News Column

PHILLIPS 66 - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 1, 2014

Management's Discussion and Analysis is the company's analysis of its financial performance, financial condition, and significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. 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 44.

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

BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW

Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. At March 31, 2014, we had total assets of $51 billion. Our common stock trades on the New York Stock Exchange under the symbol "PSX."

Executive Overview We reported earnings of $1,572 million in the first quarter of 2014, generated $1,398 million in cash from operating activities, and received $507 million from asset dispositions. We used available cash to fund capital expenditures and investments of $572 million, pay dividends of $229 million, and repurchase $640 million of our common stock. We also had a cash outflow of $450 million related to the share exchange on the Phillips Specialty Products Inc. (PSPI) transaction. We ended the first quarter of 2014 with $5.3 billion of cash and cash equivalents and approximately $5.4 billion of total capacity available under our liquidity facilities.

In 2013, we formed Phillips 66 Partners LP, a master limited partnership, to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum product and natural gas liquids (NGL) pipelines and terminals, as well as other transportation and midstream assets. On March 1, 2014, we contributed to Phillips 66 Partners certain transportation, terminaling and storage assets for total consideration of $700 million. These assets consisted of our Gold Line products system and the Medford spheres, two newly constructed refinery-grade propylene storage spheres. Since we consolidate Phillips 66 Partners for financial reporting purposes, this transaction was eliminated upon consolidation and did not impact our financial position or cash flow.

Basis of Presentation Effective January 1, 2014, we changed the organizational structure of the internal financial information reviewed by our chief executive officer, and determined this resulted in a change in the composition of our operating segments. The primary effects of this reporting reorganization were:

We moved two of our equity investments, Excel Paralubes and Jupiter Sulphur, LLC, as well as the commission revenues related to needle and anode coke, polypropylene and solvents, from the Refining segment to the Marketing and Specialties (M&S) segment. We moved several refining logistics projects from the Refining segment to the Midstream segment.



The new segment alignment is presented for the three-month period ended March 31, 2014, with the prior periods recast for comparability.

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Business Environment The Midstream segment includes our 50 percent equity investment in DCP Midstream, LLC (DCP Midstream). Earnings of DCP Midstream are closely linked to NGL prices, natural gas prices and crude oil prices. Industry NGL prices increased in the first quarter of 2014, compared with the first quarter and fourth quarter of 2013, due to strong demand. During late 2013, demand for propane increased greatly due to declining storage levels in the Midwest United States, largely from more grain crop drying and extreme winter weather. Natural gas prices increased in the first quarter of 2014, compared with the first quarter and fourth quarter of 2013. The increase in natural gas prices was largely due to increased demand and lower storage levels from extreme winter weather.

The Chemicals segment consists of our 50 percent equity investment in Chevron Phillips Chemical Company LLC (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 continues to experience higher ethylene margins in regions of the world where production is based upon NGL versus crude-derived feedstocks. In particular, companies with North American ethane-based crackers benefited from the lower-priced feedstocks and improved ethylene margins, as well as improved margins for polyethylene, an ethylene derivative.

Results for our Refining segment depend largely on refining 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. The U.S. 3:2:1 crack spread (three barrels of crude oil producing two barrels of gasoline and one barrel of diesel) decreased in the first quarter of 2014, compared with the first quarter of 2013, but increased compared with the fourth quarter of 2013. The first-quarter 2014 domestic industry crack spread declined compared with the first quarter of 2013, largely as the result of average market gasoline and distillate prices declining more than the average market crude oil price. The increase in the first-quarter 2014 domestic industry crack spread compared with the fourth quarter of 2013 was primarily due to higher gasoline prices. North American crude production continues to grow at a rapid pace, keeping downward pressure on crude prices. However, increased pipeline capacity connecting the Midcontinent to the Gulf Coast has resulted in narrower inland crude discounts than in the past. The Northwest Europe benchmark crack spread in the first quarter of 2014 decreased compared with both the first quarter and fourth quarter of 2013. The decline from the first quarter of 2013 was a result of lower gasoline and distillate cracks while the decline from the fourth quarter of 2013 was a result of lower distillate cracks. European oil product demand growth is still negative due to the ongoing weak economic situation and abnormally warm winter. Gasoline remains oversupplied and distillate remains well supplied by imports from outside Europe. Results for our M&S segment depend largely on marketing fuel margins, base oil margins, lubricant margins and other specialty product margins. These margins are primarily based on market factors, largely determined by the relationship between demand and supply. Marketing fuel margins are primarily determined by the trend of the spot prices for refined products. Generally, a downward trend of spot prices has a favorable impact on the marketing fuel margins, while an upward trend of spot prices has an unfavorable impact on marketing fuel margins. 32



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RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three-month period ended March 31, 2014, is based on a comparison with the corresponding period of 2013.

