XNYS:MPC Marathon Petroleum Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:MPC Fair Value Estimate
Premium
XNYS:MPC Consider Buying
Premium
XNYS:MPC Consider Selling
Premium
XNYS:MPC Fair Value Uncertainty
Premium
XNYS:MPC Economic Moat
Premium
XNYS:MPC Stewardship
Premium
 
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, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number 001-35054

 

 

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 338,297,004 shares of Marathon Petroleum Corporation common stock outstanding as of July 31, 2012.

 

 

 


Table of Contents

MARATHON PETROLEUM CORPORATION

Form 10-Q

Quarter Ended June 30, 2012

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 Stockholders’ Equity / Net Investment (Unaudited)

     6   

  Notes to Consolidated Financial Statements (Unaudited)

     7   

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

     27   

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

     41   

Item 4.     Controls and Procedures

     42   

  Supplementary Statistics (Unaudited)

     43   

PART II—OTHER INFORMATION

  

Item 1.     Legal Proceedings

     45   

Item 1A.  Risk Factors

     45   

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

     46   

Item 6.     Exhibits

     47   

  Signatures

     48   

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, and for periods prior to its spinoff from Marathon Oil Corporation, the Refining, Marketing & Transportation Business of Marathon Oil Corporation.

 

1


Table of Contents

Part I—Financial Information

Item 1. Financial Statements

Marathon Petroleum Corporation

Consolidated Statements of Income (Unaudited)

 

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

(In millions, except per share data)

   2012     2011     2012     2011  

Revenues and other income:

        

Sales and other operating revenues (including consumer excise taxes)

   $ 20,240      $ 20,732      $ 40,504      $ 38,551   

Sales to related parties

     3        28        4        51   

Income from equity method investments

     9        17        11        26   

Net gain on disposal of assets

     1        4        3        5   

Other income

     4        13        10        32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other income

     20,257        20,794        40,532        38,665   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of revenues (excludes items below)

     16,789        16,654        34,098        31,211   

Purchases from related parties

     57        981        120        1,766   

Consumer excise taxes

     1,428        1,269        2,808        2,478   

Depreciation and amortization

     236        218        466        434   

Selling, general and administrative expenses

     376        288        639        505   

Other taxes

     64        59        138        127   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     18,950        19,469        38,269        36,521   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     1,307        1,325        2,263        2,144   

Related party net interest and other financial income

     —          18        —          35   

Net interest and other financial income (costs)

     (17     (10     (39     (24
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,290        1,333        2,224        2,155   

Provision for income taxes

     476        531        814        824   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 814      $ 802      $ 1,410      $ 1,331   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data (See Note 6)

        

Basic:

        

Net income per share

   $ 2.39      $ 2.25      $ 4.09      $ 3.74   

Weighted average shares outstanding

     340        356        344        356   

Diluted:

        

Net income per share

   $ 2.38      $ 2.24      $ 4.07      $ 3.72   

Weighted average shares outstanding

     341        358        346        358   

Dividends paid

   $ 0.25      $ —        $ 0.50      $ —     

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

 

2


Table of Contents

Marathon Petroleum Corporation

Consolidated Statements of Comprehensive Income (Unaudited)

 

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

(In millions)

   2012      2011      2012      2011  

Net income

   $ 814       $ 802       $ 1,410       $ 1,331   

Other comprehensive income:

           

Defined benefit postretirement and post-employment plans:

           

Actuarial changes, net of tax of $25, $16, $33 and $23

     39         25         55         36   

Prior service costs, net of tax of $196, $-, $197 and $1

     326         1         327         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income

     365         26         382         38   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 1,179       $ 828       $ 1,792       $ 1,369   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

3


Table of Contents

Marathon Petroleum Corporation

Consolidated Balance Sheets (Unaudited)

 

(In millions, except per share data)

       June 30,    
2012
    December 31,
2011
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 1,895      $ 3,079   

Receivables, less allowance for doubtful accounts of $2 and $3

     4,708        5,461   

Inventories

     4,030        3,320   

Other current assets

     73        141   
  

 

 

   

 

 

 

Total current assets

     10,706        12,001   

Equity method investments

     302        302   

Property, plant and equipment, net

     12,414        12,228   

Goodwill

     925        842   

Other noncurrent assets

     334        372   
  

 

 

   

 

 

 

Total assets

   $ 24,681      $ 25,745   
  

 

 

   

 

 

 

Liabilities

    

Current liabilities:

    

Accounts payable

   $ 6,155      $ 8,189   

Payroll and benefits payable

     225        312   

Consumer excise taxes payable

     361        337   

Accrued taxes

     604        558   

Long-term debt due within one year

     19        15   

Other current liabilities

     204        180   
  

 

 

   

 

 

 

Total current liabilities

     7,568        9,591   

Long-term debt

     3,316        3,292   

Deferred income taxes

     1,823        1,310   

Defined benefit postretirement plan obligations

     1,348        1,783   

Deferred credits and other liabilities

     300        264   
  

 

 

   

 

 

 

Total liabilities

     14,355        16,240   
  

 

 

   

 

 

 

Commitments and contingencies (see Note 20)

    

Stockholders’ Equity

    

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

     —          —     

Common stock:

    

Issued—358 million and 357 million shares (par value $0.01 per share, 1 billion shares authorized)

     4        4   

Held in treasury, at cost—18 million shares at June 30, 2012

     (743     —     

Additional paid-in capital

     9,426        9,482   

Retained earnings

     2,136        898   

Accumulated other comprehensive loss

     (497     (879
  

 

 

   

 

 

 

Total stockholders’ equity

     10,326        9,505   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 24,681      $ 25,745   
  

 

 

   

 

 

 

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

 

4


Table of Contents

Marathon Petroleum Corporation

Consolidated Statements of Cash Flows (Unaudited)

 

     Six Months Ended
June 30,
 

(In millions)

   2012     2011  

Increase (decrease) in cash and cash equivalents

    

Operating activities:

    

Net income

   $ 1,410      $ 1,331   

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

    

Depreciation and amortization

     466        434   

Pension and other postretirement benefits, net

     183        62   

Deferred income taxes

     328        34   

Net gain on disposal of assets

     (3     (5

Equity method investments, net

     8        (6

Changes in the fair value of derivative instruments

     106        (92

Changes in:

    

Current receivables

     753        (757

Inventories

     (697     (613

Current accounts payable and accrued liabilities

     (2,022     580   

All other, net

     84        (16
  

 

 

   

 

 

 

Net cash provided by operating activities

     616        952   
  

 

 

   

 

 

 

Investing activities:

    

Additions to property, plant and equipment

     (635     (517

Acquisitions

     (163     (74

Disposal of assets

     6        133   

Investments in related party debt securities—purchases

     —          (10,326

 —redemptions

     —          12,730   

Investments—loans and advances

     (11     (42

—repayments of loans

     3        35   

All other, net

     2        5   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (798     1,944   
  

 

 

   

 

 

 

Financing activities:

    

Long-term debt payable to Marathon Oil and subsidiaries—borrowings

     —          7,748   

 —repayments

     —          (11,366

Long-term debt—borrowings

     —          2,989   

 —repayments

     (6     (6

Debt issuance costs

     —          (58

Issuance of common stock

     32        —     

Common stock repurchased

     (850     —     

Dividends paid

     (172     —     

Distributions to Marathon Oil

     —          (699

All other, net

     (6     —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,002     (1,392
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (1,184     1,504   

Cash and cash equivalents at beginning of period

     3,079        118   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,895      $ 1,622   
  

 

 

   

 

 

 

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

 

5


Table of Contents

Marathon Petroleum Corporation

Consolidated Statements of Stockholders’ Equity / Net Investment (Unaudited)

 

(In millions)

   Common
Stock
     Treasury
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Net
Investment
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity / Net
Investment
 

Balance as of December 31, 2010

   $ —         $ —        $ —        $ —        $ 8,867      $ (623   $ 8,244   

Net income

     —           —          —          —          1,331        —          1,331   

Distributions to Marathon Oil

     —           —          —          —          (625     (11     (636

Other comprehensive income

     —           —          —          —          —          38        38   

Reclassification of net investment to additional paid-in capital

     —           —          9,573        —          (9,573     —          —     

Issuance of common stock at spin-off

     4         —          (4     —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

   $ 4       $ —        $ 9,569      $ —        $ —        $ (596   $ 8,977   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

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

Net income

     —           —          —          1,410        —          —          1,410   

Dividends paid

     —           —          —          (172     —          —          (172

Shares repurchased

     —           (742     (108     —          —          —          (850

Shares issued (returned)—stock-based compensation

     —           (1     33        —          —          —          32   

Stock-based compensation

     —           —          28        —          —          —          28   

Other comprehensive income

     —           —          —          —          —          382        382   

Other

     —           —          (9     —          —          —          (9
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Shares in millions)

   Common
Stock
     Treasury
Stock
                               

Balance as of December 31, 2011

     357         —               

Shares issued—stock-based compensation

     1         —               

Shares repurchased

     —           (18          
  

 

 

    

 

 

           

Balance as of June 30, 2012

     358         (18          
  

 

 

    

 

 

           

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

 

6


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

1. Spinoff, Description of the Business and Basis of Presentation

SpinoffOn May 25, 2011, the Marathon Oil Corporation (“Marathon Oil”) board of directors approved the spinoff of its Refining, Marketing & Transportation Business (“RM&T Business”) into an independent, publicly traded company, Marathon Petroleum Corporation (“MPC”), through the distribution of MPC common stock to the stockholders of Marathon Oil common stock. In accordance with a separation and distribution agreement between Marathon Oil and MPC, the distribution of MPC common stock was made on June 30, 2011, with Marathon Oil stockholders receiving one share of MPC common stock for every two shares of Marathon Oil common stock held (the “Spinoff”). Following the Spinoff, Marathon Oil retained no ownership interest in MPC, and each company had separate public ownership, boards of directors and management. All subsidiaries and equity method investments not contributed by Marathon Oil to MPC remained with Marathon Oil and, together with Marathon Oil, are referred to as the “Marathon Oil Companies.” On July 1, 2011, our common stock began trading “regular-way” on the New York Stock Exchange under the ticker symbol “MPC”.

Description of the BusinessOur 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 Marathon Pipe Line LLC.

See Note 8 for additional information about our operations.

