MPC-2013.9.30-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-35054
Marathon Petroleum Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
27-1284632
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
539 South Main Street, Findlay, Ohio
 
45840-3229
(Address of principal executive offices)
 
(Zip code)
(419) 422-2121
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer 
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  ¨    No  x
There were 301,026,678 shares of Marathon Petroleum Corporation common stock outstanding as of October 31, 2013.
 


Table of Contents

MARATHON PETROLEUM CORPORATION
Form 10-Q
Quarter Ended September 30, 2013
INDEX

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

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Part I – Financial Information
Item 1. Financial Statements
Marathon Petroleum Corporation
Consolidated Statements of Income (Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions, except per share data)
2013
 
2012
 
2013
 
2012
Revenues and other income:
 
 
 
 
 
 
 
Sales and other operating revenues (including consumer excise taxes)
$
26,253

 
$
21,047

 
$
75,256

 
$
61,551

Sales to related parties
3

 
2

 
7

 
6

Income from equity method investments
9

 
7

 
16

 
18

Net gain on disposal of assets
1

 
175

 
3

 
178

Other income
8

 
18

 
40

 
28

Total revenues and other income
26,274

 
21,249

 
75,322

 
61,781

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues (excludes items below)
23,553

 
17,202

 
65,907

 
51,323

Purchases from related parties
103

 
84

 
254

 
204

Consumer excise taxes
1,631

 
1,463

 
4,685

 
4,271

Depreciation and amortization
299

 
246

 
888

 
712

Selling, general and administrative expenses
305

 
293

 
912

 
909

Other taxes
82

 
66

 
259

 
204

Total costs and expenses
25,973

 
19,354

 
72,905

 
57,623

Income from operations
301

 
1,895

 
2,417

 
4,158

Net interest and other financial income (costs)
(47
)
 
(25
)
 
(140
)
 
(64
)
Income before income taxes
254

 
1,870

 
2,277

 
4,094

Provision for income taxes
81

 
646

 
775

 
1,460

Net income
173

 
1,224

 
1,502

 
2,634

Less net income attributable to noncontrolling interests
5

 

 
16

 

Net income attributable to MPC
$
168

 
$
1,224

 
$
1,486

 
$
2,634

Per Share Data (See Note 7)
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net income attributable to MPC per share
$
0.54

 
$
3.61

 
$
4.63

 
$
7.69

Weighted average shares outstanding
309

 
338

 
321

 
342

Diluted:
 
 
 
 
 
 
 
Net income attributable to MPC per share
$
0.54

 
$
3.59

 
$
4.60

 
$
7.65

Weighted average shares outstanding
311

 
340

 
323

 
344

Dividends paid
$
0.42

 
$
0.35

 
$
1.12

 
$
0.85

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

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Marathon Petroleum Corporation
Consolidated Statements of Comprehensive Income (Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions)
2013
 
2012
 
2013
 
2012
Net income
$
173

 
$
1,224

 
$
1,502

 
$
2,634

Other comprehensive income (loss):
 
 
 
 
 
 
 
Defined benefit postretirement and post-employment plans:
 
 
 
 
 
 
 
Actuarial changes, net of tax of $34, ($5), $169 and $28
57

 
(9
)
 
282

 
46

Prior service costs, net of tax of ($5), $10, ($14) and $207
(8
)
 
17

 
(23
)
 
344

Other comprehensive income
49

 
8

 
259

 
390

Comprehensive income
222

 
1,232

 
1,761

 
3,024

Less comprehensive income attributable to noncontrolling interests
5

 

 
16

 

Comprehensive income attributable to MPC
$
217

 
$
1,232

 
$
1,745

 
$
3,024

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

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Marathon Petroleum Corporation
Consolidated Balance Sheets (Unaudited)
 
(In millions, except per share data)
September 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,018

 
$
4,860

Receivables, less allowance for doubtful accounts of $9 and $10
5,593

 
4,610

Inventories
5,714

 
3,449

Other current assets
206

 
110

Total current assets
13,531

 
13,029

Equity method investments
417

 
321

Property, plant and equipment, net
13,795

 
12,643

Goodwill
938

 
930

Other noncurrent assets
322

 
300

Total assets
$
29,003

 
$
27,223

Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
8,961

 
$
6,785

Payroll and benefits payable
341

 
364

Consumer excise taxes payable
277

 
325

Accrued taxes
609

 
598

Long-term debt due within one year
23

 
19

Other current liabilities
190

 
112

Total current liabilities
10,401

 
8,203

Long-term debt
3,380

 
3,342

Deferred income taxes
2,228

 
2,050

Defined benefit postretirement plan obligations
895

 
1,266

Deferred credits and other liabilities
835

 
257

Total liabilities
17,739

 
15,118

Commitments and contingencies (see Note 22)

 

Equity
 
 
 
MPC stockholders’ equity:
 
 
 
Preferred stock, no shares issued and outstanding (par value $0.01 per share, 30 million shares authorized)

 

Common stock:
 
 
 
Issued—362 million and 361 million shares (par value $0.01 per share, 1 billion shares authorized)
4

 
4

Held in treasury, at cost—59 million and 28 million shares
(3,703
)
 
(1,253
)
Additional paid-in capital
9,748

 
9,527

Retained earnings
5,007

 
3,880

Accumulated other comprehensive loss
(205
)
 
(464
)
Total MPC stockholders’ equity
10,851

 
11,694

Noncontrolling interests
413

 
411

Total equity
11,264

 
12,105

Total liabilities and equity
$
29,003

 
$
27,223

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

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Marathon Petroleum Corporation
Consolidated Statements of Cash Flows (Unaudited)
 
 
Nine Months Ended 
 September 30,
(In millions)
2013
 
2012
Increase (decrease) in cash and cash equivalents
 
 
 
Operating activities:
 
 
 
Net income
$
1,502

 
$
2,634

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
888

 
712

Pension and other postretirement benefits, net
3

 
119

Deferred income taxes
22

 
425

Net gain on disposal of assets
(3
)
 
(178
)
Equity method investments, net
(4
)
 
