents

                                     

Cash and cash equivalents at beginning of period

                                     

 

 

Cash and Cash Equivalents at End of Period

   $                                 

 

 

 

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Table of Contents

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis is the company’s analysis of its financial performance, financial condition, and of significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes. It contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,” beginning on page 45.

The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to net income (loss) attributable to Phillips 66.

BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW

Phillips 66 is an international downstream company with refining and marketing, midstream and chemicals businesses. At September 30, 2012, we had total assets of $52 billion. Our common stock trades on the New York Stock Exchange under the symbol “PSX.”

The Separation

On April 4, 2012, the ConocoPhillips Board of Directors approved the separation of its downstream businesses into an independent, publicly traded company named Phillips 66. In accordance with a separation and distribution agreement, the two companies were separated by ConocoPhillips distributing to its stockholders all 625,272,302 shares of common stock of Phillips 66 after the market closed on April 30, 2012. Each ConocoPhillips shareholder received one share of Phillips 66 stock for every two shares of ConocoPhillips stock held at the close of business on the record date of April 16, 2012. Fractional shares of Phillips 66 common stock were not distributed and any fractional shares of Phillips 66 common stock otherwise issuable to a ConocoPhillips shareholder were sold in the open market on such shareholder’s behalf, and such shareholder received a cash payment with respect to that fractional share. In conjunction with the separation, ConocoPhillips received a private letter ruling from the Internal Revenue Service to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the ruling, for U.S. federal income tax purposes, the distribution of Phillips 66 stock was not taxable to ConocoPhillips or U.S. holders of ConocoPhillips common stock, except in respect to cash received in lieu of fractional share interests. Following the separation, ConocoPhillips retained no ownership interest in Phillips 66, and each company now has separate public ownership, boards of directors and management. A registration statement on Form 10, as amended through the time of its effectiveness, describing the separation was filed by Phillips 66 with the U.S. Securities and Exchange Commission (SEC) and was declared effective on April 12, 2012 (the Form 10). Pursuant to the separation and distribution agreement with ConocoPhillips, on April 30, 2012, we made a special cash distribution to ConocoPhillips of $5.95 billion. After subsequent working capital and inventory determinations, an additional cash distribution of $1.87 billion was made to ConocoPhillips in June 2012. After consideration of the cash retained by Phillips 66 at separation, as well as cash flow impacts of the four months ended April 30, 2012, the net distribution to ConocoPhillips was $5.3 billion.

Basis of Presentation

Prior to the separation on April 30, 2012, our results of operations, financial position and cash flows consisted of ConocoPhillips’ refining, marketing and transportation operations; its natural gas gathering, processing, transmission and marketing operations, primarily conducted through its equity investment in DCP Midstream, LLC (DCP Midstream); its petrochemical operations, conducted through its equity investment in Chevron Phillips Chemical Company LLC (CPChem); its power generation operations; and an allocable portion of its corporate costs (together, the “downstream businesses”). These financial statements have been presented as if

 

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the downstream businesses had been combined for all periods presented. All intercompany transactions and accounts within the downstream businesses were eliminated. The assets and liabilities have been reflected on a historical cost basis, as all of the assets and liabilities presented were wholly owned by ConocoPhillips and were transferred within the ConocoPhillips consolidated group. The statement of income for periods prior to the separation includes expense allocations for certain corporate functions historically performed by ConocoPhillips and not allocated to its operating segments, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, procurement and information technology. These allocations were based primarily on specific identification of time and/or activities associated with the downstream businesses, employee headcount or capital expenditures, and our management believes the assumptions underlying the allocations were reasonable. The combined financial statements may not necessarily reflect all of the actual expenses that would have been incurred had we been a stand-alone company during the periods presented prior to the separation. All financial information presented after the separation represents the consolidated results of operations, financial position and cash flows of Phillips 66.

Business Environment

Results for our Refining and Marketing (R&M) segment depend largely on refining and marketing margins, cost control, refinery throughput, and product yields. The crack spread is a measure of the difference between market prices for refined petroleum products and crude oil, and it is used within our industry as an indicator for refining margins. Both domestic and international industry crack spreads improved in the third quarter of 2012. The U.S. 3:2:1 crack spread (three barrels of crude oil producing two barrels of gasoline and one barrel of diesel) increased in the third quarter of 2012, compared with both the third quarter of 2011 and the second quarter of 2012. The improvement in domestic industry crack spreads was primarily attributable to higher distillates and gasoline prices resulting from lower production from several domestic refineries due to refinery outages, seasonal maintenance and the weather disruptions during the third quarter of 2012.

In addition, U.S. crude production continued to increase, and limited infrastructure for takeaway options resulted in advantaged crude prices for U.S. refiners with Midcontinent and Gulf Coast refineries that run advantaged crudes. Seasonally high inventory levels in the Midcontinent continued to cause West Texas Intermediate (WTI) crude to trade at a deep discount relative to waterborne crudes such as Light Louisiana Sweet (LLS) and Brent. Refineries capable of processing WTI crude and crude oils that price relative to WTI, primarily the Midcontinent and Gulf Coast refineries, benefitted from these lower regional feedstock prices.

The Northwest Europe benchmark crack spread increased in the third quarter of 2012, compared with the third quarter of 2011 and the second quarter of 2012. The improvement over both periods was driven by higher distillates and gasoline prices due to tight supply caused by refinery closures, seasonal maintenance and outages. Decreased distillates supply from Russia and the United States also contributed to higher distillates prices. In addition, lower Brent crude oil prices in the third quarter of 2012, compared with the third quarter of 2011, contributed to the improved market crack spread.

The Midstream segment’s results are closely linked to natural gas liquids prices and, to a lesser extent, natural gas prices. Natural gas liquids prices decreased in the third quarter of 2012, compared with the third quarter of 2011 and the second quarter of 2012, due to growing natural gas liquids production from liquids-rich shale plays with limited corresponding demand increase from the petrochemical industry.