Basis of Presentation—Prior to the Spinoff on June 30, 2011, our results of operations and cash flows consisted of the RM&T Business, which represented a combined reporting entity. Subsequent to the Spinoff, our results of operations and cash flows consist of consolidated MPC activities. All significant intercompany transactions and accounts have been eliminated.

The consolidated statements of income for periods prior to the Spinoff included expense allocations for certain corporate functions historically performed by the Marathon Oil Companies, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, procurement and information technology. Those allocations were based primarily on specific identification, headcount or computer utilization. Our management believes the assumptions underlying the consolidated financial statements, including the assumptions regarding allocating general corporate expenses from the Marathon Oil Companies, are reasonable. However, these consolidated financial statements do not include all of the actual expenses that would have been incurred had we been a stand-alone company during the periods presented prior to the Spinoff and may not reflect our consolidated results of operations and cash flows had we been a stand-alone company during the periods presented. Actual costs that would have been incurred if we had been a stand-alone company would depend upon multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Subsequent to the Spinoff, we are performing these functions using internal resources or services provided by third parties, certain of which were provided by the Marathon Oil Companies during a transition period pursuant to a transition services agreement, which terminated on June 30, 2012. See Note 3.

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 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 accounting principles generally accepted in the United States of America 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, 2011. The results of operations for the six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the full year.

2. Accounting Standards

Recently Adopted

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update giving an entity the option to use a qualitative assessment to determine whether or not the entity is required to perform the two step goodwill impairment test. If, through a qualitative assessment, an entity determines that it is more likely than not

 

7


Table of Contents

that the fair value of a reporting unit is less than the carrying amount, the entity is required to perform the two step goodwill impairment test. The amendments in the update were effective for annual and interim goodwill testing performed in fiscal years beginning after December 15, 2011. The adoption of this accounting standards update in the first quarter of 2012 did not have an impact on our consolidated results of operations, financial position or cash flows. We perform the annual goodwill impairment testing for each of our reporting units in the fourth quarter.

In May 2011, the FASB issued an update amending the accounting standards for fair value measurement and disclosure, resulting in common principles and requirements under U.S. generally accepted accounting principles (“US GAAP”) and International Financial Reporting Standards (“IFRS”). The amendments change the wording used to describe certain of the US GAAP requirements either to clarify the intent of existing requirements, to change measurement or expand disclosure principles or to conform to the wording used in IFRS. The amendments were to be applied prospectively and were effective in interim and annual periods beginning with the first quarter of 2012 with early application not permitted. This accounting standards update was adopted in the first quarter of 2012 and was applied prospectively. The adoption of these amendments did not have a significant impact on our consolidated results of operations, financial position or cash flows. The new required disclosures are included in Note 14.

Not Yet Adopted

In July 2012, the FASB issued an accounting standards update which 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 is effective for annual and interim impairment tests performed in fiscal years beginning after September 15, 2012. Early adoption is permitted. Adoption of this accounting standards update is not expected to have an impact on our consolidated results of operations, financial position or cash flows.

In December 2011, the FASB issued an accounting standards update that requires disclosure of additional information related to recognized financial and derivative instruments 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 is to be applied retrospectively and is effective for annual periods that begin on or after January 1, 2013 and interim periods within those annual periods. Adoption of this update is not expected to have an impact on our consolidated results of operations, financial position or cash flows.

3. Related Party Transactions

Our related parties included:

 

   

Marathon Oil Companies until June 30, 2011, the effective date of the Spinoff.

 

   

The Andersons Clymers Ethanol LLC (“TACE”), in which we have a 36 percent interest, and The Andersons Marathon Ethanol LLC (“TAME”), in which we have a 50 percent interest. These companies each own an ethanol production facility.

 

   

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 operates an offshore oil port.

 

   

Other equity method investees.

We believe that transactions with related parties, other than certain administrative transactions with the Marathon Oil Companies to effect the Spinoff and related to the provision of services, were conducted on terms comparable to those with unrelated parties.

On May 25, 2011, we entered into a separation and distribution agreement and several other agreements with the Marathon Oil Companies to effect the Spinoff and to provide a framework for our relationship with the Marathon Oil Companies. These agreements govern the relationship between us and Marathon Oil subsequent to the completion of the Spinoff and provide for the allocation between us and the Marathon Oil Companies of assets, liabilities and obligations attributable to periods prior to the Spinoff. Because the terms of these agreements were entered into in the context of a related party transaction, the terms may not be comparable to terms that would be obtained in a transaction between unaffiliated parties.

 

8


Table of Contents

We entered into a transition services agreement with Marathon Oil under which we were providing each other with a variety of administrative services on an as-needed basis for a period of time not to exceed one year following the Spinoff. The charges under the transition service agreement were at cost-based rates that had been negotiated between us and Marathon Oil. Services provided to us by the Marathon Oil Companies for the six months ended June 30, 2012 included accounting, audit, treasury, information technology and health, environmental, safety and security. Services provided by us to the Marathon Oil Companies for the six months ended June 30, 2012 included administrative services, legal, human resources, accounting, audit, information technology and health, environmental, safety and security. The transition services agreement terminated on June 30, 2012.

Sales to related parties were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In millions)    2012      2011      2012      2011  

Equity method investees:

           

Centennial

   $ 1       $ 14       $ 1       $ 34   

Other equity method investees

     2         2         3         4   

Marathon Oil Companies

     —           12         —           13   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $     3       $     28       $     4       $     51   
  

 

 

    

 

 

    

 

 

    

 

 

 

Related party sales to Centennial consist primarily of petroleum products. Related party sales to the Marathon Oil Companies consisted primarily of pipeline operating revenue.

Purchases from related parties were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In millions)    2012      2011      2012      2011  

Equity method investees:

           

Centennial

   $ —         $ 18       $ 9       $ 31   

LOOP

     9         23         21         32   

TAME

     30         39         60         71   

TACE

     10         15         15         27   

Other equity method investees

     8         9         15         15   

Marathon Oil Companies

     —           877         —           1,590   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $     57       $   981       $   120       $   1,766   
  

 

 

    

 

 

    

 

 

    

 

 

 

Related party purchases from Centennial consist primarily of refinery feedstocks and 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. Related party purchases from the Marathon Oil Companies consisted primarily of crude oil and natural gas, which were recorded at contracted prices that were market-based.

The Marathon Oil Companies performed certain services for us prior to the Spinoff such as executive oversight, accounting, treasury, tax, legal, procurement and information technology services. We also provided certain services to the Marathon Oil Companies prior to the Spinoff, such as legal, human resources and tax services. The two groups of companies charged each other for these shared services at a negotiated rate. Where costs incurred by the Marathon Oil Companies on our behalf could not practically be determined by specific utilization, these costs were primarily allocated to us based on headcount or computer utilization. Our management believes those allocations were a reasonable reflection of the utilization of services provided. However, those allocations may not have fully reflected the expenses that would have been incurred had we been a stand-alone company during the periods presented. Net charges from the Marathon Oil Companies for these services reflected within selling, general and administrative expenses in the consolidated statements of income were $14 million and $26 million for the three and six months ended June 30, 2011, respectively.

 

9


Table of Contents

Current receivables from related parties, which are included in receivables, less allowance for doubtful accounts on the consolidated balance sheets, were as follows:

 

(In millions)    June 30,
2012
     December 31,
2011
 

Equity method investees

   $          2       $          2   

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

 

(In millions)    June 30,
2012
     December 31,
2011
 

Equity method investees:

     

Centennial

   $ —         $ 7   

LOOP

     4         5   

TAME

     3         4   

TACE

     2         2   

Other equity method investees

     2         2   
  

 

 

    

 

 

 

Total

   $        11       $        20   
  

 

 

    

 

 

 

We have throughput and deficiency agreements with LOOP and Centennial. We had prepaid tariff balances with LOOP of $4 million at December 31, 2011, which were utilized during the six months ended June 30, 2012, and with Centennial of $14 million at June 30, 2012 and $11 million at December 31, 2011. During the first quarter of 2012, we impaired our prepaid tariff with Centennial. Prepaid tariff balances are reflected in other noncurrent assets on the consolidated balance sheets. For additional information on the impairment, see Note 14.

During the six months ended June 30, 2011, we borrowed $7,748 million and repaid $10,319 million under the credit agreement with MOC Portfolio Delaware, Inc. (“PFD”), a subsidiary of Marathon Oil. The credit agreement was terminated on June 30, 2011, and there has been no subsequent activity.

There were no borrowings during the six months ended June 30, 2011 under our revenue bonds proceeds subsidiary loan agreement with Marathon Oil. The loan balance outstanding as of December 31, 2010 of $1,047 million was repaid on February 1, 2011 and the loan was terminated effective April 1, 2011.

Our investments in shares of PFD Redeemable Class A, Series 1 Preferred Stock (“PFD Preferred Stock”) were accounted for as investments in related party available-for-sale debt securities and were redeemed prior to the Spinoff.

Related party net interest and other financial income was as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(In millions)    2012      2011     2012      2011  

Dividend income:

          

PFD Preferred Stock

   $ —         $ 18      $ —         $ 35   

Interest expense:

          

PFD credit agreement

     —           1        —           3   

Marathon Oil loan agreement

     —           —          —           5   

Interest capitalized

     —           (1     —           (8
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest expense

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Related party net interest and other financial income

   $     —         $     18      $     —         $     35   
  

 

 

    

 

 

   

 

 

    

 

 

 

We also recorded property, plant and equipment additions related to capitalized interest incurred by Marathon Oil on our behalf of $2 million in the six months ended June 30, 2011, which were reflected as contributions from Marathon Oil.

Certain asset or liability transfers between us and Marathon Oil, including assets and liabilities contributed under the separation and distribution agreement related to the Spinoff, and certain expenses, such as stock-based compensation, incurred by Marathon Oil on our behalf have been recorded as non-cash capital contributions or distributions. The net non-cash capital contributions from Marathon Oil were $74 million in the six months ended June 30, 2011.

 

10


Table of Contents

4. Acquisition

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. This acquisition supports our strategic initiative to increase our Speedway segment sales volumes.

In connection with this acquisition, our Speedway segment recorded $83 million of goodwill, which is deductible for income tax purposes. The principal factors contributing to a purchase price resulting in goodwill included the acquired stores complementing our existing network in our Indiana and Ohio markets, access to our refined product transportation systems and the potential for higher merchandise sales.

