filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Disclosures Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. The following information concerning our business, results of operations and financial condition should also 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.
CORPORATE OVERVIEW
We are an independent petroleum refining and marketing, retail and midstream company. We own and operate the nation’s largest refining system through 16 refineries, located in the Gulf Coast, Mid-Continent and West Coast regions of the United States, with an aggregate crude oil refining capacity of approximately 3.1 mmbpcd. Our refineries supply refined products to resellers and consumers across the United States. We distribute refined products to our customers through transportation, storage, distribution and marketing services provided largely by our Midstream segment. We believe we are one of the largest wholesale suppliers of gasoline and distillates to resellers in the United States.
We have three strong brands: Marathon®, Speedway® and ARCO®. The branded outlets, which primarily include the Marathon brand, are established motor fuel brands across the United States available through approximately 6,900 branded outlets operated by independent entrepreneurs in 35 states, the District of Columbia and Mexico. We believe our Retail segment operates the second largest chain of company-owned and operated retail gasoline and convenience stores in the United States, with approximately 3,900 convenience stores, primarily under the Speedway brand, and 1,070 direct dealer locations, primarily under the ARCO brand, across the United States.
We primarily conduct our midstream operations through our ownership interests in MPLX, which owns and operates crude oil and refined product transportation and logistics infrastructure and natural gas and NGL gathering, processing, and fractionation assets. As of December 31, 2019, we owned, leased or had ownership interests in approximately 17,200 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. 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. As of December 31, 2019, our midstream gathering and processing assets include approximately 9.0 bcf/d of gathering capacity, 11.6 bcf/d of natural gas processing capacity and 831 mbpd of fractionation capacity.
Our operations consist of three reportable operating segments: Refining & Marketing, Retail 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 16 refineries in the Gulf Coast, Mid-Continent and West Coast regions of the United States, purchases refined products and ethanol for resale and distributes refined products through transportation, storage, distribution and marketing services provided largely by our Midstream segment. We sell refined products to wholesale marketing customers domestically and internationally, to buyers on the spot market, to our Retail business segment and to independent entrepreneurs who operate primarily Marathon® branded outlets. |
| • | Retail – sells transportation fuels and convenience products in the retail market across the United States through company-owned and operated convenience stores, primarily under the Speedway® brand, and long-term fuel supply contracts with direct dealers who operate locations mainly under the ARCO® brand. |
| • | Midstream – transports, stores, distributes and markets crude oil and refined products principally for the Refining & Marketing segment via refining logistics assets, pipelines, terminals, towboats and barges; gathers, processes and transports natural gas; and gathers, transports, fractionates, stores and markets NGLs. The Midstream segment primarily reflects the results of MPLX. |
Recent Developments
Strategic Actions to Enhance Shareholder Value
On October 31, 2019, we announced our intention to separate our retail transportation fuel and convenience store business, which is operated primarily under the Speedway brand, into an independent, publicly traded company through a tax-free distribution to MPC shareholders of publicly traded stock in the new independent retail transportation fuel and convenience store company. This transaction is targeted to be completed in the fourth quarter of 2020, subject to market, regulatory and certain other conditions, including final approval by MPC’s board of directors, receipt of customary assurances regarding the intended tax-free nature of the transaction, and the effectiveness of a registration statement to be filed with the SEC. The Speedway business is currently a reporting unit within our Retail segment. MPC will retain its direct dealer business, which is also included in the Retail segment as currently reported.
MPC’s board of directors also formed a special committee to evaluate strategies to enhance shareholder value through a review of the Midstream business and to analyze, among other things, the strategic fit of assets with MPC, the ability to realize full valuation credit for midstream earnings and cash flow, balance sheet impacts including liquidity and credit ratings, transaction tax impacts, separation costs, and overall complexity.
MPLX Acquisition of ANDX
On July 30, 2019, MPLX completed its acquisition of ANDX, and ANDX survived as a wholly-owned subsidiary of MPLX. At the effective time of the merger, each common unit held by ANDX’s public unitholders was converted into the right to receive 1.135 MPLX common units. ANDX common units held by certain affiliates of MPC were converted into the right to receive 1.0328 MPLX common units. Additionally, 600,000 ANDX preferred units were converted into 600,000 preferred units of MPLX (the “Series B preferred units”). Series B preferred unitholders are entitled to receive, when and if declared by the MPLX board, a fixed distribution of $68.75 per unit, per annum, payable semi-annually in arrears on February 15 and August 15, or the first business day thereafter, up to and including February 15, 2023. After February 15, 2023, the holders of Series B preferred units are entitled to receive cumulative, quarterly distributions payable in arrears on the 15th day of February, May, August and November of each year, or the first business day thereafter, based on a floating annual rate equal to the three month LIBOR plus 4.652 percent.
The transaction simplified our two sponsored MLPs, MPLX and ANDX, into a single listed entity to create a leading, large-scale, diversified midstream company anchored by fee-based cash flows. The combined entity has an expanded geographic footprint that is expected to enhance its long-term growth opportunities and the sustainable cash flow profile of the business.