The Chemicals segment consists of our 50 percent equity investment in CPChem. The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on market factors. The chemicals industry experienced improved ethylene margins in regions of the world where production is based upon natural gas liquids versus crude-derived feedstocks. In particular, North American ethane-based crackers benefitted from the lower-priced feedstocks.

 

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RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three- and nine-month periods ended September 30, 2012, is based on a comparison with the corresponding periods of 2011.

Consolidated Results

A summary of net income (loss) attributable to Phillips 66 by business segment follows:

 

                                                           
     Millions of Dollars  
     Three Months Ended
September  30
    Nine Months Ended
September  30
 
      2012     2011     2012     2011  
  

 

 

   

 

 

 

R&M

   $ 1,648        785        3,232        2,047   

Midstream

     (77     118        (79     290   

Chemicals

     153        193        577        568   

Corporate and Other

     (125     (47     (314     (141

 

 

Net income attributable to Phillips 66

   $ 1,599        1,049        3,416        2,764   

 

 

Earnings for Phillips 66 increased 52 percent in the third quarter of 2012 and 24 percent in the nine-month period ended September 30, 2012, compared with the corresponding periods of 2011. The increases in both periods were primarily due to the improved results from our R&M segment, mainly due to higher refining margins and increased utilization. The improved results were partially offset by lower earnings from our Midstream segment and higher interest expense and corporate repositioning expenses.

Lower earnings from the Midstream segment were driven by lower equity in earnings from DCP Midstream and impairments of our equity investment in Rockies Express Pipeline LLC (REX), which decreased our Midstream segment earnings by $133 million in the current quarter and $170 million in the second quarter of 2012.

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

 

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Income Statement Analysis

Sales and other operating revenues for the third quarter and nine-month period of 2012 decreased 15 percent and 8 percent, respectively, and purchased crude oil and products decreased 18 percent and 10 percent, respectively. The decreases were mainly due to processing lower refining volumes at our wholly owned refineries, resulting from the shutdown of Trainer Refinery in September 2011, combined with lower natural gas liquids (NGL) prices.

Equity in earnings of affiliates for the third quarter and nine-month period of 2012 increased 12 percent and 8 percent, respectively. The increases in both periods primarily resulted from improved earnings from WRB Refining LP (WRB), mainly due to higher refining margins in the Central Corridor, combined with processing higher refining volumes associated with the start-up of the coker and refining expansion (CORE) project at the Wood River Refinery. This increase was partially offset by:

 

   

Lower earnings from DCP Midstream, mainly due to lower natural gas liquids prices.

 

   

Lower earnings from Excel Paralubes, mainly due to lower margins in the third quarter of 2012, and lower volumes and higher operating expenses in the nine-month period of 2012, resulting from a major turnaround in the first quarter of 2012.

 

   

Lower earnings from Merey Sweeny, L.P. (MSLP), mainly due to lower margins.

 

   

The absence of earnings from Colonial Pipeline Company, which was sold in December 2011.

In addition, earnings from CPChem decreased in the third quarter of 2012, mainly due to a loss on early extinguishment of debt and fixed assets impairments, while equity earnings from CPChem increased in the nine-month period of 2012, primarily resulting from higher ethylene and polyethylene margins. Earnings from Malaysian Refining Company Sdn. Bhd. (MRC) increased in the third quarter of 2012, mainly due to improved refining margins in the current quarter, while they decreased in the nine-month period of 2012, primarily resulting from lower refining margins in the nine-month period.

Net loss on dispositions for the third quarter of 2012 decreased $220 million, primarily related to a before-tax loss of $228 million on the sale of our refinery in Wilhelmshaven, Germany, in the third quarter of 2011. During the nine-month period of 2012, our net gain on dispositions was $189 million, primarily reflecting the sale of Trainer Refinery and associated terminal and pipeline assets in the second quarter of 2012, compared with a net loss of $175 million in the nine-month period of 2011, primarily related to the loss on the sale of Wilhelmshaven Refinery (WRG) as mentioned above.

Other income increased $54 million in the nine-month period of 2012, compared with the corresponding period of 2011. The increase was primarily associated with gains from trading activities not directly related to our physical business.

Operating expenses for the third quarter and nine-month period of 2012 decreased 14 percent and 4 percent, respectively. The decreases in both periods were primarily driven by lower utility costs, reflecting lower natural gas prices, and the absence of operating expenses associated with Trainer Refinery, which was shut down in September 2011, and WRG, which was sold in August 2011.

Selling, general and administrative expenses for the third quarter and nine-month period of 2012 increased 16 percent and 21 percent, respectively, primarily resulting from costs associated with the separation of Phillips 66 from ConocoPhillips, and incremental costs relating to a prior retail disposition program.

Impairments in 2012 included an investment in a natural gas transmission pipeline, a marine terminal and associated assets, as well as equipment formerly associated with a cancelled refinery upgrade project. Impairments in 2011 included the Trainer Refinery and associated terminal and pipeline assets. For additional information on the impairments, see Note 8—Impairments, in the Notes to Consolidated Financial Statements.

 

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Interest and debt expense for the third quarter and nine-month period of 2012 increased $70 million and $159 million, respectively, primarily due to approximately $7.8 billion of new debt issued in March and April of 2012. For additional information on the debt issuances, see Note 9—Debt, in the Notes to Consolidated Financial Statements.

Foreign currency transaction (gains) losses for the third quarter of 2012 were a $15 million gain, compared with a loss of $18 million for the third quarter of 2011. For the nine-month period of 2012, the gains decreased $34 million compared with the same period of 2011. The favorable change in the current quarter was primarily due to the U.S. dollar weakening against both the British pound and the euro, compared with the U.S. dollar strengthening against both the British pound and the euro during the third quarter of 2011. The lower gain in the nine-month period of 2012 was driven by the U.S. dollar weakening less against both the British pound and the euro than in the nine-month period of 2011.

See Note 19—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our provision for income taxes and effective tax rates.

