Item 7. 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 information included under Item 1. Business, Item 1A. Risk Factors, Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data.

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,” “could,” “design,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “imply,” “intend,” “may,” “objective,” “opportunity,” “outlook,” “plan,” “position,” “potential,” “predict,” “project,” “prospective,” “pursue,” “seek,” “should,” “strategy,” “target,” “will,” “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.

Corporate Overview

We are an independent petroleum refining and marketing, retail and midstream company. Overall, we are one of the largest independent petroleum product refining, marketing, retail and transportation businesses in the United States and the largest east of the Mississippi.

We currently own and operate six refineries, all located in the United States, with an aggregate crude oil refining capacity of approximately 1.9 mmbpcd. Our refineries supply refined products to resellers and consumers within our market areas, including the Midwest, Northeast, East Coast, Southeast and Gulf Coast regions of the United States. We distribute refined products to our customers through pipeline and marine transportation, terminals and storage services provided by our Midstream segment. We are one of the largest wholesale suppliers of gasoline and distillates to resellers within our market area.

We have two strong retail brands: Speedway® and Marathon®. We believe that Speedway LLC, a wholly-owned subsidiary, operates the second largest chain of company-owned and operated retail gasoline and convenience stores in the United States, with approximately 2,740 convenience stores in 21 states throughout the Midwest, East Coast and Southeast. The Marathon brand is an established motor fuel brand in the Midwest and Southeast regions of the United States, and is available through approximately 5,600 retail outlets operated by independent entrepreneurs in 20 states and the District of Columbia.

Through our ownership interests in MPLX, we are one of the largest processors of natural gas in the United States and the largest processor and fractionator in the Marcellus and Utica shale regions. Our integrated midstream energy asset network links producers of natural gas and NGLs from some of the largest supply basins in the United States to domestic and international markets. Our midstream gathering and processing operations include: natural gas gathering, processing and transportation; and NGL gathering, transportation, fractionation, storage and marketing. Our assets include approximately 5.9 bcf/d of gathering capacity, 8.0 bcf/d of natural gas processing capacity and 610 mbpd of fractionation capacity as of December 31, 2017. As of December 31, 2017, we owned, leased or had ownership interests in approximately 10,800 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 distribute our refined products through one of the largest terminal operations in the United States and one of the largest private domestic fleets of inland petroleum product barges.

In the first quarter of 2017, we revised our segment reporting in connection with the contribution of certain terminal, pipeline and storage assets to MPLX. The operating results for these assets are now reported in our Midstream segment. Previously, they were reported as part of our Refining & Marketing segment. Comparable prior period information has been recast to reflect our revised presentation. The results for the pipeline and storage assets were recast effective January 1, 2015 and the results for the terminal assets were recast effective April 1, 2016. Prior to these dates, these assets were not considered businesses for accounting purposes and, therefore, there are no financial results from which to recast segment results.

Our operations consist of three reportable operating segments: Refining & Marketing; Speedway; and Midstream. Each of these segments is organized and managed based upon the nature of the products and services they offer. See Item 1. Business for additional information on our segments.

•

Refining & Marketing – refines crude oil and other feedstocks at our six refineries in the Gulf Coast and Midwest regions of the United States, purchases refined products and ethanol for resale and distributes refined products through various means, including pipeline and marine transportation, terminals and storage services provided by our Midstream segment. We sell refined products to wholesale marketing customers domestically and internationally, buyers on the spot market, our Speedway business segment and independent entrepreneurs who operate Marathon® retail outlets.

•	Speedway – sells transportation fuels and convenience products in the retail market in the Midwest, East Coast and Southeast.

•	Midstream – gathers, processes and transports natural gas; gathers, transports, fractionates, stores and markets NGLs; and transports and stores crude oil and refined products principally for the Refining & Marketing segment via pipelines, terminals, towboats and barges. The Midstream segment primarily reflects the results of MPLX, our sponsored master limited partnership.

Strategic Actions to Enhance Shareholder Value

On January 3, 2017, we announced plans to significantly accelerate the dropdown of assets with an estimated $1.4 billion of MLP-eligible annual EBITDA to MPLX and to exchange our economic interests in the general partner of MPLX, including IDRs, for newly issued MPLX common units. In 2017, in connection with these plans, we contributed assets to MPLX with projected annual EBITDA of approximately $400 million for $1.93 billion of cash and approximately 31 million MPLX common units and general partner units. See “MPLX LP - MPLX Highlights” for information on these dropdowns. On February 1, 2018, we completed the dropdown of the remaining identified assets, which included our refining logistics assets and fuels distribution services with projected annual EBITDA of approximately $1 billion, in exchange for $4.1 billion of cash and 114 million MPLX common units and general partner units.

The cash consideration for these dropdowns in 2017 and 2018 was financed by MPLX with $6.0 billion of debt. See “MPLX Highlights” section for additional information on MPLX debt financing in 2017 and 2018. The equity financing was funded through new MPLX common units and general partner units issued to us. Immediately following the closing of the February 1, 2018 dropdown, our IDRs were cancelled and our economic general partner interest was converted into a non-economic general partner interest, all in exchange for 275 million newly issued MPLX common units, which resulted in us owning approximately 64 percent of the issued and outstanding MPLX common units as of February 1, 2018. These actions were designed to provide a clear valuation of our midstream platform and to provide an ongoing return of capital to our shareholders in a manner consistent with maintaining an investment-grade credit profile.

Our January 3, 2017 announcement included conducting a full and thorough review of Speedway to ensure optimum value is being delivered to shareholders over the long term. On September 5, 2017, we announced that our board of directors, based on a recommendation from its independent special committee, determined that maintaining Speedway as a fully integrated business with MPC provides the best opportunity for enhancing long-term shareholder value. Key factors in the board of directors’ decision to maintain Speedway as an integrated business within MPC included substantial integration synergies, support of MPC’s investment-grade credit profile and ability to return capital to shareholders and the strong value of cash flow diversification.

Executive Summary

Results

Select results for 2017 and 2016 are reflected in the following table.

(In millions, except per share data)		2017				2016
Income from Operations by segment
Refining & Marketing		$	2,321			$	1,357
Speedway		732				734
Midstream		1,339				1,048
Items not allocated to segments		(423		)		(761		)
Total		$	3,969			$	2,378
(Benefit) provision for income taxes		$	(460	)		$	609
Noncontrolling interests		$	307			$	(2	)
Net income attributable to MPC		$	3,432			$	1,174
Net income attributable to MPC per diluted share		$	6.70			$	2.21

Net income attributable to MPC increased $2.26 billion, or $4.49 per diluted share, in 2017 compared to 2016, primarily due to an income tax benefit of approximately $1.5 billion resulting from the TCJA and improved results from our Refining & Marketing segment.

Refining & Marketing segment income from operations increased in 2017 compared to 2016. Excluding the $345 million LCM inventory benefit recognized in 2016, the increase in segment results for 2017 primarily resulted from higher LLS crack spreads in both the U.S. Gulf Coast and Chicago markets. The LLS blended crack spread for 2017 increased to $9.84 per barrel from $6.96 per barrel in 2016. These favorable effects were partially offset by less favorable product price realizations as compared to the spot market prices used in the LLS blended crack spread.

Excluding the $25 million LCM inventory benefit recognized in 2016, the increase in Speedway segment results for 2017 was primarily due to contributions from its travel center joint venture formed in the fourth quarter of 2016 and lower operating expense, partially offset by lower merchandise margin and lower gains from asset sales.

Midstream segment income from operations increased in 2017 compared to 2016, primarily due to higher natural gas and NGL gathering, processing and fractionating volumes and changes in natural gas and NGL prices. Segment results also benefited from the first quarter 2017 acquisitions of the Ozark pipeline and our ownership interest in the Bakken Pipeline system.

Items not allocated in 2017 includes an $86 million litigation charge, a litigation benefit of $57 million, $52 million of pension settlement expenses and a benefit of $23 million related to MPC’s share of gains from the sale of assets remaining from the canceled Sandpiper pipeline project. Items not allocated to segments in 2016 includes non-cash impairment charges totaling $486 million, which included $267 million related to our equity method investment in the Sandpiper pipeline project resulting from the indefinite deferral of this project, $130 million related to the goodwill recognized in connection with the MarkWest Merger and $89 million related to an MPLX equity method investment.

During the fourth quarter of 2017, the TCJA significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21 percent. Earnings for 2017 includes a tax benefit of approximately $1.5 billion as a result of remeasuring certain net deferred tax liabilities using the lower corporate tax rate.

Noncontrolling interests increased in 2017 compared to 2016, primarily due to increased MPLX net income.

MPLX LP

MPLX is a diversified, growth-oriented publicly traded master limited partnership originally formed by us to own, operate, develop and acquire midstream energy infrastructure assets. MPLX is engaged in the gathering, processing and transportation of natural gas; the gathering, transportation, fractionation, storage and marketing of NGLs; and the gathering, transportation and storage of crude oil and refined petroleum products. On December 4, 2015, we completed the MarkWest Merger, whereby MarkWest became a wholly-owned subsidiary of MPLX.

As of December 31, 2017, we owned a 30.4 percent interest in MPLX, including a two percent general partner interest. MPLX is a VIE because the limited partners of MPLX do not have substantive kick-out or substantive participating rights over the general partner. We are the primary beneficiary of MPLX because in addition to significant economic interest, we also have the power, through our 100 percent ownership of the general partner, to control the decisions that most significantly impact MPLX. We therefore consolidate MPLX and record a noncontrolling interest for the 69.6 percent interest owned by the public. The creditors of MPLX do not have recourse to MPC’s general credit through guarantees or other financial arrangements. The assets of MPLX are the property of MPLX and cannot be used to satisfy the obligations of MPC. MPC has effectively guaranteed certain indebtedness of LOOP and LOCAP, in which MPLX holds an interest. See Item 8. Financial Statements and Supplementary Data – Note 25 for more information.

See the “Strategic Actions to Enhance Shareholder Value” section for information on our ownership of MPLX after the dropdown of certain assets and IDR exchange on February 1, 2018.

MPLX Highlights

•

On February 8, 2018, MPLX issued $5.5 billion in aggregate principal amount of senior notes in a public offering, consisting of $500 million aggregate principal amount of 3.375 percent unsecured senior notes due March 2023, $1.25 billion aggregate principal amount of 4.000 percent unsecured senior notes due March 2028, $1.75 billion aggregate principal amount of 4.500 percent unsecured senior notes due April 2038, $1.5 billion aggregate principal amount of 4.700 percent unsecured senior notes due April 2048, and $500 million aggregate principal amount of 4.900 percent unsecured senior notes due April 2058. On February 8, 2018, $4.1 billion of the net proceeds were used to repay the 364-day term-loan facility, which was drawn on February 1, 2018 to fund the cash portion of the consideration MPLX paid MPC for the dropdown of assets on February 1, 2018. The remaining proceeds will be used to repay outstanding borrowings under MPLX’s revolving credit facility and intercompany loan agreement with us and for general partnership purposes.

•	On September 1, 2017, we contributed our joint-interest ownership in certain pipelines and storage facilities to MPLX in exchange for total consideration of $1.05 billion.

•	On March 1, 2017, we contributed certain terminal, pipeline and storage assets to MPLX in exchange for total consideration of $2.0 billion.

•

On February 10, 2017, MPLX completed a public offering of $1.25 billion aggregate principal amount of 4.125% unsecured senior notes due March 2027 and $1.0 billion aggregate principal amount of 5.200% unsecured senior notes due March 2047. MPLX used the net proceeds from this offering to fund the $1.5 billion cash portion of the consideration MPLX paid MPC for the dropdown of assets on March 1, 2017, as well as for general partnership purposes.

•	On March 31, 2016, we contributed our inland marine business to MPLX in exchange for 23 million common units and 460 thousand general partner units.

•

On August 4, 2016, MPLX entered into a Second Amended and Restated Distribution Agreement (the “Distribution Agreement”) providing for at-the-market issuance of common units, in amounts, at prices and on terms determined by market conditions and other factors at the time of the offerings (such at-the-market program, referred to as the “ATM Program”). During 2017, MPLX issued an aggregate of 14 million common units under the ATM Program, generating net proceeds of approximately $473 million. MPLX used the net proceeds from sales under the ATM Program for general partnership purposes including repayment of debt and funding for acquisitions, working capital requirements and capital expenditures.