Consolidated Results A summary of net income (loss) attributable to Phillips 66 by business segment follows: Millions of Dollars Three Months Ended March 31 2014 2013 Midstream $ 188 111 Chemicals 316 282 Refining 306 904 Marketing and Specialties 137 190 Corporate and Other (81 ) (95 ) Discontinued Operations 706 15



Net income attributable to Phillips 66$ 1,572 1,407

Earnings for Phillips 66 increased $165 million, or 12 percent, in the first quarter of 2014. The increase was primarily due to the recognition of a noncash $696 million gain related to the PSPI share exchange. This increase was mostly offset by lower realized refining margins resulting partially from decreased market crack spreads and impacts related to narrowing crude differentials. See the "Segment Results" section for additional information on our segment results.

Statement of Income Analysis

Sales and other operating revenues and purchased crude oil and products for the first quarter of 2014 both decreased 2 percent, primarily due to lower petroleum product and crude oil prices, respectively.

Equity in earnings of affiliates decreased 25 percent for the first quarter of 2014, which primarily resulted from decreased earnings from WRB Refining LP (WRB), partially offset by increased earnings from CPChem and DCP Midstream. Equity in earnings of WRB decreased 70 percent in the first quarter of 2014, mainly due to lower refining margins. See the "Segment Results" section for additional information on CPChem and DCP Midstream earnings.

Operating expenses for the first quarter of 2014 increased $112 million, or 11 percent, primarily resulting from spending related to higher utility costs due to increased natural gas prices, as well as turnarounds at our refineries.

Selling, general and administrative expenses increased $75 million, or 23 percent, in the first quarter of 2014, primarily due to additional fees under marketing consignment fuels agreements, as well as costs associated with the acquisition of an additional interest in an entity that operates a power and steam generation plant.

Foreign currency transaction (gains) losses for the first quarter of 2014 were a $19 million gain, compared with a loss of $2 million for the first quarter of 2013. The favorable change was primarily due to the U.S. dollar remaining constant against both the British pound and the euro during the first quarter of 2014, compared with the U.S. dollar strengthening against both the British pound and the euro during the first quarter of 2013.

See Note 20-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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Income from discontinued operations increased $691 million in the first quarter of 2014, due to the completion of the PSPI share exchange on February 25, 2014. See Note 4-Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements, for additional information on this transaction.

Segment Results Midstream Three Months Ended March 31 2014 2013 Millions of Dollars Net Income Attributable to Phillips 66 Transportation $ 62 45 DCP Midstream 83 56 NGL 43 10 Total Midstream $ 188 111 Dollars Per Unit Weighted Average NGL Price* DCP Midstream (per barrel) $ 44.52 37.45 DCP Midstream (per gallon) 1.06 0.89



* Based on index prices from the Mont Belvieu and Conway market hubs that are weighted by NGL component and location mix. 2013 weighted average NGL prices have been recast to reflect the impact of ethane rejection.

Thousands of Barrels Daily Transportation Volumes Pipelines* 3,101 3,032 Terminals 1,477 1,041 Operating Statistics NGL extracted** 223 198 NGL fractionated*** 112 117



* Pipelines represent the sum of volumes transported through each separately tariffed pipeline segment, including our share of equity volumes from Yellowstone Pipe Line Company and Lake Charles Pipe Line Company. ** 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 NGL from the raw gas stream. The remaining "residue" gas is marketed to electric utilities, industrial users and gas marketing companies. Most of the NGLs are fractionated-separated into individual components such as ethane, propane and butane-and marketed as chemical feedstock, fuel or blendstock. In addition, the Midstream segment includes U.S. transportation and terminaling services associated with the movement of crude oil, refined and specialty products, natural gas and NGL, as well as NGL fractionation, trading and marketing businesses in the United States. The Midstream segment includes our 50 percent equity investment in DCP Midstream and our investment in Phillips 66 Partners LP.

Earnings from the Midstream segment increased $77 million, or 69 percent, in the first quarter of 2014. The improvements were driven by higher earnings from each of our business lines.