 

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Segment Results

R&M

 

                                                           
     Three Months Ended
September  30
    Nine Months Ended
September  30
 
     2012     2011     2012      2011  
  

 

 

   

 

 

 
     Millions of Dollars  

Net Income (Loss) Attributable to Phillips 66

         

United States

   $ 1,401        795        2,932         1,913   

International

     247        (10     300         134   

 

 
   $ 1,648        785        3,232         2,047   

 

 
     Dollars Per Barrel  

Refining Margins

         

Atlantic Basin/Europe

   $ 13.02        6.86        9.25         5.81   

Gulf Coast

     11.42        10.21        9.00         9.40   

Central Corridor

     31.83        26.30        25.14         21.23   

Western/Pacific

     13.30        10.72        10.71         10.17   

Worldwide

     17.05        12.53        13.34         10.62   

 

 
     Dollars Per Gallon  

U.S. Average Wholesale Prices*

         

Gasoline

   $ 3.09        3.04        3.05         2.99   

Distillates

     3.24        3.16        3.18         3.11   

 

 
*Excludes excise taxes.          
     Thousands of Barrels Daily  

Operating Statistics

         

Refining operations*

         

Atlantic Basin/Europe

         

Crude oil capacity

     588        773        588         773   

Crude oil processed

     587        719        574         718   

Capacity utilization (percent)

     100     93        98         93   

Refinery production

     628        769        623         779   

Gulf Coast

         

Crude oil capacity

     733        733        733         733   

Crude oil processed

     649        668        640         649   

Capacity utilization (percent)

     88     91        87         89   

Refinery production

     736        761        726         741   

Central Corridor

         

Crude oil capacity

     469        471        470         471   

Crude oil processed

     478        442        467         434   

Capacity utilization (percent)

     102     94        99         92   

Refinery production

     495        453        485         449   

Western/Pacific

         

Crude oil capacity

     439        435        439         435   

Crude oil processed

     424        394        397         387   

Capacity utilization (percent)

     97     91        90         89   

Refinery production

     437        415        417         411   

Worldwide

         

Crude oil capacity

     2,229        2,412        2,230         2,412   

Crude oil processed

     2,138        2,223        2,078         2,188   

Capacity utilization (percent)

     96     92        93         91   

Refinery production

     2,296        2,398        2,251         2,380   

 

 

*Includes our share of equity affiliates.

 

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Table of Contents
                                                           
     Three Months Ended
September  30
     Nine Months Ended
September  30
 
     2012      2011      2012      2011  
  

 

 

    

 

 

 
     Thousands of Barrels Daily  

Petroleum products sales volumes

           

Gasoline

     1,211         1,300         1,208         1,326   

Distillates

     1,161         1,250         1,153         1,210   

Other products

     486         639         490         598   

 

 
     2,858         3,189         2,851         3,134   

 

 

The R&M segment refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels); buys, sells and transports crude oil; and buys, transports, distributes and markets petroleum products. This segment also includes power generation operations. R&M has operations mainly in the United States, Europe and Asia.

R&M reported earnings of $1,648 million during the third quarter of 2012, an increase of $863 million, or 110 percent, compared with the third quarter of 2011. Earnings for the nine-month period of 2012 were $3,232 million, an increase of $1,185 million, or 58 percent, compared with the same period of 2011. See the “Business Environment and Executive Overview” section for information on industry crack spreads and other market factors impacting this quarter’s results.

Earnings for both periods of 2012 improved, primarily due to higher worldwide refining margins driven by improved market cracks. Also contributing to the improved 2012 results were lower operating expenses and favorable volume impacts. Lower operating expenses were primarily due to lower utility costs, reflecting lower natural gas prices, and the absence of operating expenses from Trainer Refinery, which was shut down in September 2011, and WRG, which was sold in August 2011.

While worldwide refining volumes decreased, refining volumes increased in the high-margin Central Corridor and decreased in the low-margin Atlantic Basin/Europe as a result of the shutdown of Trainer Refinery in September 2011. The improved volume mix favorably impacted our earnings in the 2012 periods.

The third quarter of 2012 included an after-tax impairment of $27 million on the Riverhead Terminal, compared with an after-tax impairment of $314 million on Trainer Refinery during the third quarter of 2011. In addition, the nine-month period of 2012 included a $42 million after-tax impairment related to equipment formerly associated with the cancelled WRG upgrade project. For additional information on these impairments, see Note 8—Impairments, in the Notes to Consolidated Financial Statements.

Additionally, the nine-month period of 2012 included an after-tax gain of $106 million from the sale of Trainer Refinery and associated terminal and pipeline assets, compared with an after-tax loss on the sale of our refinery in Wilhelmshaven, Germany, in the third quarter of 2011. For additional information on the sale of Trainer Refinery and associated assets, see Note 5—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements.

Our worldwide refining capacity utilization rate was 96 percent in the third quarter of 2012, compared with 92 percent in the third quarter of 2011. The current year improvement was primarily due to improved market conditions.

Our Bayway Refinery in Linden, New Jersey, was shut down in advance of Hurricane Sandy, and currently remains shut down. We are assessing the impact of the hurricane on the refinery, including the extent of wind and water damage. We do not yet have a forecast on when Bayway will resume production.

 

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Industry refining margins can vary by region of the world, due to differing crude slates and refined product demand fundamentals. In conjunction with our long-range planning efforts, in the absence of any interim indicators, we perform an annual review for impairment indicators of property and equity investments in the fourth quarter. The review takes into account the company’s outlook on economic factors that influence cash flows including commodity prices, industry refining margins, capital spending and other operating plan assumptions. As we finalize our plans and conduct our review, it is reasonably possible non-cash impairments of some of our properties and equity investments may be required.

