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 June 30, 2013

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 001-35054

Marathon Petroleum Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   27-1284632

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

539 South Main Street, Findlay, Ohio   45840-3229
(Address of principal executive offices)   (Zip code)

(419) 422-2121

(Registrant’s telephone number, including area code)

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 (§232.405 of this chapter) 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. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer    ¨  (Do not check if a smaller reporting company)    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

There were 313,074,196 shares of Marathon Petroleum Corporation common stock outstanding as of July 31, 2013.

 

 

 


Table of Contents

MARATHON PETROLEUM CORPORATION

Form 10-Q

Quarter Ended June 30, 2013

INDEX

 

     Page  

PART I – FINANCIAL INFORMATION

  

Item 1.     Financial Statements:

  

  Consolidated Statements of Income (Unaudited)

     2   

  Consolidated Statements of Comprehensive Income (Unaudited)

     3   

  Consolidated Balance Sheets (Unaudited)

     4   

  Consolidated Statements of Cash Flows (Unaudited)

     5   

  Consolidated Statements of Equity (Unaudited)

     6   

  Notes to Consolidated Financial Statements (Unaudited)

     7   

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

     29   

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

     45   

Item 4.     Controls and Procedures

     46   

  Supplementary Statistics (Unaudited)

     47   

PART II – OTHER INFORMATION

  

Item 1.     Legal Proceedings

     49   

Item 1A.  Risk Factors

     49   

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

     50   

Item 6.     Exhibits

     51   

  Signatures

     52   

Unless otherwise stated or the context otherwise indicates, all references in this Form 10-Q to “MPC,” “us,” “our,” “we” or “the Company” mean Marathon Petroleum Corporation and its consolidated subsidiaries.

 

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Table of Contents

Part I – Financial Information

Item 1. Financial Statements

Marathon Petroleum Corporation

Consolidated Statements of Income (Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In millions, except per share data)

   2013     2012     2013     2012  

Revenues and other income:

        

Sales and other operating revenues (including consumer excise taxes)

   $ 25,675      $ 20,240      $ 49,003      $ 40,504   

Sales to related parties

     2        3        4        4   

Income from equity method investments

     7        9        7        11   

Net gain on disposal of assets

     1        1        2        3   

Other income

     18        4        32        10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other income

     25,703        20,257        49,048        40,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of revenues (excludes items below)

     22,320        16,800        42,354        34,121   

Purchases from related parties

     79        57        151        120   

Consumer excise taxes

     1,596        1,428        3,054        2,808   

Depreciation and amortization

     302        236        589        466   

Selling, general and administrative expenses

     358        365        607        616   

Other taxes

     88        64        177        138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     24,743        18,950        46,932        38,269   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     960        1,307        2,116        2,263   

Net interest and other financial income (costs)

     (45     (17     (93     (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     915        1,290        2,023        2,224   

Provision for income taxes

     316        476        694        814   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     599        814        1,329        1,410   

Less net income attributable to noncontrolling interests

     6        —          11        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPC

   $ 593      $ 814      $ 1,318      $ 1,410   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data (See Note 7)

        

Basic:

        

Net income attributable to MPC per share

   $ 1.84      $ 2.39      $ 4.03      $ 4.09   

Weighted average shares outstanding

     322        340        326        344   

Diluted:

        

Net income attributable to MPC per share

   $ 1.83      $ 2.38      $ 4.01      $ 4.07   

Weighted average shares outstanding

     324        341        328        346   

Dividends paid

   $ 0.35      $ 0.25      $ 0.70      $ 0.50   

The accompanying notes are an integral part of these consolidated financial statements.

 

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Marathon Petroleum Corporation

Consolidated Statements of Comprehensive Income (Unaudited)

 

                                           
     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

(In millions)

   2013     2012      2013     2012  

Net income

   $ 599      $ 814       $ 1,329      $ 1,410   

Other comprehensive income (loss):

         

Defined benefit postretirement and post-employment plans:

         

Actuarial changes, net of tax of $81, $25, $135 and $33

     135        39         225        55   

Prior service costs, net of tax of ($4), $196, ($9) and $197

     (7     326         (15     327   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income

     128        365         210        382   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

     727        1,179         1,539        1,792   

Less comprehensive income attributable to noncontrolling interests

     6        —           11        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to MPC

   $ 721      $ 1,179       $ 1,528      $ 1,792   
  

 

 

   

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Marathon Petroleum Corporation

Consolidated Balance Sheets (Unaudited)

 

                                               
     June 30,     December 31,  

(In millions, except per share data)

   2013     2012  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 3,069      $ 4,860   

Receivables, less allowance for doubtful accounts of $9 and $10

     6,163        4,610   

Inventories

     4,830        3,449   

Other current assets

     190        110   
  

 

 

   

 

 

 

Total current assets

     14,252        13,029   

Equity method investments

     328        321   

Property, plant and equipment, net

     13,799        12,643   

Goodwill

     938        930   

Other noncurrent assets

     378        300   
  

 

 

   

 

 

 

Total assets

   $ 29,695      $ 27,223   
  

 

 

   

 

 

 

Liabilities

    

Current liabilities:

    

Accounts payable

   $ 8,601      $ 6,785   

Payroll and benefits payable

     284        364   

Consumer excise taxes payable

     406        325   

Accrued taxes

     612        598   

Long-term debt due within one year

     23        19   

Other current liabilities

     315        112   
  

 

 

   

 

 

 

Total current liabilities

     10,241        8,203   

Long-term debt

     3,387        3,342   

Deferred income taxes

     2,187        2,050   

Defined benefit postretirement plan obligations

     929        1,266   

Deferred credits and other liabilities

     754        257   
  

 

 

   

 

 

 

Total liabilities

     17,498        15,118   
  

 

 

   

 

 

 

Commitments and contingencies (see Note 22)

    

Equity

    

MPC stockholders’ equity:

    

Preferred stock, no shares issued and outstanding (par value $0.01 per share, 30 million shares authorized)

     —          —     

Common stock:

    

Issued—362 million and 361 million shares (par value $0.01 per share, 1 billion shares authorized)

     4        4   

Held in treasury, at cost—45 million and 28 million shares

     (2,672     (1,253

Additional paid-in capital

     9,737        9,527   

Retained earnings

     4,969        3,880   

Accumulated other comprehensive loss

     (254     (464
  

 

 

   

 

 

 

Total MPC stockholders’ equity

     11,784        11,694   

Noncontrolling interests

     413        411   
  

 

 

   

 

 

 

Total equity

     12,197        12,105   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 29,695      $ 27,223   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Marathon Petroleum Corporation

Consolidated Statements of Cash Flows (Unaudited)

 

     Six Months Ended
June 30,
 

(In millions)

   2013     2012  

Increase (decrease) in cash and cash equivalents

    

Operating activities:

    

Net income

   $ 1,329      $ 1,410   

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

    

Depreciation and amortization

     589        466   

Pension and other postretirement benefits, net

     (42     183   

Deferred income taxes

     34        328   

Net gain on disposal of assets

     (2     (3

Equity method investments, net

     3        8   

Changes in the fair value of derivative instruments

     (57     106   

Changes in:

    

Current receivables

     (1,539     753   

Inventories

     (455     (697

Current accounts payable and accrued liabilities

     1,789        (2,022

All other, net

     (6     84   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,643        616   
  

 

 

   

 

 

 

Investing activities:

    

Additions to property, plant and equipment

     (424     (635

Acquisitions

     (1,515     (163

Disposal of assets

     9        6   

Investments—loans and advances

     (38     (11

—redemptions and repayments

     28        3   

All other, net

     22        2   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,918     (798
  

 

 

   

 

 

 

Financing activities:

    

Long-term debt—repayments

     (10     (6

Debt issuance costs

     (2     —     

Issuance of common stock

     34        32   

Common stock repurchased

     (1,313     (850

Dividends paid

     (229     (172

Distributions to noncontrolling interests

     (9     —     

All other, net

     13        (6
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,516     (1,002
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,791     (1,184

Cash and cash equivalents at beginning of period

     4,860        3,079   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,069      $ 1,895   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Marathon Petroleum Corporation

Consolidated Statements of Equity (Unaudited)

 

     MPC Stockholders’ Equity              

(In millions)

   Common
Stock
     Treasury
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interests
    Total
Equity
 

Balance as of December 31, 2011

   $ 4       $ —        $ 9,482      $ 898      $ (879   $ —        $ 9,505   

Net income

     —           —          —          1,410        —          —          1,410   

Dividends paid

     —           —          —          (172     —          —          (172

Other comprehensive income

     —           —          —          —          382        —          382   

Shares repurchased

     —           (742     (108     —          —          —          (850

Shares issued (returned)—stock based compensation

     —           (1     33        —          —          —          32   

Stock-based compensation

     —           —          28        —          —          —          28   

Other

     —           —          (9     —          —          —          (9
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

   $ 4       $ (743   $ 9,426      $ 2,136      $ (497   $ —        $ 10,326   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2012

   $ 4       $ (1,253   $ 9,527      $ 3,880      $ (464   $ 411      $ 12,105   

Net income

     —           —          —          1,318        —          11        1,329   

Dividends paid

     —           —          —          (229     —          —          (229

Distributions to noncontrolling interests

     —           —          —          —          —          (9     (9

Other comprehensive income

     —           —          —          —          210        —          210   

Shares repurchased

     —           (1,413     100        —          —          —          (1,313

Shares issued (returned)—stock based compensation

     —           (6     33        —          —          —          27   

Stock-based compensation

     —           —          38        —          —          —          38   

Tax settlement with Marathon Oil Corporation

     —           —          39        —          —          —          39   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2013

   $ 4       $ (2,672   $ 9,737      $ 4,969      $ (254   $ 413      $ 12,197   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Shares in millions)

   Common
Stock
     Treasury
Stock
                               

Balance as of December 31, 2011

     357         —               

Shares repurchased

     —           (18          

Shares issued—stock-based compensation

     1         —               
  

 

 

    

 

 

           

Balance as of June 30, 2012

     358         (18          
  

 

 

    

 

 

           

Balance as of December 31, 2012

     361         (28          

Shares repurchased

     —           (17          

Shares issued—stock-based compensation

     1         —               
  

 

 

    

 

 

           

Balance as of June 30, 2013

     362         (45          
  

 

 

    

 

 

           

The accompanying notes are an integral part of these consolidated financial statements.

 

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Notes to Consolidated Financial Statements (Unaudited)

1. Description of the Business and Basis of Presentation

Description of the BusinessAs used in this report, the terms “MPC,” “we,” “us,” “the Company” or “our” may refer to Marathon Petroleum Corporation, one or more of its consolidated subsidiaries or all of them taken as a whole.

Our business consists of refining and marketing, retail marketing and pipeline transportation operations conducted primarily in the Midwest, Gulf Coast and Southeast regions of the United States, through subsidiaries, including Marathon Petroleum Company LP, Speedway LLC and MPLX LP and its subsidiaries (“MPLX”).

See Note 9 for additional information about our operations.

Basis of PresentationAll significant intercompany transactions and accounts have been eliminated.

These interim consolidated financial statements are unaudited; however, in the opinion of our management, these statements reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal, recurring nature unless otherwise disclosed. These interim consolidated financial statements, including the notes, have been prepared in accordance with the rules of the Securities and Exchange Commission applicable to interim period financial statements and do not include all of the information and disclosures required by United States generally accepted accounting principles (“US GAAP”) for complete financial statements.

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year.