In May 2011, Speedway LLC acquired 23 convenience stores in Indiana and Illinois. In connection with this acquisition, our Speedway segment recorded $9 million of goodwill.

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.

5. 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-day St. Paul Park refinery and associated terminals, 166 convenience stores primarily branded SuperAmerica (including six stores in Wisconsin), along with the SuperMom’s bakery (a baked goods and sandwich supply operation) and certain associated trademarks, SuperAmerica Franchising LLC, interests in pipeline assets in Minnesota and associated inventories. We refer to these as the “Minnesota Assets.” The terms of the sale included (1) a preferred stock interest in the entity that holds the Minnesota Assets with a stated value of $80 million, (2) a maximum $125 million earnout provision payable to us over eight years, (3) a maximum $60 million of margin support payable to the buyer over two years, up to a maximum of $30 million per year, (4) a receivable from the buyer of $107 million which was fully collected during the six months ended June 30, 2011, and (5) guarantees with a maximum exposure of $11 million made by us on behalf of and to the buyer related to a limited number of convenience store sites. As a result of this continuing involvement, the related gain on sale of $89 million was initially deferred.

Certain terms of the transaction resulted in the creation of variable interests in a variable interest entity (“VIE”) that owns the Minnesota Assets. These variable interests include our ownership of a preferred equity interest in the VIE, operating margin support in the form of a capped liquidity guarantee and reimbursements to us for costs incurred in connection with transition services provided to the buyer. Our preferred equity interest in this VIE was reflected at $80 million in other noncurrent assets on our consolidated balance sheets as of June 30, 2012 and December 31, 2011. Any margin support obligation, when finalized, would be paid and reduce the deferred gain. We received $36 million during the three months ended June 30, 2011 and $2 million and $69 million during the six months ended June 30, 2012 and 2011 for transition services provided to the buyer. See Note 21 for additional information affecting this VIE subsequent to June 30, 2012.

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 equity interest does not allow us to appoint a majority of the board of managers to the VIE and limits our voting ability to only certain matters. Also, individually and cumulatively, none of our variable interests expose us to residual returns or expected losses that are significant to the VIE.

Our maximum exposure to loss due to this VIE at June 30, 2012 was $160 million, which was quantified based on contractual arrangements related to the sale. We did not provide any financial assistance to the buyer outside of our contractual arrangements related to the sale.

 

11


Table of Contents

6. Income per Common Share

Basic income per share is based on the weighted average number of shares of common stock outstanding. Diluted income per share assumes exercise of stock options and stock appreciation rights, full vesting of non-participating restricted stock awards and payout of share-settled performance unit awards, provided the effect is not anti-dilutive.

On June 30, 2011, 356,337,127 shares of our common stock were distributed to Marathon Oil stockholders in conjunction with the Spinoff. For comparative purposes, and to provide a more meaningful calculation for weighted average shares, we have assumed that the shares outstanding on the date of the Spinoff were also outstanding for the three and six months ended June 30, 2011. In addition, for the diluted weighted average share calculations, we have assumed the dilutive securities outstanding at June 30, 2011 were also outstanding for the three and six months ended June 30, 2011. Excluded from the diluted weighted average share calculation for the three and six months ended June 30, 2012 are approximately five million and four million shares related to stock-based compensation awards as their effect would be anti-dilutive. Excluded from the diluted weighted average share calculation for the three and six months ended June 30, 2011 are approximately four million shares related to stock-based compensation awards as their effect would be anti-dilutive.

The calculation of weighted average shares for the three and six months ended June 30, 2012 also includes non-participating restricted shares. 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
June 30,
     Six Months Ended
June 30,
 

(In millions, except per share data)

   2012      2011      2012      2011  

Basic earnings per share:

           

Allocation of earnings:

           

Net income

   $ 814       $ 802       $ 1,410       $ 1,331   

Income allocated to participating securities

     2         —           3         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Income available to common stockholders—basic

   $ 812       $ 802       $ 1,407       $ 1,331   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     340         356         344         356   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 2.39       $ 2.25       $ 4.09       $ 3.74   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

           

Allocation of earnings:

           

Net income

   $ 814       $ 802       $ 1,410       $ 1,331   

Income allocated to participating securities

     2         —           3         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Income available to common stockholders—diluted

   $ 812       $ 802       $ 1,407       $ 1,331   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     340         356         344         356   

Effect of dilutive securities

     1         2         2         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares, including dilutive effect

     341         358         346         358   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 2.38       $ 2.24       $ 4.07       $ 3.72   
  

 

 

    

 

 

    

 

 

    

 

 

 

7. Stockholders’ Equity

Share repurchase planOn 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. 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. After the effects of our accelerated share repurchase (“ASR”) program discussed below, $1.15 billion of the $2.0 billion amount authorized by our board of directors was available for share repurchases at June 30, 2012. The timing of repurchases, if any, outside of the ASR program will depend upon several factors, including market and business conditions, and such repurchases may be discontinued at any time.

 

12


Table of Contents

Accelerated share repurchase programOn February 3, 2012, we entered into an $850 million ASR program with a major financial institution to repurchase shares of MPC common stock under the approved share repurchase plan authorized by our board of directors. Under the ASR program, we received 17,581,344 shares of our common stock during the six months ended June 30, 2012. On July 25, 2012, an additional 2,776,036 shares were delivered to us, for a total of 20,357,380 repurchased shares, which concluded the ASR program. The total number of shares repurchased under the ASR program was based generally on the volume-weighted average price of our common stock during the repurchase period, subject to provisions that set a minimum and maximum number of shares. Upon final settlement, the average per share amount paid for all shares purchased under the ASR program was $41.75. The ASR program is 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 for the future settlement provisions. The forward contracts are accounted for as equity instruments.

8. Segment Information

We have three reportable operating 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, among other transportation-related assets, a majority interest in LOOP, which is the owner and operator of the only U.S. deepwater oil port.

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

 

                                                                                               

(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 from equity method investments

     (1     —          10        9   

Depreciation and amortization(b)

     191        28        12        231   

Capital expenditures and investments(c)(d)

     178        187        60        425   

 

13


Table of Contents
                                                                                               

(In millions)

   Refining
& Marketing
    Speedway      Pipeline
Transportation
    Total  

Three Months Ended June 30, 2011

         

Revenues:

         

Customer

   $ 17,135      $ 3,583       $ 14      $ 20,732   

Intersegment(a)

     2,250        —           87        2,337   

Related parties

     27        —           1        28   
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment revenues

     19,412        3,583         102        23,097   

Elimination of intersegment revenues

     (2,250     —           (87     (2,337
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

   $ 17,162      $ 3,583       $ 15      $ 20,760   
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment income from operations

   $ 1,260      $ 80       $ 54      $ 1,394   

Income from equity method investments

     4        —           13        17   

Depreciation and amortization(b)

     176        28         11        215   

Capital expenditures and investments(c)(e)

     220        97         24        341   

 

                                                                                               

(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 from equity method investments

     (1     —          12        11   

Depreciation and amortization(b)

     376        55        24        455   

Capital expenditures and investments(c)(d)

     331        198        98        627   

 

                                                                                               

(In millions)

   Refining
& Marketing
    Speedway      Pipeline
Transportation
    Total  

Six Months Ended June 30, 2011

         

Revenues:

         

Customer

   $ 31,954      $ 6,568       $ 29      $ 38,551   

Intersegment(a)

     4,014        —           164        4,178   

Related parties

     49        —           2        51   
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment revenues

     36,017        6,568         195        42,780   

Elimination of intersegment revenues

     (4,014     —           (164     (4,178
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

   $ 32,003      $ 6,568       $ 31      $ 38,602   
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment income from operations

   $ 2,062      $ 113       $ 105      $ 2,280   

Income from equity method investments

     4        —           22        26   

Depreciation and amortization(b)

     355        54         22        431   

Capital expenditures and investments(c)(e)

     376        102         38        516   

 

(a)

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

(b)

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.

(c)

Capital expenditures include changes in capital accruals.

(d)

Includes Speedway’s acquisition of 87 convenience stores in May 2012.

(e)

Includes Speedway’s acquisition of 23 convenience stores in May 2011.

 

14


Table of Contents

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

 

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

(In millions)

   2012     2011     2012     2011  

Segment income from operations

   $ 1,482      $ 1,394      $ 2,517      $ 2,280   

Items not allocated to segments:

        

Corporate and other unallocated items(a)

     (92     (69     (171     (136

Pension settlement expenses

     (83     —          (83     —     

Net interest and other financial income (costs)

     (17     8        (39     11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 1,290      $ 1,333      $ 2,224      $ 2,155   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

Corporate and other unallocated items consists primarily of MPC’s corporate administrative expenses, including allocations from the Marathon Oil Companies for periods prior to the Spinoff and costs related to certain non-operating assets.

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

 

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

(In millions)

   2012      2011      2012      2011  

Segment capital expenditures and investments

   $ 425       $ 341       $ 627       $ 516   

Less: Investments in equity method investees

     —           3         7         7   

Plus: Items not allocated to segments:

           

Capital expenditures not allocated to segments

     20         15         28         15   

Capitalized interest

     36         29         66         58   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures(a)(b)

   $ 481       $ 382       $ 714       $ 582   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Capital expenditures include changes in capital accruals.

(b)

See Note 17 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
June 30,
     Six Months Ended
June 30,
 

(In millions)

   2012     2011      2012     2011  

Total revenues (as reported above)

   $ 20,245      $ 20,760       $ 40,510      $ 38,602   

Plus: Corporate and other unallocated items

     (2     —           (2     —     

Less: Sales to related parties

     3        28         4        51   
  

 

 

   

 

 

    

 

 

   

 

 

 

Sales and other operating revenues (including consumer excise taxes)

   $ 20,240      $ 20,732       $ 40,504      $ 38,551   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

15


Table of Contents

9. Other Items

Net interest and other financial income (costs) was:

 

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

(In millions)

   2012     2011     2012     2011  

Interest:

        

Interest income

   $ 1      $ 1      $ 2      $ 1   

Interest expense(a)

     (47     (42     (93     (73

Interest capitalized(a)

     36        28        66        48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest

     (10     (13     (25     (24

Other:

        

Net foreign currency gains

     —          6        —          6   

Bank service and other fees

     (7     (3     (14     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other

     (7     3        (14     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest and other financial income (costs)

   $ (17   $ (10   $ (39   $ (24
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

See Note 3 for information on related party interest expense and capitalized interest.