13

Changes in the fair value of derivative instruments
(54
)
 
8

Changes in:
 
 
 
Current receivables
(974
)
 
360

Inventories
(1,330
)
 
(555
)
Current accounts payable and accrued liabilities
2,028

 
(1,160
)
All other, net
(28
)
 
71

Net cash provided by operating activities
2,050

 
2,449

Investing activities:
 
 
 
Additions to property, plant and equipment
(733
)
 
(966
)
Acquisitions
(1,515
)
 
(190
)
Disposal of assets
12

 
52

Investments—acquisition, loans and contributions
(113
)
 
(26
)
—redemptions and repayments
76

 
94

All other, net
22

 
3

Net cash used in investing activities
(2,251
)
 
(1,033
)
Financing activities:
 
 
 
Long-term debt—repayments
(16
)
 
(12
)
Debt issuance costs
(2
)
 
(6
)
Issuance of common stock
37

 
54

Common stock repurchased
(2,341
)
 
(850
)
Dividends paid
(358
)
 
(291
)
Distributions to noncontrolling interests
(15
)
 

Tax settlement with Marathon Oil Corporation
39

 

All other, net
15

 
(3
)
Net cash used in financing activities
(2,641
)
 
(1,108
)
Net increase (decrease) in cash and cash equivalents
(2,842
)
 
308

Cash and cash equivalents at beginning of period
4,860

 
3,079

Cash and cash equivalents at end of period
$
2,018

 
$
3,387

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

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Marathon Petroleum Corporation
Consolidated Statements of Equity (Unaudited)

 
MPC Stockholders’ Equity
 
 
 
 
(In millions)
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Equity
Balance as of December 31, 2011
$
4

 
$

 
$
9,482

 
$
898

 
$
(879
)
 
$

 
$
9,505

Net income

 

 

 
2,634

 

 

 
2,634

Dividends declared

 

 

 
(291
)
 

 

 
(291
)
Other comprehensive income

 

 

 

 
390

 

 
390

Shares repurchased

 
(850
)
 

 

 

 

 
(850
)
Shares issued (returned)—stock based compensation

 
(2
)
 
55

 

 

 

 
53

Stock-based compensation

 

 
35

 

 

 

 
35

Other

 

 
(9
)
 

 

 

 
(9
)
Balance as of September 30, 2012
$
4

 
$
(852
)
 
$
9,563

 
$
3,241

 
$
(489
)
 
$

 
$
11,467

Balance as of December 31, 2012
$
4

 
$
(1,253
)
 
$
9,527

 
$
3,880

 
$
(464
)
 
$
411

 
$
12,105

Net income

 

 

 
1,486

 

 
16

 
1,502

Dividends declared

 

 

 
(359
)
 

 

 
(359
)
Distributions to noncontrolling interests

 

 

 

 

 
(15
)
 
(15
)
Other comprehensive income

 

 

 

 
259

 

 
259

Shares repurchased

 
(2,441
)
 
100

 

 

 

 
(2,341
)
Shares issued (returned)—stock based compensation

 
(9
)
 
37

 

 

 

 
28

Stock-based compensation

 

 
45

 

 

 
1

 
46

Tax settlement with Marathon Oil Corporation

 

 
39

 

 

 

 
39

Balance as of September 30, 2013
$
4

 
$
(3,703
)
 
$
9,748

 
$
5,007

 
$
(205
)
 
$
413

 
$
11,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Shares in millions)
Common
Stock
 
Treasury
Stock
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2011
357

 

 
 
 
 
 
 
 
 
 
 
Shares repurchased

 
(20
)
 
 
 
 
 
 
 
 
 
 
Shares issued—stock-based compensation
2

 

 
 
 
 
 
 
 
 
 
 
Balance as of September 30, 2012
359

 
(20
)
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2012
361

 
(28
)
 
 
 
 
 
 
 
 
 
 
Shares repurchased

 
(31
)
 
 
 
 
 
 
 
 
 
 
Shares issued—stock-based compensation
1

 

 
 
 
 
 
 
 
 
 
 
Balance as of September 30, 2013
362

 
(59
)
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

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Notes to Consolidated Financial Statements (Unaudited)
1. Description of the Business and Basis of Presentation
Description of the Business—As used in this report, the terms “MPC,” “we,” “us,” “the Company” or “our” may refer to Marathon Petroleum Corporation, one or more of its consolidated subsidiaries or all of them taken as a whole.
Our business consists of refining and marketing, retail marketing and pipeline transportation operations conducted primarily in the Midwest, Gulf Coast and Southeast regions of the United States, through subsidiaries, including Marathon Petroleum Company LP, Speedway LLC and MPLX LP and its subsidiaries (“MPLX”).
See Note 9 for additional information about our operations.
Basis of Presentation—All significant intercompany transactions and accounts have been eliminated.
These interim consolidated financial statements are unaudited; however, in the opinion of our management, these statements reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal, recurring nature unless otherwise disclosed. These interim consolidated financial statements, including the notes, have been prepared in accordance with the rules of the Securities and Exchange Commission applicable to interim period financial statements and do not include all of the information and disclosures required by United States generally accepted accounting principles (“US GAAP”) for complete financial statements.
These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year.
In the fourth quarter of 2012, we reclassified certain expenses from selling, general and administrative expenses to cost of revenues, which is consistent with expense classifications for MPLX, MPC’s consolidated subsidiary. Historical periods were also reclassified to conform to the current period presentation. This reclassification resulted in an increase in cost of revenues and a decrease in selling, general and administrative expenses of $12 million and $35 million in the three and nine months ended September 30, 2012, respectively.
2. Accounting Standards
Recently Adopted
In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. If the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. For other amounts not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The accounting standards update was to be applied prospectively for interim and annual periods beginning with the first quarter of 2013. The adoption of this accounting standards update in the first quarter of 2013 did not have an impact on our consolidated results of operations, financial position or cash flows. The new required disclosures are included in Note 19.
In July 2012, the FASB issued an accounting standards update that gives an entity the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, through the qualitative assessment, an entity determines that it is more likely than not that the intangible asset is impaired, the quantitative impairment test must then be performed. The accounting standards update was effective for annual and interim impairment tests performed in fiscal years beginning after September 15, 2012. Early adoption was permitted. The adoption of this accounting standards update in the first quarter of 2013 did not have an impact on our consolidated results of operations, financial position or cash flows. We perform the annual intangible asset impairment testing in the fourth quarter.
In December 2011, the FASB issued an accounting standards update which was amended in January 2013 that requires disclosure of additional information related to recognized derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset or are not offset but are subject to an enforceable netting agreement. The purpose of the requirement is to help users evaluate the effect or potential effect of offsetting and related netting arrangements on an entity’s financial position. The update was to be applied retrospectively and was effective for interim and annual periods beginning with the first quarter of 2013. The adoption of this