In the fourth quarter of 2012, we reclassified certain expenses from selling, general and administrative expenses to cost of revenues, which is consistent with expense classifications for MPLX, MPC’s consolidated subsidiary. Historical periods were also reclassified to conform to the current period presentation. This reclassification resulted in an increase in cost of revenues and a decrease in selling, general and administrative expenses of $11 million and $23 million in the three and six months ended June 30, 2012, respectively.

2. Accounting Standards

Recently Adopted

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. If the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. For other amounts not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The accounting standards update was to be applied prospectively for interim and annual periods beginning with the first quarter of 2013. The adoption of this accounting standards update in the first quarter of 2013 did not have an impact on our consolidated results of operations, financial position or cash flows. The new required disclosures are included in Note 19.

In July 2012, the FASB issued an accounting standards update that gives an entity the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, through the qualitative assessment, an entity determines that it is more likely than not that the intangible asset is impaired, the quantitative impairment test must then be performed. The accounting standards update was effective for annual and interim impairment tests performed in fiscal years beginning after September 15, 2012. Early adoption was permitted. The adoption of this accounting standards update in the first quarter of 2013 did not have an impact on our consolidated results of operations, financial position or cash flows. We perform the annual intangible asset impairment testing in the fourth quarter.

 

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In December 2011, the FASB issued an accounting standards update which was amended in January 2013 that requires disclosure of additional information related to recognized derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset or are not offset but are subject to an enforceable netting agreement. The purpose of the requirement is to help users evaluate the effect or potential effect of offsetting and related netting arrangements on an entity’s financial position. The update was to be applied retrospectively and was effective for interim and annual periods beginning with the first quarter of 2013. The adoption of this accounting standards update in the first quarter of 2013 did not have an impact on our consolidated results of operations, financial position or cash flows. The new required disclosures are included in Note 15.

3. MPLX LP

MPLX is a publicly traded master limited partnership that was formed by us to own, operate, develop and acquire pipelines and other midstream assets related to the transportation and storage of crude oil, refined products and other hydrocarbon-based products. MPLX’s initial assets consisted of a 51 percent general partner interest in MPLX Pipe Line Holdings LP (“Pipe Line Holdings”), which owns a network of common carrier crude oil and product pipeline systems and associated storage assets in the Midwest and Gulf Coast regions of the United States, and a 100 percent interest in a butane storage cavern in West Virginia. On May 1, 2013, we sold an additional five percent interest in Pipe Line Holdings to MPLX for $100 million. This increased MPLX’s ownership interest in Pipe Line Holdings to 56 percent and reduced our ownership interest to 44 percent.

On October 31, 2012, MPLX completed its initial public offering of 19,895,000 common units. Net proceeds to MPLX from the sale of the units were $407 million. We own a 73.6 percent interest in MPLX, including the two percent general partner interest. We consolidate this entity for financial reporting purposes since we have a controlling financial interest, and we record a noncontrolling interest for the interest owned by the public. The initial public offering represented the sale of a 26.4 percent interest in MPLX.

4. Related Party Transactions

Our related parties included:

 

   

The Andersons Clymers Ethanol LLC (“TACE”), in which we had a 36 percent interest during the six months ended June 30, 2013 and 2012, and The Andersons Marathon Ethanol LLC (“TAME”), in which we had a 50 percent interest during the six months ended June 30, 2013 and 2012. These companies each own an ethanol production facility. Subsequent to June 30, 2013, we increased our ownership interests in TACE and TAME. See Note 23 for additional information.

 

   

Centennial Pipeline LLC (“Centennial”), in which we have a 50 percent interest. Centennial owns a refined products pipeline and storage facility.

 

   

LOOP LLC (“LOOP”), in which we have a 51 percent noncontrolling interest. LOOP owns and operates the only U.S. deepwater oil port.

 

   

Other equity method investees.

Sales to related parties were as follows:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

(In millions)

   2013      2012      2013      2012  

Centennial

   $ —         $ 1       $ —         $ 1   

Other equity method investees

     2         2         4         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2       $    3       $ 4       $    4   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Fees received for operating Centennial’s pipeline, which are included in other income on the consolidated statements of income, were $1 million for the three and six months ended June 30, 2013.

Purchases from related parties were as follows:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

(In millions)

   2013      2012      2013      2012  

Centennial

   $ —         $ —         $ —         $ 9   

LOOP

     11         9         21         21   

TAME

     37         30         67         60   

TACE

     24         10         50         15   

Other equity method investees

     7         8         13         15   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 79       $ 57       $ 151       $ 120   
  

 

 

    

 

 

    

 

 

    

 

 

 

Related party purchases from Centennial consist primarily of refined product transportation costs. Related party purchases from LOOP and other equity method investees consist primarily of crude oil transportation costs. Related party purchases from TAME and TACE consist of ethanol.

Receivables from Centennial, which are included in receivables, less allowance for doubtful accounts on the consolidated balance sheets, were $1 million at June 30, 2013 and $2 million at December 31, 2012.

At June 30, 2013, we also had a $2 million long-term receivable from Centennial, which is included in other noncurrent assets on the consolidated balance sheet.

Payables to related parties, which are included in accounts payable on the consolidated balance sheets, were as follows:

 

                                               
     June 30,      December 31,  

(In millions)

   2013      2012  

LOOP

   $ 4       $ 4   

TAME

     5         5   

TACE

     5         2   

Other equity method investees

     2         2   
  

 

 

    

 

 

 

Total

   $ 16       $ 13   
  

 

 

    

 

 

 

We had a throughput and deficiency agreement with Centennial, which expired on March 31, 2012. During the first quarter of 2012, we impaired our $14 million prepaid tariff with Centennial. For additional information on the impairment, see Note 15.

5. Acquisitions

Acquisition of Refinery and Related Logistics and Marketing Assets

On February 1, 2013, we paid $1.49 billion to acquire from BP Products North America Inc. and BP Pipelines (North America) Inc. (collectively, “BP”) the 451,000 barrel per calendar day refinery in Texas City, Texas, three intrastate natural gas liquid pipelines originating at the refinery, an allocation of BP’s Colonial Pipeline Company shipper history, four light product terminals, branded-jobber marketing contract assignments for the supply of approximately 1,200 branded sites and a 1,040 megawatt electric cogeneration facility, as well as the inventory associated with these assets. We refer to these assets as the “Galveston Bay Refinery and Related Assets”. Pursuant to the purchase and sale agreement, we may also be required to pay to BP a contingent earnout of up to an additional $700 million over six years, subject to certain conditions as discussed below. These assets complement our current geographic footprint and align with our strategic initiative of growing in existing and contiguous markets to enhance our portfolio. The transaction was funded with cash on hand.

 

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As of the acquisition date, we recorded a contingent liability of $600 million, representing the preliminary fair value of contingent consideration we expect to pay to BP related to the earnout provision. The fair value of the contingent consideration was estimated using an income approach. The amount of cash to be paid under the arrangement is based on both a market-based crack spread and refinery throughput volumes for the months during which the contract applies, as well as established thresholds that cap the annual and total payment. The earnout payment cannot exceed $200 million per year for the first three years of the arrangement or $250 million per year for the last three years of the arrangement, with the total cumulative payment capped at $700 million over the six-year period. Any excess or shortfall from the annual cap for a current year’s earnout calculation will not affect subsequent years’ calculations. We used internal and external forecasts for the crack spread and internal forecasts for refinery throughput volumes and applied an appropriate risk-adjusted discount rate to the range of cash flows indicated by various scenarios to determine the fair value of the arrangement. The fair value of the contingent consideration is reassessed each quarter, with changes in fair value recorded in cost of revenues. The fair value of the contingent consideration was $611 million at June 30, 2013, which includes $190 million classified as current. See Note 15 for additional information.

The transaction provides for a post-closing adjustment for inventory, which as of June 30, 2013 had not been finalized with the seller. If a change is made for the inventory adjustment, the fair value of the assets acquired will be revised.

The components of the fair value of consideration transferred are as follows:

 

(In millions)       

Cash

   $ 1,491   

Fair value of contingent consideration as of acquisition date

     600   

Liability assumed to seller

     6   

Estimated post-closing adjustment

     (14
  

 

 

 

Total consideration

   $ 2,083   
  

 

 

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date, pending completion of an independent appraisal and other evaluations. During the second quarter of 2013, we made minor updates to the preliminary fair value measurements of assets acquired and liabilities assumed, with the revised balances shown in the table below.

 

(In millions)       

Inventories

   $ 925   

Other current assets

     1   

Property, plant and equipment, net

     1,279   

Other noncurrent assets

     88   

Accounts payable

     (12

Payroll and benefits payable

     (14

Long-term debt due within one year(a)

     (2

Other current liabilities

     (6

Long-term debt(a)

     (58

Defined benefit postretirement plan obligations

     (43

Deferred credits and other liabilities

     (75
  

 

 

 

Total

   $ 2,083   
  

 

 

 

 

(a)

Represents a capital lease obligation assumed.

Neither goodwill nor a gain from a bargain purchase was recognized in conjunction with the Galveston Bay Refinery and Related Assets acquisition.

 

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Other noncurrent assets consist of a $20 million intangible asset related to customer relationships and a $68 million intangible asset related to prepaid licensed refinery technology agreements. The intangible assets related to customer relationships and prepaid licensed refinery technology agreements are being amortized on a straight-line basis over four and 15 years, respectively. The weighted average life over which these acquired intangibles are being amortized is approximately 13 years.

We recognized $6 million of acquisition-related costs associated with the Galveston Bay Refinery and Related Assets acquisition through June 30, 2013. These costs were expensed and were included in selling, general and administrative expenses.

Our refineries and related assets are operated as an integrated system. As the information is not available by refinery, it is not practicable to disclose the revenues and net income associated with the acquisition that were included in our consolidated statements of income for the three and six months ended June 30, 2013.

The following unaudited pro forma financial information presents consolidated results assuming the Galveston Bay Refinery and Related Assets acquisition occurred on January 1, 2012. The pro forma financial information does not give effect to potential synergies that could result from the acquisition and is not necessarily indicative of the results of future operations.

 

                                                                                   
     Three Months
Ended June 30,
     Six Months Ended
June 30,
 

(In millions, except per share data)

   2012      2013      2012  

Sales and other operating revenues (including consumer excise taxes)

   $ 25,508       $ 50,971       $ 50,826   

Net income attributable to MPC

     804         1,373         1,268   

Net income attributable to MPC per share—basic

   $ 2.36       $ 4.21       $ 3.69   

Net income attributable to MPC per share—diluted

     2.36         4.19         3.66   

The pro forma information includes adjustments to align accounting policies, an adjustment to depreciation expense to reflect the fair value of property, plant and equipment, increased amortization expense related to identifiable intangible assets and the related income tax effects. The pro forma information for the six months ended June 30, 2013 and 2012 reflect revisions made during the second quarter of 2013 to the estimated fair values of assets acquired and liabilities assumed.

Acquisitions of Convenience Stores

During the six months ended June 30, 2013, Speedway LLC acquired 9 convenience stores located in Tennessee, western Indiana and western Pennsylvania. In connection with these acquisitions, our Speedway segment recorded $8 million of goodwill, which is deductible for income tax purposes.

In July 2012, Speedway LLC acquired 10 convenience stores located in the northern Kentucky and southwestern Ohio regions from Road Ranger LLC in exchange for cash and a truck stop location in the Chicago metropolitan area. In connection with this acquisition, our Speedway segment recorded $5 million of goodwill, which is deductible for income tax purposes.