10. Income Taxes

The combined federal, state and foreign effective income tax rate was 37 percent and 40 percent for the three months ended June 30, 2012 and 2011 and 37 percent and 38 percent for the six months ended June 30, 2012 and 2011. The effective tax rates for the periods presented exceeded the U.S. statutory rate of 35 percent due to state and local tax expense, partially offset by permanent benefit differences. During the three months ended June 30, 2011, state income tax legislative changes were enacted, primarily in Michigan, resulting in an increase in tax expense of $17 million. The provision for income taxes for periods prior to the Spinoff has been computed as if we were a stand-alone company.

We are continuously undergoing examination of our income tax returns, which have been completed through the 2007 and 2003 tax years for our U.S. federal and state income tax returns, respectively. We had $38 million of unrecognized benefits as of June 30, 2012. Pursuant to our tax sharing agreement with Marathon Oil, the unrecognized tax benefits related to our operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and we have indemnified Marathon Oil accordingly. See Note 20.

11. Inventories

 

                                             

(In millions)

   June 30,
2012
     December 31,
2011
 

Crude oil and refinery feedstocks

   $ 2,154       $ 1,339   

Refined products

     1,604         1,725   

Merchandise

     87         65   

Supplies and sundry items

     185         191   
  

 

 

    

 

 

 

Total (at cost)

   $ 4,030       $ 3,320   
  

 

 

    

 

 

 

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, 2012. Cost of revenues decreased and income from operations increased by less than $1 million for the six months ended June 30, 2011 as a result of liquidations of LIFO inventories.

 

16


Table of Contents

12. Property, Plant and Equipment

 

                                             

(In millions)

   June 30,
2012
     December 31,
2011
 

Refining & Marketing

   $ 14,621       $ 14,221   

Speedway

     1,980         1,887   

Pipeline Transportation

     1,687         1,593   

Corporate and Other

     401         372   
  

 

 

    

 

 

 

Total

     18,689         18,073   

Less accumulated depreciation

     6,275         5,845   
  

 

 

    

 

 

 

Net property, plant and equipment

   $ 12,414       $ 12,228   
  

 

 

    

 

 

 

13. Goodwill

The changes in the carrying amount of goodwill for the six months ended June 30, 2012 were as follows:

 

                                                                                                                       

(In millions)

   Refining &
Marketing
     Speedway      Pipeline
Transportation
     Total  

Balance as of December 31, 2011

   $ 551       $ 129       $ 162       $ 842   

Acquisition(a)

     —           83         —           83   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2012

   $ 551       $ 212       $ 162       $ 925   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

See Note 4 for information on the acquisition.

14. 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, 2012 and December 31, 2011 by fair value hierarchy level.

 

                                                                                                             
     June 30, 2012  

(In millions)

   Level 1     Level 2      Level 3      Collateral     Total  

Commodity derivative instruments, assets

   $ 134      $ —         $ —         $ 15      $ 149   

Other assets

     2        —           —           —          2   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets at fair value

   $ 136      $ —         $ —         $ 15      $ 151   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Commodity derivative instruments, liabilities

   $ (90   $ —         $ —         $ (59   $ (149
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

                                                                                                             
     December 31, 2011  

(In millions)

   Level 1     Level 2     Level 3      Collateral      Total  

Commodity derivative instruments, assets

   $ 26      $ 1      $ —         $ 107       $ 134   

Interest rate derivative instruments, assets

     —          19        —           —           19   

Other assets

     2        —          —           —           2   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 28      $ 20      $ —         $ 107       $ 155   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Commodity derivative instruments, liabilities

   $ (45   $ (1   $ —         $ —         $ (46
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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. Collateral deposits in broker accounts covered by master netting agreements related to Level 1 commodity derivatives are classified as Level 1 in the fair value hierarchy.

 

17


Table of Contents

Commodity derivatives in Level 2 were measured at fair value with a market approach using monthly average close-of-day settlement prices for the market. Interest rate swap derivatives in Level 2 were measured at fair value using prices from Bloomberg L.P. and validated using market value information provided by the counterparties to the transactions.

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

 

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

(In millions)

   2012     2011     2012     2011  

Beginning balance

   $ —        $ 2,764      $ —        $ 2,402   

Total realized and unrealized gains (losses) included in net income

     (2     1        (2     —     

Purchases of PFD Preferred Stock(a)

     —          6,972        —          10,326   

Redemptions of PFD Preferred Stock(a)

     —          (9,737     —          (12,730

Settlements of derivative instruments

     2        (2     2        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ —        $ (2   $ —        $ (2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

For information on PFD Preferred Stock, see Note 3. The fair value of our PFD Preferred Stock investment was measured using an income approach since the securities were not publicly traded; therefore, they were classified as Level 3 in the fair value hierarchy.

There were no unrealized gains or losses recorded in net income for the three and six months ended June 30, 2012 related to Level 3 derivative instruments held at June 30, 2012. Net income for the three and six months ended June 30, 2011, included unrealized losses of $1 million and $2 million, respectively, related to Level 3 derivative instruments held at June 30, 2011. See Note 15 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, 2012
 

(In millions)

   Fair Value      Impairment  

Other noncurrent assets

   $ —         $ 14   

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 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 on March 31, 2014 if not utilized. This measurement is classified as Level 3.

 

18


Table of Contents

Fair Values—Reported

The following table summarizes financial instruments on the basis of their nature, characteristics and risk at June 30, 2012 and December 31, 2011, excluding the derivative financial instruments reported above.

 

                                                                                   
     June 30, 2012      December 31, 2011  

(In millions)

   Fair Value      Carrying
Value
     Fair Value      Carrying
Value
 

Financial assets:

           

Investments

   $ 280       $ 93       $ 289       $ 93   

Other

     29         28         31         30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 309       $ 121       $ 320       $ 123   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

           

Long-term debt(a)

   $ 3,359       $ 3,008       $ 3,203       $ 3,008   

Deferred credits and other liabilities

     24         24         21         21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 3,383       $ 3,032       $ 3,224       $ 3,029   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) 

Excludes capital leases 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 (e.g., less than 1 percent of our trade receivables and payables are outstanding for greater than 90 days), (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 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.

15. Derivatives

For further information regarding the fair value measurement of derivative instruments, see Note 14. 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 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, 2012 and December 31, 2011:

 

                                                           
     June 30, 2012       

(In millions)

   Asset      Liability      Balance Sheet Location

Commodity derivatives

   $ 11       $ —         Other current assets

Commodity derivatives

     123         90       Other current liabilities
     December 31, 2011       

(In millions)

   Asset      Liability      Balance Sheet Location

Commodity derivatives

   $ 26       $ 45       Other current assets

Interest rate derivatives

     19         —         Other noncurrent assets

Commodity derivatives

     1         1       Other current liabilities

 

19


Table of Contents

Derivatives Designated as Fair Value Hedges

During the first quarter 2012, we terminated interest rate swap agreements with a notional amount of $500 million that had been entered into as fair value 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 four-year life of the 3.50 percent senior notes, which will reduce our interest expense. The interest rate swaps had no hedge ineffectiveness.

Derivatives not Designated as Hedges

Derivatives that are not designated as hedges may include commodity derivatives used to manage 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, 2012:

 

     Position      Total Barrels
(In thousands)
 

Crude oil(a)

     

Exchange-traded

     Long         14,023   

Exchange-traded

     Short         (26,774

Refined Products(b)

     

Exchange-traded

     Long         3,124   

Exchange-traded

     Short         (7,062

 

(a) 

99.1 percent of these contracts expire in the third quarter of 2012.

(b)

100 percent of these contracts expire in the third quarter of 2012.

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

 

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

Income Statement Location

   2012      2011     2012      2011  

Sales and other operating revenues

   $ 44       $ (4   $ 38       $ (19

Cost of revenues

     356         238        309         195   

Other income

     —           —          —           1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 400       $ 234      $ 347       $ 177   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

20


Table of Contents

16. Debt

Our outstanding borrowings at June 30, 2012 and December 31, 2011 consisted of the following:

 

                                             

(In millions)

   June 30,
2012
    December 31,
2011
 

Marathon Petroleum Corporation:

    

Revolving credit agreement due 2015

   $ —        $ —     

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 2012-2027(a)

     327        299   

Trade receivables securitization facility due 2014

     —          —     
  

 

 

   

 

 

 

Total

     3,327        3,299   

Unamortized discount

     (10     (11

Fair value adjustments(b)

     18        19   

Amounts due within one year

     (19     (15
  

 

 

   

 

 

 

Total long-term debt due after one year

   $ 3,316      $ 3,292   
  

 

 

   

 

 

 

 

(a)

These obligations as of June 30, 2012 include $128 million related to assets under construction at that date for which a capital lease will commence upon completion of construction. The amounts currently reported are based upon the percent of construction completed as of June 30, 2012 and therefore do not reflect future lease obligations of $164 million related to the assets.

(b)

See Notes 14 and 15 for information on interest rate swaps.

There were no borrowings or letters of credit outstanding under the revolving credit agreement or the trade receivable securitization facility at June 30, 2012.

17. Supplemental Cash Flow Information

 

     Six Months Ended
June 30,
 

(In millions)

   2012      2011  

Net cash provided by operating activities included:

     

Interest paid (net of amounts capitalized)

   $ 16       $ —     

Income taxes paid to taxing authorities(a)

     384         4   

Non-cash investing and financing activities:

     

Property, plant and equipment contributed by Marathon Oil

   $ —         $ 74   

Capital lease obligations increase

     30         8   

Acquisition:

     

Intangible asset acquired

     3         —     

Liability assumed

     2         —     

 

(a)

U.S. federal and most state income taxes, if incurred, were paid by Marathon Oil for periods prior to the Spinoff.

 

21


Table of Contents

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)

   2012     2011  

Additions to property, plant and equipment

   $ 635      $ 517   

Acquisitions(a)

     155        74   

Decrease in capital accruals

     (76     (9
  

 

 

   

 

 

 

Total capital expenditures

   $ 714      $ 582   
  

 

 

   

 

 

 

 

(a) 

Excludes inventory acquired and liability assumed in 2012.