Midstream

 

                                                           
     Three Months Ended
September  30
     Nine Months Ended
September  30
 
     2012     2011      2012     2011  
  

 

 

    

 

 

 
     Millions of Dollars  

Net Income (Loss) Attributable to Phillips 66*

   $ (77     118         (79     290   

 

 

*Includes DCP Midstream-related earnings:

   $ 39        87         141        228   
     Dollars Per Barrel  

Weighted Average Sales Prices

         

U.S. natural gas liquids*

         

Equity affiliates

   $ 30.21        52.09         34.93        50.66   

 

 

* Based on index prices from the Mont Belvieu and Conway market hubs that are weighted by natural gas liquids component and location mix.

  

     Thousands of Barrels Daily   

Operating Statistics

         

Natural gas liquids extracted*

     199        196         200        188   

Natural gas liquids fractionated**

     113        116         104        112   

 

 

* Includes our share of equity affiliates.

**Excludes DCP Midstream.

         

The Midstream segment purchases raw natural gas from producers and gathers natural gas through an extensive network of pipeline gathering systems. The natural gas is then processed to extract natural gas liquids from the raw gas stream. The remaining “residue” gas is marketed to electric utilities, industrial users and gas marketing companies. Most of the natural gas liquids are fractionated—separated into individual components such as ethane, propane and butane—and marketed as chemical feedstock, fuel or blendstock. The Midstream segment consists of our 50 percent equity investment in DCP Midstream, as well as other natural gas liquids fractionation, trading and marketing businesses in the United States. The Midstream segment also includes our 25 percent ownership interest in REX.

Earnings from the Midstream segment decreased $195 million in the third quarter of 2012 and $369 million in the nine-month period of 2012, compared with the corresponding periods of 2011. The decreases in both periods were primarily due to impairments of our equity investment in REX during the second and third quarters of 2012, and decreased equity earnings from DCP Midstream.

During the third quarter of 2012, we recorded an after-tax impairment of $133 million on our equity investment in REX, in addition to a $170 million after-tax impairment recorded during the second quarter of 2012. These impairments primarily reflect a diminished view of fair value of west-to-east natural gas transmission, due to the impact of shale gas production in the northeast. For additional information on the impairment of REX, see Note 8—Impairments, in the Notes to Consolidated Financial Statements.

The decrease in earnings of DCP Midstream in both 2012 periods mainly resulted from lower NGL prices and, to a lesser extent, lower natural gas prices, as well as higher operating expenses driven by increased planned repairs and maintenance activities due to asset expansions. These items were partially offset by lower

 

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depreciation and increased gain from the issuance of limited partner units by DCP Midstream Partners, L.P., as described below. See the “Business Environment and Executive Overview” section for additional information on natural gas liquids prices.

During the second quarter of 2012, DCP Midstream completed a review of the estimated depreciable lives of its major classes of properties, plants and equipment (PP&E). As a result of that review, the depreciable lives were extended. This change in accounting estimate was implemented on a prospective basis, effective April 1, 2012. DCP Midstream estimates its depreciation will be lowered approximately $240 million per year (on a 100 percent basis), which would be an estimated after-tax benefit to our equity in earnings from DCP Midstream of approximately $75 million.

DCP Midstream Partners, L.P., a subsidiary of DCP Midstream, issues, from time to time, limited partner units to the public. These issuances benefited our equity in earnings from DCP Midstream, on an after-tax basis, by approximately $9 million and $23 million in the three- and nine-month periods of 2012, respectively, compared with approximately $1 million and $10 million in the corresponding periods of 2011.

Chemicals

 

                                                           
     Three Months Ended
September  30
     Nine Months Ended
September  30
 
     2012      2011      2012      2011  
  

 

 

    

 

 

 
     Millions of Dollars  

Net Income Attributable to Phillips 66

   $ 153         193         577         568   

 

 
     Millions of Pounds  

CPChem Externally Marketed Sales Volumes*

           

Olefins and Polyolefins

     3,811         3,758         10,961         10,593   

Specialties, Aromatics and Styrenics

     1,545         1,722         5,149         5,141   

 

 
     5,356         5,480         16,110         15,734   

 

 

*Represents 100 percent of CPChem outside sales of produced petrochemical products, as well as commission sales from equity affiliates.

The Chemicals segment consists of our 50 percent interest in CPChem, which we account for under the equity method. CPChem uses natural gas liquids and other feedstocks to produce petrochemicals. These products are then marketed and sold or used as feedstocks to produce plastics and other chemicals.

Earnings from the Chemicals segment decreased $40 million, or 21 percent, in the third quarter of 2012, while Chemicals earnings increased $9 million, or 2 percent, in the nine-month period of 2012, compared with the corresponding periods of 2011. The decrease in the third quarter of 2012 primarily resulted from a loss on early extinguishment of debt and fixed assets impairments, as described below, and higher provision for income taxes. These unfavorable items were partially offset by higher ethylene and polyethylene margins, reflecting lower feedstock costs, and lower utility costs due to lower natural gas prices. The slight increase in the nine-month period of 2012 was primarily driven by higher ethylene and polyethylene margins, partially offset by a loss on early extinguishment of debt, fixed assets impairments and higher provision for income taxes. Ethylene margins benefitted from lower feedstock costs, particularly lower ethane and propane prices during the 2012 periods.

During the second and third quarters of 2012, CPChem executed and completed its plan to retire $1 billion of fixed-rate debt. In June 2012, CPChem redeemed its $300 million of 7% notes due 2014 and its $300 million of 4.75% notes due 2021. In August 2012, CPChem redeemed its $400 million of 8.25% notes due 2019. CPChem also incurred prepayment premiums and wrote off the associated unamortized debt issuance costs. As a result, CPChem recognized a loss on early extinguishment of debt in the third quarter of 2012 of $173 million (100 percent basis), which decreased our equity in earnings from CPChem, on an after-tax basis, by $54 million, while the impact on the nine-month period of 2012 was a loss of $287 million (100 percent basis) which decreased our equity earnings, on an after-tax basis, by approximately $90 million.

 

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In addition, during the third quarter of 2012, CPChem recorded fixed assets impairments totaling $87 million (100 percent basis), which decreased our equity in earnings from CPChem, on an after-tax basis, by approximately $27 million.