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accounting standards update in the first quarter of 2013 did not have an impact on our consolidated results of operations, financial position or cash flows. The new required disclosures are included in Note 15.
3. MPLX LP
MPLX is a publicly traded master limited partnership that was formed by us to own, operate, develop and acquire pipelines and other midstream assets related to the transportation and storage of crude oil, refined products and other hydrocarbon-based products. MPLX’s initial assets consisted of a 51 percent general partner interest in MPLX Pipe Line Holdings LP (“Pipe Line Holdings”), which owns a network of common carrier crude oil and product pipeline systems and associated storage assets in the Midwest and Gulf Coast regions of the United States, and a 100 percent interest in a butane storage cavern in West Virginia. On May 1, 2013, we sold an additional five percent interest in Pipe Line Holdings to MPLX for $100 million. This increased MPLX’s ownership interest in Pipe Line Holdings to 56 percent and reduced our ownership interest to 44 percent.
On October 31, 2012, MPLX completed its initial public offering of 19,895,000 common units. Net proceeds to MPLX from the sale of the units were $407 million. We own a 73.6 percent interest in MPLX, including the two percent general partner interest. We consolidate this entity for financial reporting purposes since we have a controlling financial interest, and we record a noncontrolling interest for the interest owned by the public. The initial public offering represented the sale of a 26.4 percent interest in MPLX.
4. Acquisitions and Investments
Acquisition of Refinery and Related Logistics and Marketing Assets
On February 1, 2013, we paid $1.49 billion to acquire from BP Products North America Inc. and BP Pipelines (North America) Inc. (collectively, “BP”) the 451,000 barrel per calendar day refinery in Texas City, Texas, three intrastate natural gas liquid pipelines originating at the refinery, an allocation of BP’s Colonial Pipeline Company shipper history, four light product terminals, branded-jobber marketing contract assignments for the supply of approximately 1,200 branded sites and a 1,040 megawatt electric cogeneration facility, as well as the inventory associated with these assets. We refer to these assets as the “Galveston Bay Refinery and Related Assets”. Pursuant to the purchase and sale agreement, we may also be required to pay to BP a contingent earnout of up to an additional $700 million over six years, subject to certain conditions as discussed below. These assets complement our current geographic footprint and align with our strategic initiative of growing in existing and contiguous markets to enhance our portfolio. The transaction was funded with cash on hand.

As of the acquisition date, we recorded a contingent liability of $600 million, representing the preliminary fair value of contingent consideration we expect to pay to BP related to the earnout provision. The fair value of the contingent consideration was estimated using an income approach. The amount of cash to be paid under the arrangement is based on both a market-based crack spread and refinery throughput volumes for the months during which the contract applies, as well as established thresholds that cap the annual and total payment. The earnout payment cannot exceed $200 million per year for the first three years of the arrangement or $250 million per year for the last three years of the arrangement, with the total cumulative payment capped at $700 million over the six-year period. Any excess or shortfall from the annual cap for a current year’s earnout calculation will not affect subsequent years’ calculations. We used internal and external forecasts for the crack spread and internal forecasts for refinery throughput volumes and applied an appropriate risk-adjusted discount rate to the range of cash flows indicated by various scenarios to determine the fair value of the arrangement. The fair value of the contingent consideration is reassessed each quarter, with changes in fair value recorded in cost of revenues. The fair value of the contingent consideration was $606 million at September 30, 2013, which includes $108 million classified as current. See Note 15 for additional information.
The transaction provided for a post-closing adjustment for inventory, which was finalized for $9 million during the three months ended September 30, 2013, reducing our total consideration.
The components of the fair value of consideration transferred are as follows:
 
(In millions)
 
Cash
$
1,491

Fair value of contingent consideration as of acquisition date
600

Payable to seller
6

Post-closing adjustment
(9
)
Total consideration
$
2,088


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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date, pending finalization of an independent appraisal and other evaluations. During the second and third quarters of 2013, we made minor updates to the preliminary fair value measurements of assets acquired and liabilities assumed, with the revised balances shown in the table below.
 
(In millions)
 
Inventories
$
935

Other current assets
1

Property, plant and equipment, net
1,274

Other noncurrent assets
88

Accounts payable
(12
)
Payroll and benefits payable
(14
)
Long-term debt due within one year(a)
(2
)
Other current liabilities
(6
)
Long-term debt(a)
(58
)
Defined benefit postretirement plan obligations
(43
)
Deferred credits and other liabilities
(75
)
Total
$
2,088

 
(a) 
Represents a capital lease obligation assumed.
Neither goodwill nor a gain from a bargain purchase was recognized in conjunction with the Galveston Bay Refinery and Related Assets acquisition.