In May 2012, Speedway LLC acquired 87 convenience stores situated throughout Indiana and Ohio from GasAmerica Services, Inc., along with the associated inventory, intangible assets and two parcels of undeveloped real estate. In connection with this acquisition, our Speedway segment recorded $83 million of goodwill, which is deductible for income tax purposes.

These acquisitions support our strategic initiative to increase our Speedway segment sales and profitability. The principal factors contributing to a purchase price resulting in goodwill included the acquired stores complementing our existing network in our Midwest market, access to our refined product transportation systems and the potential for higher merchandise sales.

Assuming these transactions had been made at the beginning of any period presented, the consolidated pro forma results would not be materially different from reported results.

 

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6. Variable Interest Entity

On December 1, 2010, we completed the sale of most of our Minnesota assets. These assets included the 74,000 barrel per calendar day St. Paul Park refinery and associated terminals, 166 convenience stores primarily branded SuperAmerica®, along with the SuperMom’s bakery and certain associated trademarks, SuperAmerica Franchising LLC, interests in pipeline assets in Minnesota and associated inventories. We refer to these assets as the “Minnesota Assets.” Certain terms of the transaction and the subsequent settlement agreement with the buyer resulted in the creation of variable interests in a variable interest entity (“VIE”) that owns the Minnesota Assets. At June 30, 2013, our variable interests in this VIE included our preferred security, which was reflected at $48 million in other noncurrent assets on our consolidated balance sheet, and store lease guarantees of $5 million. Our maximum exposure to loss due to this VIE at June 30, 2013 was $53 million.

We are not the primary beneficiary of this VIE and, therefore, do not consolidate it because we lack the power to control or direct the activities that impact the VIE’s operations and economic performance. Our preferred security does not allow us to appoint any members to the VIE’s board of managers and limits our voting ability to only certain matters. Also, individually and cumulatively, neither of our variable interests expose us to residual returns or expected losses that are significant to the VIE.

7. Income per Common Share

We compute basic earnings per share by dividing net income attributable to MPC by the weighted average number of shares of common stock outstanding. Diluted income per share assumes exercise of stock options and stock appreciation rights, provided the effect is not anti-dilutive.

Shares related to stock-based compensation awards excluded from the diluted share calculation as their effect would be anti-dilutive are approximately one million and five million shares for the three months ended June 30, 2013 and 2012 and one million and four million shares for the six months ended June 30, 2013 and 2012, respectively.

MPC grants certain incentive compensation awards to employees and non-employee directors that are considered to be participating securities. Due to the presence of participating securities, we have calculated our earnings per share using the two-class method.

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

(In millions, except per share data)

   2013      2012      2013      2012  

Basic earnings per share:

           

Allocation of earnings:

           

Net income attributable to MPC

   $ 593       $ 814       $ 1,318       $ 1,410   

Income allocated to participating securities

     1         2         2         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income available to common stockholders—basic

   $ 592       $ 812       $ 1,316       $ 1,407   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     322         340         326         344   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 1.84       $ 2.39       $ 4.03       $ 4.09   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

           

Allocation of earnings:

           

Net income attributable to MPC

   $ 593       $ 814       $ 1,318       $ 1,410   

Income allocated to participating securities

     1         2         2         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income available to common stockholders—diluted

   $ 592       $ 812       $ 1,316       $ 1,407   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     322         340         326         344   

Effect of dilutive securities

     2         1         2         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares, including dilutive effect

     324         341         328         346   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 1.83       $ 2.38       $ 4.01       $ 4.07   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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8. Equity

On February 1, 2012, we announced that our board of directors authorized a share repurchase plan, enabling us to purchase up to $2.0 billion of MPC common stock over a two-year period. Through January 30, 2013, we had acquired $1.35 billion of shares under the initial $2.0 billion authorization. On January 30, 2013, we announced that our board of directors approved an additional $2.0 billion share repurchase authorization. The board also extended the remaining $650 million share repurchase authorization, for a total outstanding authorization of $2.65 billion through December 2014. After the effects of the accelerated share repurchase (“ASR”) programs and open market repurchases shown below, $1.34 billion of the amount authorized by our board of directors was available for repurchases at June 30, 2013. We may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, accelerated share repurchases or open market solicitations for shares, some of which may be effected through Rule 10b5-1 plans. The timing and amount of future repurchases, if any, will depend upon several factors, including market and business conditions, and such repurchases may be discontinued at any time.

In February 2012 and November 2012, we entered into $850 million and $500 million ASR programs, respectively, to repurchase shares of MPC common stock under the approved share repurchase plan authorized by our board of directors. The total number of shares repurchased under these ASR programs was based generally on the volume-weighted average price of our common stock during the repurchase periods. The shares repurchased under the ASR programs were accounted for as treasury stock purchase transactions, reducing the weighted average number of basic and diluted common shares outstanding by the shares repurchased, and as forward contracts indexed to our common stock. The forward contracts were accounted for as equity instruments.

Total share repurchases transacted through ASR programs and open market transactions were as follows for the three and six months ended June 30, 2013 and 2012:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

(In millions, except per share data)

   2013      2012      2013      2012  

Number of shares repurchased(a)

     11         —           17         18   

Cash paid for shares repurchased

   $ 882       $ —         $ 1,313       $ 850   

Effective average cost per delivered share

   $ 80.31       $ —         $ 80.54       $ 41.75   

 

(a) 

The six months ended June 30, 2013 includes one million shares received under the November 2012 ASR program, which were paid for in 2012.

As of June 30, 2013, the total number of shares we have repurchased cumulatively through the ASR programs and open market repurchases since February 2012 was 45 million shares at an average cost per share of $59.55. The cash paid for shares repurchased was $2.66 billion. In addition, at June 30, 2013, we had agreements to acquire additional common shares for $36 million, which were settled in early July 2013.

9. Segment Information

We have three reportable segments: Refining & Marketing; Speedway; and Pipeline Transportation. Each of these segments is organized and managed based upon the nature of the products and services they offer.

 

   

Refining & Marketing – refines crude oil and other feedstocks at our refineries in the Gulf Coast and Midwest regions of the United States, purchases ethanol and refined products for resale and distributes refined products through various means, including barges, terminals and trucks that we own or operate. We sell refined products to wholesale marketing customers domestically and internationally, to buyers on the spot market, to our Speedway segment and to dealers and jobbers who operate Marathon® retail outlets;

 

   

Speedway – sells transportation fuels and convenience products in retail markets in the Midwest, primarily through Speedway® convenience stores; and

 

   

Pipeline Transportation – transports crude oil and other feedstocks to our refineries and other locations, delivers refined products to wholesale and retail market areas and includes the aggregated operations of MPLX and MPC’s retained pipeline assets and investments.

 

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On February 1, 2013, we acquired the Galveston Bay Refinery and Related Assets, which are part of the Refining & Marketing and Pipeline Transportation segments. Segment information for periods prior to the acquisition does not include amounts for these operations. See Note 5.

Segment income represents income from operations attributable to the reportable segments. Corporate administrative expenses and costs related to certain non-operating assets are not allocated to the reportable segments. In addition, certain items that affect comparability (as determined by the chief operating decision maker) are not allocated to the reportable segments.

 

(In millions)

   Refining
& Marketing
    Speedway     Pipeline
Transportation
    Total  

Three Months Ended June 30, 2013

        

Revenues:

        

Customer

   $ 21,888      $ 3,768      $ 19      $ 25,675   

Intersegment(a)

     2,434        1        119        2,554   

Related parties

     2        —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenues

     24,324        3,769        138        28,231   

Elimination of intersegment revenues

     (2,434     (1     (119     (2,554
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 21,890      $ 3,768      $ 19      $ 25,677   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment income from operations(b)

   $ 903      $ 123      $ 58      $ 1,084   

Income from equity method investments

     3        —          4        7   

Depreciation and amortization(c)

     252        27        18        297   

Capital expenditures and investments(d)(e)

     134        76        41        251   

(In millions)

   Refining
& Marketing
    Speedway     Pipeline
Transportation
    Total  

Three Months Ended June 30, 2012

        

Revenues:

        

Customer

   $ 16,589      $ 3,632      $ 21      $ 20,242   

Intersegment(a)

     2,214        1        87        2,302   

Related parties

     2        —          1        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenues

     18,805        3,633        109        22,547   

Elimination of intersegment revenues

     (2,214     (1     (87     (2,302
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 16,591      $ 3,632      $ 22      $ 20,245   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment income from operations

   $ 1,325      $ 107      $ 50      $ 1,482   

Income (loss) from equity method investments

     (1     —          10        9   

Depreciation and amortization(c)

     191        28        12        231   

Capital expenditures and investments(d)(e)

     178        187        60        425   

 

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(In millions)

   Refining
& Marketing
    Speedway     Pipeline
Transportation
    Total  

Six Months Ended June 30, 2013

        

Revenues:

        

Customer

   $ 41,760      $ 7,209      $ 40      $ 49,009   

Intersegment(a)

     4,633        2        223        4,858   

Related parties

     4        —          —          4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenues

     46,397        7,211        263        53,871   

Elimination of intersegment revenues

     (4,633     (2     (223     (4,858
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 41,764      $ 7,209      $ 40      $ 49,013   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment income from operations(b)

   $ 2,008      $ 190      $ 109      $ 2,307   

Income (loss) from equity method investments

     (1     —          8        7   

Depreciation and amortization(c)

     488        54        36        578   

Capital expenditures and investments(d)(e)(f)

     1,554        112        131        1,797   

 

(In millions)

   Refining
& Marketing
    Speedway     Pipeline
Transportation
    Total  

Six Months Ended June 30, 2012

        

Revenues:

        

Customer

   $ 33,552      $ 6,916      $ 38      $ 40,506   

Intersegment(a)

     4,173        2        169        4,344   

Related parties

     3        —          1        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenues

     37,728        6,918        208        44,854   

Elimination of intersegment revenues

     (4,173     (2     (169     (4,344
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 33,555      $ 6,916      $ 39      $ 40,510   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment income from operations

   $ 2,268      $ 157      $ 92      $ 2,517   

Income (loss) from equity method investments

     (1     —          12        11   

Depreciation and amortization(c)

     376        55        24        455   

Capital expenditures and investments(d)(e)

     331        198        98        627   

 

(a) 

Management believes intersegment transactions were conducted under terms comparable to those with unaffiliated parties.

(b) 

Included in the Pipeline Transportation segment for the three and six months ended June 30, 2013 are $5 million and $10 million of corporate overhead costs attributable to MPLX, which were included in items not allocated to segments prior to MPLX’s October 31, 2012 initial public offering. These expenses are not currently allocated to other segments.

(c) 

Differences between segment totals and MPC totals represent amounts related to unallocated items and are included in “Items not allocated to segments” in the reconciliation below.

(d) 

Capital expenditures include changes in capital accruals.

(e) 

Includes Speedway’s acquisitions of convenience stores. See Note 5.

(f) 

The Refining & Marketing and Pipeline Transportation segments include $1.30 billion and $70 million, respectively, for the acquisition of the Galveston Bay Refinery and Related Assets. See Note 5.

 

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The following reconciles segment income from operations to income before income taxes as reported in the consolidated statements of income:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In millions)

   2013     2012     2013     2012  

Segment income from operations

   $ 1,084      $ 1,482      $ 2,307      $ 2,517   

Items not allocated to segments:

        

Corporate and other unallocated items(a)(b)

     (64     (92     (131     (171

Pension settlement expenses

     (60     (83     (60     (83

Net interest and other financial income (costs)

     (45     (17     (93     (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 915      $ 1,290      $ 2,023      $ 2,224   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

Corporate and other unallocated items consists primarily of MPC’s corporate administrative expenses and costs related to certain non-operating assets.