Corporate and Other

 

                                                           
     Millions of Dollars  
     Three Months Ended
September  30
    Nine Months Ended
September  30
 
     2012     2011     2012     2011  
  

 

 

   

 

 

 

Net Income (Loss) Attributable to Phillips 66

        

Net interest

   $ (47     (2     (101     (7

Corporate general and administrative expenses

     (30     (17     (79     (53

Technology

     (11     (14     (35     (38

Repositioning costs

     (13            (43       

Other

     (24     (14     (56     (43

 

 
   $ (125     (47     (314     (141

 

 

Net interest consists of interest and financing expense, net of interest income and capitalized interest. Net interest increased $45 million and $94 million, respectively, in the three- and nine-month periods of 2012, compared with the corresponding periods of 2011, primarily due to approximately $7.8 billion of new debt issued in March and April of 2012. For additional information on these debt issuances, see Note 9—Debt, in the Notes to Consolidated Financial Statements.

Corporate general and administrative expenses increased $13 million and $26 million, respectively, in the three- and nine-month periods of 2012, compared with the corresponding periods of 2011. The increases in both periods were primarily due to higher actual expenses as a stand-alone company for the months subsequent to the separation.

Repositioning costs consist of expenses related to the separation of Phillips 66 from ConocoPhillips. Expenses incurred in the five-month period subsequent to the separation primarily included compensation and benefits, employee relocations and moves, information systems, and shared services costs.

The category “Other” includes certain foreign currency transaction gains and losses, environmental costs associated with sites no longer in operation, income tax expenses and other costs not directly associated with an operating segment. The increases in both periods were primarily due to higher provision for income taxes associated with repositioning deferred tax liabilities.

CAPITAL RESOURCES AND LIQUIDITY

Significant Sources of Capital

Historically, cash generated from operating activities has been our primary source of liquidity and capital resources. In addition, we received proceeds from asset dispositions.

Operating Activities

During the first nine months of 2012, cash provided by operating activities was $2,991 million compared with $2,275 million in the corresponding period of 2011. The improvement in the 2012 period reflects higher realized refining margins in the 2012 period and positive working capital impacts due to increased accruals for taxes, employee benefits and interest, partially offset by interest and tax payments in 2012.

 

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Our short- and long-term operating cash flows are highly dependent upon refining and marketing margins, prices for natural gas liquids, and chemicals margins. Prices and margins in our industry are typically volatile and are driven by market conditions over which we have little or no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows.

Generally, demand for gasoline is higher during the spring and summer months than during the fall and winter months in most of our markets due to seasonal changes in highway traffic. As a result, our operating results in the first and fourth quarters are generally lower than in the second and third quarters. However, our cash flow from operations may not always follow this seasonal trend in operating results, due to working capital fluctuations associated with inventory management. Historically, we have built inventory levels during the first quarter (thus lowering cash flow from operations) and lowered inventory levels in the fourth quarter (increasing cash flow from operations). We are currently evaluating our target inventory levels for year-end 2012. An option under consideration is to draw a portion of our inventory late in the year, such that cash realization will not transpire prior to December 31. This option could have the effect of a reduced positive impact to cash flows from operations from inventory management practices in the fourth quarter, as compared with our predominant historical practice. We do not believe these inventory decisions will have a material impact on our short- or long-term liquidity.

The level and quality of output from our refineries impacts our cash flows. The output at our refineries is impacted by such factors as operating efficiency, maintenance turnarounds, market conditions, feedstock availability and weather conditions. We actively manage the operations of our refineries and, typically, any variability in their operations has not been as significant to cash flows as that caused by margins and prices.

Our operating cash flows are also impacted by dividend decisions made by our equity affiliates, including WRB, DCP Midstream and CPChem. During the first nine months of 2012, we received dividends of $1,580 million from our equity affiliates, compared with $1,230 million during the same period of 2011. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these companies are not assured. For a discussion of distributions by CPChem, see the “Capital Spending—Chemicals” section.

Credit Facilities

In February 2012, we entered into a five-year revolving credit agreement with a syndicate of financial institutions. Under the terms of the revolving credit agreement, we have a borrowing capacity of up to $4.0 billion. We have not borrowed under this facility. However, as of September 30, 2012, $51 million in letters of credit had been issued that were supported by this facility.

The revolving credit agreement contains covenants that we consider usual and customary for an agreement of this type for comparable commercial borrowers, including a maximum consolidated net debt-to-capitalization ratio of 60 percent. The agreement has customary events of default, such as nonpayment of principal when due; nonpayment of interest, fees or other amounts; violation of covenants; cross-payment default and cross-acceleration (in each case, to indebtedness in excess of a threshold amount); and a change of control.

Borrowings under the credit agreement will incur interest at London Interbank Offered Rate (LIBOR) plus a margin based on the credit rating of our senior unsecured long-term debt as determined from time to time by Standard & Poor’s Ratings Services (S&P) and Moody’s Investors Service (Moody’s). The revolving credit agreement also provides for customary fees, including administrative agent fees and commitment fees.

During April, a newly formed, wholly owned subsidiary entered into a trade receivables securitization facility with an aggregate borrowing capacity of $1.2 billion, and a term of three years. As of September 30, 2012, no amount had been drawn under the facility. However, $166 million in letters of credit had been issued that were supported by the facility.

 

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Debt Financings

During March 2012, we issued, through a private placement, $5.8 billion of debt consisting of:

 

   

$0.8 billion aggregate principal amount of 1.950% Senior Notes due 2015.

 

   

$1.5 billion aggregate principal amount of 2.950% Senior Notes due 2017.

 

   

$2.0 billion aggregate principal amount of 4.300% Senior Notes due 2022.

 

   

$1.5 billion aggregate principal amount of 5.875% Senior Notes due 2042.