Other noncurrent assets consist of a $20 million intangible asset related to customer relationships and a $68 million intangible asset related to prepaid licensed refinery technology agreements. The intangible assets related to customer relationships and prepaid licensed refinery technology agreements are being amortized on a straight-line basis over four and 15 years, respectively. The weighted average life over which these acquired intangibles are being amortized is approximately 13 years.
We recognized $7 million of acquisition-related costs associated with the Galveston Bay Refinery and Related Assets acquisition. These costs were expensed and were included in selling, general and administrative expenses.
Our refineries and related assets are operated as an integrated system. As the information is not available by refinery, it is not practicable to disclose the revenues and net income associated with the acquisition that were included in our consolidated statements of income for the three and nine months ended September 30, 2013.
The following unaudited pro forma financial information presents consolidated results assuming the Galveston Bay Refinery and Related Assets acquisition occurred on January 1, 2012. The pro forma financial information does not give effect to potential synergies that could result from the acquisition and is not necessarily indicative of the results of future operations.
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions, except per share data)
2012
 
2013
 
2012
Sales and other operating revenues (including consumer excise taxes)
$
26,888

 
$
77,224

 
$
77,714

Net income attributable to MPC
1,530

 
1,541

 
2,798

Net income attributable to MPC per share - basic
$
4.53

 
$
4.80

 
$
8.18

Net income attributable to MPC per share - diluted
4.50

 
4.77

 
8.13

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


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Acquisitions of Convenience Stores
During the nine months ended September 30, 2013, Speedway LLC acquired nine convenience stores located in Tennessee, western Indiana and western Pennsylvania. In connection with these acquisitions, our Speedway segment recorded $8 million of goodwill, which is deductible for income tax purposes.
In July 2012, Speedway LLC acquired 10 convenience stores located in the northern Kentucky and southwestern Ohio regions from Road Ranger LLC in exchange for cash and a truck stop location in the Chicago metropolitan area. In connection with this acquisition, our Speedway segment recorded $5 million of goodwill, which is deductible for income tax purposes.
In May 2012, Speedway LLC acquired 87 convenience stores situated throughout Indiana and Ohio from GasAmerica Services, Inc., along with the associated inventory, intangible assets and two parcels of undeveloped real estate. In connection with this acquisition, our Speedway segment recorded $83 million of goodwill, which is deductible for income tax purposes.
These acquisitions support our strategic initiative to increase our Speedway segment sales and profitability. The principal factors contributing to a purchase price resulting in goodwill included the acquired stores complementing our existing network in our Midwest market, access to our refined product transportation systems and the potential for higher merchandise sales.
Assuming these transactions had been made at the beginning of any period presented, the consolidated pro forma results would not be materially different from reported results.
Investments in Ethanol Companies
On August 1, 2013, we acquired from Mitsui & Co. (U.S.A.), Inc. its interests in three ethanol companies for $75 million. Under the purchase agreement, we acquired an additional 24 percent interest in The Andersons Clymers Ethanol LLC ("TACE"), bringing our ownership interest to 60 percent; a 34 percent interest in The Andersons Ethanol Investment LLC, which holds a 50 percent ownership in The Andersons Marathon Ethanol LLC ("TAME"), bringing our direct and indirect ownership interest in TAME to 67 percent; and a 40 percent interest in The Andersons Albion Ethanol LLC ("TAAE"), which owns an ethanol production facility in Albion, Michigan. We hold a noncontrolling interest in each of these entities and account for them using the equity method of accounting since the minority owners have substantive participating rights.
On October 1, 2013, our ownership interest in TAAE increased to 43 percent as a result of TAAE redeeming one of the owner's interest.
5. Related Party Transactions
Our related parties include:
TAAE, in which we have a 43 percent interest, TACE, in which we have a 60 percent noncontrolling interest and TAME, in which we have a 67 percent direct and indirect noncontrolling interest. These companies each own an ethanol production facility.
Centennial Pipeline LLC (“Centennial”), in which we have a 50 percent noncontrolling interest. Centennial owns a refined products pipeline and storage facility.
LOOP LLC (“LOOP”), in which we have a 51 percent noncontrolling interest. LOOP owns and operates the only U.S. deepwater oil port.
Other equity method investees.
Sales to related parties were as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions)
2013
 
2012
 
2013
 
2012
Centennial
$

 
$

 
$

 
$
1

Other equity method investees
3

 
2

 
7

 
5

Total
$
3

 
$
2

 
$
7

 
$
6


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

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Table of Contents

Purchases from related parties were as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions)
2013
 
2012
 
2013
 
2012
Centennial
$
4

 
$

 
$
4

 
$
9

LOOP
11

 
11

 
32

 
32

TAAE
8

 

 
8

 

TACE
42

 
35

 
92

 
50

TAME
31

 
29

 
98

 
89

Other equity method investees
7

 
9

 
20

 
24

Total
$
103

 
$
84

 
$
254

 
$
204

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 TAAE, TACE and TAME consist of ethanol.
Receivables from related parties, which are included in receivables, less allowance for doubtful accounts on the consolidated balance sheets, were as follows:
(In millions)
September 30,
2013
 
December 31,
2012
Centennial
$
1

 
$
2

TAME
1

 

Other equity method investees
1

 

Total
$
3

 
$
2

At September 30, 2013, we also had a $2 million long-term receivable from Centennial, which is included in other noncurrent assets on the consolidated balance sheet.
Payables to related parties, which are included in accounts payable on the consolidated balance sheets, were as follows:
 
(In millions)
September 30,
2013
 
December 31,
2012
Centennial
$
7

 
$

LOOP
4

 
4

TAAE
2

 