(b) 

Corporate overhead costs attributable to MPLX were included in the Pipeline Transportation segment subsequent to MPLX’s October 31, 2012 initial public offering.

The following reconciles segment capital expenditures and investments to total capital expenditures:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

(In millions)

   2013      2012      2013      2012  

Segment capital expenditures and investments

   $ 251       $ 425       $ 1,797       $ 627   

Less: Investments in equity method investees

     6         —           11         7   

Plus: Items not allocated to segments:

           

Capital expenditures not allocated to segments

     28         20         52         28   

Capitalized interest

     4         36         8         66   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures(a)(b)

   $ 277       $ 481       $ 1,846       $ 714   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) 

Capital expenditures include changes in capital accruals.

(b) 

See Note 18 for a reconciliation of total capital expenditures to additions to property, plant and equipment as reported in the consolidated statements of cash flows.

The following reconciles total revenues to sales and other operating revenues (including consumer excise taxes) as reported in the consolidated statements of income:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In millions)

   2013      2012     2013     2012  

Total revenues (as reported above)

   $ 25,677       $ 20,245      $ 49,013      $ 40,510   

Plus: Corporate and other unallocated items

     —           (2     (6     (2

Less: Sales to related parties

     2         3        4        4   
  

 

 

    

 

 

   

 

 

   

 

 

 

Sales and other operating revenues (including consumer excise taxes)

   $ 25,675       $ 20,240      $ 49,003      $ 40,504   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Total assets by reportable segment were:

 

                                               

(In millions)

   June 30,
2013
     December 31,
2012
 

Refining & Marketing

   $ 19,784       $ 17,052   

Speedway

     2,019         1,947   

Pipeline Transportation

     1,943         1,950   

Corporate and Other

     5,949         6,274   
  

 

 

    

 

 

 

Total consolidated assets

   $ 29,695       $ 27,223   
  

 

 

    

 

 

 

10. Other Items

Net interest and other financial income (costs) was:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In millions)

   2013     2012     2013     2012  

Interest:

        

Net interest expense

   $ (46   $ (46   $ (92   $ (91

Interest capitalized

     4        36        8        66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net interest

     (42     (10     (84     (25

Other:

        

Bank service and other fees

     (3     (7     (9     (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest and other financial income (costs)

   $ (45   $ (17   $ (93   $ (39
  

 

 

   

 

 

   

 

 

   

 

 

 

11. Income Taxes

The combined federal, state and foreign income tax rate was 35 percent and 37 percent for the three months ended June 30, 2013 and 2012, respectively, and 34 percent and 37 percent for the six months ended June 30, 2013 and 2012, respectively. The effective tax rate for the three and six months ended June 30, 2013 is equivalent to or slightly less than the U.S. statutory rate of 35 percent primarily due to certain permanent benefit differences, partially offset by state and local tax expense. The effective tax rate for the three and six months ended June 30, 2012 exceeded the U.S. statutory rate of 35 percent due to state and local tax expense, partially offset by permanent benefit differences.

Prior to the June 30, 2011 spinoff transaction from Marathon Oil Corporation (“Marathon Oil”), we were included in Marathon Oil’s income tax returns for all applicable years. During 2011, we anticipated a future settlement between Marathon Oil and us upon the filing of Marathon Oil’s consolidated U.S. federal and state income tax returns for the period prior to June 30, 2011. During the three months ended June 30, 2013, we settled with Marathon Oil for the 2011 period, resulting in a $39 million increase to additional paid in capital.

We are continuously undergoing examination of our income tax returns, which have been completed for our U.S. federal and state income tax returns through the 2009 and 2003 tax years, respectively. We had $22 million of unrecognized tax benefits as of June 30, 2013. Pursuant to our tax sharing agreement with Marathon Oil, the unrecognized tax benefits related to pre-spinoff operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and we have indemnified Marathon Oil accordingly. See Note 22 for indemnification information. During the three months ended June 30, 2013, we settled with Marathon Oil our U.S. federal and related state return liabilities for the 2008-2009 tax years, resulting in a reduction in unrecognized tax benefits of $21 million.

 

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12. Inventories

 

                                           
     June 30,      December 31,  

(In millions)

   2013      2012  

Crude oil and refinery feedstocks

   $ 1,958       $ 1,383   

Refined products

     2,471         1,761   

Merchandise

     80         74   

Supplies and sundry items

     321         231   
  

 

 

    

 

 

 

Total (at cost)

   $ 4,830       $ 3,449   
  

 

 

    

 

 

 

Inventories are carried at the lower of cost or market value. The cost of inventories of crude oil and refinery feedstocks, refined products and merchandise is determined primarily under the last-in, first-out (“LIFO”) method. There were no liquidations of LIFO inventories for the six months ended June 30, 2013 and 2012.

13. Property, Plant and Equipment

 

                                             
     June 30,      December 31,  

(In millions)

   2013      2012  

Refining & Marketing

   $ 16,536       $ 15,089   

Speedway

     2,183         2,100   

Pipeline Transportation

     1,862         1,747   

Corporate and Other

     525         473   
  

 

 

    

 

 

 

Total

     21,106         19,409   

Less accumulated depreciation

     7,307         6,766   
  

 

 

    

 

 

 

Net property, plant and equipment

   $ 13,799       $ 12,643   
  

 

 

    

 

 

 

14. Goodwill

The changes in the carrying amount of goodwill for the six months ended June 30, 2013 were as follows:

 

(In millions)

   Refining
& Marketing
     Speedway      Pipeline
Transportation
         Total      

Balance as of December 31, 2012

   $ 551       $ 217       $ 162       $   930   

Acquisitions(a)

     —           8         —           8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2013

   $ 551       $ 225       $ 162       $ 938   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) 

See Note 5 for information on acquisitions.

 

 

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15. Fair Value Measurements

Fair Values—Recurring

The following tables present assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 by fair value hierarchy level. We have elected to offset the fair value amounts recognized for multiple derivative contracts executed with the same counterparty, including any related cash collateral as shown below; however, fair value amounts by hierarchy level are presented on a gross basis in the tables below.

 

     June 30, 2013  
     Fair Value Hierarchy      Netting     Net Carrying      Collateral  

(In millions)

   Level 1      Level 2      Level 3      and
Collateral(a)
    Value on
Balance Sheet(b)
     Pledged
Not Offset
 

Commodity derivative instruments, assets

   $ 58       $ —         $ —         $ (30   $ 28       $ 71   

Other assets

     2         —           —           N/A        2         —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total assets at fair value

   $ 60       $ —         $ —         $ (30   $ 30       $ 71   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Commodity derivative instruments, liabilities

   $ 30       $ —         $ —         $ (30   $ —         $ —     

Contingent consideration, liability(c)

     —           —           611         N/A        611         —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total liabilities at fair value

   $ 30       $ —         $ 611       $ (30   $ 611       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2012  
     Fair Value Hierarchy      Netting     Net Carrying      Collateral  

(In millions)

   Level 1      Level 2      Level 3      and
Collateral(a)
    Value on
Balance Sheet(b)
     Pledged
Not Offset
 

Commodity derivative instruments, assets

   $ 49       $ —         $ —         $ (49   $ —         $ 45   

Other assets

     2         —           —           N/A        2         —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total assets at fair value

   $ 51       $ —         $ —         $ (49   $ 2       $ 45   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Commodity derivative instruments, liabilities

   $ 88       $ —         $ —         $ (88   $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(a) 

Represents the impact of netting assets, liabilities and cash collateral when a legal right of offset exists. As of December 31, 2012, cash collateral of $39 million was netted with mark-to-market derivative liabilities.

(b) 

We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.

(c) 

Includes $190 million that is classified as current.

Commodity derivatives in Level 1 are exchange-traded contracts for crude oil and refined products measured at fair value with a market approach using the close-of-day settlement prices for the market. Commodity derivatives are covered under master netting agreements with an unconditional right to offset. Collateral deposits in futures commission merchant accounts covered by master netting agreements related to Level 1 commodity derivatives are classified as Level 1 in the fair value hierarchy.

The contingent consideration represents the fair value as of June 30, 2013 of the amount we expect to pay to BP related to the earnout provision for the Galveston Bay Refinery and Related Assets acquisition. See Note 5. The fair value of the contingent consideration was estimated using an income approach and is therefore a Level 3 liability. The amount of cash to be paid under the arrangement is based on both a market-based crack spread and refinery throughput volumes for the months during which the contract applies, as well as established thresholds that cap the annual and total payment. The earnout payment cannot exceed $200 million per year for the first three years of the arrangement or $250 million per year for the last three years of the arrangement, with the total cumulative payment capped at $700 million over the six-year period. Any excess or shortfall from the annual cap for a current year’s earnout calculation will not affect subsequent years’ calculations. The fair value calculation included significant unobservable inputs, including (1) an estimate of refinery throughput volumes; (2) a range of internal and external crack spread forecasts from $14 to $18 per barrel; and (3) a range of risk-adjusted discount rates from 5 percent to 10 percent. An increase or decrease in crack spread forecasts or refinery throughput volume expectations will result in a corresponding increase or decrease in the fair value. Increases to the fair value as a result of increasing forecasts for both of these unobservable inputs, however, are limited as the earnout payment is subject to annual thresholds. An increase or decrease in the discount rate will result in a decrease or increase to the fair value, respectively. The fair value of the contingent consideration is reassessed each quarter, with changes in fair value recorded in cost of revenues.

 

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The following is a reconciliation of the beginning and ending balances recorded for liabilities classified as Level 3 in the fair value hierarchy.

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In millions)

   2013      2012     2013      2012  

Beginning balance

   $ 600       $ —        $ —         $ —     

Contingent consideration agreement

     —           —          600         —     

Total realized and unrealized losses included in net income

     11         2        11         2   

Settlements of derivative instruments

     —           (2     —           (2
  

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance

   $ 611       $ —        $ 611       $ —     
  

 

 

    

 

 

   

 

 

    

 

 

 

There were no unrealized gains or losses recorded in net income for the three and six months ended June 30, 2013 and 2012 related to Level 3 derivative instruments held at June 30, 2013 and 2012, respectively. See Note 16 for the income statement impacts of our derivative instruments.

Fair Values – Nonrecurring

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.

 

     Six Months Ended June 30,  
     2013      2012  

(In millions)

   Fair Value      Impairment      Fair Value      Impairment  

Property, plant and equipment, net

   $ 1       $ 8       $ —         $ —     

Other noncurrent assets

     —           —           —           14   

Due to changing market conditions, we assessed one of our light products terminals for impairment. The terminal is operated by our Refining & Marketing segment. During the second quarter of 2013, we recorded an impairment charge of $8 million for this terminal. The impairment is included in depreciation and amortization on the consolidated statements of income. The fair value of the terminal was measured using a market approach based on comparable area property values which are Level 3 inputs.

As a result of changing market conditions and declining throughput volumes, we impaired our Refining & Marketing segment’s prepaid tariff with Centennial by $14 million during the first quarter of 2012. The fair value measurement of the prepaid tariff was based on the income approach utilizing the probability of shipping sufficient volumes on Centennial’s pipeline over the remaining life of the throughput and deficiency credits, which expire March 31, 2014 if not utilized. This measurement is classified as Level 3.