The following is a reconciliation of contributions from (distributions to) Marathon Oil:

 

     Six Months Ended
June 30,
 

(In millions)

   2012      2011  

Distributions to Marathon Oil per consolidated statements of cash flows

   $ —         $ (699

Non-cash contributions from Marathon Oil

     —           74   
  

 

 

    

 

 

 

Distributions to Marathon Oil per consolidated statements of stockholders’ equity / net investment

   $ —         $ (625
  

 

 

    

 

 

 

18. Defined Benefit Pension and Other Postretirement Plans

The following summarizes the components of net periodic benefit cost:

 

     Three Months Ended June 30,  
     Pension Benefits     Other Benefits  

(In millions)

   2012     2011     2012      2011  

Service cost

   $ 15      $ 15      $ 5       $ 4   

Interest cost

     28        27        6         7   

Expected return on plan assets

     (25     (24     —           —     

Amortization – prior service cost

     2        1        —           —     

                      – actuarial loss

     22        17        —           —     

                      – net settlement/curtailment loss

     83        —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 125      $ 36      $ 11       $ 11   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six Months Ended June 30,  
     Pension Benefits     Other Benefits  

(In millions)

   2012     2011     2012      2011  

Service cost

   $ 32      $ 33      $ 10       $ 9   

Interest cost

     55        54        13         14   

Expected return on plan assets

     (51     (48     —           —     

Amortization – prior service cost

     4        3        —           —     

                      – actuarial loss

     46        35        —           —     

                      – net settlement/curtailment loss

     83        —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 169      $ 77      $ 23       $ 23   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

22


Table of Contents

During the six months ended June 30, 2012, we made no contributions to our funded pension plans. We expect to make funding contributions of approximately $125 million to our funded pension plans over the remainder of 2012. We may make additional contributions to our pension plans depending upon the anticipated funding status and plan asset performance. Current benefit payments related to unfunded pension and other postretirement benefit plans were $1 million and $8 million, respectively, during the six months ended June 30, 2012.

During the three months ended June 30, 2012, we determined that lump sum payments to employees retiring in 2012 will exceed the plan’s 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, 2012, we recorded pension settlement expenses related to our cumulative lump sum payments made during the first six months of 2012.

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 will be 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 will be amortized into income through 2024.

19. Stock-Based Compensation Plans

Stock Option Awards

The following table presents a summary of stock option award activity for the six months ended June 30, 2012:

 

     Number
of Shares(a)
    Weighted Average
Exercise Price
 

Outstanding at December 31, 2011

     9,372,370      $ 33.08   

Granted

     766,543        42.04   

Exercised

     (1,713,725     22.07   

Forfeited, canceled or expired

     (81,560     39.09   
  

 

 

   

Outstanding at June 30, 2012

     8,343,628        36.10   
  

 

 

   

 

(a)

Includes an immaterial number of stock appreciation rights.

The grant date fair value of stock option awards granted was $14.43 per share for the six months ended June 30, 2012. The fair value of stock options granted to our employees is estimated on the date of grant using the Black Scholes option-pricing model, which employs various assumptions. The assumption for expected volatility of our stock price was updated for the six months ended June 30, 2012 to reflect a weighting of 25 percent of MPC’s common stock implied volatility and 75 percent of the historical volatility for a selected group of peer companies.

Restricted Stock Awards

The following table presents a summary of restricted stock award activity for the six months ended June 30, 2012:

 

     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, 2011

     348,691      $ 34.36         319,944       $ 29.43   

Granted

     411,435        42.96         22,201         38.51   

RS’s Vested/RSU’s Issued

     (67,392     22.04         —           —     

Forfeited

     (4,873     38.06         —           —     
  

 

 

      

 

 

    

Outstanding at June 30, 2012

     687,861        40.69         342,145         30.02   
  

 

 

      

 

 

    

 

23


Table of Contents

Performance Unit Awards

During the six months ended June 30, 2012, we granted performance unit awards to certain officer employees. These awards will have a per unit payout determined based on the total shareholder return of MPC common stock compared to the total shareholder return of a selected combination of peer companies and index fund shareholder return over an average of four periods during the 36 month requisite service period. These performance units are designed to pay out 75 percent in cash and 25 percent in MPC common stock. The performance units paying out in cash are accounted for as liability awards and are recorded at fair value. The performance units settling in shares are accounted for as equity awards and have a grant date fair value of $1.09 per unit, as calculated using a Monte Carlo valuation model. 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, 2012:

 

     Number of
Units
 

Outstanding at December 31, 2011

     —     

Granted

     2,040,000   

Settled

     —     

Canceled

     —     
  

 

 

 

Outstanding at June 30, 2012

     2,040,000   
  

 

 

 

20. Commitments & Contingencies

We are the subject of, or a party to, a number of pending or threatened legal proceedings, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Some of these matters are discussed below. The ultimate resolution 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, 2012 and December 31, 2011, accrued liabilities for remediation totaled $119 million and $117 million. 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 $48 million and $51 million at June 30, 2012 and December 31, 2011, respectively.

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. If the lawsuit is resolved unfavorably, it could materially impact our consolidated results of operations, financial position or cash flows. 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. Management does not believe the ultimate resolution of this litigation will have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

24


Table of Contents

We are a defendant in a number of other lawsuits and 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, which extend through 2037. Our maximum potential undiscounted payments under these agreements for the debt principal totaled $172 million as of June 30, 2012.

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 $49 million as of June 30, 2012.

We hold an interest in an ethanol production facility through our investment in TAME, and have guaranteed the repayment of TAME’s tax exempt bond financing through our participation as a lender in the credit agreement under which a letter of credit has been issued to secure 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, 2012.

Marathon Oil indemnifications—In conjunction with the Spinoff, we entered into arrangements with Marathon Oil providing indemnities and guarantees with recorded values of $12 million as of June 30, 2012, which consist of unrecognized tax benefits related to MPC, its consolidated subsidiaries and the RM&T Business operations prior to the Spinoff that are not already reflected in the unrecognized tax benefits described in Note 10, 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 the 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.

Other guarantees—We have entered into other guarantees with maximum potential undiscounted payments totaling $108 million as of June 30, 2012, which 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, 2012, our contractual commitments to acquire property, plant and equipment and advance funds to equity method investees totaled $231 million.

 

25


Table of Contents

21. Subsequent Events

On July 2, 2012, MPLX LP (“MPLX”), a wholly owned subsidiary of MPC, filed a registration statement on Form S-1 with the Securities and Exchange Commission. This filing was made in anticipation of a proposed initial public offering of common units representing limited interests in MPLX. The number of common units to be offered and the price range for the offering have not been determined. MPLX was formed by MPC to own, operate, develop and acquire crude oil, refined products and other hydrocarbon-based products pipelines and other midstream assets. Headquartered in Findlay, Ohio, MPLX’s initial assets are expected to consist of a 51 percent interest in a network of common carrier crude oil and products pipeline assets located in the Midwest and Gulf Coast regions and a 100 percent interest in a butane cavern in West Virginia. As of the date of this report, the registration statement is not effective. The completion of the offering is subject to numerous conditions, including market conditions, and we can provide no assurance that it will be successfully completed. Following the completion of the offering, we expect to consolidate MPLX into our financial statements since we will be the general partner of MPLX and will have the ability to direct the activities of MPLX that most significantly impact its economic performance.

In July 2012, the buyer of our Minnesota Assets successfully completed an initial public offering (“IPO”). The successful completion of this IPO triggered the provisions in our May 4, 2012 settlement agreement with the buyer to be effective. Under the settlement agreement, we are released from our obligation to pay margin support and the buyer is released from its obligation to pay us under the earnout provisions contained in the original sales agreement. Also, the buyer repurchased our existing preferred equity interest in the VIE, paid us $12 million for dividends accrued on our preferred equity interest and paid us $40 million of cash using proceeds from the offering, for total cash receipts of $132 million. In addition, the buyer issued us a new preferred security with a $45 million liquidation preference. As a result, we will recognize income before income taxes of approximately $183 million during the third quarter of 2012, which includes substantially all of the $89 million deferred gain that was recorded when the sale transaction was originally closed.

 

26


Table of Contents

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, 2011.

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” or “would” 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 this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2011.

The Spinoff and Basis of Presentation

On May 25, 2011, the Marathon Oil board of directors approved the spinoff of its RM&T Business into an independent, publicly traded company, MPC, through the distribution of MPC common stock to the stockholders of Marathon Oil common stock. In accordance with a separation and distribution agreement between Marathon Oil and MPC, the distribution of MPC common stock was made on June 30, 2011, with Marathon Oil stockholders receiving one share of MPC common stock for every two shares of Marathon Oil common stock. Following the Spinoff, Marathon Oil retained no ownership interest in MPC, and each company had separate public ownership, boards of directors and management. On July 1, 2011, our common stock began trading “regular-way” on the NYSE under the ticker symbol “MPC”.

Prior to the Spinoff on June 30, 2011, our results of operations and cash flows consisted of the RM&T Business, which represented a combined reporting entity. Subsequent to the Spinoff, our results of operations and cash flows consist of consolidated MPC activities. All significant intercompany transactions and accounts have been eliminated. The consolidated statements of income for periods prior to the Spinoff include expense allocations for certain corporate functions historically performed by Marathon Oil, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, procurement and information technology. Those allocations were based primarily on specific identification, headcount or computer utilization. Our management believes the assumptions underlying the consolidated financial statements, including the assumptions regarding allocating general corporate expenses from Marathon Oil, are reasonable. However, the consolidated financial statements do not include all of the actual expenses that would have been incurred had we been a stand-alone company during those periods presented prior to the Spinoff and may not reflect our consolidated results of operations and cash flows had we been a stand-alone company during the periods presented. Actual costs that would have been incurred if we had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Subsequent to the Spinoff, we are performing these functions using internal resources or services provided by third parties, certain of which were provided by Marathon Oil during a transition period pursuant to a transition services agreement, which terminated on June 30, 2012.

Corporate Overview

We are an independent petroleum refining, marketing and transportation company. We currently own and operate six refineries, all located in the United States, with an aggregate crude oil refining capacity of approximately 1.2 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 operating 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.

 

27


Table of Contents
   

Refining & Marketing—refines crude oil and other feedstocks at our six 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 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, among other transportation-related assets, a majority interest in LOOP, which is the owner and operator of the only U.S. deepwater oil port.