As described in Item 8. Financial Statements and Supplementary Data – Notes 5 and 6, we have consolidated ANDX since October 1, 2018 in accordance with ASC Topic 810, Consolidation (“ASC 810”) and previously recorded ANDX’s assets and liabilities to our balance sheet at preliminary fair values as of the Andeavor acquisition date of October 1, 2018.
EXECUTIVE SUMMARY
Results
Select results for 2019 and 2018 are reflected in the following table. The 2018 amounts include the results of Andeavor from the October 1, 2018 acquisition date forward.
| (In millions, except per share data) | 2019 | 2018 | ||||||
| Income from operations by segment | ||||||||
| Refining & Marketing | $ | 2,367 | $ | 2,481 | ||||
| Retail | 1,582 | 1,028 | ||||||
| Midstream | 3,594 | 2,752 | ||||||
| Items not allocated to segments | (1,967 | ) | (690 | ) | ||||
| Income from operations | $ | 5,576 | $ | 5,571 | ||||
| Provision for income taxes | $ | 1,074 | $ | 962 | ||||
| Net income attributable to MPC | $ | 2,637 | $ | 2,780 | ||||
| Net income attributable to MPC per diluted share | $ | 3.97 | $ | 5.28 |
Net income attributable to MPC decreased $143 million in 2019 compared to 2018 primarily due to increases in net interest and other financial costs and provision for income taxes, partially offset by a decrease in net income attributable to noncontrolling interests in 2019. Income from operations was essentially flat in 2019 compared to 2018 as increases in Retail and Midstream segment income from operations were largely offset by MPLX goodwill impairment charges, which are reported in Items not allocated to segments. Refer to the Results of Operations section for a discussion of financial results by segment for the three years ended December 31, 2019.
MPLX
We received limited partner distributions of $1.82 billion and $1.24 billion from MPLX and ANDX during 2019 and 2018, respectively.
We owned approximately 666 million MPLX common units at December 31, 2019 with a market value of $16.96 billion based on the December 31, 2019 closing unit price of $25.46. On January 23, 2020, MPLX declared a quarterly cash distribution of $0.6875 per common unit, which was paid February 14, 2020. As a result, MPLX made distributions totaling $715 million to its common unitholders. MPC’s portion of this distribution was approximately $445 million.
See Item 8. Financial Statements and Supplementary Data – Note 4 for additional information on MPLX.
Share Repurchases
During the year ended December 31, 2019, we returned $1.95 billion to our shareholders through repurchases of 34 million shares of common stock at an average price per share of $58.87.
Since January 1, 2012, our board of directors has approved $18.0 billion in total share repurchase authorizations and we have repurchased a total of approximately $15.0 billion of our common stock, leaving approximately $3.0 billion available for repurchases as of December 31, 2019. Under these authorizations, we have acquired 327 million shares, representing approximately 46 percent of our outstanding common shares when we became a stand-alone company in June 2011, at an average cost per share of $46.05.
Liquidity
Our liquidity, excluding MPLX, totaled $8.3 billion at December 31, 2019. As of December 31, 2019, we had cash and cash equivalents of $1.51 billion, excluding MPLX’s cash and cash equivalents of $15 million. We had no borrowings and $1 million of letters of credit outstanding under our $6.0 billion bank revolving credit facilities and no borrowings or letters of credit outstanding under our $750 million trade receivables securitization facility (“trade receivables facility”). As of December 31, 2019, eligible trade receivables supported borrowings of $750 million under the trade receivable facility.
MPLX’s liquidity totaled $4.42 billion at December 31, 2019. As of December 31, 2019, MPLX had cash and cash equivalents of $15 million, $3.5 billion available under its $3.5 billion revolving credit agreement and $906 million available through its 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, refining operating costs, refining planned turnaround and refinery throughputs. Our total refining capacity was 3,067 mbpcd, 3,021 mbpcd and 1,881 mbpcd as of December 31, 2019, 2018 and 2017, respectively. The increase in 2018 was primarily due to the acquisition of Andeavor on October 1, 2018, which added 10 refineries with approximately 1,117 mbpcd of total refining capacity.