 

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Fair Values – Reported

The following table summarizes financial instruments on the basis of their nature, characteristics and risk at June 30, 2013 and December 31, 2012, excluding the derivative financial instruments and contingent consideration reported above.

 

     June 30, 2013      December 31, 2012  

(In millions)

   Fair Value      Carrying
Value
     Fair Value      Carrying
Value
 

Financial assets:

           

Investments

   $ 255       $ 61       $ 263       $ 59   

Other

     30         29         33         31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 285       $ 90       $ 296       $ 90   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

           

Long-term debt(a)

   $ 3,322       $ 3,004       $ 3,559       $ 3,006   

Deferred credits and other liabilities

     24         24         23         23   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 3,346       $ 3,028       $ 3,582       $ 3,029   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) 

Excludes capital leases

Our current assets and liabilities include financial instruments, the most significant of which are trade accounts receivable and payables. We believe the carrying values of our current assets and liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments, (2) our investment-grade credit rating and (3) our historical incurrence of and expected future insignificance of bad debt expense, which includes an evaluation of counterparty credit risk.

Fair values of our financial assets included in investments and other financial assets and of our financial liabilities included in deferred credits and other liabilities are measured primarily using an income approach and most inputs are internally generated, which results in a Level 3 classification. Estimated future cash flows are discounted using a rate deemed appropriate to obtain the fair value. Other financial assets primarily consist of environmental remediation receivables. Deferred credits and other liabilities primarily consist of insurance liabilities and environmental remediation liabilities.

Fair value of long-term debt is measured using a market approach, based upon the average of quotes from major financial institutions and a third-party service for our debt. Because these quotes cannot be independently verified to the market, they are considered Level 3 inputs.

16. Derivatives

For further information regarding the fair value measurement of derivative instruments, including any effect of master netting agreements or collateral, see Note 15. We do not designate any of our commodity derivative instruments as hedges for accounting purposes. Our interest rate derivative instruments were designated as fair value accounting hedges.

The following table presents the gross fair values of derivative instruments, excluding cash collateral, and where they appear on the consolidated balance sheets as of June 30, 2013 and December 31, 2012:

 

     June 30, 2013       

(In millions)

   Asset      Liability      Balance Sheet Location

Commodity derivatives

   $ 58       $ 30       Other current assets
     December 31, 2012       

(In millions)

   Asset      Liability      Balance Sheet Location

Commodity derivatives

   $ 49       $ 88       Other current assets

Derivatives Designated as Fair Value Accounting Hedges

During the first quarter of 2012, we terminated interest rate swap agreements with a notional amount of $500 million that had been entered into as fair value accounting hedges on our 3.50 percent senior notes due in March 2016. There was a $20 million gain on the termination of the transactions, which has been accounted for as an adjustment to our long-term debt balance. The gain is being amortized over the remaining life of the 3.50 percent senior notes, which reduces our interest expense. The interest rate swaps had no accounting hedge ineffectiveness.

 

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Table of Contents

Derivatives not Designated as Accounting Hedges

Derivatives that are not designated as accounting hedges may include commodity derivatives used to hedge price risk on (1) inventories, (2) fixed price sales of refined products, (3) the acquisition of foreign-sourced crude oil and (4) the acquisition of ethanol for blending with refined products.

The table below summarizes open commodity derivative contracts as of June 30, 2013.

 

     Position      Total Barrels
(In  thousands)
 

Crude oil(a)

     

Exchange-traded

     Long         9,830   

Exchange-traded

     Short         (26,622

Refined Products(a)

     

Exchange-traded

     Long         3,412   

Exchange-traded

     Short         (5,992

 

(a) 

100 percent of these contracts expire in the third quarter of 2013.

The following table summarizes the effect of all commodity derivative instruments in our consolidated statements of income:

 

     Gain (Loss)      Gain (Loss)  
     Three Months Ended      Six Months Ended  
(In millions)    June 30,      June 30,  

Income Statement Location

       2013              2012              2013             2012      

Sales and other operating revenues

   $ 3       $ 44       $ 4      $ 38   

Cost of revenues

     51         356         (9     309   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 54       $ 400       $ (5   $ 347   
  

 

 

    

 

 

    

 

 

   

 

 

 

17. Debt

Our outstanding borrowings at June 30, 2013 and December 31, 2012 consisted of the following:

 

                                             

(In millions)

   June 30,
2013
    December 31,
2012
 

Marathon Petroleum Corporation:

    

Revolving credit agreement due 2017

   $ —        $ —     

3.500% senior notes due March 1, 2016

     750        750   

5.125% senior notes due March 1, 2021

     1,000        1,000   

6.500% senior notes due March 1, 2041

     1,250        1,250   

Consolidated subsidiaries:

    

Capital lease obligations due 2013-2028

     406        355   

MPLX Operations LLC revolving credit
agreement due 2017

     —          —     

Trade receivables securitization facility due 2014

     —          —     
  

 

 

   

 

 

 

Total

     3,406        3,355   

Unamortized discount

     (10     (10

Fair value adjustments(a)

     14        16   

Amounts due within one year

     (23     (19
  

 

 

   

 

 

 

Total long-term debt due after one year

   $ 3,387      $ 3,342   
  

 

 

   

 

 

 

 

(a) 

See Note 16 for information on interest rate swaps.

 

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Table of Contents

There were no borrowings or letters of credit outstanding under the revolving credit agreements or the trade receivable securitization facility at June 30, 2013.

18. Supplemental Cash Flow Information

 

     Six Months Ended
June 30,
 

(In millions)

   2013      2012  

Net cash provided by operating activities included:

     

Interest paid (net of amounts capitalized)

   $ 86       $ 16   

Net income taxes paid to taxing authorities

     719         384   

Non-cash investing and financing activities:

     

Capital lease obligations increase

   $ 61       $ 30   

Acquisitions:

     

Contingent consideration(a)

     600         —     

Liability assumed to seller(a)

     6         —     

Intangible asset acquired

     —           3   

Liability assumed

     —           2   

 

(a) 

See Note 5.

The consolidated statements of cash flows exclude changes to the consolidated balance sheets that did not affect cash. The following is a reconciliation of additions to property, plant and equipment to total capital expenditures:

 

     Six Months Ended
June 30,
 

(In millions)

   2013      2012  

Additions to property, plant and equipment

   $ 424       $ 635   

Acquisitions(a)

     1,391         155   

Increase (decrease) in capital accruals

     31         (76
  

 

 

    

 

 

 

Total capital expenditures

   $ 1,846       $ 714   
  

 

 

    

 

 

 

 

(a) 

Includes $1.37 billion in 2013 for the acquisition of the Galveston Bay Refinery and Related Assets, comprised of total consideration, excluding inventory and other current assets, of $1.16 billion plus assumed liabilities of $210 million. The 2012 acquisitions exclude the inventory acquired and liability assumed. See Note 5.

 

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Table of Contents

19. Accumulated Other Comprehensive Loss

The following table shows the changes in accumulated other comprehensive loss by component. Amounts in parentheses indicate debits.

 

                                                                                                                                                     

(In millions)

  Pension Benefits     Other Benefits     Gain on
Cash Flow Hedge
    Workers
Compensation
    Total  

Balance as of December 31, 2012

  $ (432   $ (36   $ 4      $ —        $ (464

Other comprehensive income before reclassifications

    158        3        —          2        163   

Amounts reclassified from accumulated other comprehensive loss:

         

Amortization – prior service credit(a)

    (22     (2     —          —          (24

                      – actuarial loss(a)

    39        1        —          —          40   

                      – settlement loss(a)

    60        —          —          —          60   

Tax benefit

    (29     —          —          —          (29
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

    206        2        —          2        210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2013

  $ (226   $ (34   $ 4      $ 2      $ (254
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 20.

20. Defined Benefit Pension and Other Postretirement Plans

The following summarizes the components of net periodic benefit costs:

 

     Three Months Ended June 30,  
     Pension Benefits     Other Benefits  

(In millions)

   2013     2012     2013      2012  

Components of net periodic benefit cost:

         

Service cost

   $ 23      $ 15      $ 6       $ 5   

Interest cost

     18        28        6         6   

Expected return on plan assets

     (26     (25     —           —     

Amortization – prior service cost (credit)

     (11     2        —           —     

                      – actuarial loss

     18        22        —           —     

                      – net settlement/curtailment loss

     60        83        —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 82      $ 125      $ 12       $ 11   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six Months Ended June 30,  
     Pension Benefits     Other Benefits  

(In millions)

   2013     2012     2013     2012  

Components of net periodic benefit cost:

        

Service cost

   $ 46      $ 32      $ 12      $ 10   

Interest cost

     36        55        13        13   

Expected return on plan assets

     (53     (51     —          —     

Amortization – prior service cost (credit)

     (22     4        (2     —     

                      – actuarial loss

     39        46        1        —     

                      – net settlement/curtailment loss

     60        83        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 106      $ 169      $ 24      $ 23   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

During the six months ended June 30, 2013, we made contributions of $158 million to our funded pension plans. We may make additional contributions to our pension plans in 2013 depending upon the anticipated funding status and plan asset performance. Current benefit payments related to unfunded pension and other postretirement benefit plans were $4 million and $10 million, respectively, during the six months ended June 30, 2013.

Due to the Galveston Bay Refinery and Related Assets acquisition, during the first quarter of 2013, we remeasured certain pension and retiree medical plans resulting in a $122 million decrease in liabilities. The decrease in liabilities was due to a 0.2 percent increase in discount rates and an increase in pension plan asset value from December 31, 2012 to the remeasurement date. The net periodic benefit costs for the six months ended June 30, 2013 reflect these remeasurements. The purchase accounting for the Galveston Bay Refinery and Related Assets acquisition includes a $43 million liability related to retiree medical assumed at the acquisition date. See Note 5.

During the three months ended June 30, 2013 and 2012, we determined that lump sum payments to employees retiring in the respective year would exceed the plans’ total service and interest costs for the year. Settlement losses are required to be recorded when lump sum payments exceed total service and interest costs. As a result, during the three months ended June 30, 2013 and 2012, we recorded pension settlement expenses related to our cumulative lump sum payments made during the first six months of 2013 and 2012, respectively.

On May 17, 2012, we communicated to our employees changes in the defined benefit pension plans for Speedway and the legacy portion of the Marathon Petroleum Retirement Plan effective January 1, 2013. Final average pensionable earnings used to calculate pension benefits under these plans were fixed as of December 31, 2012. In addition, cap protection was added to limit potential annual lump sum distribution discount rate increases. These plan amendments resulted in an overall decrease in pension liabilities of approximately $537 million, with the offset primarily to other comprehensive income, which was recorded in the three months ended June 30, 2012. The benefit of this liability reduction is being amortized into income through 2024.

21. Stock-Based Compensation Plans

Stock Option Awards

The following table presents a summary of our stock option award activity for the six months ended June 30, 2013:

 

     Number
of  Shares(a)
    Weighted Average
Exercise Price
 

Outstanding at December 31, 2012

     6,172,194      $ 36.17   

Granted

     408,603        84.65   

Exercised

     (948,149     35.42   

Forfeited, canceled or expired

     (43,508     37.61   
  

 

 

   

Outstanding at June 30, 2013

     5,589,140        39.83   
  

 

 

   

 

(a) 

Includes an immaterial number of stock appreciation rights.