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Transportation earnings increased $17 million in the first quarter of 2014. This increase primarily resulted from increased throughput fees, as well as higher earnings associated with railcar activity.

The $27 million increase in earnings of DCP Midstream in the first quarter of 2014 primarily resulted from higher NGL and natural gas prices. See the "Business Environment and Executive Overview" section for information on market factors impacting this quarter's results.

DCP Midstream Partners, LP (DCP Partners), is a publicly-traded master limited partnership and a subsidiary of DCP Midstream. DCP Partners 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 $30 million in the three-month period ended March 31, 2014, compared with approximately $27 million in the corresponding period of 2013.

Earnings of our NGL business increased $33 million for the three-month period ended March 31, 2014. The increase was primarily due to improved margins driven by strong propane prices and inventory impacts.

Chemicals Three Months Ended March 31 2014 2013 Millions of Dollars Net Income Attributable to Phillips 66 $ 316 282 Millions of Pounds CPChem Externally Marketed Sales Volumes* Olefins and Polyolefins 4,302 4,036 Specialties, Aromatics and Styrenics 1,569 1,496 5,871 5,532



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

Olefins and Polyolefins Capacity Utilization (percent) 93 % 91 %

The Chemicals segment consists of our 50 percent interest in CPChem, which we account for under the equity method. CPChem uses NGL 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 increased $34 million, or 12 percent, in the first quarter of 2014. The increase in earnings was primarily driven by improved polyethylene realized margins, higher equity earnings from CPChem's equity affiliates and lower turnaround activity costs. These increases were partially offset by an increase in utility costs due to higher natural gas prices. See the "Business Environment and Executive Overview" section for information on market factors impacting this quarter's results.

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Table of Contents Refining Three Months Ended March 31 2014 2013 Millions of Dollars Net Income (Loss) Attributable to Phillips 66 Atlantic Basin/Europe $ 16 95 Gulf Coast 77 35 Central Corridor 222 588 Western/Pacific (47 ) 63 Other Refining 38 123 Worldwide $ 306 904 Dollars Per Barrel Refining Margins* Atlantic Basin/Europe $ 7.46 8.61 Gulf Coast 8.64 8.08 Central Corridor 15.21 27.29 Western/Pacific 7.02 9.64 Worldwide 9.88 13.78



* Based on total processed inputs and includes proportional share of refining margins contributed by certain equity affiliates.

Thousands of Barrels Daily Operating Statistics Refining operations* Atlantic Basin/Europe Crude oil capacity 588 588 Crude oil processed 551 571 Capacity utilization (percent) 94 97 Refinery production 588 618 Gulf Coast Crude oil capacity 733 733 Crude oil processed 613 584 Capacity utilization (percent) 84 80 Refinery production 717 646 Central Corridor Crude oil capacity 485 475 Crude oil processed 466 457 Capacity utilization (percent) 96 96 Refinery production 483 475



Western/Pacific

Crude oil capacity 440 440 Crude oil processed 395 401 Capacity utilization (percent) 90 91 Refinery production 429 445



Worldwide

Crude oil capacity 2,246 2,236 Crude oil processed 2,025 2,013 Capacity utilization (percent) 90 90 Refinery production 2,217 2,184



* Includes our share of equity affiliates.

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The Refining segment buys, sells and refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels) at 15 refineries, mainly in the United States, Europe and Asia.

Earnings for the Refining segment decreased $598 million, or 66 percent, in the first quarter of 2014. The decrease was primarily due to lower realized refining margins resulting partially from decreased market crack spreads and impacts related to narrowing crude differentials. See the "Business Environment and Executive Overview" section for information on industry crack spreads and other market factors impacting this quarter's results. Also contributing to the lower results were increased maintenance and turnaround costs in the first quarter of 2014, as well as higher utility costs due to increased natural gas prices.

Our worldwide refining crude oil capacity utilization rate was 90 percent in the first quarter of 2014 and 2013.

Marketing and Specialties Three Months Ended March 31 2014 2013 Millions of Dollars Net Income Attributable to Phillips 66 Marketing and Other $ 93 177 Specialties 44 13 Total Marketing and Specialties $ 137 190 Dollars Per Barrel Realized Marketing Fuel Margin* U.S. $ 1.19 1.02 International 3.72 3.16



* On third-party petroleum products sales.