•

On September 1, 2016, MPC, MPLX and various affiliates initiated a series of reorganization transactions in order to simplify MPLX’s ownership structure and its financial and tax reporting. In connection with these transactions, MPC contributed $225 million to MPLX, and all of the issued and outstanding MPLX Class A Units, all of which were held by MarkWest Hydrocarbon, a wholly-owned subsidiary of MPLX, were exchanged for newly issued MPLX common units.

•	On May 13, 2016, MPLX completed the private placement of approximately 30.8 million 6.5 percent Series A Convertible Preferred Units (the “MPLX Preferred Units”) at a cash price of $32.50 per unit. The aggregate net proceeds of approximately $984 million from the sale of the MPLX Preferred Units was used for capital expenditures, repayment of debt and general partnership purposes.

Distributions from MPLX

The following table summarizes the cash distributions we received from MPLX during 2017 and 2016.

(In millions)		2017				2016
Cash distributions received from MPLX:
General partner distributions, including IDRs		$	301			$	190
Limited partner distributions		197				142
Total		$	498			$	332

As discussed in the “Strategic Actions to Enhance Shareholder Value” section above, we believe there is substantial value in our economic interests in the general partner of MPLX and exchanged these economic interests for 275 million newly issued MPLX common units in conjunction with the completion of our dropdowns to highlight that value. After giving effect to the dropdown of certain assets and IDR exchange on February 1, 2018, we owned approximately 505 million MPLX common units valued at $19.15 billion based on the February 1, 2018 closing unit price of $37.95.

On January 26, 2018, MPLX declared a quarterly cash distribution of $0.6075 per common unit, which was payable February 14, 2018. As a result, MPLX made distributions totaling $346 million to its limited and general partners. MPC’s portion of this distribution was approximately $170 million.

See Item 8. Financial Statements and Supplementary Data – Note 4 for additional information on MPLX.

Acquisitions and Investments

•	On March 1, 2017, MPLX acquired the Ozark pipeline from Enbridge Pipelines (Ozark) LLC for approximately $219 million.

•

On February 15, 2017, MPLX acquired a partial, indirect equity interest in the Dakota Access Pipeline (“DAPL”) and Energy Transfer Crude Oil Company Pipeline (“ETCOP”) projects, collectively referred to as the Bakken Pipeline system, through a joint venture, MarEn Bakken Company LLC (“MarEn Bakken”), with Enbridge Energy Partners L.P. (“Enbridge Energy Partners”). MPLX holds, through a subsidiary, a 25 percent interest in MarEn Bakken, which equates to an approximate 9.2 percent indirect equity interest in the Bakken Pipeline system.

•

Effective January 1, 2017, MPLX and Antero Midstream formed a joint venture, Sherwood Midstream LLC (“Sherwood Midstream”), to support the development of Antero Resources Corporation’s Marcellus Shale acreage in West Virginia. MarkWest has a 50 percent ownership interest in Sherwood Midstream. In connection with this transaction, MarkWest contributed certain gas processing plants currently under construction at the Sherwood Complex with a fair value of approximately $134 million, cash of approximately $20 million and sold Class A Interests in MarkWest Ohio Fractionation to Sherwood Midstream for $126 million in cash. Sherwood Midstream Holdings LLC (“Sherwood Midstream Holdings”), a joint venture with MarkWest and Sherwood Midstream, was also formed to own, operate and maintain certain assets owned by Sherwood Midstream and MarkWest. MarkWest contributed certain real property, equipment and facilities with a fair value of approximately $209 million to Sherwood Midstream Holdings in exchange for a 79 percent initial ownership interest.

•

In the fourth quarter of 2016, Speedway and Pilot Flying J finalized the formation of a joint venture consisting of 123 travel plazas, primarily in the Southeast United States. The new entity, PFJ Southeast, consisted of 41 existing locations contributed by Speedway and 82 locations contributed by Pilot Flying J, all of which carry either the Pilot or Flying J brand and are operated by Pilot Flying J. Our non-cash contribution was $273 million based on the book value of the assets we contributed to the joint venture.

•

On September 1, 2016, Enbridge Energy Partners announced that its affiliate, North Dakota Pipeline, would withdraw certain pending regulatory applications for the Sandpiper pipeline project and that the project would be deferred indefinitely. These decisions were considered to indicate an impairment of the costs capitalized to date on the project. We made contributions of $14 million to North Dakota Pipeline during the year ended December 31, 2016 and contributed $301 million since project inception to fund our share of the construction costs for the project. As the operator of North Dakota Pipeline, which owns the investments made to date in the Sandpiper pipeline project, and the entity responsible for maintaining its financial records, Enbridge Energy Partners completed a fixed asset impairment analysis as of August 31, 2016, in accordance with ASC Topic 360, to determine the fixed asset impairment charge. Based on the estimated liquidation value of the fixed assets, an impairment charge was recorded by North Dakota Pipeline. Based on our 37.5 percent ownership of North Dakota Pipeline, we recognized approximately $267 million of this charge in the third quarter of 2016 through “Income (loss) from equity method investments” on the accompanying consolidated statements of income. See Item 8. Financial Statements and Supplementary Data – Note 17 to the for information regarding the charge.

•	In September 2015, we acquired a 50 percent ownership interest in a joint venture, Crowley Ocean Partners, with Crowley. The joint venture owns and operates four new Jones Act product tankers, three of which are leased to MPC. We contributed a total of $141 million for the four vessels.

•

In May 2016, MPC and Crowley formed a new ocean vessel joint venture, Crowley Coastal Partners, in which MPC has a 50 percent ownership interest. MPC and Crowley each contributed their 50 percent ownership in Crowley Ocean Partners, discussed above, into Crowley Coastal Partners. In addition, we contributed $48 million in cash and Crowley contributed its 100 percent ownership interest in Crowley Blue Water Partners to Crowley Coastal Partners. Crowley Blue Water Partners is an entity that owns and operates three 750 Series ATB vessels that are leased to MPC.

•

On December 4, 2015, MPLX completed the MarkWest Merger. Each common unit of MarkWest issued and outstanding immediately prior to the effective time of the MarkWest Merger was converted into a right to receive 1.09 common units of MPLX representing limited partner interests in MPLX, plus a one-time cash payment of $6.20 per unit. We contributed approximately $1.28 billion of cash to MPLX to pay the aggregate cash consideration to MarkWest unitholders, without receiving any new equity from MPLX in exchange. At closing, we made a payment of $1.23 billion to MarkWest common unitholders and the remaining $50 million was paid in equal amounts, the first $25 million was paid in July 2016 and the second $25 million was paid in July 2017, in connection with the conversion of the MPLX Class B Units to MPLX common units. MPLX recorded impairment charges of approximately $130 million in 2016 to impair a portion of the $2.21 billion of goodwill, as adjusted, recorded in connection with the MarkWest Merger. Our financial results and operating statistics reflect the results of MarkWest from the date of the MarkWest Merger.

See Item 8. Financial Statements and Supplementary Data – Note 5 for additional information on these acquisitions and investments, Note 6 for additional information on Crowley Coastal Partners as a VIE and Note 25 for information regarding our conditional guarantee of the indebtedness of Crowley Ocean Partners and Crowley Blue Water Partners.

Share Repurchases

As part of our strategic actions to enhance shareholder value, we repurchased $2.37 billion of our common stock at an average cost per share of $53.85 during 2017. Since January 1, 2012, our board of directors has approved $13.0 billion in total share repurchase authorizations and we have repurchased a total of $9.81 billion of our common stock, leaving $3.19 billion available for repurchases as of December 31, 2017. Under these authorizations, we have acquired 246 million shares at an average cost per share of $39.82.

Liquidity

As of December 31, 2017, we had cash and cash equivalents of $3.01 billion, excluding MPLX’s cash and cash equivalents of $5 million, and no borrowings or letters of credit outstanding under our $3.5 billion bank revolving credit facilities or under our $750 million trade receivables securitization facility (“trade receivables facility”). As of December 31, 2017, eligible trade receivables supported borrowings of $750 million under the trade receivable facility. As of December 31, 2017, we do not have any commercial paper borrowings outstanding. We do not intend to have outstanding commercial paper borrowings in excess of available capacity under our bank revolving credit facilities. As of December 31, 2017, MPLX had $505 million borrowings outstanding under its $2.25 billion revolving credit agreement and $114 million available through its $500 million intercompany loan agreement with MPC.

See Item 8. Financial Statements and Supplementary Data – Note 19 for information on our new bank revolving credit facilities.

Overview of Segments

Refining & Marketing

Refining & Marketing segment income from operations depends largely on our Refining & Marketing margin and refinery throughputs. Our total refining capacity was 1,881 mbpcd, 1,817 mbpcd and 1,794 mbpcd as of December 31, 2017, 2016 and 2015, respectively.

Our Refining & Marketing 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 and the costs of products purchased for resale. 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 three percent residual fuel oil) 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 margin to differ from crack spreads based on sweet crude oil. In general, a larger sweet/sour differential will enhance our Refining & Marketing margin.

Future crude oil differentials will be dependent on a variety of market and economic factors, as well as U.S. energy policy.

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

(In millions, after-tax(a))
LLS 6-3-2-1 crack spread sensitivity(b) (per $1.00/barrel change)		$	590
Sweet/sour differential sensitivity(c) (per $1.00/barrel change)		300
LLS-WTI differential sensitivity(d) (per $1.00/barrel change)		90
Natural gas price sensitivity(e) (per $1.00/million British thermal unit change)		200

(a)	The tax rate reflects the lower corporate tax rate under the TCJA.

(b)	Weighted 40 percent Chicago and 60 percent USGC LLS 6-3-2-1 crack spreads and assumes all other differentials and pricing relationships remain unchanged.

(c)	LLS (prompt) – [delivered cost of sour crude oil: Arab Light, Kuwait, Maya, Western Canadian Select and Mars] and assumes approximately 58 percent of crude throughput are sour-based crudes.

(d)	Assumes approximately 17 percent of crude oil throughput volumes are WTI-based domestic crude oil.

(e)	This is consumption based exposure for our Refining & Marketing segment and does not include the sales exposure for our Midstream segment.

In addition to the market changes indicated by the crack spreads, the sweet/sour differential and the LLS to WTI differential, our Refining & Marketing margin is impacted by factors such as:

•	the selling prices realized for refined products;

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

•	our refinery yields;

•	the cost of products purchased for resale;

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

•	the potential impact of LCM adjustments to inventories in periods of declining prices.

Inventories are stated at the lower of cost or market. Costs of crude oil, refinery feedstocks and refined products are stated under the LIFO inventory costing method and aggregated on a consolidated basis for purposes of assessing if the cost basis of these inventories may have to be written down to market values. At December 31, 2017, market values for refined products exceed their cost basis and, therefore, there is no LCM inventory market valuation reserve at the end of the year. Based on movements of refined product prices, future inventory valuation adjustments could have a negative effect to earnings. Such losses are subject to reversal in subsequent periods if prices recover.

Refining & Marketing segment income from operations is also affected by changes in refinery direct operating costs, which include turnaround and major maintenance, depreciation and amortization and other manufacturing expenses. Changes in manufacturing costs are primarily driven by the cost of energy used by our refineries, including purchased natural gas, and the level of maintenance costs. Planned major maintenance activities, or turnarounds, requiring temporary shutdown of certain refinery operating units, are periodically performed at each refinery. The following table lists the refineries that had significant planned turnaround and major maintenance activities for each of the last three years.