The grant date fair value of stock option awards granted during the six months ended June 30, 2013 was $27.13 per share. The fair value of stock options granted to our employees is estimated on the date of the grant using the Black Scholes option-pricing model, which employs various assumptions. The assumption for expected volatility of our stock price was refined for the six months ended June 30, 2013 to reflect a weighting of 33 percent of MPC’s common stock implied volatility and 67 percent of the historical volatility for a selected group of peer companies.

 

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Table of Contents

Restricted Stock Awards

The following table presents a summary of restricted stock award activity for the six months ended June 30, 2013:

 

     Shares of Restricted Stock (“RS”)      Restricted Stock Units (“RSU”)  
     Number
of Shares
    Weighted Average
Grant Date
Fair Value
     Number
of Units
    Weighted Average
Grant Date
Fair Value
 

Outstanding at December 31, 2012

     638,073      $ 40.83         359,111      $ 31.07   

Granted

     249,158        87.78         11,568        78.00   

RS’s Vested/RSU’s Issued

     (196,628     37.21         (252     43.44   

Forfeited

     (12,833     55.25         —          —     
  

 

 

      

 

 

   

Outstanding at June 30, 2013

     677,770        58.87         370,427        32.52   
  

 

 

      

 

 

   

Performance Unit Awards

The following table presents a summary of the activity for performance unit awards to be settled in shares for the six months ended June 30, 2013:

 

     Number of
Units
 

Outstanding at December 31, 2012

     2,040,000   

Granted

     1,782,500   

Settled

     —     

Canceled

     —     
  

 

 

 

Outstanding at June 30, 2013

     3,822,500   
  

 

 

 

The performance unit awards granted in 2013 have a grant date fair value of $1.12 per unit, as calculated using a Monte Carlo valuation model.

MPLX Awards

During the six months ended June 30, 2013, MPLX granted equity-based compensation awards under the MPLX LP 2012 Incentive Compensation Plan. The compensation expense for these awards is not material to our consolidated financial statements.

22. Commitments and Contingencies

We are the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Some of these matters are discussed below. For matters for which we have not recorded an accrued liability, we are unable to estimate a range of possible loss because the issues involved have not been fully developed through pleadings and discovery. However, the ultimate resolution of some of these contingencies could, individually or in the aggregate, be material.

Environmental matters—We are subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites and certain other locations including presently or formerly owned or operated retail marketing sites. Penalties may be imposed for noncompliance.

At June 30, 2013 and December 31, 2012, accrued liabilities for remediation totaled $132 million and $123 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties if any that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in clean-up efforts related to underground storage tanks at presently or formerly owned or operated retail marketing sites, were $49 million and $51 million at June 30, 2013 and December 31, 2012, respectively.

 

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We are involved in a number of environmental enforcement matters arising in the ordinary course of business. While the outcome and impact on us cannot be predicted with certainty, management believes the resolution of these environmental matters will not, individually or collectively, have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Lawsuits—In May 2007, the Kentucky attorney general filed a lawsuit against us and Marathon Oil in state court in Franklin County, Kentucky for alleged violations of Kentucky’s emergency pricing and consumer protection laws following Hurricanes Katrina and Rita in 2005. The lawsuit alleges that we overcharged customers by $89 million during September and October 2005. The complaint seeks disgorgement of these sums, as well as penalties, under Kentucky’s emergency pricing and consumer protection laws. We are vigorously defending this litigation. We believe that this is the first lawsuit for damages and injunctive relief under the Kentucky emergency pricing laws to progress this far and it contains many novel issues. In May 2011, the Kentucky attorney general amended his complaint to include a request for immediate injunctive relief as well as unspecified damages and penalties related to our wholesale gasoline pricing in April and May 2011 under statewide price controls that were activated by the Kentucky governor on April 26, 2011 and which have since expired. The court denied the attorney general’s request for immediate injunctive relief, and the remainder of the 2011 claims likely will be resolved along with those dating from 2005. If the lawsuit is resolved unfavorably in its entirety, it could materially impact our consolidated results of operations, financial position or cash flows. However, management does not believe the ultimate resolution of this litigation will have a material adverse effect.

We are a defendant in a number of other lawsuits and other proceedings arising in the ordinary course of business. While the ultimate outcome and impact to us cannot be predicted with certainty, we believe that the resolution of these other lawsuits and proceedings will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

GuaranteesWe have provided certain guarantees, direct and indirect, of the indebtedness of other companies. Under the terms of most of these guarantee arrangements, we would be required to perform should the guaranteed party fail to fulfill its obligations under the specified arrangements. In addition to these financial guarantees, we also have various performance guarantees related to specific agreements.

Guarantees related to indebtedness of equity method investees—We hold interests in an offshore oil port, LOOP, and a crude oil pipeline system, LOCAP LLC. Both LOOP and LOCAP LLC have secured various project financings with throughput and deficiency agreements. Under the agreements, we are required to advance funds if the investees are unable to service their debt. Any such advances are considered prepayments of future transportation charges. The duration of the agreements vary but tend to follow the terms of the underlying debt. Our maximum potential undiscounted payments under these agreements for the debt principal totaled $172 million as of June 30, 2013.

We hold an interest in a refined products pipeline through our investment in Centennial, and have guaranteed the payment of Centennial’s principal, interest and prepayment costs, if applicable, under a Master Shelf Agreement, which is scheduled to expire in 2024. The guarantee arose in order for Centennial to obtain adequate financing. Our maximum potential undiscounted payments under this agreement for debt principal totaled $44 million as of June 30, 2013.

We hold an interest in an ethanol production facility through our investment in TAME, and through our participation as a lender under TAME’s revolving credit agreement, have agreed to reimburse the bank for 50 percent of any amounts drawn on a letter of credit that has been issued to secure TAME’s repayment of the tax exempt bonds. The credit agreement expires in 2018. Our maximum potential undiscounted payments under this arrangement were $25 million at June 30, 2013.

Marathon Oil indemnifications—In conjunction with our spinoff from Marathon Oil, we have entered into arrangements with Marathon Oil providing indemnities and guarantees with recorded values of $9 million as of June 30, 2013, which consist of unrecognized tax benefits related to MPC, its consolidated subsidiaries and the refining, marketing and transportation business operations prior to our spinoff which are not already reflected in the unrecognized tax benefits described in Note 11, and other contingent liabilities Marathon Oil may incur related to taxes. Furthermore, the separation and distribution agreement and other agreements with Marathon Oil to effect our spinoff provide for cross-indemnities between Marathon Oil and us. In general, Marathon Oil is required to indemnify us for any liabilities relating to Marathon Oil’s historical oil and gas exploration and production operations, oil sands mining operations and integrated gas operations, and we are required to indemnify Marathon Oil for any liabilities relating to Marathon Oil’s historical refining, marketing and transportation operations. The terms of these indemnifications are indefinite and the amounts are not capped.

 

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Other guarantees—We have entered into other guarantees with maximum potential undiscounted payments totaling $122 million as of June 30, 2013, which primarily consist of a commitment to contribute cash to an equity method investee for certain catastrophic events, up to $50 million per event, in lieu of procuring insurance coverage, an indemnity to the co-lenders associated with an equity method investee’s credit agreement, and leases of assets containing general lease indemnities and guaranteed residual values.

General guarantees associated with dispositions – Over the years, we have sold various assets in the normal course of our business. Certain of the related agreements contain performance and general guarantees, including guarantees regarding inaccuracies in representations, warranties, covenants and agreements, and environmental and general indemnifications that require us to perform upon the occurrence of a triggering event or condition. These guarantees and indemnifications are part of the normal course of selling assets. We are typically not able to calculate the maximum potential amount of future payments that could be made under such contractual provisions because of the variability inherent in the guarantees and indemnities. Most often, the nature of the guarantees and indemnities is such that there is no appropriate method for quantifying the exposure because the underlying triggering event has little or no past experience upon which a reasonable prediction of the outcome can be based.

Contractual commitmentsAt June 30, 2013, our contractual commitments to acquire property, plant and equipment and advance funds to equity method investees totaled $870 million, which includes $700 million of contingent consideration associated with the acquisition of the Galveston Bay Refinery and Related Assets. See Note 5 for additional information on the contingent consideration.

23. Subsequent Event

On August 1, 2013, we acquired from Mitsui & Co. (U.S.A.), Inc. its interests in three ethanol companies for $75 million in cash. Under the agreement, we acquired an additional 24 percent interest in TACE, bringing our ownership interest to 60 percent; a 34 percent interest in The Andersons Ethanol Investment LLC, which holds a 50 percent ownership in TAME, bringing our direct and indirect ownership interest in TAME to 67 percent; and a 40 percent interest in The Andersons Albion Ethanol LLC, which owns an ethanol production facility in Albion, Michigan. We expect to hold a noncontrolling interest in each of these entities and account for them using the equity method of accounting.

 

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited financial statements and accompanying footnotes included under Item 1. Financial Statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012.

Management’s Discussion and Analysis of Financial Condition and Results of Operations includes various forward-looking statements concerning trends or events potentially affecting our business. You can identify our forward-looking statements by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “plan,” “predict,” “project,” “seek,” “target,” “could,” “may,” “should,” “would” or “will” or other similar expressions that convey the uncertainty of future events or outcomes. In accordance with “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, which could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting our business, see Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012.

Corporate Overview

We are an independent petroleum refining, marketing and transportation company. We currently own and operate seven refineries, all located in the United States, with an aggregate crude oil refining capacity of approximately 1.7 million barrels per calendar day. Our refineries supply refined products to resellers and consumers within our market areas, including the Midwest, Gulf Coast and Southeast regions of the United States. We distribute refined products to our customers through one of the largest private domestic fleets of inland petroleum product barges, one of the largest terminal operations in the United States, and a combination of MPC-owned and third-party-owned trucking and rail assets. We currently own, lease or have ownership interests in approximately 8,300 miles of crude oil and refined product pipelines to deliver crude oil to our refineries and other locations and refined products to wholesale and retail market areas. We are one of the largest petroleum pipeline companies in the United States on the basis of total volumes delivered.

Our operations consist of three reportable segments: Refining & Marketing; Speedway; and Pipeline Transportation. Each of these segments is organized and managed based upon the nature of the products and services they offer.

 

   

Refining & Marketing—refines crude oil and other feedstocks at our seven refineries in the Gulf Coast and Midwest regions of the United States, purchases ethanol and refined products for resale and distributes refined products through various means, including barges, terminals and trucks that we own or operate. We sell refined products to wholesale marketing customers domestically and internationally, to buyers on the spot market, to our Speedway business segment and to dealers and jobbers who operate Marathon® retail outlets;

 

   

Speedway—sells transportation fuels and convenience products in the retail market in the Midwest, primarily through Speedway® convenience stores; and

 

   

Pipeline Transportation—transports crude oil and other feedstocks to our refineries and other locations, delivers refined products to wholesale and retail market areas and includes the aggregated operations of MPLX and MPC’s retained pipeline assets and investments.

Executive Summary

Net income attributable to MPC was $593 million and $1.32 billion, or $1.83 and $4.01 per diluted share, for the second quarter and first six months of 2013 compared to $814 million and $1.41 billion, or $2.38 and $4.07 per diluted share, for the second quarter and first six months of 2012. The decreases were primarily due to our Refining & Marketing segment, which generated income from operations of $903 million and $2.01 billion in the second quarter and first six months of 2013 compared to $1.33 billion and $2.27 billion in the second quarter and first six months of 2012.