TACE
1

 
2

TAME
5

 
5

Other equity method investees
2

 
2

Total
$
21

 
$
13

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


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Table of Contents

6. Variable Interest Entity
On December 1, 2010, we completed the sale of most of our Minnesota assets. These assets included the 74,000 barrel per calendar day St. Paul Park refinery and associated terminals, 166 convenience stores primarily branded SuperAmerica®, along with the SuperMom’s bakery and certain associated trademarks, SuperAmerica Franchising LLC, interests in pipeline assets in Minnesota and associated inventories. We refer to these assets as the “Minnesota Assets.” 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 in 2011, and (5) lease guarantees 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.
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. Under the settlement agreement, we were released from our obligation to pay margin support and the buyer was released from its obligation to pay us under the earnout provisions contained in the original sales agreement. Also, the buyer redeemed our $80 million preferred equity interest, paid us $12 million for dividends accrued on our preferred equity interest and paid us $40 million of cash, for total cash receipts of $132 million. In addition, the buyer issued to us a second preferred security with a stated valued of $45 million. As a result, we recognized income before income taxes of approximately $183 million during the three months ended September 30, 2012, which included $86 million of the deferred gain that was recorded when the sale transaction was originally closed.
During the three months ended September 30, 2013, the buyer redeemed the second preferred security for $49 million, which included $4 million of accrued distributions.
Certain terms of the transaction and the subsequent settlement agreement with the buyer resulted in the creation of variable interests in a variable interest entity (“VIE”) that owns the Minnesota Assets. 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. At September 30, 2013, our variable interest in this VIE and maximum exposure to loss is limited to convenience store lease guarantees of $5 million. These guarantees do not expose us to residual returns or expected losses that are significant to the VIE.
7. Income per Common Share
We compute basic earnings per share by dividing net income attributable to MPC by the weighted average number of shares of common stock outstanding. Diluted income per share assumes exercise of stock options and stock appreciation rights, provided the effect is not anti-dilutive.
Shares related to stock-based compensation awards excluded from the diluted share calculation as their effect would be anti-dilutive are approximately one million and two million shares for the three months ended September 30, 2013 and 2012 and one million and four million shares for the nine months ended September 30, 2013 and 2012, respectively.
MPC grants certain incentive compensation awards to employees and non-employee directors that are considered to be participating securities. Due to the presence of participating securities, we have calculated our earnings per share using the two-class method.
 

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Table of Contents

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions, except per share data)
2013
 
2012
 
2013
 
2012
Basic earnings per share:
 
 
 
 
 
 
 
Allocation of earnings:
 
 
 
 
 
 
 
Net income attributable to MPC
$
168

 
$
1,224

 
$
1,486

 
$
2,634

Income allocated to participating securities

 
2

 
2

 
5

Income available to common stockholders - basic
$
168

 
$
1,222

 
$
1,484

 
$
2,629

Weighted average common shares outstanding
309

 
338

 
321

 
342

Basic earnings per share
$
0.54

 
$
3.61

 
$
4.63

 
$
7.69

Diluted earnings per share:
 
 
 
 
 
 
 
Allocation of earnings:
 
 
 
 
 
 
 
Net income attributable to MPC
$
168

 
$
1,224

 
$
1,486

 
$
2,634

Income allocated to participating securities

 
2

 
2

 
5

Income available to common stockholders - diluted
$
168

 
$
1,222

 
$
1,484

 
$
2,629

Weighted average common shares outstanding
309

 
338

 
321

 
342

Effect of dilutive securities
2

 
2

 
2

 
2

Weighted average common shares, including dilutive effect
311

 
340

 
323

 
344

Diluted earnings per share
$
0.54

 
$
3.59

 
$
4.60

 
$
7.65

8. Equity
On February 1, 2012, we announced that our board of directors authorized a share repurchase plan, enabling us to purchase up to $2.0 billion of MPC common stock over a two-year period. Through January 30, 2013, we had acquired $1.35 billion of shares under the initial $2.0 billion authorization. On January 30, 2013, we announced that our board of directors extended the duration of the existing $650 million repurchase authorization and approved an additional $2.0 billion share repurchase authorization, both to expire in December 2014. On September 26, 2013, we announced that our board of directors approved an additional $2.0 billion share repurchase authorization through September 2015, resulting in $6.0 billion of total share repurchase authorizations since January 1, 2012. After the effects of the accelerated share repurchase (“ASR”) programs and open market repurchases shown below, $2.31 billion of the amounts authorized by our board of directors remain available for repurchases at September 30, 2013. We may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, accelerated share repurchases or open market solicitations for shares, some of which may be effected through Rule 10b5-1 plans. The timing and amount of future repurchases, if any, will depend upon several factors, including market and business conditions, and such repurchases may be discontinued at any time.
In February 2012 and November 2012, we entered into $850 million and $500 million ASR programs, respectively, to repurchase shares of MPC common stock under the approved share repurchase plan authorized by our board of directors. The total number of shares repurchased under these ASR programs was based generally on the volume-weighted average price of our common stock during the repurchase periods. The shares repurchased under the ASR programs were accounted for as treasury stock purchase transactions, reducing the weighted average number of basic and diluted common shares outstanding by the shares repurchased, and as forward contracts indexed to our common stock. The forward contracts were accounted for as equity instruments.

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Table of Contents

Total share repurchases transacted through ASR programs and open market transactions were as follows for the three and nine months ended September 30, 2013 and 2012:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions, except per share data)
2013
 
2012
 
2013
 
2012
Number of shares repurchased(a)
14

 
2

 
31

 
20

Cash paid for shares repurchased
$
1,028

 
$

 
$
2,341

 
$
850

Effective average cost per delivered share
$
70.73

 
$
41.75

 
$
76.01

 
$
41.75

 
(a) 
The nine months ended September 30, 2013 includes one million shares received under the November 2012 ASR program, which were paid for in the fourth quarter of 2012. The three months ended September 30, 2012 includes two million shares received under the February 2012 ASR program, which were paid for in the first quarter of 2012.
As of September 30, 2013, the total number of shares we have repurchased cumulatively through the ASR programs and open market repurchases since February 2012 was 59 million shares at an average cost per share of $62.29. The cash paid for shares repurchased was $3.69 billion. In addition, at September 30, 2013, we had agreements to acquire additional common shares for $42 million, which were settled in early October 2013.
9. Segment Information
We have three reportable segments: Refining & Marketing; Speedway; and Pipeline Transportation. Each of these segments is organized and managed based upon the nature of the products and services they offer.
Refining & Marketing – refines crude oil and other feedstocks at our refineries in the Gulf Coast and Midwest regions of the United States, purchases ethanol and refined products for resale and distributes refined products through various means, including barges, terminals and trucks that we own or operate. We sell refined products to wholesale marketing customers domestically and internationally, to buyers on the spot market, to our Speedway segment and to dealers and jobbers who operate Marathon® retail outlets;
Speedway – sells transportation fuels and convenience products in retail markets in the Midwest, primarily through Speedway® convenience stores; and
Pipeline Transportation – transports crude oil and other feedstocks to our refineries and other locations, delivers refined products to wholesale and retail market areas and includes the aggregated operations of MPLX and MPC’s retained pipeline assets and investments.