We reported net income of $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 compared to net income of $802 million and $1.33 billion, or $2.24 and $3.72 per diluted share, for the second quarter and first six months of 2011. The increases were primarily due to our Refining & Marketing segment, which generated income from operations of $1.33 billion and $2.27 billion in the second quarter and first six months of 2012 compared to $1.26 billion and $2.06 billion in the second quarter and first six months of 2011. The increases in Refining & Marketing segment income from operations were due to an improved Refining & Marketing gross margin, which was primarily a result of a larger Chicago and U.S. Gulf Coast (“USGC”) Light Louisiana Sweet crude oil (“LLS”) 6-3-2-1 blended crack spread, partially offset by unfavorable crude oil acquisition costs. The increase in the first six months was also due to wider differentials between West Texas Intermediate crude oil (“WTI”) and other light sweet crudes such as LLS and an increase in WTI-priced crude oil volumes.

The Detroit refinery heavy oil upgrading and expansion project continues to be a significant portion of our 2012 capital spending. As of June 30, 2012, the project was approximately 96 percent complete and on budget and on schedule to complete construction in the third quarter of 2012. Immediately following the completion of construction, there will be a 70-day turnaround with the expanded Detroit refinery anticipated to be online by year end 2012.

Our Speedway segment generated income from operations of $107 million and $157 million in the second quarter and first six months of 2012 compared to income from operations of $80 million and $113 million in the second quarter and first six months of 2011. The increases were primarily due to increases in our merchandise gross margin and gasoline and distillates gross margin, partially offset by increases in operating expense.

In May 2012, Speedway LLC acquired 87 convenience stores situated throughout Indiana and Ohio from GasAmerica Services, Inc. In July 2012, Speedway LLC acquired 10 convenience stores throughout northern Kentucky and southwestern Ohio from Road Ranger LLC in exchange for cash and a truck stop location in the Chicago metropolitan area. These acquisitions support our strategic initiative to increase Speedway segment sales volumes and complement our existing network of assets.

Our Pipeline Transportation segment generated income from operations of $50 million and $92 million in the second quarter and first six months of 2012 compared to income from operations of $54 million and $105 million in the second quarter and first six months of 2011. The decreases primarily reflect reductions in income from pipeline affiliates due to reduced shipment volumes.

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. On February 3, 2012, we entered into an $850 million ASR program with a major financial institution as part of this authorization. Under the ASR program, we received 17,581,344 shares of MPC common stock in the first quarter of 2012. On July 25, 2012, an additional 2,776,036 shares were delivered to us, for a total of 20,357,380 repurchased shares, which concluded the ASR program. Upon final settlement, the average per share amount paid for all shares purchased under the ASR program was $41.75. After the effects of our ASR program, $1.15 billion of the $2.0 billion amount authorized by our board of directors was available for share repurchases at June 30, 2012.

On July 2, 2012, MPLX, a wholly owned subsidiary of MPC, filed a registration statement on Form S-1 with the Securities and Exchange Commission. This filing was made in anticipation of a proposed initial public offering of common units representing limited interests in MPLX. The number of common units to be offered and the price range for the offering have not been determined. MPLX was formed by MPC to own, operate, develop and acquire crude oil, refined products and other hydrocarbon-based products pipelines and other midstream assets. Headquartered in Findlay, Ohio, MPLX’s initial assets are expected to consist of a 51 percent interest in a network of common carrier crude oil and products pipeline assets located in the Midwest and Gulf Coast regions and a 100 percent interest in a butane cavern in West Virginia. As of the date of this report, the registration statement is not effective. The completion of the offering is subject to numerous conditions, including market conditions, and we can provide no assurance that it will be successfully completed.

 

28


Table of Contents

The collective bargaining agreement for the hourly workers at our Catlettsburg refinery expired in January 2012. The agreement was temporarily extended while negotiations continued on a new collective bargaining agreement. When we were unable to reach agreement with the union, we declared impasse in the negotiations and implemented our last, best and final offer in late April 2012. We are in the process of working to resolve unfair labor practice charges the union has filed with the National Labor Relations Board. While no work stoppage has occurred, we have an increased risk of a temporary work stoppage at this location until such time as a new contract is ratified.

The above discussion includes forward-looking statements with respect to the Detroit refinery heavy oil upgrading and expansion project, the share repurchase plan, the proposed initial public offering of common units representing limited interests in MPLX and labor relations at the Catlettsburg refinery. Factors that could affect the Detroit refinery heavy oil upgrading and expansion project include, but are not limited to, transportation logistics, availability of materials and labor, unforeseen hazards such as weather conditions, delays in obtaining or conditions imposed by necessary government and third-party approvals and other risks customarily associated with construction projects. Factors that could affect the share repurchase plan and its timing include, but are not limited to, business conditions, availability of liquidity, and the market price of our common stock. Factors that could affect the proposed initial public offering of common units representing limited interests in MPLX include, but are not limited to, risks relating to securities markets generally, the impact of adverse market conditions affecting our midstream business, adverse changes in laws including with respect to tax and regulatory matters and other risks. Factors that could affect labor relations at the Catlettsburg refinery include, but are not limited to, risks related to labor matters generally and our ability to obtain a signed agreement with the union. These factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements.

Overview of Segments

Refining & Marketing

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

Our Refining & 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 manufacturing expenses, including depreciation and amortization. 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 USGC crack spreads that we believe most closely track our operations and slate of products. 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 & Marketing gross margin to differ from crack spreads which are calculated by reference to light sweet crude oil. In general, a larger sweet/sour differential will enhance our Refining & Marketing gross margin.

Historically, WTI has traded at prices similar to LLS. In the second quarter and first six months of 2012 and 2011, WTI traded at prices significantly less than LLS, which favorably impacted our Refining & Marketing gross margin.

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)

   $ 300   

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

     150   

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

     65   

 

(a) 

Weighted 52% Chicago and 48% 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 25% of crude oil throughput volumes are WTI-based domestic crude oil.

 

29


Table of Contents

In addition to the market changes indicated by the crack spreads, the sweet/sour differential and the discount of WTI to LLS, our Refining & 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 manage price risk;

 

   

the cost of products purchased for resale; and

 

   

changes in manufacturing costs, which include depreciation and amortization.

Changes in manufacturing costs are primarily driven by the cost of energy used by our refineries 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, and we charge the related costs to expense when they are incurred. We had significant planned turnaround and major maintenance activities at our Garyville, Louisiana and Robinson, Illinois refineries during the first six months of 2012. During the first six months of 2011, significant planned turnaround and major maintenance activities occurred at our Canton, Ohio refinery.

Speedway

Our retail marketing gross margin for gasoline and distillates, which is the price paid by consumers less the cost of refined products, including transportation and consumer excise taxes, and the cost of bankcard processing fees, impacts the Speedway segment profitability. Numerous factors impact gasoline and distillates 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 distillates generally increase the product margin we can realize. The gross margin on merchandise sold at convenience stores historically has been less volatile.

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. 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.

 

30


Table of Contents

Results of Operations

Consolidated Results of Operations

 

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

(In millions)

   2012     2011     Variance     2012     2011     Variance  

Revenues and other income:

            

Sales and other operating revenues (including consumer excise taxes)

   $ 20,240      $ 20,732      $ (492   $ 40,504      $ 38,551      $ 1,953   

Sales to related parties

     3        28        (25     4        51        (47

Income from equity method investments

     9        17        (8     11        26        (15

Net gain on disposal of assets

     1        4        (3     3        5        (2

Other income

     4        13        (9     10        32        (22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues and other income

     20,257        20,794        (537     40,532        38,665        1,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

            

Cost of revenues (excludes items below)

     16,789        16,654        135        34,098        31,211        2,887   

Purchases from related parties

     57        981        (924     120        1,766        (1,646

Consumer excise taxes

     1,428        1,269        159        2,808        2,478        330   

Depreciation and amortization

     236        218        18        466        434        32   

Selling, general and administrative expenses

     376        288        88        639        505        134   

Other taxes

     64        59        5        138        127        11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     18,950        19,469        (519     38,269        36,521        1,748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     1,307        1,325        (18     2,263        2,144        119   

Related party net interest and other financial income

     —          18        (18     —          35        (35

Net interest and other financial income (costs)

     (17     (10     (7     (39     (24     (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,290        1,333        (43     2,224        2,155        69   

Provision for income taxes

     476        531        (55     814        824        (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 814      $ 802      $ 12      $ 1,410      $ 1,331      $ 79   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income was $12 million and $79 million higher in the second quarter and first six months of 2012 compared to the second quarter and first six months of 2011, primarily due to a higher Refining & Marketing gross margin, which increased to $11.13 and $9.76 per barrel in the second quarter and first six months of 2012 from $10.78 and $8.78 per barrel in the second quarter and first six months of 2011.

Total revenues and other income decreased $537 million in the second quarter and increased $1.87 billion in the first six months of 2012 compared to the second quarter and first six months of 2011, primarily due to changes in refined product selling prices.

Sales to related parties decreased $25 million in the second quarter and $47 million in the first six months of 2012 compared to the second quarter and first six months of 2011 primarily due to lower refined product and crude oil sales volumes. The crude oil sales in 2011 were to Marathon Oil, which are not classified as related party sales in periods subsequent to the Spinoff.

Income from equity method investments decreased $8 million in the second quarter and $15 million in the first six months of 2012 compared to the second quarter and first six months of 2011, primarily due to $7 million and $12 million decreases in income from our investment in LOOP and $4 million and $5 million decreases in income from our ethanol investments. These impacts were partially offset in the second quarter of 2012 by a $3 million decrease in losses from our investment in Centennial. LOOP experienced reductions in shipment volumes in the second quarter and first six months of 2012 compared to the same periods of 2011. At June 30, 2012, Centennial was not shipping product; therefore, we continued to evaluate the carrying value of our equity investment in Centennial and concluded that no impairment was required.

Other income decreased $9 million in the second quarter and $22 million in the first six months of 2012 compared to the second quarter and first six months of 2011, primarily due to a decrease in income from transition services provided to the buyer of the Minnesota Assets and a decrease in dividends received from our investment in a pipeline company. The decrease for the first six months of 2012 was also due to a decrease in sales of Renewable Identification Numbers.

 

31


Table of Contents

Cost of revenues increased $2.89 billion in the first six months of 2012 compared to the first six months of 2011. The increase in the first six months of 2012 was primarily due to higher acquisition costs of crude oil and refined products in the Refining & Marketing segment, which resulted from increased volumes. The increase in crude oil volumes was partially due to purchases from Marathon Oil not being classified as related party purchases in periods subsequent to the Spinoff. These impacts were partially offset by decreased acquisition costs of other charge and blendstocks, primarily due to decreased volumes. In the first six months of 2012, crude oil volumes were up 11 percent, refined product volumes were up 16 percent and other charge and blendstocks volumes were down 20 percent.