The decreases in Refining & Marketing segment income from operations were primarily due to lower refining and marketing gross margins, which were $6.18 per barrel and $6.99 per barrel in the second quarter and first six months of 2013 compared to $11.13 per barrel and $9.76 per barrel in the second quarter and first six months of 2012. These impacts were partially offset by increases in refined product sales volumes related to the Galveston Bay refinery acquired in February 2013.

 

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Speedway segment income from operations increased $16 million and $33 million in the second quarter and first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to increases in our gasoline and distillate gross margin and our merchandise gross margin, partially offset by higher expenses attributable to an increase in the number of convenience stores.

Pipeline Transportation segment income from operations increased $8 million and $17 million in the second quarter and first six months of 2013 compared to the second quarter and first six months of 2012. The increases primarily reflect higher transportation tariffs, partially offset by higher operating, including mechanical integrity, and depreciation expenses.

On February 1, 2013, we paid $1.49 billion to acquire from BP the 451,000 barrel per calendar day refinery in Texas City, Texas, three intrastate natural gas liquid pipelines originating at the refinery, an allocation of BP’s Colonial Pipeline Company shipper history, four light product terminals, branded-jobber marketing contract assignments for the supply of approximately 1,200 branded sites and a 1,040 megawatt electric cogeneration facility, as well as the inventory associated with these assets. We refer to these assets as the “Galveston Bay Refinery and Related Assets”. Pursuant to the purchase and sale agreement, we may also be required to pay BP a contingent earnout of up to an additional $700 million over six years, subject to certain conditions. These assets are part of our Refining & Marketing and Pipeline Transportation segments. Information for periods prior to the acquisition does not include amounts for these operations. See Note 5 to the unaudited consolidated financial statements for additional information on this acquisition.

On January 30, 2013, we announced that our board of directors approved an additional $2.0 billion share repurchase authorization. The board also extended the remaining $650 million share repurchase authorization announced on February 1, 2012, for a total outstanding authorization of $2.65 billion through December 2014. During the six months ended June 30, 2013, we paid $1.31 billion to repurchase our common shares, and received 17 million common shares through open market share repurchases and the final shares received under our November 2012 ASR program. The effective average cost was $80.54 per delivered share. At June 30, 2013, we also had agreements to repurchase additional common shares for $36 million, which were settled in early July 2013.

Overview of Segments

Refining & Marketing

Refining & Marketing segment income from operations depends largely on our refining and marketing gross margin and refinery throughputs.

Our refining and marketing gross margin is the difference between the prices of refined products sold and the costs of crude oil and other charge and blendstocks refined, including the costs to transport these inputs to our refineries, the costs of purchased products and refinery direct operating costs, including turnaround and major maintenance, depreciation and amortization and other manufacturing expenses. The crack spread is a measure of the difference between market prices for refined products and crude oil, commonly used by the industry as a proxy for the refining margin. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same relationship as the cost of crude oil. As a performance benchmark and a comparison with other industry participants, we calculate Midwest (Chicago) and U.S. Gulf Coast (“USGC”) crack spreads that we believe most closely track our operations and slate of products. Light Louisiana Sweet crude oil (“LLS”) prices and a 6-3-2-1 ratio of products (6 barrels of LLS crude oil producing 3 barrels of unleaded regular gasoline, 2 barrels of ultra-low sulfur diesel and 1 barrel of 3 percent sulfur residual fuel) are used for these crack-spread calculations.

Our refineries can process significant amounts of sour crude oil, which typically can be purchased at a discount to sweet crude oil. The amount of this discount, the sweet/sour differential, can vary significantly, causing our refining and marketing gross margin to differ from crack spreads based on sweet crude oil. In general, a larger sweet/sour differential will enhance our refining and marketing gross margin.

 

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Historically, West Texas Intermediate crude oil (“WTI”) has traded at prices similar to LLS. During the first six months of 2012 and in early 2013, WTI traded at prices significantly less than LLS, which favorably impacted our refining and marketing gross margin. Logistical constraints in the U.S. mid-continent markets and other market factors acted to keep the price of WTI from rising with the prices of crude oil produced in other regions. However, the differential between WTI and LLS significantly narrowed in the second quarter of 2013 due to a variety of domestic and international market conditions along with changes in logistical infrastructure. Future crude oil differentials will be dependent on a variety of market and economic factors.

The following table provides sensitivities showing the estimated change in annual net income due to potential changes in market conditions.

 

(In millions, after-tax)

      

LLS 6-3-2-1 crack spread sensitivity (a) (per $1.00/barrel change)

   $ 425   

Sweet/sour differential sensitivity (b) (per $1.00/barrel change)

     225   

LLS-WTI spread sensitivity (c) (per $1.00/barrel change)

     75   

Natural gas price sensitivity (per $1.00/million British thermal unit change)

     140   

 

(a) 

Weighted 38% Chicago and 62% USGC LLS 6-3-2-1 crack spreads and assumes all other differentials and pricing relationships remain unchanged.

(b) 

LLS (prompt)—[delivered cost of sour crude oil: Arab Light, Kuwait, Maya, Western Canadian Select and Mars].

(c) 

Assumes 20% of crude oil throughput volumes are WTI-based domestic crude oil.

In addition to the market changes indicated by the crack spreads, the sweet/sour differential and the discount of WTI to LLS, our refining and marketing gross margin is impacted by factors such as:

 

   

the types of crude oil and other charge and blendstocks processed;

 

   

the selling prices realized for refined products;

 

   

the impact of commodity derivative instruments used to hedge price risk;

 

   

the cost of products purchased for resale; and

 

   

changes in refinery direct operating costs, which include turnaround and major maintenance, depreciation and amortization and other manufacturing expenses.

Changes in manufacturing costs are primarily driven by the cost of energy used by our refineries, including purchased natural gas, and the level of maintenance costs. Planned major maintenance activities, or turnarounds, requiring temporary shutdown of certain refinery operating units, are periodically performed at each refinery. We had significant planned turnaround and major maintenance activities at our Catlettsburg, Kentucky; Garyville, Louisiana; and Galveston Bay refineries during the first six months of 2013 compared to activities at our Garyville and Robinson, Illinois refineries during the first six months of 2012.

Speedway

Our retail marketing gross margin for gasoline and distillate, which is the price paid by consumers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees, impacts the Speedway segment profitability. Numerous factors impact gasoline and distillate demand throughout the year, including local competition, seasonal demand fluctuations, the available wholesale supply, the level of economic activity in our marketing areas and weather conditions. Market demand increases for gasoline and distillate generally increase the product margin we can realize. The gross margin on merchandise sold at convenience stores historically has been less volatile. Approximately two-thirds of Speedway’s gross margin was derived from merchandise sales in the second quarter and first six months of 2013.

 

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Pipeline Transportation

The profitability of our pipeline transportation operations primarily depends on tariff rates and the volumes shipped through the pipelines. A majority of the crude oil and refined product shipments on our common carrier pipelines serve our Refining & Marketing segment. In the fourth quarter of 2012, new transportation services agreements were entered into between MPC and MPLX, which resulted in higher tariff rates. The volume of crude oil that we transport is directly affected by the supply of, and refiner demand for, crude oil in the markets served directly by our crude oil pipelines. Key factors in this supply and demand balance are the production levels of crude oil by producers in various regions or fields, the availability and cost of alternative modes of transportation, the volumes of crude oil processed at refineries and refinery and transportation system maintenance levels. The volume of refined products that we transport is directly affected by the production levels of, and user demand for, refined products in the markets served by our refined product pipelines. In most of our markets, demand for gasoline and distillates peaks during the summer driving season, which extends from May through September of each year, and declines during the fall and winter months. As with crude oil, other transportation alternatives and system maintenance levels influence refined product movements.

Results of Operations

Consolidated Results of Operations

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In millions)

   2013     2012     Variance     2013     2012     Variance  

Revenues and other income:

            

Sales and other operating revenues (including consumer excise taxes)

   $ 25,675      $ 20,240      $ 5,435      $ 49,003      $ 40,504      $ 8,499   

Sales to related parties

     2        3        (1     4        4        —     

Income from equity method investments

     7        9        (2     7        11        (4

Net gain on disposal of assets

     1        1        —          2        3        (1

Other income

     18        4        14        32        10        22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other income

     25,703        20,257        5,446        49,048        40,532        8,516   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

            

Cost of revenues (excludes items below)

     22,320        16,800        5,520        42,354        34,121        8,233   

Purchases from related parties

     79        57        22        151        120        31   

Consumer excise taxes

     1,596        1,428        168        3,054        2,808        246   

Depreciation and amortization

     302        236        66        589        466        123   

Selling, general and administrative expenses

     358        365        (7     607        616        (9

Other taxes

     88        64        24        177        138        39   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     24,743        18,950        5,793        46,932        38,269        8,663   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     960        1,307        (347     2,116        2,263        (147

Net interest and other financial income (costs)

     (45     (17     (28     (93     (39     (54
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     915        1,290        (375     2,023        2,224        (201

Provision for income taxes

     316        476        (160     694        814        (120
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     599        814        (215     1,329        1,410        (81

Less net income attributable to noncontrolling interests

     6        —          6        11        —          11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPC

   $ 593      $ 814      $ (221   $ 1,318      $ 1,410      $ (92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPC decreased $221 million in the second quarter and $92 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to decreases in refining and marketing gross margins, which were $6.18 per barrel and $6.99 per barrel in the second quarter and first six months of 2013 compared to $11.13 per barrel and $9.76 per barrel in the second quarter and first six months of 2012. These impacts were partially offset by increases in refined product sales volumes related to the Galveston Bay refinery acquired in February 2013.

 

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Sales and other operating revenues (including consumer excise taxes) increased $5.44 billion in the second quarter and $8.50 billion in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to higher refined product sales volumes, which increased to 2,135 thousand barrels per day (“mbpd”) and 2,016 mbpd in the second quarter and first six months of 2013 from 1,591 mbpd and 1,574 mbpd in the second quarter and first six months of 2012, primarily due to the Galveston Bay refinery acquired in February 2013. This impact was partially offset by decreases in refined product selling prices.

Other income increased $14 million in the second quarter and $22 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to increases in sales of Renewable Identification Numbers (“RINs”) and dividends received from pipeline affiliates.

Cost of revenues increased $5.52 billion in the second quarter and $8.23 billion in the first six months of 2013 compared to the second quarter and first six months of 2012. The increases were primarily due to increases in purchased crude oil volumes in the Refining & Marketing segment. Crude oil volumes increased 40 percent in the second quarter and 32 percent in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily associated with the Galveston Bay refinery acquired in February 2013.

Purchases from related parties increased $22 million in the second quarter and $31 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to higher acquisition costs of ethanol from our ethanol investments due to increases in ethanol volumes purchased and higher ethanol prices, partially offset by a decrease in purchases from Centennial in the first six months of 2013.

Centennial experienced a significant reduction in shipment volumes in the second half of 2011 that continued through the first six months of 2013. At June 30, 2013, Centennial was not shipping product. As a result, we continued to evaluate the carrying value of our equity investment in Centennial and concluded that no impairment was required given our assessment of its fair value based on various uses of Centennial’s assets.

Consumer excise taxes increased $168 million in the second quarter and $246 million in the first six months of 2013 compared to the same periods of 2012, primarily due to the increase in refined product sales volumes related to the Galveston Bay refinery acquired in February 2013.

Depreciation and amortization increased $66 million in the second quarter and $123 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to the completion of the heavy oil upgrading and expansion project at our Detroit, Michigan refinery and our acquisition of the Galveston Bay Refinery and Related Assets.