The notes are guaranteed by Phillips 66 Company, a wholly owned subsidiary. In connection with the private placement, we and Phillips 66 Company granted the holders of the notes certain registration rights under a Registration Rights Agreement. We have agreed for the benefit of the holders of the notes to use our commercially reasonable efforts to file and cause to be effective a registration statement with the U.S. Securities and Exchange Commission on an appropriate form with respect to a registered offer to exchange each series of notes for new notes that are guaranteed by Phillips 66 Company with terms substantially identical in all material respects to such series of notes. Generally, we have one year from the issuance of the Senior Notes to complete the exchange offer.

During April 2012, approximately $185 million of previously existing debt was retired. Also during April, we closed on $2.0 billion of new debt as a three-year amortizing term loan. The term loan bears interest at a variable rate based on referenced rates plus a margin dependent upon the credit rating of our senior unsecured long-term debt as determined from time to time by S&P and Moody’s. As of September 30, 2012, the interest rate was 1.69 percent.

Our senior unsecured long-term debt has been rated investment grade by Moody’s and S&P. We do not have any ratings triggers on any of our corporate debt that would cause an automatic default, and thereby impact our access to liquidity, in the event of a downgrade of our credit rating. If our credit rating deteriorated to a level prohibiting us from accessing the commercial paper market, we would expect to be able to access funds under our $5.2 billion in liquidity facilities mentioned above.

Because of the opportunities available to us, including internally generated cash flow and access to capital markets, we believe our short-term and long-term liquidity will be adequate to fund not only our operations, but also our anticipated near-term and long-term funding requirements, including capital spending programs, dividend payments, defined benefit plan contributions, repayment of debt maturities and other amounts that may ultimately be paid in connection with contingencies.

Off-Balance Sheet Arrangements

In April 2012, in connection with the separation, we entered into an agreement to guarantee 100 percent of certain outstanding debt obligations of Merey Sweeny, L.P. (MSLP). At September 30, 2012, the aggregate principal amount of MSLP debt guaranteed by us was $242 million.

For additional information about guarantees, see Note 11—Guarantees, in the Notes to Consolidated Financial Statements.

Capital Requirements

For information about our capital expenditures and investments, see the “Capital Spending” section.

On October 3, 2012, our Board of Directors declared a quarterly dividend of $0.25 per share, representing a 25 percent increase from the prior quarter. The dividend is payable on December 3, 2012, to stockholders of record at the close of business on October 15, 2012.

On July 31, 2012, our Board of Directors authorized the repurchase of up to $1 billion of our outstanding common stock. Stock purchases under this authorization began in the third quarter of 2012. Through September 30, 2012, $111 million was used to repurchase 2.6 million shares. Shares of stock repurchased are held as treasury shares.

 

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Capital Spending

 

                             
     Millions of Dollars  
     Nine Months Ended 
September 30
 
     2012      2011  
  

 

 

 

Capital Expenditures and Investments

     

R&M

     

United States

   $ 554         490   

International

     143         137   

 

 
     697         627   

 

 

Midstream

     11         9   

Chemicals

               

Corporate and Other

     119         17   

 

 
   $ 827         653   

 

 

United States

   $ 684         516   

International

     143         137   

 

 
   $ 827         653   

 

 

R&M

Capital spending for the R&M segment during the first nine months of 2012 was primarily for air emission reduction and clean fuels projects to meet new environmental standards, refinery upgrade projects to improve product yields, improvements to the operating integrity of key processing units and safety-related projects. During the first nine months of 2012, R&M capital spending was $697 million.

Major construction activities in progress include:

 

   

Several reliability and maintenance capital projects across the refining system aimed at improving operating availability.

 

   

Programs aimed at air emission reductions in various U.S. plants.

Generally, our equity affiliates in the R&M segment are intended to have self-funding capital programs.

Midstream

During the first nine months of 2012, DCP Midstream had a self-funded capital program, and thus required no new capital infusions from us or our co-venturer, Spectra Energy Corp. During this period, on a 100 percent basis, DCP Midstream’s capital expenditures and investments were approximately $1,946 million. Pursuant to an agreement in principle with Spectra Energy and DCP Midstream, we expect to acquire a one-third interest in both the Sand Hills and Southern Hills pipeline projects, which currently are under construction by DCP Midstream. The transaction is expected to close in the fourth quarter of 2012. Upon closing, Phillips 66, Spectra Energy and DCP Midstream each will own a one-third interest in the two pipeline projects. Our direct investment, in total, is expected to range between $700 million to $800 million.

Chemicals

During the first nine months of 2012, CPChem had a self-funded capital program, and thus required no new capital infusions from us or our co-venturer. During this period, on a 100 percent basis, CPChem’s capital expenditures and investments were approximately $497 million. In addition, CPChem’s advances to equity affiliates, primarily used for project construction and startup activities, were $149 million and its repayments received from equity affiliates were $220 million. Our agreement with Chevron Corporation regarding CPChem provides for CPChem to: (i) prior to the separation, halt all mandatory cash distributions to its owners and accumulate its excess cash; and (ii) after the separation, use the accumulated cash and its excess cash flow to retire all of its approximately $1 billion outstanding fixed-rate debt on an accelerated basis. In the third quarter of 2012, CPChem completed the redemption of all outstanding fixed-rate debt, and it resumed cash distributions to its owners in the fourth quarter. After the separation, the agreement generally provides that

 

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instead of CPChem incurring debt, CPChem’s owners will make capital infusions as necessary to fund CPChem’s capital requirements to the extent these requirements exceed CPChem’s available cash from operations. We are currently forecasting CPChem to remain self-funding through 2012.

Corporate and Other

Capital spending for Corporate and Other during the first nine months of 2012 was primarily for expenditures that facilitated the separation from ConocoPhillips.

Contingencies

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

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 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.

Legal and Tax Matters

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

Environmental

We are subject to the same numerous international, federal, state and local environmental laws and regulations as other companies in our industry. For a discussion of the most significant of these environmental laws and regulations, including those with associated remediation obligations, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 146, 147 and 148 of the Information Statement included in the Form 10.