Year		Refinery
2017		Catlettsburg, Galveston Bay and Garyville
2016		Galveston Bay, Garyville and Robinson
2015		Catlettsburg, Galveston Bay, Garyville and Robinson

Speedway

Our retail marketing margin for gasoline and distillate, which is the price paid by consumers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees, impacts the Speedway segment profitability. Gasoline and distillate prices are volatile and are impacted by changes in supply and demand in PADD 1 and PADD 2 where we operate. Numerous factors impact gasoline and distillate demand throughout the year, including local competition, seasonal demand fluctuations, the available wholesale supply, the level of economic activity in our marketing areas and weather conditions. The following PADD 1 and PADD 2 market demands for 2017 are based on current estimates. PADD 2 2017 gasoline demand grew for the fifth consecutive year, up 0.5 percent from last year’s record level. PADD 1 gasoline demand posted an annual gain in 2017 for the fourth consecutive year, up 0.9 percent year over year. Continuing economic growth and slowing fleet fuel efficiency gains supported gasoline demand in most of the U.S. Distillate demand in 2017 posted its first year-over-year increase in three years, up 1.9 percent from 2016. Increases in truck tonnage, which grew by 3.8 percent, the largest annual increase since 2013, and rail traffic (total carloads and intermodal) supported a 3.4 percent increase in 2017 distillate demand over 2016’s six year low. PADD 1 2017 distillate demand was up 0.8 percent from its four year low in 2016. PADD 2 2017 distillate demand is up 2.8 percent year over year. The margin on merchandise sold at our convenience stores historically has been less volatile and has contributed substantially to Speedway’s margin. More than half of Speedway’s margin was derived from merchandise sales in 2017. Speedway’s convenience stores offer a wide variety of merchandise, including prepared foods, beverages and non-food items.

Inventories are carried at the lower of cost or market value. Costs of refined products and merchandise are stated under the LIFO inventory costing method and aggregated on a consolidated basis for purposes of assessing if the cost basis of these inventories may have to be written down to market values. As of December 31, 2017, market values for refined products exceed their cost basis and, therefore, there is no LCM inventory market valuation reserve at the end of the year. Based on movements of refined product prices, future inventory valuation adjustments could have a negative effect to earnings. Such losses are subject to reversal in subsequent periods if prices recover.

Midstream

NGL and natural gas prices are volatile and are impacted by changes in fundamental supply and demand, as well as market uncertainty, availability of NGL transportation and fractionation capacity and a variety of additional factors. Our Midstream segment profitability is affected by prevailing commodity prices primarily as a result of processing or conditioning at our own or third‑party processing plants, purchasing and selling or gathering and transporting volumes of natural gas at index‑related prices and the cost of third‑party transportation and fractionation services. To the extent that commodity prices influence the level of natural gas drilling volumes by our producer customers, such prices also affect Midstream segment profitability.

The profitability of our pipeline transportation operations included in our Midstream segment, 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 distillate peaks during the summer driving season, which extends from May through September of each year, and declines during the fall and winter months. As with crude oil, other transportation alternatives and system maintenance levels influence refined product movements.

Results of Operations

The following discussion includes comments and analysis relating to our results of operations for the years ended December 31, 2017, 2016 and 2015. This discussion should be read in conjunction with Item 8. Financial Statements and Supplementary Data and is intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.

Consolidated Results of Operations

(In millions)		2017				2016				2017 vs. 2016 Variance				2015				2016 vs. 2015 Variance
Revenues and other income:
Sales and other operating revenues (including consumer excise taxes)		$	74,104			$	63,277			$	10,827			$	72,045			$	(8,768	)
Sales to related parties		629				62				567				6				56
Income (loss) from equity method investments		306				(185		)		491				88				(273		)
Net gain on disposal of assets		10				32				(22		)		7				25
Other income		320				178				142				112				66
Total revenues and other income		75,369				63,364				12,005				72,258				(8,894		)
Costs and expenses:
Cost of revenues (excludes items below)		58,760				49,170				9,590				55,583				(6,413		)
Purchases from related parties		570				509				61				308				201
Inventory market valuation adjustment		—				(370		)		370				370				(740		)
Consumer excise taxes		7,759				7,506				253				7,692				(186		)
Impairment expense		—				130				(130		)		144				(14		)
Depreciation and amortization		2,114				2,001				113				1,502				499
Selling, general and administrative expenses		1,743				1,605				138				1,576				29
Other taxes		454				435				19				391				44
Total costs and expenses		71,400				60,986				10,414				67,566				(6,580		)
Income from operations		3,969				2,378				1,591				4,692				(2,314		)
Net interest and other financial income (costs)		(625		)		(556		)		(69		)		(318		)		(238		)
Income before income taxes		3,344				1,822				1,522				4,374				(2,552		)
(Benefit) provision for income taxes		(460		)		609				(1,069		)		1,506				(897		)
Net income		3,804				1,213				2,591				2,868				(1,655		)
Less net income (loss) attributable to:
Redeemable noncontrolling interest		65				41				24				—				41
Noncontrolling interests		307				(2		)		309				16				(18		)
Net income attributable to MPC		$	3,432			$	1,174			$	2,258			$	2,852			$	(1,678	)

Net income attributable to MPC increased $2.26 billion in 2017 compared to 2016 and decreased $1.68 billion in 2016 compared to 2015. The increase in 2017 was primarily due to a tax benefit of $1.5 billion resulting from the TCJA enacted in the fourth quarter of 2017 and an increase in our Refining & Marketing segment income from operations of $964 million in 2017 compared to 2016. The decrease in 2016 was primarily due to a decrease in our Refining & Marketing segment income from operations of $2.64 billion in 2016 compared to 2015, partially offset by increases in our Midstream and Speedway segment results. Income from operations for 2016 includes a non-cash benefit of $370 million related to the reversal of the Company’s LCM inventory valuation reserve and impairment charges of $356 million related to equity method investments and $130 million related to goodwill. See Segment Results for additional information.

Sales and other operating revenues (including consumer excise taxes) increased $10.83 billion in 2017 compared to 2016 and decreased $8.77 billion in 2016 compared to 2015. The increase in 2017 was primarily due to higher averaged refined product sales prices, which increased $0.25 per gallon, and an increase in refined product sales volumes, which increased 42 mbpd. The decrease in 2016 was primarily due to lower refined product sales prices, which decreased $0.27 per gallon, and lower sales volumes, which decreased 32 mbpd.

Sales to related parties increased $567 million in 2017 compared to 2016 mainly due to sales from our Refining & Marketing segment to PFJ Southeast, a joint venture with Pilot Flying J, which commenced in the fourth quarter of 2016.

Income (loss) from equity method investments increased $491 million in 2017 compared to 2016 and decreased $273 million in 2016 compared to 2015. The increase in 2017 was primarily due to the absence of impairment charges related to equity method investments of $356 million recorded in 2016 along with increases in income from new and existing pipeline, natural gas, retail and marine affiliates. The decrease in 2016 was primarily due to the $356 million of impairment charges, partially offset by increases in income from new and existing pipeline and marine equity investments.

Net gain on disposal of assets decreased $22 million in 2017 compared to 2016 and increased $25 million in 2016 compared to 2015 primarily due to gains on the sale of certain Speedway locations in 2016.

Other income increased $142 million in 2017 compared to 2016 and increased $66 million in 2016 compared to 2015. The increase in 2017 was primarily due to increased RIN sales. The increase in 2016 was primarily due to the inclusion of a full year of MarkWest other income and increased RIN sales.

Cost of revenues increased $9.59 billion in 2017 compared to 2016 and decreased $6.41 billion in 2016 compared to 2015. The increase in 2017 was primarily due to an increase in refined product cost of sales of $9.18 billion, primarily attributable to an increase in our average crude oil costs of $9.50 per barrel. The decrease in 2016 was primarily due to a decrease in refined product cost of sales of $6.52 billion, primarily attributable to a decrease in our average crude oil costs of $7.26 per barrel, partially offset by an increase in refinery direct operating costs of $407 million, or $0.72 per barrel of total refinery throughput, which reflects significantly higher turnaround activity in 2016 as compared to a lower than normal level of turnaround costs in 2015.

Purchases from related parties increased $61 million in 2017 compared to 2016 and increased $201 million in 2016 compared to 2015. The increase in 2017 was primarily due to:

•	an increase in transportation services provided by Crowley Ocean Partners of $27 million;

•	an increase in transportation services provided by Crowley Blue Water Partners of $23 million; and

•	an increase in volumes purchased from LOOP of $12 million.

The increase in purchases from related parties in 2016 was primarily due to:

•	an increase in volumes transported by Illinois Extension Pipeline, which is a pipeline affiliate that became operational in December 2015, of $106 million;

•	an increase in transportation services provided by Crowley Ocean Partners, which was a new marine joint venture established in September 2015, of $46 million; and

•	an increase in transportation services provided by Crowley Blue Water Partners, which was a new marine joint venture established in May 2016, of $37 million.

Inventory market valuation adjustment decreased costs and expenses by $740 million in 2016 compared to 2015. The LCM inventory reserve recorded in 2015 of $370 million was reversed in 2016 due to increases in refined product prices during the second quarter of 2016 resulting in reductions to cost of revenues of $370 million in 2016.

Impairment expense decreased $130 million in 2017 compared to 2016 and decreased $14 million in 2016 compared to 2015. Impairment expense in 2016 reflects a $130 million charge recorded by MPLX to impair a portion of the $2.21 billion of goodwill recorded in connection with the MarkWest Merger. In 2015, an impairment charge of $144 million was recorded related to the cancellation of the ROUX project at our Garyville refinery. Impairments related to equity method investments were recorded to Income (loss) from equity method investments and discussed above.

Depreciation and amortization increased $499 million in 2016 compared to 2015, primarily due to the depreciation of the fair value of the assets acquired in connection with the MarkWest Merger in December 2015.

Selling, general and administrative expenses increased $138 million in 2017 compared to 2016 and increased $29 million in 2016 compared to 2015. The increase in 2017 was primarily due a $45 million increase in pension settlement expenses, increases in employee-related compensation and benefit expenses, higher corporate costs and net litigation settlement expenses of $29 million. The increase in 2016 was primarily attributable to the inclusion of MarkWest expenses, largely offset by decreases in contract services and other corporate costs.

Other taxes increased $44 million in 2016 compared to 2015, primarily due to the inclusion of MarkWest’s taxes.

Net interest and other financial costs increased $69 million in 2017 compared to 2016 and increased $238 million in 2016 compared to 2015. The increase in 2017 reflects the MPLX senior notes issued in February 2017, partially offset by decreased borrowings on the MPC term loan agreement. The increase in 2016 was primarily due to interest on the debt assumed in the MarkWest Merger. We capitalized interest of $55 million in 2017, $63 million in 2016 and $37 million in 2015. See Item 8. Financial Statements and Supplementary Data – Note 19 for further details.

Provision for income taxes decreased $1.07 billion in 2017 compared to 2016 and decreased $897 million in 2016 compared to 2015. The TCJA was signed into law on December 22, 2017 and provided several key changes to U.S. tax law, including a federal corporate tax rate of 21 percent replacing the current rate applicable to MPC of 35 percent. MPC was required to calculate the effect of the TCJA on its deferred tax balances as of the enactment date. The effect of the federal corporate income tax rate change reduced net deferred tax liabilities by $1.5 billion in 2017. This benefit was partially offset by an increase in our income before income taxes, which increased $1.52 billion in 2017 compared to 2016. The decrease in 2016 was primarily due to a decrease in our income before income taxes of $2.55 billion compared to 2015. The TCJA impacted our effective tax rate by 45 percentage points in 2017, decreasing our effective tax rate from 31 percent to (14) percent. The effective tax rate, excluding the TCJA, of 31 percent in 2017 and the effective tax rates of 33 percent and 34 percent in 2016 and 2015, respectively, are slightly 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. See Item 8. Financial Statements and Supplementary Data – Note 12 for further details.

Segment Results

Non-GAAP Financial Measures

Management uses certain financial measures to evaluate our operating performance that are calculated and presented on the basis of methodologies other than in accordance with GAAP (“non-GAAP”). We believe these non-GAAP financial measures are useful to investors and analysts to assess our ongoing financial performance because, when reconciled to its most comparable GAAP financial measure, they provide improved comparability between periods through the exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. These measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP, and our calculations thereof may not be comparable to similarly titled measures reported by other companies. The non-GAAP financial measures we use are as follows:

Refining & Marketing Margin

Refining margin is defined as sales revenue less the cost of refinery inputs and purchased products and excludes the LCM inventory market adjustment.

Speedway Gasoline and Distillate Margin

Speedway gasoline and distillate margin is defined as the price paid by consumers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees and excluding any LCM inventory market adjustment.

Speedway Merchandise Margin

Speedway merchandise margin is defined as the price paid by consumers less the cost of merchandise.

See the reconciliations of these non-GAAP measures in the following segment discussions.