Dollars Per Gallon U.S. Average Wholesale Prices* Gasoline $ 2.79 2.93 Distillates 3.10 3.14 * Excludes excise taxes. Thousands of Barrels Daily Marketing Petroleum Products Sales Volumes Gasoline 1,119 1,105 Distillates 944 956 Other products 16 16 Total 2,079 2,077



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

The M&S segment earnings were $137 million in the first quarter of 2014, a decrease of $53 million, or 28 percent. Earnings in the first quarter of 2014 were unfavorably impacted by costs associated with the acquisition of an additional interest in an entity that operates a power and steam generation plant. Earnings in the first quarter of 2013 benefited from a full quarter of earnings from our U.K. power generation business, which was sold in July 2013, and the biodiesel tax

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credit program that was discontinued in 2014. See the "Business Environment and Executive Overview" section for information on marketing fuel margins and other market factors impacting this quarter's results.

Corporate and Other Millions of Dollars Three Months Ended March 31 2014 2013 Net Income (Loss) Attributable to Phillips 66 Net interest $ (41 ) (43 ) Corporate general and administrative expenses (40 ) (34 ) Technology (13 ) (12 ) Other 13 (6 ) Total Corporate and Other $ (81 ) (95 )



Net interest consists of interest and financing expense, net of interest income and capitalized interest. Corporate general and administrative expenses increased $6 million in the three-month period ended March 31, 2014. Partially contributing to this increase was greater charitable contributions.

The category "Other" includes certain income tax expenses, environmental costs associated with sites no longer in operation, foreign currency transaction gains and losses and other costs not directly associated with an operating segment. The decrease in costs was primarily due to expenditures in the first quarter of 2013, related to an asset impairment and higher environmental costs, as well as increased foreign tax credit utilization benefit in the first quarter of 2014.

Discontinued Operations Millions of Dollars Three Months Ended March 31 2014 2013 Net Income Attributable to Phillips 66 Discontinued operations $ 706 15



In December 2013, we entered into an agreement to exchange the stock of PSPI, a flow improver business, which was included in our M&S segment, for shares of Phillips 66 common stock owned by the other party to the transaction. On February 25, 2014, we completed the PSPI share exchange, resulting in the receipt of approximately 17.4 million shares of Phillips 66 common stock, which are held as treasury shares, and the recognition of a before-tax noncash gain of $696 million. See Note 4-Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements, for additional information on this transaction.

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CAPITAL RESOURCES AND LIQUIDITY

Financial Indicators Millions of Dollars Except as Indicated March 31 December 31 2014 2013 Short-term debt $ 40 24 Total debt 6,217 6,155 Total equity 21,829 22,392 Percent of total debt to capital* 22 % 22 Percent of floating-rate debt to total debt 1 % 1



* Capital includes total debt and total equity.

To meet our short- and long-term liquidity requirements, we look to a variety of funding sources, but rely primarily on cash generated from operating activities. During the first three months of 2014, we generated $1,398 million in cash from operations and received $507 million from asset dispositions. This available cash was primarily used for capital expenditures and investments ($572 million), repurchases of our common stock ($640 million), the PSPI share exchange ($450 million) and dividend payments on our common stock ($229 million). During the first three months of 2014, cash and cash equivalents decreased by $74 million to $5,326 million.

In addition to cash flows from operating activities, we rely on our credit facility programs, asset sales and our ability to issue securities using our shelf registration statement to support our short- and long-term liquidity requirements. We believe current cash and cash equivalents and cash generated by operations, together with access to external sources of funds as described below in the "Significant Sources of Capital" section, will be sufficient to meet our funding requirements in the near and long term, including our capital spending, dividend payments, defined benefit plan contributions, repayment of debt and share repurchases.

Significant Sources of Capital

Operating Activities During the first three months of 2014, cash provided by operating activities was $1,398 million, compared with $2,213 million for the first three months of 2013. The decrease in the 2014 period reflected lower realized refining margins and reduced distributions from CPChem, partially offset by increased distributions from WRB. Additionally, reduced positive working capital impacts were driven by a smaller increase in payables, partially offset by decreased receivables.

Our short- and long-term operating cash flows are highly dependent upon refining and marketing margins, NGL prices, 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.

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 DCP Midstream, CPChem and WRB. During the first three months of 2014, cash from operations included dividends of $1,410 million from our equity affiliates, compared with $1,116 million during the same period of 2013. We cannot control the amount of future dividends from equity affiliates; therefore, future dividend payments by these companies are not assured.