On February 1, 2013, we acquired the Galveston Bay Refinery and Related Assets, which are part of the Refining & Marketing and Pipeline Transportation segments. Segment information for periods prior to the acquisition does not include amounts for these operations. See Note 4.
Segment income represents income from operations attributable to the reportable segments. Corporate administrative expenses and costs related to certain non-operating assets are not allocated to the reportable segments. In addition, certain items that affect comparability (as determined by the chief operating decision maker) are not allocated to the reportable segments.
 

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Table of Contents

(In millions)
Refining & Marketing
 
Speedway
 
Pipeline Transportation
 
Total
Three Months Ended September 30, 2013
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Customer
$
22,478

 
$
3,755

 
$
20

 
$
26,253

Intersegment(a)
2,439

 
1

 
117

 
2,557

Related parties
3

 

 

 
3

Segment revenues
24,920

 
3,756

 
137

 
28,813

Elimination of intersegment revenues
(2,439
)
 
(1
)
 
(117
)
 
(2,557
)
Total revenues
$
22,481

 
$
3,755

 
$
20

 
$
26,256

Segment income from operations(b)
$
227

 
$
102

 
$
54

 
$
383

Income from equity method investments
8

 

 
1

 
9

Depreciation and amortization(c)
246

 
29

 
19

 
294

Capital expenditures and investments(d)
243

 
65

 
42

 
350

(In millions)
Refining & Marketing
 
Speedway
 
Pipeline Transportation
 
Total
Three Months Ended September 30, 2012
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Customer
$
17,242

 
$
3,787

 
$
19

 
$
21,048

Intersegment(a)
2,387

 
1

 
97

 
2,485

Related parties
2

 

 

 
2

Segment revenues
19,631

 
3,788

 
116

 
23,535

Elimination of intersegment revenues
(2,387
)
 
(1
)
 
(97
)
 
(2,485
)
Total revenues
$
17,244

 
$
3,787

 
$
19

 
$
21,050

Segment income from operations
$
1,691

 
$
76

 
$
52

 
$
1,819

Income (loss) from equity method investments
(1
)
 

 
8

 
7

Depreciation and amortization(c)
198

 
29

 
13

 
240

Capital expenditures and investments(d)(e)
182

 
59

 
71

 
312

(In millions)
Refining & Marketing
 
Speedway
 
Pipeline Transportation
 
Total
Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Customer
$
64,238

 
$
10,964

 
$
60

 
$
75,262

Intersegment(a)
7,072

 
3

 
340

 
7,415

Related parties
7

 

 

 
7

Segment revenues
71,317

 
10,967

 
400

 
82,684

Elimination of intersegment revenues
(7,072
)
 
(3
)
 
(340
)
 
(7,415
)
Total revenues
$
64,245

 
$
10,964

 
$
60

 
$
75,269

Segment income from operations(b)
$
2,235

 
$
292

 
$
163

 
$
2,690

Income from equity method investments
7

 

 
9

 
16

Depreciation and amortization(c)
734

 
83

 
55

 
872

Capital expenditures and investments(d)(e)(f)
1,797

 
177

 
173

 
2,147

 

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Table of Contents

(In millions)
Refining & Marketing
 
Speedway
 
Pipeline Transportation
 
Total
Nine Months Ended September 30, 2012
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Customer
$
50,794

 
$
10,703

 
$
57

 
$
61,554

Intersegment(a)
6,560

 
3

 
266

 
6,829

Related parties
5

 

 
1

 
6

Segment revenues
57,359

 
10,706

 
324

 
68,389

Elimination of intersegment revenues
(6,560
)
 
(3
)
 
(266
)
 
(6,829
)
Total revenues
$
50,799

 
$
10,703

 
$
58

 
$
61,560

Segment income from operations
$
3,959

 
$
233

 
$
144

 
$
4,336

Income (loss) from equity method investments
(2
)
 

 
20

 
18

Depreciation and amortization(c)
574

 
84

 
37

 
695

Capital expenditures and investments(d)(e)
513

 
257

 
169

 
939

 
(a) 
Management believes intersegment transactions were conducted under terms comparable to those with unaffiliated parties.
(b) 
Included in the Pipeline Transportation segment for the three and nine months ended September 30, 2013 are $5 million and $15 million of corporate overhead costs attributable to MPLX, which were included in items not allocated to segments prior to MPLX’s October 31, 2012 initial public offering. These expenses are not currently allocated to other segments.
(c) 
Differences between segment totals and MPC totals represent amounts related to unallocated items and are included in “Items not allocated to segments” in the reconciliation below.
(d) 
Capital expenditures include changes in capital accruals.
(e) 
Includes Speedway’s acquisitions of convenience stores. See Note 4.
(f) 
The Refining & Marketing and Pipeline Transportation segments include $1.29 billion and $70 million, respectively, for the acquisition of the Galveston Bay Refinery and Related Assets. See Note 4.

The following reconciles segment income from operations to income before income taxes as reported in the consolidated statements of income:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions)
2013
 
2012
 
2013
 
2012
Segment income from operations
$
383

 
$
1,819

 
$
2,690

 
$
4,336

Items not allocated to segments:
 
 
 
 
 
 
 
Corporate and other unallocated items(a)(b)
(59
)
 
(74
)
 
(190
)
 
(245
)
Minnesota Assets sale settlement gain(c)

 
183

 

 
183

Pension settlement expenses(d)
(23
)
 
(33
)
 
(83
)
 
(116
)
Net interest and other financial income (costs)
(47
)
 
(25
)
 
(140
)
 
(64
)
Income before income taxes
$
254

 
$
1,870

 
$
2,277

 
$
4,094

 
(a) 
Corporate and other unallocated items consists primarily of MPC’s corporate administrative expenses and costs related to certain non-operating assets.
(b) 
Corporate overhead costs attributable to MPLX were included in the Pipeline Transportation segment subsequent to MPLX’s October 31, 2012 initial public offering.
(c) 
See Note 6.
(d) 
See Note 20.