We occasionally receive requests for information or notices of potential liability from the U.S. Environmental Protection Agency (EPA) and state environmental agencies alleging that we are a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. As of December 31, 2011, we reported that we had been notified of potential liability under

 

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CERCLA and comparable state laws at 61 sites around the United States. During the first nine months of 2012, we were notified of one new site, settled two sites, and 11 sites were resolved and closed, leaving 49 unresolved sites with potential liability.

At September 30, 2012, our consolidated balance sheet included a total environmental accrual of $533 million, compared with $542 million at December 31, 2011. We expect to incur a substantial amount of these expenditures within the next 30 years.

Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in our operations and products, and there can be no assurance that material costs and liabilities will not be incurred. However, we currently do not expect any material adverse effect on our results of operations or financial position as a result of compliance with current environmental laws and regulations.

The EPA’s Renewable Fuel Standard (RFS) program was implemented in accordance with the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007. The RFS program sets annual quotas for the percentage of biofuels (such as ethanol) that must be blended into motor fuels consumed in the United States. A Renewable Identification Number (RIN) represents a serial number assigned to each gallon of biofuel produced or imported into the United States. As a producer of petroleum-based motor fuels, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the EPA’s quota and, to the extent we do not, we must purchase RINs in the open market to satisfy our obligation under the RFS program. The market for RINs has been the subject of fraudulent activity, and we have identified that we have unknowingly purchased RINs in the past that were invalid due to fraudulent activity. Although costs to replace fraudulently marketed RINs that have been determined to be invalid have not been material through September 30, 2012, it is reasonably possible that some additional RINs that we have previously purchased may also be determined to be invalid. Should that occur, we would incur additional replacement charges. Although the cost for replacing any additional fraudulently marketed RINs is not reasonably estimable at this time, we could have a possible exposure of approximately $150 million before tax. It could take several years for this possible exposure to reach ultimate resolution; therefore, we would not expect to incur the full financial impact of fraudulent RIN replacement costs in any single interim or annual period.

Climate Change

There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (GHG) reduction. These proposed or promulgated laws apply or could apply in countries where we have interests or may have interests in the future. Laws in this field continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws, if enacted, could have a material impact on our results of operations and financial condition. We previously disclosed that the EPA’s announcement on March 29, 2010 (published as “Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs,” 75 Fed. Reg. 17004 (April 2, 2010)), and the EPA’s and U.S. Department of Transportation’s joint promulgation of a Final Rule on April 1, 2010, that triggers regulation of GHGs under the Clean Air Act, may lead to more climate-based claims for damages, and may result in longer agency review time for development projects to determine the extent of potential climate change. Challenges to both the announcement and rulemaking were denied by the Court of Appeals for the D.C. Circuit (see Coalition for Responsible Regulation v. EPA, 684 F. 3d 102 (D.C. Cir. 2012)), but may be subject to additional legal actions. We continue to monitor other legislative and regulatory actions and legal proceedings globally for potential impacts on our operations.

For examples of legislation or precursors for possible regulation that do or could affect our operations, see the “Climate Change” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 148 and 149 of the Information Statement included in the Form 10.

 

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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.

We based the forward-looking statements on our current expectations, estimates and projections about us and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:

 

   

Fluctuations in crude oil, NGL, and natural gas prices, refining and marketing margins and margins for our chemicals business.

 

   

Failure of new products and services to achieve market acceptance.

 

   

Unexpected changes in costs or technical requirements for constructing, modifying or operating facilities for manufacturing, refining or transportation projects.

 

   

Unexpected technological or commercial difficulties in manufacturing, refining or transporting our products, including chemicals products.

 

   

Lack of, or disruptions in, adequate and reliable transportation for our crude oil, natural gas, NGL, and refined products.

 

   

The level and success of natural gas drilling around DCP Midstream’s assets, the level and quality of gas production volumes around its assets and its ability to connect supplies to its gathering and processing systems in light of competition.

 

   

Inability to timely obtain or maintain permits, including those necessary for refinery projects; comply with government regulations; or make capital expenditures required to maintain compliance.

 

   

Failure to complete definitive agreements and feasibility studies for, and to timely complete construction of, announced and future refinery, chemical plant, midstream and transportation projects.

 

   

Potential disruption or interruption of our operations due to accidents, weather events, civil unrest, political events, terrorism or cyber attacks.

 

   

International monetary conditions and exchange controls.

 

   

Substantial investment or reduced demand for products as a result of existing or future environmental rules and regulations.

 

   

Liability for remedial actions, including removal and reclamation obligations, under environmental regulations.

 

   

Liability resulting from litigation.

 

   

General domestic and international economic and political developments, including armed hostilities; expropriation of assets; changes in governmental policies relating to crude oil, natural gas, NGL or refined product pricing, regulation or taxation; other political, economic or diplomatic developments; and international monetary fluctuations.

 

   

Changes in tax, environmental and other laws and regulations (including alternative energy mandates) applicable to our business.

 

   

Limited access to capital or significantly higher cost of capital related to illiquidity or uncertainty in the domestic or international financial markets.

 

   

Inability to obtain economical financing for projects, construction or modification of facilities and general corporate purposes.

 

   

The operation, financing and distribution decisions of our joint ventures.

 

   

Domestic and foreign supplies of crude oil and other feedstocks.

 

   

Domestic and foreign supplies of refined products, such as gasoline, diesel, jet fuel, home heating oil and petrochemicals.

 

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Overcapacity or under capacity in the refining and chemical industries.

 

   

Fluctuations in consumer demand for refined products.

 

   

Crude/refined product inventory levels.

 

   

The factors generally described in the section entitled “Risk Factors” in the Information Statement included in the Form 10.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information about market risks for the nine months ended September 30, 2012, does not differ materially from that discussed on pages 152 and 153 in the Information Statement included in the Form 10.

Item 4. CONTROLS AND PROCEDURES

With the participation of management, our Chairman and Chief Executive Officer (principal executive officer) and our Executive Vice President, Finance, and Chief Financial Officer (principal financial officer) carried out an evaluation, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Act), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act) as of the end of the period covered by this report. Based upon that evaluation, our Chairman and Chief Executive Officer and our Executive Vice President, Finance, and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of September 30, 2012.