Refining & Marketing

Key Financial and Operating Data		2017				2016				2015
Refining & Marketing revenues (in millions)		$	64,691			$	53,817			$	64,198
Refining & Marketing intersegment sales to Speedway (in millions)		$	11,309			$	10,589			$	12,024
Refining & Marketing intersegment fees paid to Midstream (in millions)		$	1,443			$	1,262			$	930
Refining & Marketing income from operations (in millions)(a)		$	2,321			$	1,357			$	3,997
Consumer excise taxes included in both revenues and costs (in millions)		$	7,759			$	7,506			$	7,692
Refined product sales volumes (thousands of barrels per day)(b)		2,301				2,259				2,289
Refined product intersegment sales volumes to Speedway (millions of gallons)		5,611				5,957				5,873
Refined product sales destined for export (thousands of barrels per day)		297				296				319
Average refined product sales prices (dollars per gallon)		$	1.72			$	1.47			$	1.74
Average refined product intersegment sales prices to Speedway (dollars per gallon)		$	2.01			$	1.77			$	2.04
Refinery throughputs (thousands of barrels per day):
Crude oil refined		1,765				1,699				1,711
Other charge and blendstocks		179				151				177
Total		1,944				1,850				1,888
Sour crude oil throughput percent		59				60				55
WTI-priced crude oil throughput percent		21				19				20
Refining & Marketing margin (dollars per barrel)(c)		$	12.60			$	11.16			$	15.16
Refinery direct operating costs (dollars per barrel):(d)
Planned turnaround and major maintenance		$	1.72			$	1.83			$	1.13
Depreciation and amortization		1.43				1.47				1.39
Other manufacturing(e)		4.07				4.09				4.15
Total		$	7.22			$	7.39			$	6.67

(a)

We revised our operating segment presentation in the first quarter of 2017 in connection with the contribution of certain terminal, pipeline and storage assets to MPLX. The operating results for these assets, which were previously included in the Refining & Marketing segment, are now included in the Midstream segment. Comparable prior period information has been recast to reflect our revised presentation. The results for the pipeline and storage assets were recast effective January 1, 2015, and the results for the terminal assets were recast effective April 1, 2016. Prior to these dates these assets were not considered businesses and therefore there are no financial results from which to recast segment results.

(b)	Includes intersegment sales and sales destined for export.

(c)	Sales revenue less cost of refinery inputs and purchased products, divided by total refinery throughputs. Excludes the LCM inventory valuation adjustments.

(d)	Per barrel of total refinery throughputs.

(e)	Includes utilities, labor, routine maintenance and other operating costs.

Reconciliation of Refining & Marketing margin to Refining & Marketing income from operations (in millions)			2017				2016				2015
Refining & Marketing income from operations			$	2,321			$	1,357			$	3,997
Plus (Less):
Refinery direct operating costs(a)			4,113				4,007				3,640
Refinery depreciation and amortization			1,013				994				955
Other:
Operating expenses(a)(b)			1,924				1,835				1,742
Segment (income) expense, net(a)			(499		)		(360		)		(325		)
Depreciation and amortization			69				69				97
Inventory market valuation adjustment			—				(345		)		345
Refining & Marketing margin(c)			$	8,941			$	7,557			$	10,451

(a)	Excludes depreciation and amortization.

(b)	Includes fees paid to MPLX for various midstream services, which includes marine and pipeline transportation and terminal and storage services, but excludes costs related to delivery of crude and feedstocks to our refineries.

(c)	Sales revenue less cost of refinery inputs and purchased products, excluding any LCM inventory market adjustment.

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

Benchmark prices (dollars per gallon)		2017				2016				2015
Chicago spot unleaded regular gasoline		$	1.58			$	1.33			$	1.60
Chicago spot ultra-low sulfur diesel		1.64				1.34				1.62
USGC spot unleaded regular gasoline		1.60				1.33				1.55
USGC spot ultra-low sulfur diesel		1.62				1.32				1.58
Market Indicators (dollars per barrel)
Chicago LLS 6-3-2-1 crack spread(a)(b)		$	9.77			$	7.19			$	10.67
USGC LLS 6-3-2-1 crack spread(a)		9.89				6.80				9.11
Blended 6-3-2-1 crack spread(a)(c)		9.84				6.96				9.70
LLS		54.00				45.01				52.35
WTI		50.85				43.47				48.76
LLS – WTI crude oil differential(a)		3.15				1.55				3.59
Sweet/Sour crude oil differential(a)(d)		5.94				6.52				6.10

The following table includes the impacts of changes in the market indicators above on Refining & Marketing segment results.

Market Indicators impact on Refining & Marketing segment income		2017 vs. 2016 Variance								2016 vs. 2015 Variance
	(dollars per barrel)				(in millions)				(dollars per barrel)				(in millions)
Chicago LLS 6-3-2-1 crack spread(a)(b)		$	2.58			$	825			$	(3.48	)		$	(846	)
USGC LLS 6-3-2-1 crack spread(a)		3.09				1,446				(2.31		)		(1,129		)
LLS – WTI crude oil differential(a)		1.60				249				(2.04		)		(260		)
Sweet/Sour crude oil differential(a)(d)		(0.58		)		(189		)		0.42				334
Total						$	2,331							$	(1,901	)

(a)	All spreads and differentials are measured against prompt LLS.

(b)	Calculation utilizes USGC three percent residual fuel oil price as a proxy for Chicago three percent residual fuel oil price.

(c)	Blended Chicago/USGC crack spread is 40/60 percent in 2017, 40/60 percent in 2016 and 38/62 percent in 2015 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 revenues increased $10.87 billion in 2017 compared to 2016 and decreased $10.38 billion in 2016 compared to 2015. The increase in 2017 was primarily due to higher refined product sales prices and volumes. The decrease in 2016 was primarily due to lower refined product sales prices and volumes.

Refining & Marketing intersegment sales to our Speedway segment increased $720 million in 2017 compared to 2016 and decreased $1.44 billion in 2016 compared to 2015. The increase in 2017 was primarily due to an increase in average refined product sales prices, partially offset by a decrease in sales volumes. The decrease in 2016 was primarily due to a decrease in average refined product sales prices, partially offset by an increase in refined product sales volumes.

Refining & Marketing intersegment fees paid to our Midstream segment increased $181 million in 2017 compared to 2016 and $332 million in 2016 compared to 2015 due the dropdown of certain assets to MPLX. Certain segment information has been recast to reflect this activity as noted in the “Corporate Overview” section. After the February 1, 2018 dropdown of assets to MPLX, as noted in the “Corporate Overview - Strategic Actions to Enhance Shareholder Value” section, Refining & Marketing intersegment fees paid to MPLX will increase for fuels distribution services and refinery logistics assets and Refining & Marketing direct operating costs will decrease. These changes will not impact Refining & Marketing margin but will reduce Refining & Marketing segment results. There will be a corresponding increase in the Midstream segment results.

Refining & Marketing segment income from operations increased $964 million in 2017 compared to 2016 and decreased $2.64 billion in 2016 compared to 2015. Segment income in 2016 includes a $345 million non-cash benefit related to the Company’s LCM inventory reserve. Excluding the LCM inventory benefit, the increase in segment results for 2017 primarily resulted from higher LLS crack spreads in both the U.S. Gulf Coast and Chicago markets. The LLS blended crack spread for 2017 increased to $9.84 per barrel from $6.96 per barrel in 2016. These favorable effects were partially offset by less favorable product price realizations as compared to the spot market prices used in the LLS blended crack spread. Segment income in 2015 includes a

$345 million non-cash charge related to the Company’s LCM inventory reserve, which was reversed in 2016. The favorable LCM inventory adjustment variance was more than offset by the unfavorable effects of lower crack spreads and higher direct operating costs due to refinery turnarounds.

Based on changes in the market indicators shown above and our refinery throughputs, we estimate a positive impact of $2.33 billion for 2017 compared to 2016 and a negative impact of $1.90 billion for 2016 compared to 2015 on Refining & Marketing segment income from operations. The market indicators use spot market values and an estimated mix of crude purchases and product sales. Differences in our results compared to these market indicators, including product price realizations, the mix of crudes purchased and their costs, the effects of LCM inventory valuation adjustments, the effects of market structure on our crude oil acquisition prices, and other items like refinery yields and other feedstock variances, had estimated negative impacts on Refining & Marketing segment income from operations of $1.35 billion in 2017 compared to 2016 and $304 million in 2016 compared to 2015. The significant elements of the negative impact in both years were unfavorable product price realizations and unfavorable crude acquisition costs relative to the market indicators. In 2016, these negative impacts were partially offset by the reversal of the Company’s LCM inventory valuation reserve that was recorded in 2015.

The cost of inventories of crude oil and refinery feedstocks, refined products and merchandise is determined primarily under the LIFO method. In the second quarter of 2016, we had recognized the effects of an interim liquidation of our refined products inventories which we did not expect to reinstate by year end resulting in a pre-tax charge of approximately $54 million to income. Based on year end refined product inventories, which were higher than inventories at the beginning of the year, we had a build in refined product inventories for 2016. Therefore, we recognized the effects of this annual build in our refined products in the fourth quarter of 2016 which had the effect of reversing the second quarter charge. In the fourth quarter of 2015, we recorded a LIFO charge of $45 million as a result of annual decreased levels in refined products and crude inventory volumes. For the full year, we recognized a LIFO charge of $7 million in 2017, $2 million in 2016 and $78 million in 2015.

Refinery direct operating costs decreased $0.17 per barrel in 2017 compared to 2016 and increased $0.72 per barrel in 2016 compared to 2015. The decrease in 2017 includes an $0.11 per barrel decrease in planned turnaround and major maintenance costs resulting from lower turnaround activity at our Garyville and Robinson refineries partially offset by higher activity at our Catlettsburg refinery. The change in 2016 compared to 2015 includes an increase in planned turnaround and major maintenance costs of $0.70 per barrel as well as a decrease in other manufacturing costs of $0.06 per barrel. The increase in planned turnaround and major maintenance costs for 2016 are primarily attributable to higher turnaround activity at the Galveston Bay, Garyville and Robinson refineries and a lower than normal schedule of turnaround activity in 2015, partially offset by a decrease in turnaround activity at the Catlettsburg refinery. In 2016, the decrease in other manufacturing costs was primarily due to lower routine maintenance costs, general and administrative expenses and waste costs.

We purchase RINs to satisfy a portion of our RFS2 compliance. Our expenses associated with purchased RINs were $457 million in 2017, $288 million in 2016 and $212 million in 2015. The increase in 2017 was primarily due to higher weighted average RIN costs driven by higher market prices for purchased RINs and increases in the number of RINs purchased. In 2015, we recorded a $46 million charge to recognize increased estimated costs for compliance based on the renewable fuel standards for 2014 and 2015 proposed by the EPA in May 2015 and finalized in November 2015, particularly those for biomass-based diesel and advanced biofuels. Excluding this charge, the increase in 2016 was primarily due to the effect of increased purchases of biomass-based diesel RINs at increased prices.

Speedway

Key Financial and Operating Data		2017				2016				2015
Speedway revenues (in millions)		$	19,033			$	18,286			$	19,693
Speedway income from operations (in millions)		$	732			$	734			$	673
Convenience stores at period-end		2,744				2,733				2,766
Gasoline & distillate sales (millions of gallons)		5,799				6,094				6,038
Average gasoline & distillate sales prices (dollars per gallon)		$	2.34			$	2.09			$	2.36
Gasoline & distillate margin (dollars per gallon)(a)		$	0.1738			$	0.1656			$	0.1823
Same store gasoline sales volume (period over period)		(1.3		)%		(0.4		)%		(0.3		)%
Merchandise sales (in millions)		$	4,893			$	5,007			$	4,879
Same store merchandise sales (period over period)(b)		1.2		%		3.2		%		4.1		%
Merchandise margin (in millions)(c)		$	1,402			$	1,435			$	1,368
Merchandise margin percent		28.7		%		28.7		%		28.0		%

(a)	The price paid by consumers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees, divided by gasoline and distillate sales volume. Excludes LCM inventory valuation adjustments.

(b)	Excludes cigarettes.

(c)	The price paid by the consumers less the cost of merchandise.