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Table of Contents

The following reconciles segment capital expenditures and investments to total capital expenditures:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions)
2013
 
2012
 
2013
 
2012
Segment capital expenditures and investments
$
350

 
$
312

 
$
2,147

 
$
939

Less: Investments in equity method investees
75

 
5

 
86

 
12

Plus: Items not allocated to segments:
 
 
 
 
 
 
 
Capital expenditures not allocated to segments
54

 
19

 
106

 
47

Capitalized interest
7

 
29

 
15

 
95

Total capital expenditures(a)(b)
$
336

 
$
355

 
$
2,182

 
$
1,069

 
(a) 
Capital expenditures include changes in capital accruals.
(b) 
See Note 18 for a reconciliation of total capital expenditures to additions to property, plant and equipment as reported in the consolidated statements of cash flows.
The following reconciles total revenues to sales and other operating revenues (including consumer excise taxes) as reported in the consolidated statements of income:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions)
2013
 
2012
 
2013
 
2012
Total revenues (as reported above)
$
26,256

 
$
21,050

 
$
75,269

 
$
61,560

Plus: Corporate and other unallocated items

 
(1
)
 
(6
)
 
(3
)
Less: Sales to related parties
3

 
2

 
7

 
6

Sales and other operating revenues (including consumer excise taxes)
$
26,253

 
$
21,047

 
$
75,256

 
$
61,551

Total assets by reportable segment were:
 
(In millions)
September 30,
2013
 
December 31,
2012
Refining & Marketing
$
20,379

 
$
17,052

Speedway
2,036

 
1,947

Pipeline Transportation
1,943

 
1,950

Corporate and Other
4,645

 
6,274

Total consolidated assets
$
29,003

 
$
27,223



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Table of Contents

10. Other Items
Net interest and other financial income (costs) was:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions)
2013
 
2012
 
2013
 
2012
Interest:
 
 
 
 
 
 
 
Net interest expense
$
(48
)
 
$
(47
)
 
$
(140
)
 
$
(138
)
Interest capitalized
7

 
29

 
15

 
95

Total net interest
(41
)
 
(18
)
 
(125
)
 
(43
)
Other:
 
 
 
 
 
 
 
Net foreign currency losses
(1
)
 
(1
)
 

 
(1
)
Bank service and other fees
(5
)
 
(6
)
 
(15
)
 
(20
)
Total other
(6
)
 
(7
)
 
(15
)
 
(21
)
Net interest and other financial income (costs)
$
(47
)
 
$
(25
)
 
$
(140
)
 
$
(64
)
11. Income Taxes
The combined federal, state and foreign income tax rate was 32 percent and 35 percent for the three months ended September 30, 2013 and 2012, respectively, and 34 percent and 36 percent for the nine months ended September 30, 2013 and 2012, respectively. The effective tax rate for the three and nine months ended September 30, 2013 is less than the U.S. statutory rate of 35 percent primarily due to certain permanent benefit differences, including the domestic manufacturing deduction, partially offset by state and local tax expense. The effective tax rate for the three and nine months ended September 30, 2012 exceeded the U.S. statutory rate of 35 percent due to state and local tax expense, partially offset by permanent benefit differences, including the domestic manufacturing deduction.
Prior to the June 30, 2011 spinoff transaction from Marathon Oil Corporation (“Marathon Oil”), we were included in Marathon Oil’s income tax returns for all applicable years. During 2011, we anticipated a future settlement between Marathon Oil and us upon the filing of Marathon Oil’s consolidated U.S. federal and state income tax returns for the period prior to June 30, 2011. During the second quarter of 2013, we settled with Marathon Oil for the 2011 period based on filed tax returns, resulting in a $39 million increase to additional paid-in capital.
We are continuously undergoing examination of our income tax returns, which have been completed for our U.S. federal and state income tax returns through the 2009 and 2003 tax years, respectively. We had $25 million of unrecognized tax benefits as of September 30, 2013. Pursuant to our tax sharing agreement with Marathon Oil, the unrecognized tax benefits related to pre-spinoff operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and we have indemnified Marathon Oil accordingly. See Note 22 for indemnification information. During the second quarter of 2013, we settled with Marathon Oil our U.S. federal and related state return liabilities for the 2008-2009 tax years, resulting in a reduction in unrecognized tax benefits of $21 million.
12. Inventories
 
(In millions)
September 30,
2013
 
December 31,
2012
Crude oil and refinery feedstocks
$
2,615

 
$
1,383

Refined products
2,651

 
1,761

Merchandise
83

 
74

Materials and supplies
365

 
231

Total (at cost)
$
5,714

 
$
3,449

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


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Table of Contents

13. Property, Plant and Equipment
 
(In millions)
September 30,
2013
 
December 31,
2012
Refining & Marketing
$
16,712

 
$
15,089

Speedway
2,236

 
2,100

Pipeline Transportation
1,901

 
1,747

Corporate and Other
526

 
473

Total
21,375

 
19,409

Less accumulated depreciation
7,580

 
6,766

Net property, plant and equipment
$
13,795

 
$
12,643

14. Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2013 were as follows:
 
(In millions)
Refining & Marketing
 
Speedway
 
Pipeline Transportation
 
Total
Balance at December 31, 2012
$
551

 
$
217

 
$
162

 
$
930

Acquisitions(a)

 
8

 

 
8

Balance at September 30, 2013
$
551

 
$
225

 
$
162

 
$
938

 
(a) 
See Note 4 for information on acquisitions.
15. Fair Value Measurements
Fair Values—Recurring
The following tables present assets and liabilities accounted for at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 by fair value hierarchy level. We have elected to offset the fair value amounts recognized for multiple derivative contracts executed with the same counterparty, including any related cash collateral as shown below; however, fair value amounts by hierarchy level are presented on a gross basis in the following tables.
 