There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The following is a description of reportable legal proceedings including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment for this reporting period. The following proceedings include those matters that arose during the third quarter of 2012 and any material developments with respect to matters previously reported in the Form 10 or the Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2012, and June 30, 2012. While it is not possible to accurately predict the final outcome of these pending proceedings, if any one or more of such proceedings was decided adversely to Phillips 66, we expect there would be no material effect on our consolidated financial position. Nevertheless, such proceedings are reported pursuant to the U.S. Securities and Exchange Commission’s (SEC) regulations.

Our U.S. refineries are implementing two separate consent decrees regarding alleged violations of the Federal Clean Air Act with the U.S. Environmental Protection Agency (EPA), six states and one local air pollution agency. Some of the requirements and limitations contained in the decrees provide for stipulated penalties for violations. Stipulated penalties under the decrees are not automatic, but must be requested by one of the agency signatories. As part of periodic reports under the decrees or other reports required by permits or regulations, we occasionally report matters that could be subject to a request for stipulated penalties. If a specific request for stipulated penalties meeting the reporting threshold set forth in SEC rules is made pursuant to these decrees based on a given reported exceedance, we will separately report that matter and the amount of the proposed penalty.

 

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New Matters

On September 19, 2012, the Bay Area Air Quality Management District (District) issued a $213,500 demand to settle 14 Notices of Violation (NOVs) issued in 2009 and 2010 with respect to alleged violations of regulatory and/or permit requirements at the Rodeo Refinery. We are working with the District to resolve this matter.

On October 15, 2012, the District issued a $313,000 demand to settle 13 NOVs issued in 2010 and 2011 with respect to alleged violations of regulatory and/or permit requirements at the Rodeo Refinery. We are working with the District to resolve this matter.

Matters Previously Reported

Phillips 66 was one of several companies who entered Administrative Settlement Agreements (ASAs) with the U.S. Environmental Protection Agency (EPA) to settle allegations that it had used invalid Renewable Identification Numbers (RINs) for its 2010 and 2011 fuel program compliance. Under its ASA, we will pay a maximum of $350,000 in penalties for the use of invalid RINs covered thereunder. Payments are made upon demand from the EPA. To date, $250,000 has been paid and it is anticipated that the EPA will demand the final $100,000 in 2013.

Phillips 66 has settled an allegation that it did not immediately notify the EPA of certain releases in 2010 and 2011 at the Wood River Refinery. The facility will pay a fine of $25,224 and perform on-site supplemental environmental projects valued at $125,000.

Item 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in the section entitled “Risk Factors” in the Information Statement included in the Form 10.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

 

                                                           
                          Millions of Dollars  
Period    Total Number of
Shares Purchased
    

Average Price

Paid per Share

    

Total Number of
Shares Purchased

as Part of Publicly
Announced Plans

or Programs

    

Approximate Dollar
Value of Shares

that May Yet Be
Purchased Under the
Plans or Programs

 

 

 

July 1-31, 2012

           $               $ 1,000   

August 1-31, 2012

     1,319,900         40.90         1,319,900         946   

September 1-30, 2012

     1,274,500         44.70         1,274,500         889   

 

 

Total

     2,594,400       $ 42.77         2,594,400      

 

 

On July 31, 2012, our Board of Directors authorized the repurchase of up to $1 billion of our outstanding common stock. We began purchases under this authorization, which has no expiration date, in the third quarter of 2012. The shares will be repurchased from time to time in the open market at the company’s discretion, subject to market conditions and other factors, and in accordance with applicable regulatory requirements and the Tax Sharing Agreement entered into in connection with the separation from ConocoPhillips. We are not obligated to acquire any particular amount of common stock and may commence, suspend or discontinue purchases at any time or from time to time without prior notice. Shares of stock repurchased are held as treasury shares.

 

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Item 5. OTHER INFORMATION

Shareholder Proposals

We intend to hold our first Annual Meeting of Shareholders (the Annual Meeting) on May 8, 2013, at a time and location to be determined and specified in our proxy statement related to the Annual Meeting.

Under the Securities and Exchange Commission’s proxy rules, we have set the deadline for submission of proposals to be included in our proxy materials for the Annual Meeting as December 3, 2012. Accordingly, in order for a shareholder proposal to be considered for inclusion in our proxy materials for the Annual Meeting, the proposal must be received by our Corporate Secretary, Phillips 66, 3010 Briarpark Drive, Houston, Texas 77042, on or before December 3, 2012, and comply with the procedures and requirements set forth in Rule 14a-8 under the Securities Exchange Act of 1934.

In accordance with the advance notice requirements contained in our amended and restated bylaws, for director nominations or other business to be brought before the Annual Meeting by a shareholder, other than Rule 14a-8 proposals described above, written notice must be delivered no earlier than the close of business on January 8, 2013, and no later than the close of business on February 7, 2013, to our Corporate Secretary, Phillips 66, 3010 Briarpark Drive, Houston, Texas 77042. These shareholder notices also must comply with the requirements of our amended and restated bylaws and will not be effective otherwise.

 

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Item 6. EXHIBITS

 

Exhibit     
Number    Exhibit Description

12*

   Computation of Ratio of Earnings to Fixed Charges.

31.1*

   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2*

   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32*

   Certifications pursuant to 18 U.S.C. Section 1350.

101.INS*

   XBRL Instance Document.

101.SCH*

   XBRL Schema Document.

101.CAL*

   XBRL Calculation Linkbase Document.

101.LAB*

   XBRL Labels Linkbase Document.

101.PRE*

   XBRL Presentation Linkbase Document.

101.DEF*

   XBRL Definition Linkbase Document.

*  Filed herewith.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

PHILLIPS 66
/s/ C. Doug Johnson

C. Doug Johnson

Vice President and Controller

(Chief Accounting and Duly Authorized Officer)

November 1, 2012

 

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