Reconciliation of Speedway total margin to Speedway income from operations (in millions)			2017				2016				2015
Speedway income from operations			$	732			$	734			$	673
Plus (Less):
Operating, selling, general and administrative expenses(a)			1,530				1,554				1,573
Depreciation and amortization(a)			275				273				254
Income from equity method investments			(69		)		(5		)		—
Net gain on disposal of assets			(14		)		(30		)		(1		)
Other income(a)			(14		)		(18		)		(17		)
Inventory market valuation adjustment			—				(25		)		25
Speedway total margin			$	2,440			$	2,483			$	2,507
Speedway total margin:(a)
Gasoline and distillate margin(b)			$	1,008			$	1,009			$	1,101
Merchandise margin(c)			1,402				1,435				1,368
Other margin			30				39				38
Speedway total margin			$	2,440			$	2,483			$	2,507

(a)	2017 margin and expenses do not reflect any results from the 41 travel centers contributed to PFJ Southeast, whereas they are reflected in the 2016 and 2015 information. Our share of the net results from the joint venture is reflected in income from equity method investments.

(b)	The price paid by consumers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees and excluding any LCM inventory market adjustment.

(c)	The price paid by the consumers less the cost of merchandise.

Speedway segment revenues increased $747 million in 2017 compared to 2016 and decreased $1.41 billion in 2016 compared to 2015. The increase in 2017 was due to an increase in gasoline and distillate sales of $860 million partially offset by a decrease in merchandise sales of $114 million. Average gasoline and distillate selling prices increased $0.25 per gallon which were partially offset by a decrease in sales volumes in 2017 compared to 2016. The decreases in gasoline and distillate sales volumes and merchandise sales are primarily attributable to the contribution of 41 travel centers to PJF Southeast in fourth quarter of 2016. The decrease in 2016 was due to a decrease in gasoline and distillate sales of $1.52 billion primarily due to a decrease in gasoline and distillate selling prices of $0.27 per gallon.

Speedway segment income from operations decreased $2 million in 2017 compared to 2016 and increased $61 million in 2016 compared to 2015. Segment income in 2016 includes a $25 million non-cash benefit related to the reversal of the Company’s LCM inventory reserve, which was recorded in 2015. Excluding the LCM inventory benefit recognized in 2016, the increase in segment results for 2017 was primarily due to a full year of contributions from Speedway’s travel center joint venture formed

in the fourth quarter 2016 and lower operating expense, partially offset by lower merchandise margin and lower gains from asset sales. In 2016, in addition to the favorable LCM inventory adjustment variance, the remaining increase during 2016 was primarily due to higher merchandise margin of $67 million and gains from asset sales, partially offset by lower gasoline and distillate margin of $91 million, or $0.0167 per gallon. The increase in merchandise margin in 2016 was related to a combination of higher merchandise and food sales and improved margins.

Midstream

Key Financial and Operating Data		2017				2016				2015
Midstream third party revenues (in millions)		$	2,322			$	1,828			$	187
Midstream intersegment sales to Refining & Marketing (in millions)		1,443				1,262				930
Total Midstream revenues (in millions)		$	3,765			$	3,090			$	1,117
Midstream income from operations (in millions)(a)		$	1,339			$	1,048			$	463
Crude oil and refined product pipeline throughputs (mbpd)(b)		3,377				2,948				2,829
Average crude oil and refined products tariff rates (dollars per barrel)(c)		$	0.61			$	0.61			$	0.62
Terminal throughput (mbpd)(d)		1,477				1,505				—
Gathering system throughput (MMcf/d)(e)		3,608				3,275				3,075
Natural gas processed (MMcf/d)(e)		6,460				5,761				5,468
C2 (ethane) + NGLs fractionated (mbpd)(e)		394				335				307
Benchmark Prices
Natural Gas NYMEX HH ($ per MMBtu)(e)		$	3.02			$	2.55			$	2.04
C2 + NGL Pricing ($ per gallon)(e)(f)		$	0.66			$	0.47			$	0.40

(a)

We revised our operating segment presentation in the first quarter of 2017 in connection with the contribution of certain terminal, pipeline and storage assets to MPLX. The operating results for these assets, which were previously included in the Refining & Marketing segment, are now included in the Midstream segment. Comparable prior period information has been recast to reflect our revised presentation. The results for the pipeline and storage assets were recast effective January 1, 2015, and the results for the terminal assets were recast effective April 1, 2016. Prior to these dates these assets were not considered businesses and therefore there are no financial results from which to recast segment results.

(b)	On owned common-carrier pipelines, excluding equity method investments.

(c)	Average tariff rates calculated using pipeline transportation revenues divided by pipeline throughput barrels.

(d)	Includes the results of the terminal assets beginning on April 1, 2016, the date the assets became a business.

(e)	Beginning December 4, 2015, which was the effective date of the MarkWest Merger.

(f)	C2 + NGL pricing based on Mont Belvieu prices assuming an NGL barrel of approximately 35 percent ethane, 35 percent propane, six percent Iso-Butane, 12 percent normal butane and 12 percent natural gasoline.

Midstream segment revenue and income from operations increased $675 million and $291 million in 2017 compared to 2016, respectively, and $1.97 billion and $585 million in 2016 compared to 2015, respectively. The increases in 2017 were primarily due to increased revenue from higher natural gas and NGL gathering, processing and fractionation volumes and changes in natural gas and NGL prices. Segment results also benefited from the first quarter 2017 acquisitions of the Ozark pipeline and our ownership interest in the Bakken Pipeline system. The comparison for 2017 and 2016 also reflects the absence of any revenues for the terminal services provided to the Refining & Marketing segment in the first quarter of 2016 versus the inclusion of revenues for these services in the first quarter of 2017. These assets were not considered a business prior to April 1, 2016, and therefore, no financial results for these assets were available from which to recast first quarter 2016 Midstream segment results. The increases in 2016 were primarily due to the inclusion of MarkWest’s operating results in Midstream segment income following the merger with MPLX from the December 4, 2015 merger date. Midstream income from operations also increased due to earnings from new and existing pipeline and marine equity investments.

After the February 1, 2018 dropdown of assets to MPLX, as noted in the “Corporate Overview - Strategic Actions to Enhance Shareholder Value” section, intersegment sales to our Refining & Marketing segment will increase for fees charged for fuels distribution services and refinery logistics assets.

Corporate and Other

Key Financial Information (in millions)		2017				2016				2015
Items not allocated to segments:
Corporate and other unallocated items(a)		$	(365	)		$	(268	)		$	(293	)
Pension settlement expenses(b)		$	(52	)		$	(7	)		$	(4	)
Litigation		$	(29	)		$	—			$	—
Impairment(c)		$	23			$	(486	)		$	(144	)

(a)	Corporate and other unallocated items consists primarily of MPC’s corporate administrative expenses and costs related to certain non-operating assets, except for corporate overhead expenses attributable to MPLX, which are included in the Midstream segment. Corporate overhead expenses are not allocated to the Refining & Marketing and Speedway segments.

(b)	See Item 8. Financial Statements and Supplementary Data – Note 22.

(c)	See Item 8. Financial Statements and Supplementary Data – Notes 16 and 17.

Corporate and other unallocated expenses increased $97 million in 2017 compared to 2016 and decreased $25 million in 2016 compared to 2015. The increase in 2017 is largely due to higher unallocated corporate costs and increases in employee-related expenses and corporate costs. The decrease in 2016 is primarily due to increased allocations of corporate costs to the segments.

Other unallocated items in 2017 include an $86 million litigation charge, a litigation benefit of $57 million and a benefit of $23 million related to MPC’s share of gains from the sale of assets remaining from the canceled Sandpiper pipeline project. Other unallocated items in 2016 include impairment charges of $486 million resulting from non-cash charges of $267 million related to the indefinite deferral of the Sandpiper pipeline project, $130 million related to the goodwill recognized in connection with the MarkWest Merger and $89 million related to an MPLX equity method investment. Other unallocated items in 2015 include an impairment charge of $144 million recorded in the third quarter of 2015 related to the cancellation of the ROUX project at our Garyville refinery. See Item 8. Financial Statements and Supplementary Data – Note 17 for additional information on the impairment charges.

We recorded pretax pension settlement expenses of $52 million in 2017, $7 million in 2016 and $4 million in 2015 from the recognition of certain deferred pension plan losses in connection with significant settlements of our pension obligations during these years.

Liquidity and Capital Resources

Cash Flows

Our cash and cash equivalents balance was $3.01 billion at December 31, 2017 compared to $887 million at December 31, 2016. Net cash provided by (used in) operating activities, investing activities and financing activities for the past three years is presented in the following table.

(In millions)		2017				2016				2015
Net cash provided by (used in):
Operating activities		$	6,609			$	3,995			$	4,073
Investing activities		(3,394		)		(2,941		)		(3,441		)
Financing activities		(1,091		)		(1,294		)		(999		)
Total		$	2,124			$	(240	)		$	(367	)

Net cash provided by operating activities increased $2.61 billion in 2017 compared to 2016, primarily due to increased operating results and favorable changes in working capital of $1.74 billion compared to 2016. Net cash provided by operating activities decreased $78 million in 2016 compared to 2015, primarily due to decreased operating results, partially offset by favorable changes in working capital of $1.22 billion compared to 2015. The above changes in working capital exclude changes in short-term debt.

For 2017, changes in working capital were a net $1.94 billion source of cash, primarily due to an increase in accounts payable and accrued liabilities and a decrease in inventories, partially offset by an increase in current receivables. Changes from December 31, 2016 to December 31, 2017 per the consolidated balance sheets, excluding the impact of acquisitions, were as follows:

•	Accounts payable increased $2.70 billion from year-end 2016, primarily due to higher crude oil payable volumes and prices.

•	Current receivables increased $1.08 billion from year-end 2016, primarily due to higher crude oil and refined product receivable prices and volumes.

•	Inventories decreased $106 million from year-end 2016, primarily due to lower crude oil inventory volumes.

For 2016, changes in working capital were a net $200 million source of cash, primarily due to an increase in accounts payable and accrued liabilities, partially offset by increases in current receivables and inventories. Accounts payable increased $850 million from year-end 2015, primarily due to higher crude oil payable prices; current receivables increased $690 million from year-end 2015, primarily due to higher refined product and crude oil receivable prices; and inventories increased $61 million from year-end 2015, excluding the change in the Company’s inventory valuation reserve of $370 million, primarily due to higher crude oil and refined product inventory volumes.

For 2015, changes in working capital were a net $1.02 billion use of cash, primarily due to a decrease in accounts payable and accrued liabilities, partially offset by decreases in current receivables and inventories. Accounts payable decreased $1.92 billion from year-end 2014, primarily due to lower crude oil payable prices and volumes; current receivables decreased $1.13 billion from year-end 2014, primarily due to lower refined product and crude oil receivable prices and lower crude oil receivable volumes; and inventories decreased $47 million from year-end 2014, excluding a $370 million LCM inventory valuation charge, primarily due to lower refined product and crude oil inventory volumes.

Cash flows used in investing activities increased $453 million in 2017 compared to 2016 and decreased $500 million in 2016 compared to 2015.

•	Cash used for additions to property, plant and equipment was primarily due to spending in our Midstream segment. See discussion of capital expenditures and investments under the “Capital Spending” section.

•

Net investments were a use of cash of $740 million in 2017 compared to $262 million in 2016 and $327 million in 2015. The change in 2017 compared to 2016 was primarily due to MPLX’s investment of $500 million for a partial interest in the Bakken Pipeline system. The change in 2016 compared to 2015 was primarily due to decreases in contributions to the SAX pipeline project of $114 million, the Sandpiper pipeline project of $57 million and Crowley Ocean Partners of $38 million, partially offset by increases in contributions to Crowley Coastal Partners of $82 million and MPLX equity method investments of $74 million.

•	Cash provided by disposal of assets totaled $79 million, $101 million and $21 million in 2017, 2016 and 2015, respectively. Cash provided in 2016 was primarily due the sale of certain Speedway locations in the normal course of business.

The consolidated statements of cash flows exclude changes to the consolidated balance sheets that did not affect cash. A reconciliation of additions to property, plant and equipment to total capital expenditures and investments follows for each of the last three years.