Other taxes increased $24 million in the second quarter and $39 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to increases in personal property taxes and payroll taxes. These increases were attributable to a number of factors including the completion of the heavy oil upgrading and expansion project at our Detroit refinery, the acquisition of the Galveston Bay Refinery and Related Assets and Speedway’s acquisition of 97 convenience stores in 2012.

Net interest and other financial costs increased $28 million in the second quarter and $54 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily reflecting a decrease in capitalized interest due to the completion of the Detroit refinery heavy oil upgrading and expansion project in late 2012. We capitalized interest of $4 million in the second quarter and $8 million in the first six months of 2013 compared to $36 million in the second quarter and $66 million in the first six months of 2012.

Provision for income taxes decreased $160 million in the second quarter and $120 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to the $375 million and $201 million decreases in income before income taxes and decreases in the effective tax rates, which were 35 percent and 34 percent in the second quarter and first six months of 2013 compared to 37 percent in the same periods of 2012. The effective tax rates in the second quarter and first six months of 2013 is equivalent to or slightly less than the U.S. statutory rate of 35 percent primarily due to certain permanent benefit differences, partially offset by state and local tax expense. See Note 11 to the unaudited consolidated financial statements for further details.

 

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Segment Results

Revenues are summarized by segment in the following table.

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In millions)

   2013     2012     2013     2012  

Refining & Marketing

   $ 24,324      $ 18,805      $ 46,397      $ 37,728   

Speedway

     3,769        3,633        7,211        6,918   

Pipeline Transportation

     138        109        263        208   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenues

     28,231        22,547        53,871        44,854   

Elimination of intersegment revenues

     (2,554     (2,302     (4,858     (4,344
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 25,677      $ 20,245      $ 49,013      $ 40,510   
  

 

 

   

 

 

   

 

 

   

 

 

 

Items included in both revenues and costs:

        

Consumer excise taxes

   $ 1,596      $ 1,428      $ 3,054      $ 2,808   

Refining & Marketing segment revenues increased $5.52 billion in the second quarter and $8.67 billion in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to increases in refined product sales volumes related to the Galveston Bay refinery acquired in February 2013, partially offset by lower refined product selling prices. The table below shows our Refining & Marketing segment refined product sales volumes and prices.

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2013      2012      2013      2012  

Refining & Marketing segment:

           

Refined product sales volumes (thousands of barrels per day )(a)

     2,125         1,571         2,004         1,551   

Average refined product sales prices (dollars per gallon )

   $ 2.89       $ 3.01       $ 2.93       $ 3.04   

 

(a)

Includes intersegment sales

The table below shows the average refined product benchmark prices for our marketing areas.

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

(Dollars per gallon)

   2013      2012      2013      2012  

Chicago spot unleaded regular gasoline

   $     2.95       $     2.89       $     2.87       $     2.88   

Chicago spot ultra-low sulfur diesel

     3.03         2.89         3.05         2.93   

USGC spot unleaded regular gasoline

     2.69         2.79         2.76         2.88   

USGC spot ultra-low sulfur diesel

     2.86         2.94         2.97         3.05   

Refining & Marketing intersegment sales to our Speedway segment were $2.43 billion in the second quarter and $4.63 billion in the first six months of 2013 compared to $2.21 billion in the second quarter and $4.17 billion in the first six months of 2012. Intersegment refined product sales volumes were 745 million gallons in the second quarter and 1.43 billion gallons in the first six months of 2013 compared to 678 million gallons in the second quarter and 1.29 billion gallons in the first six months of 2012, with the increased volumes primarily due to Speedway’s acquisitions of convenience stores in 2013 and 2012.

Speedway segment revenues increased $136 million in the second quarter and $293 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to increases in gasoline and distillate sales volumes of 25 million gallons and 64 million gallons, respectively. Gasoline and distillate selling prices averaged $3.63 per gallon and $3.57 per gallon in

 

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the second quarter and first six months of 2013 compared to $3.62 per gallon and $3.57 per gallon in the second quarter and first six months of 2012. The Speedway segment also had higher merchandise sales in the second quarter and first six months of 2013. The increases in gasoline and distillate sales volumes and merchandise sales were primarily due to the acquisitions of convenience stores in 2013 and 2012.

Pipeline Transportation segment revenue increased $29 million in the second quarter and $55 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to higher transportation tariffs from our crude oil pipelines, resulting from higher crude oil volumes transported and increased tariff rates in the last half of 2012. Crude oil pipeline throughput volumes increased 141 mbpd in the second quarter and 146 mbpd for the six months of 2013 compared to the corresponding 2012 periods.

Income before income taxes and income from operations by segment are presented in the following table.

 

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In millions)

       2013             2012             2013             2012      

Income from operations by segment:

        

Refining & Marketing

   $ 903      $ 1,325      $ 2,008      $ 2,268   

Speedway

     123        107        190        157   

Pipeline Transportation (a)

     58        50        109        92   

Items not allocated to segments:

        

Corporate and other unallocated items (a)(b)

     (64     (92     (131     (171

Pension settlement expenses

     (60     (83     (60     (83
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     960        1,307        2,116        2,263   

Net interest and other financial income (costs)

     (45     (17     (93     (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 915      $ 1,290      $ 2,023      $ 2,224   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

Corporate overhead costs attributable to MPLX are included in the Pipeline Transportation segment subsequent to MPLX’s October 31, 2012 initial public offering.

(b) 

Corporate and other unallocated items consist primarily of MPC’s corporate administrative expenses and costs related to certain non-operating assets.

The following table presents certain market indicators that we believe are helpful in understanding the results of our Refining & Marketing segment’s business.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(Dollars per barrel)

       2013              2012              2013              2012      

Chicago LLS 6-3-2-1 (a)(b)

   $ 14.62       $ 9.11       $ 9.48       $ 4.76   

USGC LLS 6-3-2-1 (a)

     6.93         7.76         5.93         6.51   

Blended 6-3-2-1 (a)(c)

     9.85         8.46         7.28         5.60   

LLS

     104.82         108.22         109.20         113.89   

WTI

     94.17         93.35         94.26         98.15   

LLS—WTI differential (a)

     10.65         14.87         14.94         15.74   

Sweet/Sour differential (a)(d)

     6.28         10.50         9.11         12.09   

 

(a) 

All spreads and differentials are measured against prompt LLS.

(b) 

Calculation utilizes USGC 3% Bunker value as a proxy for Chicago residual fuel price.

(c) 

Blended Chicago/USGC crack spread is 38%/62% in 2013 and 52%/48% in 2012 based on MPC’s refining capacity by region in each period.

(d) 

LLS (prompt)—[delivered cost of sour crude oil: Arab Light, Kuwait, Maya, Western Canadian Select and Mars].

 

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Refining & Marketing segment income from operations decreased $422 million in the second quarter and $260 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to lower refining and marketing gross margins, which averaged $6.18 per barrel and $6.99 per barrel in the second quarter and first six months of 2013 compared to $11.13 per barrel and $9.76 per barrel in the second quarter and first six months of 2012.

Our realized Refining & Marketing gross margin for the second quarter and first six months of 2013 benefited from increases in the Chicago and USGC LLS 6-3-2-1 blended crack spread of $1.39 per barrel and $1.68 per barrel, respectively. However, we experienced lower product price realizations compared to the spot market product prices used in the LLS crack spread calculation. We believe the product price realizations were impacted by volatility in the Chicago market and compliance with the Renewable Fuel Standard (“RFS2”). In addition, our average crude oil acquisition discount narrowed compared to LLS in 2013. These impacts were partially offset by increases in refined product sales volumes related to the Galveston Bay refinery acquired in February 2013.

The following table summarizes our refinery throughputs.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(thousands of barrels per day)

       2013              2012              2013              2012      

Refinery Throughputs:

           

Crude oil refined

     1,690         1,208         1,562         1,177   

Other charge and blendstocks

     174         131         206         153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,864         1,339         1,768         1,330   
  

 

 

    

 

 

    

 

 

    

 

 

 

The increases in crude oil throughput and other charge and blendstocks throughput in the second quarter and first six months of 2013 compared to the same periods of 2012 were primarily due to the Galveston Bay refinery acquired in February 2013.

Within our refining system, sour crude accounted for 52 percent and 53 percent of our crude oil processed in the second quarter and first six months of 2013 compared to 54 percent and 50 percent in the same periods of 2012.

The following table includes certain key operating statistics for the Refining & Marketing segment.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2013              2012              2013              2012      

Refining & Marketing gross margin (dollars per barrel) (a)

   $ 6.18       $ 11.13       $ 6.99       $ 9.76   

Refinery direct operating costs in Refining & Marketing gross margin (dollars per barrel): (b)

           

Turnaround and major maintenance

   $ 0.73       $ 0.88       $ 0.93       $ 0.96   

Depreciation and amortization

     1.28         1.39         1.35         1.39   

Other manufacturing (c)

     4.06         3.05         3.94         3.11   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6.07       $ 5.32       $ 6.22       $ 5.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

Refined product sales volumes (thousands of barrels per day) (d)

     2,125         1,571         2,004         1,551   

 

(a) 

Sales revenue less cost of refinery inputs, purchased products and refinery direct operating costs (including turnaround and major maintenance, depreciation and amortization and other manufacturing expenses), divided by Refining & Marketing segment refined product sales volumes.

(b) 

Per barrel of total refinery throughputs.

(c) 

Includes utilities, labor, routine maintenance and other operating costs.

(d) 

Includes intersegment sales.

Refinery direct operating costs in the Refining & Marketing gross margin increased $0.75 per barrel and $0.76 per barrel of total refinery throughputs in the second quarter and first six months of 2013 compared to the same periods of 2012, which includes increases in other manufacturing costs of $1.01 per barrel and $0.83 per barrel, respectively. The increases were primarily attributable to the addition of the Galveston Bay refinery, which had higher operating costs per barrel of throughput than the average of our other six refineries due to its greater level of complexity.

 

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We purchase RINs to satisfy a portion of our RFS compliance. Our cost of purchasing RINs increased to $65 million and $107 million in the second quarter and first six months of 2013 from $34 million and $66 million in the same periods of 2012, primarily due to higher ethanol RIN prices.

Speedway segment income from operations increased $16 million in the second quarter and $33 million in the first six months of 2013 compared to the second quarter and first six months of 2012, primarily due to increases in our gasoline and distillate gross margin and our merchandise gross margin, partially offset by higher expenses attributable to an increase in the number of convenience stores. The increases in our gasoline and distillate gross margin were primarily due to $0.0099 and $0.0148 increases in our gross margin per gallon along with higher sales volumes related to the increase in the number of convenience stores. The increases in the merchandise gross margin were primarily due to higher merchandise sales resulting from an increase in the number of convenience stores.

The following table includes certain key operating statistics for the Speedway segment.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Convenience stores at period-end

     1,468        1,455       

Gasoline & distillate sales (millions of gallons)

     781        756        1,526        1,462   

Gasoline & distillate gross margin (dollars per gallon)(a)

   $ 0.1738      $ 0.1639      $ 0.1525      $ 0.1377   

Merchandise sales (in millions)

   $ 806      $ 776      $ 1,517      $ 1,471   

Merchandise gross margin (in millions)

   $ 212      $ 203      $ 396      $ 382   

Same store gasoline sales volume (period over period)

     0.0     2.1     0.3     0.5

Same store merchandise sales excluding cigarettes (period over period)

     4.5     10.1     2.8     10.3

 

(a)

The price paid by consumers less the cost of refined products, including transportation, consume