Purchases from related parties decreased $924 million in the second quarter and $1.65 billion in the first six months of 2012 compared to the second quarter and first six months of 2011. The decreases were primarily due to purchases of crude oil from Marathon Oil after the Spinoff not being classified as related party transactions.

Selling, general and administrative expenses increased $88 million in the second quarter and $134 million first six months of 2012 compared to the second quarter and first six months of 2011. Employee compensation and benefits expenses comprised $81 million and $110 million of the increases, which was primarily due to $83 million of pension settlement expenses that were recognized in the second quarter of 2012. Contract service expenses increased $19 million and $42 million primarily due to higher information technology costs associated with being a separate stand-alone company and higher refinery-related contract services. These impacts were partially offset by lower shared services costs and having no allocations from Marathon Oil subsequent to the Spinoff.

Related party net interest and other financial income decreased $18 million in the second quarter and $35 million in the first six months of 2012 compared to the second quarter and first six months of 2011, due to our short-term investments in PFD Preferred Stock being redeemed prior to the Spinoff. See Note 3 to the unaudited consolidated financial statements for further discussion of our investment in PFD Preferred Stock.

Net interest and other financial costs increased $7 million in the second quarter and $15 million in the first six months of 2012 compared to the second quarter and first six months of 2011, primarily reflecting decreased foreign currency gains and increased bank service and other fees. We capitalized third-party interest of $36 million in the second quarter and $66 million in the first six months of 2012 compared to $28 million and $48 million in the same periods of 2011. The capitalized interest is primarily associated with the Detroit refinery heavy oil upgrading and expansion project.

Provision for income taxes decreased $55 million in the second quarter of 2012 compared to the second quarter of 2011, primarily due to the $43 million decrease in income before income taxes and lower state income taxes. During the second quarter of 2011, state income tax legislative changes were enacted, primarily in Michigan, resulting in an increase in tax expense of $17 million. The effective income tax rate was 37 percent in the second quarter of 2012 compared to 40 percent in the second quarter of 2011. The provision for income taxes for the second quarter of 2011, which was prior to the Spinoff, was computed as if we were a stand-alone company. See Note 10 to the unaudited consolidated financial statements for further details.

Segment Results

Revenues are summarized by segment in the following table:

 

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

(In millions)

   2012     2011     2012     2011  

Refining & Marketing

   $ 18,805      $ 19,412      $ 37,728      $ 36,017   

Speedway

     3,633        3,583        6,918        6,568   

Pipeline Transportation

     109        102        208        195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenues

     22,547        23,097        44,854        42,780   

Elimination of intersegment revenues

     (2,302     (2,337     (4,344     (4,178
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 20,245      $ 20,760      $ 40,510      $ 38,602   
  

 

 

   

 

 

   

 

 

   

 

 

 

Items included in both revenues and costs:

        

Consumer excise taxes

   $ 1,428      $ 1,269      $ 2,808      $ 2,478   

 

32


Table of Contents

Refining & Marketing segment revenues decreased $607 million in the second quarter and increased $1.71 billion in the first six months of 2012 compared to the second quarter and first six months of 2011, primarily due to changes in refined product selling prices. Our average refined product selling prices were $3.01 per gallon and $3.04 per gallon in the second quarter and first six months of 2012 compared to $3.15 per gallon and $2.95 per gallon in the second quarter and first six months of 2011. The table below shows the average refined product benchmark prices for our marketing areas.

 

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

(Dollars per gallon)

   2012      2011      2012      2011  

Chicago spot unleaded regular gasoline

   $ 2.89       $ 3.12       $ 2.88       $ 2.85   

Chicago spot ultra-low sulfur diesel

     2.89         3.14         2.93         2.97   

USGC spot unleaded regular gasoline

     2.79         2.97         2.88         2.79   

USGC spot ultra-low sulfur diesel

     2.94         3.08         3.05         2.96   

Refining & Marketing intersegment sales to our Speedway segment were $2.21 billion in the second quarter and $4.17 billion in the first six months of 2012 compared to $2.25 billion in the second quarter and $4.01 billion in the first six months of 2011. Intersegment refined product sales volumes were 678 million gallons in the second quarter and 1.29 billion gallons in the first six months of 2012 compared to 660 million gallons in the second quarter and 1.27 billion gallons in the first six months of 2011.

Speedway segment revenues increased $50 million in the second quarter and $350 million in the first six months of 2012 compared to the second quarter and first six months of 2011, primarily due to higher gasoline and distillates sales, which increased $13 million and $271 million in the second quarter and first six months of 2012, and higher merchandise sales, which increased $33 million and $65 million in the same periods. The increase in gasoline and distillates sales in the second quarter was primarily due to higher sales volumes partially offset by lower selling prices while the increase in the first six months of 2012 was primarily due to higher sales volumes and higher selling prices. Our gasoline and distillates sales volumes increased 31 million gallons and 44 million gallons in the second quarter and first six months of 2012 compared to the same periods of 2011. Our gasoline and distillates selling prices averaged $3.62 per gallon and $3.57 per gallon in the second quarter and first six months of 2012 compared to $3.76 per gallon and $3.49 per gallon in the second quarter and first six months of 2011.

Income before income taxes and income from operations by segment are summarized in the following table:

 

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

(In millions)

   2012     2011     2012     2011  

Income from operations by segment:

        

Refining & Marketing

   $ 1,325      $ 1,260      $ 2,268      $ 2,062   

Speedway

     107        80        157        113   

Pipeline Transportation

     50        54        92        105   

Items not allocated to segments:

        

Corporate and other unallocated items (a)

     (92     (69     (171     (136

Pension settlement expenses

     (83     —          (83     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     1,307        1,325        2,263        2,144   

Net interest and other financial income (costs) (b)

     (17     8        (39     11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 1,290      $ 1,333      $ 2,224      $ 2,155   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

Corporate and other unallocated items consists primarily of MPC’s corporate administrative expenses, including allocations from Marathon Oil for the periods ended June 30, 2011, and costs related to certain non-operating assets.

(b) 

Includes related party net interest and other financial income.

 

33


Table of Contents

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)

   2012      2011      2012      2011  

Chicago LLS 6-3-2-1 (a) (b)

   $ 9.11       $ 7.38       $ 4.76       $ 3.80   

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

     7.76         3.45         6.51         2.39   

Blended 6-3-2-1 (c)

     8.46         5.53         5.60         3.14   

LLS

     108.22         118.43         113.89         113.09   

WTI

     93.35         102.34         98.15         98.50   

LLS—WTI differential

     14.87         16.09         15.74         14.59   

Sweet/Sour differential (a) (d)

     10.50         11.02         12.09         11.71   

 

(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 52%/48% in 2012 and 53%/47% in 2011 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].

Refining & Marketing segment income from operations increased $65 million in the second quarter and $206 million in the first six months of 2012 compared to the second quarter and first six months of 2011, primarily due to a higher Refining & Marketing gross margin per barrel, which averaged $11.13 per barrel in the second quarter and $9.76 per barrel in the first six months of 2012 compared to $10.78 per barrel in the second quarter and $8.78 per barrel in the first six months of 2011. Our realized Refining & Marketing gross margin for the second quarter and first six months of 2012 improved from the same periods of 2011 primarily due to larger Chicago and USGC LLS 6-3-2-1 blended crack spreads. The increase in the first six months of 2012 was also due to wider differentials between WTI and other light sweet crudes such as LLS and an increase in WTI-priced crude oil volumes. The blended crack spread increased $2.93 per barrel and $2.46 per barrel in the second quarter and first six months of 2012, and we estimate this had positive impacts on our Refining & Marketing gross margin of $341 million and $590 million, respectively. The discount of WTI to LLS increased $1.15 per barrel in the first six months of 2012 as a result of logistical constraints in the U.S. mid-continent markets. We estimate this had a $207 million positive impact on our Refining & Marketing gross margin in the first six months of 2012.

For the second quarter 2012, the positive impacts on the Refining & Marketing gross margin were partially offset by a narrower sweet/sour differential, a reduced contango market structure and other unfavorable crude oil acquisition costs, as well as higher direct operating costs, primarily associated with higher planned turnaround and major maintenance expenses at our Robinson, Illinois refinery. For the first six months 2012, the positive impacts on the Refining & Marketing gross margin were partially offset by a decrease in the volume of sour crude oil processed, a reduced contango market structure and other unfavorable crude oil acquisition costs.

Within our refining system, sour crude accounted for 54 percent and 50 percent of our crude oil processed in the second quarter and first six months of 2012 compared to 54 percent in each of the same periods of 2011.

The 1,208 thousand barrels per day (“mbpd”) of crude oil refined in the second quarter and 1,177 mbpd in the first six months of 2012 was higher than the 1,196 mbpd in the second quarter and 1,155 mbpd in the first six months of 2011. Other charge and blendstocks throughput decreased 45 mbpd and 39 mbpd in the second quarter and first six months of 2012 compared to the same periods of 2011, primarily due to a combination of increased crude oil throughput and operational economics at our Garyville, Louisiana refinery.

 

34


Table of Contents

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

 

      Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

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

   $ 11.13       $ 10.78       $ 9.76       $ 8.78   

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

           

Planned turnaround and major maintenance

   $ 0.88       $ 0.65       $ 0.96       $ 0.94   

Depreciation and amortization

     1.39         1.26         1.39         1.29   

Other manufacturing (c)

     3.05         2.94         3.11         3.23   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5.32       $ 4.85       $ 5.46       $ 5.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     1,571         1,561         1,551         1,551   

 

(a) 

Sales revenue less cost of refinery inputs, purchased products and manufacturing expenses, including depreciation and amortization, 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.

Speedway segment income from operations increased $27 million in the second quarter and $44 million in the first six months of 2012 compared to the second quarter and first six months of 2011, primarily due to increases in merchandise gross margin and gasoline and distillates gross margin, partially offset by increases in operating expense attributable to an increase in the number of convenience stores. Merchandise gross margin was $203 million in the second quarter and $382 million in the first six months of 2012 compared to $178 million in the second quarter and $336 million in the first six months of 2011. The increases in the merchandise gross margin were primarily due to margin expansion resulting from higher merchandise and food sales system wide. Same-store merchandise sales increased 2.2 percent and 2.1 percent in the second quarter and first six months of 2012 compared to the same periods of 2011.