(In millions)		2017				2016				2015
Additions to property, plant and equipment per consolidated statements of cash flows		$	2,732			$	2,892			$	1,998
Non-cash additions to property, plant and equipment		—				—				5
Asset retirement expenditures		2				6				1
Increase (decrease) in capital accruals		67				(127		)		94
Total capital expenditures		2,801				2,771				2,098
Acquisitions(a)		250				10				13,854
Investments in equity method investees(b)		805				288				331
Total capital expenditures and investments		$	3,856			$	3,069			$	16,283

(a)	The 2017 acquisitions include the Ozark pipeline. The 2016 acquisitions include purchase price adjustments related to the MarkWest Merger. The 2015 acquisitions include the MarkWest Merger. The acquisition numbers above include property, plant and equipment, equity investments, intangibles and goodwill. See Item 8. Financial Statements and Supplementary Data – Note 5 for further details.

(b)	The 2017 investments in equity method investees includes the investment of $500 million in MarEn Bakken related to the Bakken Pipeline system. The 2016 amount excludes an adjustment of $143 million to the fair value of equity method investments acquired in connection with the MarkWest Merger.

Financing activities were uses of cash of $1.09 billion in 2017, $1.29 billion in 2016 and $999 million in 2015.

•

Long-term debt borrowings and repayments, including debt issuance costs, were a net $2.24 billion source of cash in 2017 compared to a $1.42 billion use of cash in 2016 and a $746 million source of cash in 2015. During 2017 MPLX issued $2.25 billion of senior notes, borrowed $505 million under the MPLX bank revolving credit agreement, repaid the remaining $250 million under the MPLX term loan agreement and we repaid the remaining $200 million balance

under the MPC term loan agreement. During 2016, MPLX used proceeds from its issuance of the MPLX Preferred Units to repay amounts outstanding under the MPLX bank revolving credit facility and MPC chose to prepay $500 million under its term loan. See Item 8. Financial Statements and Supplementary Data – Note 19 for additional information on our long-term debt.

•	Cash proceeds from the issuance of MPLX common units were $473 million in 2017 and $776 million in 2016. Cash proceeds from the issuance of MPLX Preferred Units was $984 million in 2016. See Item 8. Financial Statements and Supplementary Data – Note 4 for further discussion of MPLX.

•	Cash used in common stock repurchases totaled $2.37 billion in 2017, $197 million in 2016 and $965 million in 2015 associated with the share repurchase plans authorized by our board of directors. See the “Capital Requirements” section for further discussion of our stock repurchases.

•	Cash used in dividend payments totaled $773 million in 2017, $719 million in 2016 and $613 million in 2015. The increases were primarily due to increases in our base dividend, partially offset by decreases in the number of outstanding shares of our common stock as a result of share repurchases. Dividends per share were $1.52 in 2017, $1.36 in 2016 and $1.14 in 2015.

•	Cash used in financing activities in all three years included a portion of the payments to the seller of the Galveston Bay refinery under the contingent earnout provisions of the purchase and sale agreement.

Derivative Instruments

See Item 7A. Quantitative and Qualitative Disclosures about Market Risk for a discussion of derivative instruments and associated market risk.

Capital Resources

Our liquidity totaled $7.3 billion at December 31, 2017 consisting of:

		December 31, 2017
(In millions)		Total Capacity				Outstanding Borrowings				Available Capacity
Bank revolving credit facility(a)		$	2,500			$	—			$	2,500
364 day bank revolving credit facility		1,000				—				1,000
Trade receivables facility		750				—				750
Total		$	4,250			$	—			$	4,250
Cash and cash equivalents(b)										3,006
Total liquidity										$	7,256

(a)	Excludes MPLX’s $2.25 billion bank revolving credit facility, which had $505 million borrowings and $3 million of letters of credit outstanding as of December 31, 2017.

(b)	Excludes $5 million of MPLX cash and cash equivalents.

Because of the alternatives available to us, including internally generated cash flow and access to capital markets, including a commercial paper program, 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.

As discussed in the “Strategic Actions to Enhance Shareholder Value” section in the Corporate Overview, MPLX financed the dropdown transactions in the aggregate with debt and equity in approximately equal proportions. The equity financing was funded through MPLX common units and general partner units issued to us. These actions were designed to provide a clear valuation of our midstream platform and to provide an ongoing return of capital to shareholders in a manner consistent with maintaining an investment-grade credit profile. In connection with the final dropdown, on January 2, 2018, MPLX entered into a $4.1 billion 364-day term-loan facility to fund the cash portion of the dropdown consideration.

On February 8, 2018, MPLX issued $5.5 billion in aggregate principal amount of senior notes in a public offering, consisting of $500 million aggregate principal amount of 3.375 percent unsecured senior notes due March 2023, $1.25 billion aggregate principal amount of 4.000 percent unsecured senior notes due March 2028, $1.75 billion aggregate principal amount of 4.500 percent unsecured senior notes due April 2038, $1.5 billion aggregate principal amount of 4.700 percent unsecured senior notes due April 2048, and $500 million aggregate principal amount of 4.900 percent unsecured senior notes due April 2058.

On February 8, 2018, $4.1 billion of the net proceeds were used to repay the 364-day term-loan facility, which was drawn on February 1, 2018 to fund the cash portion of the consideration MPLX paid MPC for the dropdown of assets on February 1,

2018. The remaining proceeds will be used to repay outstanding borrowings under MPLX’s revolving credit facility and intercompany loan agreement with us and for general partnership purposes.

Commercial Paper – We established a commercial paper program that allows us to have a maximum of $2 billion in commercial paper outstanding, with maturities up to 397 days from the date of issuance. We do not intend to have outstanding commercial paper borrowings in excess of available capacity under our bank revolving credit facilities. At December 31, 2017, we had no amounts outstanding under the commercial paper program.

MPC Bank Revolving Credit Facility – On July 21, 2017, we entered into credit agreements with a syndicate of lenders to replace our previous $2.5 billion four-year revolving credit facility due in 2020 and our previous $1 billion 364-day credit agreement, dated as of July 20, 2016, which expired on July 19, 2017. The new agreements provide for a five-year $2.5 billion bank revolving credit agreement (“MPC five-year credit agreement”) maturing on July 21, 2022 and a 364-day $1 billion bank revolving credit agreement (“MPC 364-day credit agreement” and together with the MPC five-year credit agreement, the “MPC credit agreements”) maturing on July 20, 2018. There were no borrowings or letters of credit outstanding under these facilities at December 31, 2017.

Trade receivables facility – Our trade receivables facility has a borrowing capacity of $750 million (depending on the amount of our eligible domestic trade accounts receivable) and a maturity date of July 19, 2019. As of December 31, 2017, eligible trade receivables supported borrowings of $750 million. There were no borrowings outstanding at December 31, 2017. Availability under our trade receivables facility is primarily a function of refined product selling prices.

MPLX Credit Agreement – On July 21, 2017, MPLX entered into a credit agreement with a syndicate of lenders to replace the existing $2 billion five-year bank revolving credit facility with a $2.25 billion five-year bank revolving credit facility with a maturity date of July 21, 2022 (“MPLX credit agreement”). At December 31, 2017, MPLX had $505 million borrowings and $3 million of letters of credit outstanding under the bank revolving credit facility, resulting in total unused loan availability of approximately $1.74 billion.

See Item 8. Financial Statements and Supplementary Data – Note 19 for further discussion of our debt.

The MPC credit agreements contain representations and warranties, affirmative and negative covenants and events of default that we consider usual and customary for agreements of these types. The financial covenant included in the MPC credit agreements requires us to maintain, as of the last day of each fiscal quarter, a ratio of Consolidated Net Debt to Total Capitalization (as defined in the MPC credit agreements) of no greater than 0.65 to 1.00. Other covenants restrict us and/or certain of our subsidiaries from incurring debt, creating liens on assets and entering into transactions with affiliates. As of December 31, 2017, we were in compliance with this debt covenant with a ratio of Consolidated Net Debt to Total Capitalization of 0.20 to 1.00, as well as the other covenants contained in the MPC credit agreements.

The MPLX credit agreement contains certain representations and warranties, affirmative and restrictive covenants and events of default that we consider to be usual and customary for an agreement of this type. The MPLX credit agreement includes a financial covenant that requires MPLX to maintain a ratio of Consolidated Total Debt as of the end of each fiscal quarter to Consolidated EBITDA (both as defined in the MPLX credit agreement) for the prior four fiscal quarters of no greater than 5.0 to 1.0 (or 5.5 to 1.0 for up to two fiscal quarters following certain acquisitions). Consolidated EBITDA is subject to adjustments for certain acquisitions completed and capital projects undertaken during the relevant period. Other covenants restrict MPLX and/or certain of its subsidiaries from incurring debt, creating liens on assets and entering into transactions with affiliates. As of December 31, 2017, MPLX was in compliance with the covenants contained in the MPLX credit agreement, including a ratio of Consolidated Total Debt to Consolidated EBITDA of 3.23 to 1.0.

As disclosed in Item 8. Financial Statements and Supplementary Data – Note 3 to our audited consolidated financial statements, we expect the adoption of the lease accounting standard update to result in the recognition of a significant lease obligation. The MPC bank revolving credit facility and the MPLX credit agreement both contain provisions under which the effects of the new accounting standard are not recognized for purposes of financial covenant calculations.

Our intention is to maintain an investment-grade credit profile. As of January 31, 2018, the credit ratings on our and MPLX’s senior unsecured debt were at or above investment-grade level as follows.

Company	Rating Agency	Rating
MPC	Moody’s	Baa2 (stable outlook)
	Standard & Poor’s	BBB (stable outlook)
	Fitch	BBB (stable outlook)
MPLX	Moody’s	Baa3 (stable outlook)
	Standard & Poor’s	BBB (stable outlook)
	Fitch	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.

None of the MPC credit agreements, the MPLX credit agreement or our trade receivables 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 would increase the applicable interest rates, yields and other fees payable under the revolving credit facility and our trade receivables 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 facility, impact our ability to purchase crude oil on an unsecured basis and could result in us having to post letters of credit under existing transportation services agreements.

Capital Requirements

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

During the second quarter of 2017, we paid BP $131 million for the fourth year’s contingent earnout related to our 2013 acquisition of the Galveston Bay refinery. This second quarter payment represents the final payment under the agreement. See Item 8. Financial Statements and Supplementary Data – Note 17.

In 2017, we made pension contributions totaling $128 million. We have no required funding for 2018, but may make voluntary contributions at our discretion.

On January 29, 2018, we announced our board of directors approved a $0.46 per share dividend, payable March 12, 2018 to shareholders of record at the close of business on February 21, 2018.

On February 5, 2018, we announced our intent to redeem all of the $600 million outstanding aggregate principal amount of our 2.700 percent senior notes due on December 14, 2018. The 2018 senior notes will be redeemed from available cash on March 15, 2018, at a price equal to par plus a make whole premium, plus accrued and unpaid interest. The make whole premium will be calculated based on the market yield of the applicable treasury issue as of the redemption date as determined in accordance with the indenture governing the 2018 senior notes. Based on current treasury yields, we expect the make whole premium on the 2018 senior notes, excluding accrued and unpaid interest, to be less than $3.0 million or 0.50 percent of the face value of the notes.

We may, from time to time, repurchase notes in the open market, in privately-negotiated transactions or otherwise in such volumes, at such prices and upon such other terms as we deem appropriate.

Share Repurchases

Since January 1, 2012, our board of directors has approved $13.0 billion in total share repurchase authorizations and we have repurchased a total of $9.81 billion of our common stock, leaving $3.19 billion available for repurchases as of December 31, 2017. Under these authorizations, we have acquired 246 million shares at an average cost per share of $39.82. As part of our strategic actions to enhance shareholder value, for the year ended December 31, 2017, cash proceeds received from dropdowns to MPLX during the year were used in part to repurchase $2.37 billion of our common stock. Additionally, we expect to continue repurchasing our common stock in 2018 with cash received from the dropdown of our refining logistics assets and fuels distribution services on February 1, 2018. The table below summarizes our total share repurchases. See Item 8. Financial Statements and Supplementary Data – Note 9 for further discussion of the share repurchase plans.

(In millions, except per share data)	2017				2016				2015
Number of shares repurchased	44				4				19
Cash paid for shares repurchased	$	2,372			$	197			$	965
Average cost per share	$	53.85			$	41.84			$	50.31

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.

Contractual Cash Obligations

The table below provides aggregated information on our consolidated obligations to make future payments under existing contracts as of December 31, 2017. The contractual obligations detailed below do not include our contractual obligations to MPLX under various fee-based commercial agreements as these transactions are eliminated in the consolidated financial statements.