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WRB

WRB is a 50-percent-owned business venture with Cenovus Energy Inc. (Cenovus). Cenovus was obligated to contribute $7.5 billion, plus accrued interest, to WRB over a 10-year period that began in 2007. In the first quarter of 2014, Cenovus prepaid its remaining balance under this obligation. As a result, WRB declared a special dividend, which was distributed to the co-venturers in March 2014. Of the $1,232 million that we received, $760 million was considered a return on our investment in WRB (an operating cash inflow), and $472 million was considered a return of our investment in WRB (an investing cash inflow). The return of investment portion of the dividend was included in the "Proceeds from assets dispositions" line in our consolidated statement of cash flows.

Contribution to Phillips 66 Partners LP Effective March 1, 2014, we contributed to Phillips 66 Partners certain transportation, terminaling and storage assets for total consideration of $700 million. These assets consisted of the Gold Line products system and the Medford spheres, two newly constructed refinery-grade propylene storage spheres. Phillips 66 Partners financed the acquisition with cash on hand of $400 million, the issuance to us of 3,530,595 and 72,053 additional common and general partner units, respectively, valued at $140 million, and a five-year, $160 million note payable to a subsidiary of Phillips 66. See Note 21-Phillips 66 Partners LP, in the Notes to Consolidated Financial Statements, for additional information.

Credit Facilities As of March 31, 2014, no amount had been drawn under our $4.5 billion credit facility; however, $51 million in letters of credit had been issued that were supported by this facility. As of March 31, 2014, no amount had been drawn under Phillips 66 Partners'$250 million revolving credit facility.

Trade Receivables Securitization Facility As of March 31, 2014, no amount had been drawn under our $696 million trade receivables securitization facility; however, $26 million in letters of credit had been issued that were collateralized by trade receivables held by a subsidiary under this facility.

Shelf Registration We have a universal shelf registration statement on file with the U.S. Securities and Exchange Commission (SEC) under which we, as a well-known seasoned issuer, have the ability to issue and sell an indeterminate amount of various types of debt and equity securities.

Off-Balance Sheet Arrangements In April 2012, in connection with our separation from ConocoPhillips (the Separation), we entered into an agreement to guarantee 100 percent of certain outstanding debt obligations of Merey Sweeny, L.P. (MSLP). At March 31, 2014, the aggregate principal amount of MSLP debt guaranteed by us was $214 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.

Our debt balance at both March 31, 2014, and December 31, 2013, was $6.2 billion. Our debt-to-capital ratio was 22 percent at both March 31, 2014, and December 31, 2013, within our target range of 20-to-30 percent.

On February 7, 2014, our Board of Directors declared a quarterly cash dividend of $0.39 per common share. The dividend was paid on March 3, 2014, to holders of record at the close of business on February 18, 2014.

During 2012 and 2013, our Board of Directors authorized repurchases totaling up to $5 billion of our outstanding common stock. The share repurchases are expected to be funded primarily through available cash. During the first quarter of 2014, we repurchased 8,410,109 shares at a cost of $640 million. Since the inception of our share repurchases in 2012, through March 31, 2014, we have repurchased a total of 52,516,489 shares at a cost of $3,242 million. Shares of stock repurchased are held as treasury shares.

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In December 2013, we announced that we had entered into an agreement to exchange the stock of PSPI for shares of our common stock held by the other party to the transaction. On February 25, 2014, we completed the PSPI share exchange, resulting in the receipt of approximately 17.4 million shares of Phillips 66 common stock, which are held as treasury shares, and the recognition of a before-tax, noncash gain of $696 million.

Capital Spending Millions of Dollars Three Months Ended March 31 2014 2013 Capital Expenditures and Investments Midstream $ 288 115 Chemicals - - Refining 186 131 Marketing and Specialties 84 97 Corporate and Other 14 39 Total consolidated from continuing operations $ 572 382 Discontinued operations $ - 5 Selected Equity Affiliates* DCP Midstream $ 178 274 CPChem** 155 106 WRB 23 29 $ 356 409



* Our share of capital spending, which is self-funded by the equity affiliate. ** 2013 has been recast to reflect a change in CPChem's basis of presentation.

Midstream

During the first three months of 2014, DCP Midstream 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, DCP Midstream's capital expenditures and investments were approximately $355 million.