Speedway’s gasoline and distillates gross margin per gallon averaged 16.39 cents in the second quarter and 13.77 cents in the first six months of 2012, compared with 15.02 cents in the second quarter and 12.88 cents in the first six months of 2011. Same-store gasoline sales volume increased 2.1 percent and 0.5 percent in the second quarter and first six months of 2012 compared to the same periods of 2011. The primary factor affecting higher same-store gasoline sales volume in the second quarter of 2012 was the lower average retail price of gasoline.

Pipeline Transportation segment income from operations decreased $4 million in the second quarter and $13 million in the first six months of 2012 compared to the second quarter and first six months of 2011. The decrease primarily reflects a reduction in income from pipeline affiliates due to reduced shipment volumes.

Corporate and other unallocated expenses increased $23 million in the second quarter and $35 million in the first six months of 2012 compared to the second quarter and first six months of 2011, primarily due to our administrative units realizing the impact of being a stand-alone company in 2012 compared to expenses incurred prior to the June 30, 2011 Spinoff.

During the second quarter of 2012, we recorded pretax cumulative pension settlement expenses of $83 million resulting from the level of employee lump sum retirement distributions occurring in 2012. We anticipate recording additional pension settlement expenses of approximately $25 million in the third quarter 2012 based on lump sum distributions to be made during the quarter. However, this expected increase in pension expenses will be partially offset by an approximately $19 million reduction in pension expenses in the third quarter of 2012 associated with pension plan amendments made in the second quarter of 2012. See Note 18 to the unaudited consolidated financial statements for additional information on the pension plan amendments.

Liquidity and Capital Resources

Cash Flows

Our cash and cash equivalents balance was $1.90 billion at June 30, 2012 compared to $3.08 billion at December 31, 2011. The change in cash and cash equivalents was due to the factors discussed below.

Net cash provided by operating activities totaled $616 million in the first six months of 2012, compared to $952 million in the first six months of 2011. The $336 million decrease was primarily due to increases in working capital, partially offset by

 

35


Table of Contents

higher noncash income adjustments. Changes in working capital were a net $1.86 billion use of cash in the first six months of 2012 compared to a net $882 million use of cash in the first six months of 2011. The $1.86 billion use of cash in the first six months of 2012 was primarily due to a decrease in accounts payable and accrued liabilities resulting primarily from decreases in crude oil payable volumes and prices, and an increase in inventories resulting primarily from increases in crude oil and refined product inventory volumes. Partially offsetting these uses of cash was a decrease in accounts receivable primarily caused by lower crude oil receivable volumes and prices. The $882 million use of cash in the first six months of 2011 was primarily due to the impact of increased crude oil and refined product prices on accounts receivable, the impact of decreased crude oil volumes on accounts payable and the impact of increased crude oil and refined product inventory volumes, partially offset by the impact of increased crude oil prices on accounts payable.

Net cash used in investing activities totaled $798 million in the first six months of 2012, compared to net cash provided by investing activities of $1.94 billion in the first six months of 2011. The $2.74 billion change was primarily due to net redemptions of related party debt securities in the first six months of 2011.

Net investments in related party debt securities was a source of cash of $2.40 billion in the first six months of 2011. All such activity reflected the net cash flow from redemptions and purchases of PFD Preferred Stock. Prior to the Spinoff, all investments in PFD Preferred Stock were redeemed, and the agreement with PFD was terminated. See Note 3 to the unaudited consolidated financial statements for further discussion of our investments in PFD Preferred Stock.

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

 

      Six Months Ended
June 30,
 

(In millions)

   2012     2011  

Additions to property, plant and equipment

   $ 635      $ 517   

Acquisitions(a)

     155        74   

Decrease in capital accruals

     (76     (9
  

 

 

   

 

 

 

Total capital expenditures

     714        582   

Investments in equity method investees

     7        7   
  

 

 

   

 

 

 

Total capital expenditures and investments

   $ 721      $ 589   
  

 

 

   

 

 

 

 

(a) 

Excludes inventory acquired and liability assumed in 2012.

Capital expenditures and investments are summarized by segment below:

 

      Six Months
Ended June 30,
 

(In millions)

   2012      2011  

Refining & Marketing

   $ 331       $ 376   

Speedway (a)

     198         102   

Pipeline Transportation

     98         38   

Corporate and Other (b)

     94         73   
  

 

 

    

 

 

 

Total

   $ 721       $ 589   
  

 

 

    

 

 

 

 

(a)

Includes acquisitions of 87 convenience stores in May 2012 and 23 convenience stores in May 2011.

(b) 

Includes capitalized interest of $66 million and $58 million for the six months ended June 30, 2012 and 2011, respectively.

The Detroit refinery heavy oil upgrading and expansion project comprised 60 percent and 61 percent (excluding capitalized interest associated with this project) of our Refining & Marketing segment capital spending in the first six months of 2012 and 2011, respectively.

Cash used in acquisitions increased $89 million in the first six months of 2012 compared to the first six months of 2011, primarily due to an increase in the number of convenience stores acquired by Speedway LLC, which acquired 87 convenience stores in May 2012 and 23 convenience stores in May 2011.

Cash provided by asset disposals decreased $127 million in the first six months of 2012 compared to the first six months of 2011, primarily due to the collection of a receivable in the first six months of 2011 related to the sale of our Minnesota Assets in December 2010.

 

36


Table of Contents

Net cash used in financing activities totaled $1.00 billion in the first six months of 2012 and $1.39 billion in the first six months of 2011. The net use of cash in the first six months of 2012 was primarily due to the common stock repurchases under our ASR program and dividend payments. The net use of cash in the first six months of 2011 was primarily due to the net repayment of debt payable to Marathon Oil and its subsidiaries and net distributions to Marathon Oil, partially offset by cash provided by the issuance of long-term debt. These activities were undertaken to effect the Spinoff. See Note 16 to the unaudited consolidated financial statements for additional information on our long-term debt.

Net borrowings and repayments under our long-term debt payable to Marathon Oil and its subsidiaries was a use of cash of $3.62 billion in the first six months of 2011. The agreements with Marathon Oil and its subsidiaries were terminated in 2011. See Note 3 to the unaudited consolidated financial statements for further discussion of these financing agreements.

Distributions to Marathon Oil totaled $699 million in the first six months of 2011, primarily related to net cash distributions paid to Marathon Oil to effect the Spinoff, partially offset by income taxes it incurred on our behalf.

Derivative Instruments

See Item 3. Quantitative and Qualitative Disclosures about Market Risk for a discussion of derivative instruments and associated market risk.

Capital Resources

As of June 30, 2012, our liquidity totaled $4.90 billion consisting of:

 

(In millions)

   June 30,
2012
 

Cash and cash equivalents

   $ 1,895   

Revolving credit agreement

     2,000   

Trade receivables securitization facility

     1,000   
  

 

 

 

Total

   $ 4,895   
  

 

 

 

At June 30, 2012, we had no borrowings or letters of credit outstanding under our revolving credit agreement or our trade receivables securitization facility.

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

Our revolving credit agreement, as amended and effective July 1, 2011 (the “Credit Agreement”), contains covenants that we consider usual and customary for an agreement of this type, including a maximum ratio of Net Consolidated Indebtedness as of the end of each fiscal quarter to Consolidated EBITDA (as defined in the Credit Agreement) for each consecutive four fiscal quarter period of 3.0 to 1.0 and a minimum ratio of Consolidated EBITDA to Consolidated Interest Expense (as defined in the Credit Agreement) for each consecutive four fiscal quarter period of 3.5 to 1.0. As of June 30, 2012, we were in compliance with these debt covenants with a ratio of Net Consolidated Indebtedness to Consolidated EBITDA (as defined in the Credit Agreement) of 0.6 to 1.0 and a ratio of Consolidated EBITDA to Consolidated Interest Expense (as defined in the Credit Agreement) of 79.1 to 1.0.

As of June 30, 2012, the credit ratings on our senior unsecured debt were at or above investment grade level as follows:

 

Rating Agency                                    

  

Rating                                     

Moody’s

   Baa2 (stable outlook)

Standard & Poor’s

   BBB (stable outlook)

The ratings reflect the respective views of the rating agencies. Although it is our intention to maintain a credit profile that supports an investment grade rating, there is no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirely by the rating agencies if, in their respective judgments, circumstances so warrant.

 

37


Table of Contents

Neither our Credit Agreement nor our trade receivables securitization facility contains credit rating triggers that would result in the acceleration of interest, principal or other payments in the event that our credit ratings are downgraded. However, any downgrades of our senior unsecured debt to below investment grade ratings would increase the applicable interest rates, yields and other fees payable under our Credit Agreement and trade receivables securitization facility. In addition, a downgrade of our senior unsecured debt rating to below investment grade levels could, under certain circumstances, decrease the amount of trade receivables that are eligible to be sold under our trade receivables securitization facility.

Debt-to-Total-Capital Ratio

Our debt-to-total-capital ratio (total debt to total debt plus stockholders’ equity) was 24 percent at June 30, 2012 and 26 percent at December 31, 2011 as shown in the calculation below.

 

                                             

(In millions)

   June 30,
2012
    December 31,
2011
 

Long-term debt due within one year

   $ 19      $ 15   

Long-term debt

     3,316        3,292   
  

 

 

   

 

 

 

Total debt

   $ 3,335      $ 3,307   
  

 

 

   

 

 

 

Calculation of debt-to-total-capital ratio:

    

Total debt

   $ 3,335      $ 3,307   

Plus stockholders’ equity

     10,326        9,505   
  

 

 

   

 

 

 

Total debt plus stockholders’ equity

   $ 13,661      $ 12,812   
  

 

 

   

 

 

 

Debt-to-total-capital ratio

     24     26

Capital Requirements

We have a capital and investment budget of $1.42 billion, excluding capitalized interest, for 2012. Approximately 25% of the 2012 budget is for continuation of the Detroit refinery heavy oil upgrading and expansion project, which is expected to complete construction in the third quarter of 2012 with full integration into the refinery by year-end 2012. The budget also includes spending on other refining, transportation, logistics and marketing projects, spending for new construction and acquisitions to expand our Speedway segment, and amounts designated for corporate activities. There have been no material changes to our 2012 capital and investment budget since our Annual Report on Form 10-K for th