(In millions)		Total				2018				2019-2020				2021-2022				Later Years
Long-term debt(a)		$	21,204			$	1,222			$	1,855			$	2,577			$	15,550
Capital lease obligations(b)		457				46				93				88				230
Operating lease obligations		1,476				255				429				329				463
Purchase obligations:(c)
Crude oil, feedstock, refined product and renewable fuel contracts(d)		9,680				8,967				435				152				126
Transportation and related contracts		2,670				400				692				705				873
Contracts to acquire property, plant and equipment		484				482				2
Service, materials and other contracts(e)		1,998				419				558				418				603
Total purchase obligations		14,832				10,268				1,687				1,275				1,602
Other long-term liabilities reported in the consolidated balance sheet(f)		2,084				225				438				402				1,019
Total contractual cash obligations		$	40,053			$	12,016			$	4,502			$	4,671			$	18,864

(a)	Includes interest payments for our senior notes and the MPLX credit agreement and commitment and administrative fees for our credit agreement, the MPLX credit agreement and our trade receivables facility.

(b)	Capital lease obligations represent future minimum payments.

(c)	Includes both short- and long-term purchases obligations.

(d)	These contracts include variable price arrangements. For purposes of this disclosure we have estimated prices to be paid primarily based on futures curves for the commodities to the extent available.

(e)	Primarily includes contracts to purchase services such as utilities, supplies and various other maintenance and operating services.

(f)	Primarily includes obligations for pension and other postretirement benefits including medical and life insurance, which we have estimated through 2027. See Item 8. Financial Statements and Supplementary Data – Note 22.

Capital Spending

MPC’s capital investment plan, excluding MPLX, totals approximately $1.6 billion in 2018 for capital projects and investments, excluding capitalized interest and acquisitions. We continuously evaluate our capital plan and make changes as conditions warrant. Capital expenditures and investments for each of the last three years are summarized by segment below.

(In millions)		2018 Plan				2017				2016				2015
Capital expenditures and investments:(a)
Refining & Marketing		$	950			$	832			$	1,054			$	1,045
Speedway		530				381				303				501
Midstream(b)		2,405				2,505				1,568				14,545
Corporate and Other(c)		85				138				144				192
Total		$	3,970			$	3,856			$	3,069			$	16,283

(a)	Capital expenditures include changes in capital accruals.

(b)	Includes $220 million for the acquisition of the Ozark pipeline and an investment of $500 million in MarEn Bakken related to the Bakken Pipeline in 2017, $10 million in 2016 for purchase price adjustments related to the MarkWest Merger and $13.85 billion in 2015 for the MarkWest Merger. See Item 8. Financial Statements and Supplementary Data – Note 5.

(c)	Includes capitalized interest of $55 million, $63 million and $37 million for 2017, 2016 and 2015, respectively.

Refining & Marketing

The Refining & Marketing segment’s forecasted 2018 capital spending and investments is approximately $950 million. This amount includes approximately $400 million of growth capital focused on optimizing the Galveston Bay Refinery, upgrading residual fuel oils to higher-value products, maximizing distillate production and expanding light product placement flexibility including exports. Sustaining capital is approximately $550 million, which includes approximately $210 million related to regulatory spending for Tier 3 gasoline. A number of these projects span multiple years.

Major projects completed over last three years have prepared us to meet the upcoming transportation fuel regulatory mandate (Tier 3 fuel standards), increase our diesel production, process light crude oil and increase our export capabilities. In addition, the transformational STAR investment project at our Galveston Bay refinery is progressing according to plan and is scheduled to complete in 2022.

Speedway

The Speedway segment’s 2018 capital forecast of approximately $530 million is focused on the construction of new store locations as well as remodeling and rebuilding existing locations, consistent with our commitment to aggressively grow the business and build upon its industry-leading position.

Major projects over last three years included building new store locations, remodeling and rebuilding existing locations in core markets and building out our network of commercial fueling lane locations to capitalize on diesel demand growth. We also invested in the conversion, remodel and maintenance of stores acquired in 2014.

Midstream

MPLX’s capital investment plan includes $2.2 billion of organic growth capital and approximately $190 million of maintenance capital. This growth plan includes the addition of eight processing plants representing nearly 1.5 bcf/d of incremental processing capacity as well as 100,000 barrels per day of additional fractionation capacity in the Marcellus, Utica and Permian basins. The remaining growth capital is planned for the development of various crude oil and refined petroleum products infrastructure projects, including the export-capacity expansion project at our Galveston Bay refinery.

Major projects over last three years included investments for the development of natural gas and gas liquids infrastructure to support MPLX’s producer customers, primarily in the Marcellus and Utica shale regions, development of various crude oil and refined petroleum products infrastructure projects, including a build-out of Utica Shale infrastructure in connection with the Cornerstone Pipeline, a butane cavern in Robinson, Illinois, and a tank farm expansion in Texas City, Texas. The MarkWest Merger comprised 85 percent of our total capital expenditures and investments in 2015.

The Midstream segment’s forecasted 2018 capital spend, excluding MPLX, is approximately $15 million.

Corporate and Other

The 2018 capital forecast includes approximately $85 million to support corporate activities. Major projects over the last three years included an expansion project for our corporate headquarters and upgrades to information technology systems.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements comprise those arrangements that may potentially impact our liquidity, capital resources and results of operations, even though such arrangements are not recorded as liabilities under accounting principles generally accepted in the United States. Our off-balance sheet arrangements are limited to indemnities and guarantees that are described below. Although these arrangements serve a variety of our business purposes, we are not dependent on them to maintain our liquidity and capital resources, and we are not aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse effect on liquidity and capital resources.

We have provided various guarantees related to equity method investees. In conjunction with the Spinoff, we entered into various indemnities and guarantees to Marathon Oil. These arrangements are described in Item 8. Financial Statements and Supplementary Data – Note 25.

Our opinions concerning liquidity and capital resources and our ability to avail ourselves in the future of the financing options mentioned in the above forward-looking statements are based on currently available information. If this information proves to be inaccurate, future availability of financing may be adversely affected. Factors that affect the availability of financing include our performance (as measured by various factors, including cash provided by operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance, the global financial climate, and, in particular, with respect to borrowings, the levels of our outstanding debt and credit ratings by rating agencies. The discussion of liquidity and capital resources above also contains forward-looking statements regarding expected capital requirements and investment spending, costs for projects under construction, project completion dates and expectations or projections about strategies and goals for growth, upgrades and expansion. The forward-looking statements about our capital and investment budget are based on current expectations, estimates and projections and are not guarantees of future performance. Actual results may differ materially from these expectations, estimates and projections and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. Some factors that could cause actual results to differ materially include our ability to achieve the objectives related to the strategic initiatives discussed herein; adverse changes in laws including with respect to tax and regulatory matters; our ability to generate sufficient income and cash flow to effect the intended share repurchases, including within the expected timeframe; our ability to manage disruptions in credit markets or changes to our credit rating; the potential impact on our share price if we are unable to effect the intended share repurchases; the impact of adverse market conditions affecting MPC's and MPLX's midstream businesses; changes to the expected construction costs and timing of projects; continued/further volatility in and/or degradation of market and industry conditions; the availability and pricing of crude oil and other feedstocks; slower growth in domestic and Canadian crude supply; the effects of the lifting of the U.S. crude oil export ban; completion of pipeline capacity to areas outside the U.S. Midwest; consumer demand for refined products; transportation logistics; the reliability of processing units and other equipment; MPC's ability to successfully implement growth opportunities; modifications to MPLX earnings and distribution growth objectives; compliance with federal and state environmental, economic, health and safety, energy and other policies and regulations, including the cost of compliance with the Renewable Fuel Standard, and/or enforcement actions initiated thereunder; adverse results in litigation; changes to MPC's capital budget; other risk factors inherent to MPC's industry; These factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements. For additional information on forward-looking statements and risks that can affect our business, see “Disclosures Regarding Forward-Looking Statements” and Item 1A. Risk Factors in this Annual Report on Form 10-K.

Transactions with Related Parties

We believe that transactions with related parties were conducted under terms comparable to those with unrelated parties. See Item 8. Financial Statements and Supplementary Data – Note 7 for discussion of activity with related parties.

Environmental Matters and Compliance Costs

We have incurred and may continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. If these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, our operating results will be adversely affected. We believe that substantially all of our competitors must comply with similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether it is also engaged in the petrochemical business or the marine transportation of crude oil and refined products.

Legislation and regulations pertaining to fuel specifications, climate change and greenhouse gas emissions have the potential to materially adversely impact our business, financial condition, results of operations and cash flows, including costs of compliance and permitting delays. The extent and magnitude of these adverse impacts cannot be reliably or accurately estimated at this time because specific regulatory and legislative requirements have not been finalized and uncertainty exists

with respect to the measures being considered, the costs and the time frames for compliance, and our ability to pass compliance costs on to our customers. For additional information see Item 1A. Risk Factors.

Our environmental expenditures, including non-regulatory expenditures, for each of the last three years were:

(In millions)		2017				2016				2015
Capital		$	343			$	302			$	222
Compliance:(a)
Operating and maintenance		413				541				355
Remediation(b)		36				40				53
Total		$	792			$	883			$	630

(a)	Based on the American Petroleum Institute’s definition of environmental expenditures.

(b)	These amounts include spending charged against remediation reserves, where permissible, but exclude non-cash provisions recorded for environmental remediation.

We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required.

New or expanded environmental requirements, which could increase our environmental costs, may arise in the future. We believe we comply with all legal requirements regarding the environment, but since not all of them are fixed or presently determinable (even under existing legislation) and may be affected by future legislation or regulations, it is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed.

Our environmental capital expenditures accounted for ten percent, ten percent and nine percent of capital expenditures, for 2017, 2016 and 2015, respectively, excluding the acquisition of the Ozark pipeline in 2017 and the MarkWest Merger in 2015. Our environmental capital expenditures are expected to approximate $370 million, or 9 percent, of total planned capital expenditures in 2018. Predictions beyond 2018 can only be broad-based estimates, which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based on currently identified projects, we anticipate that environmental capital expenditures will be approximately $290 million in 2019; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed.

For more information on environmental regulations that impact us, or could impact us, see Item 1. Business – Environmental Matters, Item 1A. Risk Factors and Item 3. Legal Proceedings.

Critical Accounting Estimates

The preparation of financial statements in accordance with US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Accounting estimates are considered to be critical if (1) the nature of the estimates and assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and (2) the impact of the estimates and assumptions on financial condition or operating performance is material. Actual results could differ from the estimates and assumptions used.

Fair Value Estimates

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three approaches for measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach, each of which includes multiple valuation techniques. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to measure fair value by converting future amounts, such as cash flows or earnings, into a single present value amount using current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace the service capacity of an asset. This is often referred to as current replacement cost. The cost approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.

The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and does not prioritize among the techniques. These standards establish a fair value hierarchy that prioritizes the inputs used in applying the various valuation techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The three levels of the fair value hierarchy are as follows:

•	Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

•	Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the measurement date.

•	Level 3 – Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.

Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. We use an income or market approach for recurring fair value measurements and endeavor to use the best information available. See Item 8. Financial Statements and Supplementary Data – Note 17 for disclosures regarding our fair value measurements.

Significant uses of fair value measurements include:

•	assessment of impairment of long-lived assets;

•	assessment of impairment of intangible assets:

•	assessment of impairment of goodwill;

•	assessment of impairment of equity method investments;

•	recorded values for assets acquired and liabilities assumed in connection with acquisitions; and

•	recorded values of derivative instruments.

Impairment Assessments of Long-Lived Assets, Intangible Assets, Goodwill and Equity Method Investments

Fair value calculated for the purpose of testing our long-lived assets, intangible assets, goodwill and equity method investments for impairment is estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in performing these fair value estimates since the results are based on forecasted assumptions. Significant assumptions include:

•	Future margins on products produced and sold. Our estimates of future product margins are based on our analysis of various supply and demand factors, which include, among other things, industry-wide capacity, our planned utilization rate, end-user demand, capital expenditures and economic conditions. Such estimates are consistent with those used in our planning and capital investment reviews.