 
September 30, 2013
 
Fair Value Hierarchy
 
 
 
 
 
 
(In millions)
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral(a)
 
Net Carrying Value on Balance Sheet(b)
 
Collateral Pledged Not Offset
Commodity derivative instruments, assets
$
88

 
$

 
$

 
$
(62
)
 
$
26

 
$
69

Other assets
2

 

 

 
 N/A

 
2

 

Total assets at fair value
$
90

 
$

 
$

 
$
(62
)
 
$
28

 
$
69

 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative instruments, liabilities
$
62

 
$

 
$

 
$
(62
)
 
$

 
$

Contingent consideration, liability(c)

 

 
606

 
 N/A

 
606

 

Total liabilities at fair value
$
62

 
$

 
$
606

 
$
(62
)
 
$
606

 
$

 

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Table of Contents

 
December 31, 2012
 
Fair Value Hierarchy
 
 
 
 
 
 
(In millions)
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral(a)
 
Net Carrying Value on Balance Sheet(b)
 
Collateral Pledged Not Offset
Commodity derivative instruments, assets
$
49

 
$

 
$

 
$
(49
)
 
$

 
$
45

Other assets
2

 

 

 
 N/A

 
2

 

Total assets at fair value
$
51

 
$

 
$

 
$
(49
)
 
$
2

 
$
45

 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative instruments, liabilities
$
88

 
$

 
$

 
$
(88
)
 
$

 
$

 
(a) 
Represents the impact of netting assets, liabilities and cash collateral when a legal right of offset exists. As of December 31, 2012, cash collateral of $39 million was netted with mark-to-market derivative liabilities.
(b) 
We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
(c) 
Includes $108 million classified as current.
Commodity derivatives in Level 1 are exchange-traded contracts for crude oil and refined products measured at fair value with a market approach using the close-of-day settlement prices for the market. Commodity derivatives are covered under master netting agreements with an unconditional right to offset. Collateral deposits in futures commission merchant accounts covered by master netting agreements related to Level 1 commodity derivatives are classified as Level 1 in the fair value hierarchy.
The contingent consideration represents the fair value as of September 30, 2013 of the amount we expect to pay to BP related to the earnout provision for the Galveston Bay Refinery and Related Assets acquisition. See Note 4. The fair value of the contingent consideration was estimated using an income approach and is therefore a Level 3 liability. The amount of cash to be paid under the arrangement is based on both a market-based crack spread and refinery throughput volumes for the months during which the contract applies, as well as established thresholds that cap the annual and total payment. The earnout payment cannot exceed $200 million per year for the first three years of the arrangement or $250 million per year for the last three years of the arrangement, with the total cumulative payment capped at $700 million over the six-year period. Any excess or shortfall from the annual cap for a current year’s earnout calculation will not affect subsequent years’ calculations. The fair value calculation used significant unobservable inputs, including (1) an estimate of refinery throughput volumes; (2) a range of internal and external crack spread forecasts from $12 to $18 per barrel; and (3) a range of risk-adjusted discount rates from 5 percent to 10 percent. An increase or decrease in crack spread forecasts or refinery throughput volume expectations will result in a corresponding increase or decrease in the fair value. Increases to the fair value as a result of increasing forecasts for both of these unobservable inputs, however, are limited as the earnout payment is subject to annual thresholds. An increase or decrease in the discount rate will result in a decrease or increase to the fair value, respectively. The fair value of the contingent consideration is reassessed each quarter, with changes in fair value recorded in cost of revenues.
The following is a reconciliation of the beginning and ending balances recorded for liabilities classified as Level 3 in the fair value hierarchy.
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In millions)
2013
 
2012
 
2013
 
2012
Beginning balance
$
611

 
$

 
$

 
$

Contingent consideration agreement

 

 
600

 

Total realized and unrealized (gains) losses included in net income
(5
)
 

 
6

 
2

Settlements of derivative instruments

 

 

 
(2
)
Ending balance
$
606

 
$

 
$
606

 
$

There were no unrealized gains or losses recorded in net income for the three and nine months ended September 30, 2013 and 2012 related to Level 3 derivative instruments held at September 30, 2013 and 2012, respectively. See Note 16 for the income statement impacts of our derivative instruments. There was an unrealized gain of $5 million and an unrealized loss of $6 million related to the contingent consideration agreement for the three and nine months ended September 30, 2013, respectively.

20

Table of Contents

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.
 
 
Nine Months Ended September 30,
 
2013
 
2012
(In millions)
Fair Value
 
Impairment
 
Fair Value
 
Impairment
Property, plant and equipment, net
$
1

 
$
8

 
$

 
$

Other noncurrent assets

 

 

 
14

Due to changing market conditions, we assessed one of our light products terminals for impairment. The terminal is operated by our Refining & Marketing segment. During the second quarter of 2013, we recorded an impairment charge of $8 million for this terminal. The impairment is included in depreciation and amortization on the consolidated statements of income. The fair value of the terminal was measured using a market approach based on comparable area property values which are Level 3 inputs.
As a result of changing market conditions and declining throughput volumes, we impaired our Refining & Marketing segment’s prepaid tariff with Centennial by $14 million during the first quarter of 2012. The fair value measurement of the prepaid tariff was based on the income approach utilizing the probability of shipping sufficient volumes on Centennial’s pipeline over the remaining life of the throughput and deficiency credits, which expire March 31, 2014 if not utilized. This measurement is classified as Level 3.

Fair Values – Reported
The following table summarizes financial instruments on the basis of their nature, characteristics and risk at September 30, 2013 and December 31, 2012, excluding the derivative financial instruments and contingent consideration reported above.
 
 
September 30, 2013
 
December 31, 2012
(In millions)
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Financial assets:
 
 
 
 
 
 
 
Investments
$
203

 
$
14

 
$
263

 
$
59

Other
30

 
29

 
33

 
31

Total financial assets
$
233

 
$
43

 
$
296

 
$
90

Financial liabilities:
 
 
 
 
 
 
 
Long-term debt(a)
$
3,270

 
$
3,002

 
$
3,559

 
$
3,006

Deferred credits and other liabilities
24

 
24

 
23

 
23

Total financial liabilities
$
3,294

 
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