During the first three months of 2014, other capital spending in our Midstream segment not related to DCP Midstream included construction activities related to our Sweeny Fractionator I project, the purchase of an additional 5.7 percent interest in the refined products Explorer Pipeline for $61 million, thereby increasing our ownership to 19.5 percent, and spending associated with return, reliability and maintenance projects in our Transportation business. In addition to our Sweeny Fractionator I project, our major construction activities in progress include the installation of rail racks to accept advantaged crude deliveries at the Bayway and Ferndale refineries.

Chemicals

During the first three months of 2014, 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 $310 million, primarily for their U.S. Gulf Coast Petrochemicals Project. We are currently forecasting CPChem to remain self-funding through 2014.

Refining

Capital spending for the Refining segment during the first three months of 2014 was primarily for air emission reduction projects to meet new environmental standards, refinery upgrade projects to increase accessibility of advantaged crudes and improve product yields, improvements to the operating integrity of key processing units and safety-related projects.

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Major construction activities in progress include:

Installation of facilities to reduce nitrous oxide emissions from the fluid catalytic cracker at the Alliance Refinery. Installation of a tail gas treating unit at the Humber Refinery to reduce emissions from the sulfur recovery units.



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

Marketing and Specialties Capital spending for the M&S segment during the first three months of 2014 was primarily for reliability and maintenance projects, and projects targeted at growing our international Marketing and Specialties businesses. In March 2014, we paid approximately $70 million, net of acquired cash, to acquire the remaining interest that we did not already own in an entity that operates a power and steam generation plant.

Corporate and Other Capital spending for Corporate and Other during the first three months of 2014 was primarily for projects related to information technology and facilities.

Contingencies

A number of lawsuits involving a variety of claims that arose in the ordinary course of business have been filed against us or are subject to indemnifications provided by us. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for 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 and tax matters are handled by our legal and tax organizations. These organizations apply their knowledge, experience and professional judgment to the specific characteristics of our cases and uncertain tax positions. We employ a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases and enables the tracking of those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required. In the case of income-tax-related contingencies, we monitor tax legislation and court decisions, the status of tax audits and the statute of limitations within which a taxing authority can assert a liability.

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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 50, 51 and 52 of our 2013 Annual Report on Form 10-K.

From time to time, we 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, 2013, we reported that we had been notified of potential liability under CERCLA and comparable state laws at 35 sites around the United States. During the first three months of 2014, there were no new sites for which we received notification of potential liability nor was there resolution of any previously identified sites, leaving 35 unresolved sites with potential liability at March 31, 2014.

At March 31, 2014, our consolidated balance sheet included a total environmental accrual of $488 million, compared with $492 million at December 31, 2013. 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.

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 states and/or 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'sand 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 those government actions are 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 53 and 54 of our 2013 Annual Report on Form 10-K.

NEW ACCOUNTING STANDARDS

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." This ASU amends the definition of discontinued operations so that only disposals of components of an entity representing major strategic shifts that have a major effect on an entity's operations and financial results will qualify for discontinued operations reporting. The ASU also requires additional disclosures about discontinued operations and individually material disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective January 1, 2015, and earlier application is permitted,

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but only for disposals not previously reported in the financial statements. We are currently evaluating the provisions of ASU 2014-08 and assessing the impact, if any, it may have on our financial position and results of operations. Our initial assessment is that this ASU will result in fewer dispositions qualifying for discontinued operations reporting.

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 NGL, crude oil and natural gas prices and petrochemical

and refining margins.

Failure of new products and services to achieve market acceptance.

Unexpected changes in costs or technical requirements for constructing, modifying or operating our facilities or transporting our products. 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 NGL, crude oil, natural gas 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 capital 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 capital 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 resulting from litigation or for remedial actions, including removal and reclamation obligations under environmental regulations. General domestic and international economic and political developments including: armed hostilities; expropriation of assets; changes in governmental policies relating to NGL, crude oil, natural gas or refined product pricing, regulation or taxation; and other political, economic or diplomatic developments. 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 changes to our credit profile or illiquidity or uncertainty in the domestic or international financial markets.



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 petrochemicals and refined products, such as gasoline, diesel, jet fuel and home heating oil.



Governmental policies relating to exports of crude oil and natural gas.

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Overcapacity or under capacity in the midstream, chemicals and refining

industries.

Fluctuations in consumer demand for refined products.

The factors generally described in Item 1A.-Risk Factors in our 2013

Annual Report on Form 10-K.


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Source: Edgar Glimpses