•	Future volumes. Our estimates of future refinery, retail, pipeline throughput and natural gas and NGL processing volumes are based on internal forecasts prepared by our Refining & Marketing, Speedway and Midstream segments operations personnel.

•	Discount rate commensurate with the risks involved. We apply a discount rate to our cash flows based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible. A higher discount rate decreases the net present value of cash flows.

•	Future capital requirements. These are based on authorized spending and internal forecasts.

We base our fair value estimates on projected financial information which we believe to be reasonable. However, actual results may differ from these projections.

The need to test for impairment can be based on several indicators, including a significant reduction in prices of or demand for products produced, a poor outlook for profitability, a significant reduction in pipeline throughput volumes, a significant reduction in natural gas or NGLs processed, a significant reduction in refining margins, other changes to contracts or changes in the regulatory environment in which the asset or equity method investment is located.

Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate that the carrying value of the assets may not be recoverable based on the expected undiscounted future cash flow of an asset group. For purposes of impairment evaluation, long-lived assets must be grouped at the lowest level for which independent cash flows can be identified, which generally is the refinery and associated distribution system level for Refining & Marketing segment assets, site level for Speedway segment convenience stores, and the plant level or pipeline system level for Midstream segment assets. If the sum of the undiscounted estimated pretax cash flows is less than the carrying value of an asset group, fair value is calculated, and the carrying value is written down if greater than the calculated fair value.

We own a 33 percent undivided joint interest in the Capline Pipeline System (“Capline”), which currently transports crude oil from St. James, Louisiana to Patoka, Illinois. Competing pipelines and changing oil transport routes in the U.S. may result in a decline in volumes on Capline in future years to levels that cannot sustain operations. The owners of Capline are considering various alternatives for the use of the pipeline system, including an assessment of the commercial potential to reverse the pipeline direction within the next several years. A non-binding open season started in October 2017, and results indicated shipper interest in the reversal of Capline. As a result, in December 2017, Marathon Pipe Line LLC, a wholly owned subsidiary of MPLX, and operator of Capline, announced that the pipeline`s owners are proceeding with planning for the potential reversal of the pipeline, including a plan to evaluate next steps required for a potential binding open season. Pending agreement among the owners, southbound service is estimated to commence by the second half of 2022. Developments in the commercial outlook for Capline could result in incurring costs associated with retiring certain assets or an impairment of the carrying value of our interest which was $159 million as of December 31, 2017.

Unlike long-lived assets, goodwill must be tested for impairment at least annually, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level. We have thirteen reporting units, nine of which have goodwill allocated to them. At December 31, 2017, we had a total of $3.59 billion of goodwill recorded on our consolidated balance sheet. The fair value of our reporting units exceeded book value for each of our reporting units in 2017.

MPC has nine reporting units with goodwill totaling approximately $3.59 billion as of November 30, 2017. Step 1 of the annual impairment analysis resulted in the fair value of the reporting units exceeding their carrying value by percentages ranging from approximately 22 percent to 406 percent. The reporting unit with fair value exceeding its carrying value by approximately 22 percent has goodwill of $228 million at December 31, 2017. An increase of 1.50 percent to the discount rate used to estimate the fair value of the reporting units would not have resulted in a goodwill impairment charge as of November 30, 2017. Significant assumptions used to estimate the reporting units’ fair value included estimates of future cash flows. If estimates for future cash flows, which are impacted by commodity prices and producers’ production plans, were to decline, the overall reporting units’ fair value would decrease, resulting in potential goodwill impairment charges. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the impairment tests will prove to be an accurate prediction of the future.

Equity method investments are assessed for impairment whenever factors indicate an other than temporary loss in value. Factors providing evidence of such a loss include the fair value of an investment that is less than its carrying value, absence of an ability to recover the carrying value or the investee’s inability to generate income sufficient to justify our carrying value. At December 31, 2017, we had $4.79 billion of investments in equity method investments recorded on our consolidated balance sheet.

Centennial is a refined products pipeline which experienced a significant reduction in shipment volumes in the second half of 2011 that has continued through 2017. At December 31, 2017, Centennial was not shipping product. As a result, we continued to evaluate the carrying value of our equity investment in Centennial. We concluded that no impairment was required given our assessment of its fair value based on market participant assumptions for various potential uses and future cash flows of Centennial’s assets. If market conditions were to change and the owners of Centennial are unable to find an alternative use for the assets, there could be a future impairment of our Centennial interest. As of December 31, 2017, our equity investment in Centennial was $35 million and we had a $25 million guarantee associated with 50 percent of Centennial’s outstanding debt. See Item 8. Financial Statements and Supplementary Data – Note 25 for additional information on the debt guarantee.

An estimate of the sensitivity to net income resulting from impairment calculations is not practicable, given the numerous assumptions (e.g., pricing, volumes and discount rates) that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset by favorable adjustments in other assumptions.

The above discussion contains forward-looking statements with respect to the carrying value of our Centennial equity investment and our undivided joint interest in Capline. Factors that could affect the carrying value of these assets include, but are not limited to, a change in business conditions, a further decline or improvement in the long-term outlook of the potential

uses of these assets and the pursuit of different strategic alternatives for such assets. These factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements.

Acquisitions

In accounting for business combinations, acquired assets, assumed liabilities and contingent consideration are recorded based on estimated fair values as of the date of acquisition. The excess or shortfall of the purchase price when compared to the fair value of the net tangible and identifiable intangible assets acquired, if any, is recorded as goodwill or a bargain purchase gain, respectively. A significant amount of judgment is involved in estimating the individual fair values of property, plant and equipment, intangible assets, contingent consideration and other assets and liabilities. We use all available information to make these fair value determinations and, for certain acquisitions, engage third-party consultants for assistance.

The fair value of assets and liabilities, including contingent consideration, as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project related future cash inflows and outflows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity-specific differences. The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ from the projected results used to determine fair value.

See Item 8. Financial Statements and Supplementary Data – Note 5 for additional information on our acquisitions. See Item 8. Financial Statements and Supplementary Data – Note 17 for additional information on fair value measurements.

Derivatives

We record all derivative instruments at fair value. Substantially all of our commodity derivatives are cleared through exchanges which provide active trading information for identical derivatives and do not require any assumptions in arriving at fair value. Fair value estimation for all our derivative instruments is discussed in Item 8. Financial Statements and Supplementary Data – Note 17. Additional information about derivatives and their valuation may be found in Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Variable Interest Entities

We evaluate all legal entities in which we hold an ownership or other pecuniary interest to determine if the entity is a VIE. Our interests in a VIE are referred to as variable interests. Variable interests can be contractual, ownership or other pecuniary interests in an entity that change with changes in the fair value of the VIE’s assets. When we conclude that we hold an interest in a VIE we must determine if we are the entity’s primary beneficiary. A primary beneficiary is deemed to have a controlling financial interest in a VIE. This controlling financial interest is evidenced by both (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses that could potentially be significant to the VIE or the right to receive benefits that could potentially be significant to the VIE. We consolidate any VIE when we determine that we are the primary beneficiary. We must disclose the nature of any interests in a VIE that is not consolidated.

Significant judgment is exercised in determining that a legal entity is a VIE and in evaluating our interest in a VIE. We use primarily a qualitative analysis to determine if an entity is a VIE. We evaluate the entity’s need for continuing financial support; the equity holder’s lack of a controlling financial interest; and/or if an equity holder’s voting interests are disproportionate to its obligation to absorb expected losses or receive residual returns. We evaluate our interests in a VIE to determine whether we are the primary beneficiary. We use a primarily qualitative analysis to determine if we are deemed to have a controlling financial interest in the VIE, either on a standalone basis or as part of a related party group. We continually monitor our interests in legal entities for changes in the design or activities of an entity and changes in our interests, including our status as the primary beneficiary to determine if the changes require us to revise our previous conclusions.

Changes in the design or nature of the activities of a VIE, or our involvement with a VIE, may require us to reconsider our conclusions on the entity’s status as a VIE and/or our status as the primary beneficiary. Such reconsideration requires significant judgment and understanding of the organization. This could result in the deconsolidation or consolidation of the affected subsidiary, which would have a significant impact on our financial statements.

Variable Interest Entities are discussed in Item 8. Financial Statements and Supplementary Data – Note 6 .

Pension and Other Postretirement Benefit Obligations

Accounting for pension and other postretirement benefit obligations involves numerous assumptions, the most significant of which relate to the following:

•	the discount rate for measuring the present value of future plan obligations;

•	the expected long-term return on plan assets;

•	the rate of future increases in compensation levels;

•	health care cost projections; and

•	the mortality table used in determining future plan obligations.

We utilize the work of third-party actuaries to assist in the measurement of these obligations. We have selected different discount rates for our funded pension plans and our unfunded retiree health care plans due to the different projected benefit payment patterns. The selected rates are compared to various similar bond indexes for reasonableness. In determining the assumed discount rates, we use our third-party actuary’s discount rate model. This model calculates an equivalent single discount rate for the projected benefit plan cash flows using a yield curve derived from AA bond yields. The yield curve represents a series of annualized individual spot discount rates from 0.5 to 99 years. The bonds used have an average rating of AA or higher by a recognized rating agency and generally only non-callable bonds are included. Outlier bonds that have a yield to maturity that deviate significantly from the average yield within each maturity grouping are not included. Each issue is required to have at least $250 million par value outstanding.

Of the assumptions used to measure the year-end obligations and estimated annual net periodic benefit cost, the discount rate has the most significant effect on the periodic benefit cost reported for the plans. Decreasing the discount rates of 3.55 percent for our pension plans and 3.70 percent for our other postretirement benefit plans by 0.25 percent would increase pension obligations and other postretirement benefit plan obligations by $53 million and $31 million, respectively, and would increase defined benefit pension expense and other postretirement benefit plan expense by $5 million and $3 million, respectively.

The long-term asset rate of return assumption considers the asset mix of the plans (currently targeted at approximately 51 percent equity securities and 49 percent fixed income securities for the primary funded pension plan), past performance and other factors. Certain components of the asset mix are modeled with various assumptions regarding inflation and returns. In addition, our long-term asset rate of return assumption is compared to those of other companies and to historical returns for reasonableness. We used the 6.50 percent long-term rate of return to determine our 2017 defined benefit pension expense. After evaluating activity in the capital markets, along with the current and projected plan investments, we did not change the asset rate of return for our primary plan from 6.50 percent effective for 2018. Decreasing the 6.50 percent asset rate of return assumption by 0.25 percent would increase our defined benefit pension expense by $4 million.

Compensation change assumptions are based on historical experience, anticipated future management actions and demographics of the benefit plans.

Health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends.

We utilized the 2017 mortality tables from the U.S. Society of Actuaries.

Item 8. Financial Statements and Supplementary Data – Note 22 includes detailed information about the assumptions used to calculate the components of our annual defined benefit pension and other postretirement plan expense, as well as the obligations and accumulated other comprehensive loss reported on the year-end balance sheets.

Contingent Liabilities

We accrue contingent liabilities for legal actions, claims, litigation, environmental remediation, tax deficiencies related to operating taxes and third-party indemnities for specified tax matters when such contingencies are both probable and estimable. We regularly assess these estimates in consultation with legal counsel to consider resolved and new matters, material developments in court proceedings or settlement discussions, new information obtained as a result of ongoing discovery and past experience in defending and settling similar matters. Actual costs can differ from estimates for many reasons. For instance, settlement costs for claims and litigation can vary from estimates based on differing interpretations of laws, opinions on degree of responsibility and assessments of the amount of damages. Similarly, liabilities for environmental remediation may vary from estimates because of changes in laws, regulations and their interpretation, additional information on the extent and nature of site contamination and improvements in technology.

We generally record losses related to these types of contingencies as cost of revenues or selling, general and administrative expenses in the consolidated statements of income, except for tax deficiencies unrelated to income taxes, which are recorded as other taxes. For additional information on contingent liabilities, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters and Compliance Costs.

An estimate of the sensitivity to net income if other assumptions had been used in recording these liabilities is not practical because of the number of contingencies that must be assessed, the number of underlying assumptions and the wide range of reasonably possible outcomes, in terms of both the probability of loss and the estimates of such loss.

Accounting Standards Not Yet Adopted

As discussed in Item 8. Financial Statements and Supplementary Data – Note 3 to our audited consolidated financial statements, certain new financial accounting pronouncements will be effective for our financial statements in the future.