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 Gulf Coast, Mid-Continent and West Coast crack spreads that we believe most closely track our operations and slate of products. The following will be used for these crack-spread calculations:
| • | The Gulf Coast crack spread uses three barrels of LLS crude producing two barrels of USGC CBOB gasoline and one barrel of USGC ULSD; |
| • | The Mid-Continent crack spread uses three barrels of WTI crude producing two barrels of Chicago CBOB gasoline and one barrel of Chicago ULSD; and |
| • | The West Coast crack spread uses three barrels of ANS crude producing two barrels of LA CARBOB and one barrel of LA CARB Diesel. |
Our refineries process a variety of sweet and sour grades of crude oil, which typically can be purchased at a discount to the crude oils referenced in our Gulf Coast, Mid-Continent and West Coast crack spreads. The amount of these discounts, which we refer to as the sweet differential and the sour differential, can vary significantly, causing our Refining & Marketing margin to differ from blended crack spreads. In general, larger sweet and sour differentials 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) | ||||
| Blended crack spread sensitivity(a) (per $1.00/barrel change) | $ | 910 | ||
| Sour differential sensitivity(b) (per $1.00/barrel change) | 420 | |||
| Sweet differential sensitivity(c) (per $1.00/barrel change) | 420 | |||
| Natural gas price sensitivity(d) (per $1.00/MMBtu) | 325 |
| (a) | Crack spread based on 38 percent LLS, 38 percent WTI and 24 percent ANS with Gulf Coast, Mid-Continent and West Coast product pricing, respectively, and assumes all other differentials and pricing relationships remain unchanged. |
| (b) | Sour crude oil basket consists of the following crudes: ANS, Argus Sour Crude Index, Maya and Western Canadian Select. We expect approximately 50 percent of the crude processed at our refineries in 2020 will be sour crude. |
| (c) | Sweet crude oil basket consists of the following crudes: Bakken, Brent, LLS, WTI-Cushing and WTI-Midland. We expect approximately 50 percent of the crude processed at our refineries in 2020 will be sweet crude. |
| (d) | 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 sour differential and the sweet 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, 2019, 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 refining operating costs and refining planned turnaround costs. Changes in operating costs are primarily driven by the cost of energy used by our refineries, including purchased natural gas, and the level of maintenance costs. Refining planned 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 and only reflects the activity for the acquired refineries after October 1, 2018.
| Year | Refinery | |
| 2019 | Catlettsburg, Gallup, Galveston Bay, Garyville, Los Angeles, Martinez, Robinson and St. Paul Park | |
| 2018 | Canton, Detroit, Galveston Bay and Martinez | |
| 2017 | Catlettsburg, Galveston Bay and Garyville |
We have various long-term, fee-based commercial agreements with MPLX. Under these agreements, MPLX, which is reported in our Midstream segment, provides transportation, storage, distribution and marketing services to our Refining & Marketing segment. Certain of these agreements include commitments for minimum quarterly throughput and distribution volumes of crude oil and refined products and minimum storage volumes of crude oil, refined products and other products. Certain other agreements include commitments to pay for 100 percent of available capacity for certain marine transportation and refining logistics assets.
Retail
Our Retail fuel margin for gasoline and distillate, which is the price paid by consumers or direct dealers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees (where applicable), impacts the Retail segment profitability. Gasoline and distillate prices are volatile and are impacted by changes in supply and demand in the regions 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. As fleet fuel efficiency gains have taken hold, gasoline demand fell for the first time since 2012 by 0.4 percent from 2018 despite average annual gasoline prices falling four percent, record level of light trucks’ share of auto sales (72 percent), and continuing economic growth in 2019. According to current estimates, 2019 gasoline demand fell less than 0.1 million barrels per day, remaining at approximately 9.3 million barrels per day for the fourth consecutive year. Meanwhile, distillate demand fell for the first time in three years as weather impacted agricultural uses, and trade tensions weighed on port traffic in 2019. Distillate demand was down 1.6 percent from 2018, but remained near 4.1 million barrels per day, the fourth highest U.S. demand level ever. Truck tonnage growth slowed in 2019, rising 3.4 percent year over year in 2019-about half of the prior year’s growth, while port container traffic (at the 10 largest U.S. ports), was flat year over year in 2019 (through November).
The margin on merchandise sold at our convenience stores historically has been less volatile and has contributed substantially to our Retail segment margin. Approximately 40 percent of our Retail margin was derived from merchandise sales in 2019. This percentage decreased from 2018 due to the addition of long-term fuel supply contracts with direct dealers and fuel only locations as part of the Andeavor acquisition. Our Retail 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, 2019, 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
Our Midstream segment transports, stores, distributes and markets crude oil and refined products, principally for our Refining & Marketing segment. The profitability of our pipeline transportation operations primarily depends on tariff rates and the volumes shipped through the pipelines. The profitability of our marine operations primarily depends on the quantity and availability of our vessels and barges. The profitability of our light product terminal operations primarily depends on the throughput volumes at these terminals. The profitability of our fuels distribution services primarily depends on the sales volumes of certain refined products. The profitability of our refining logistics operations depends on the quantity and availability of our refining logistics assets. A majority of the crude oil and refined product shipments on our pipelines and marine vessels and the
refined product throughput at our terminals serve our Refining & Marketing segment and our refining logistics assets and fuels distribution services are used solely by our Refining & Marketing segment.
As discussed above in the Refining & Marketing section, MPLX, which is reported in our Midstream segment, has various long-term, fee-based commercial agreements related to services provided to our Refining & Marketing segment. Under these agreements, MPLX has received various commitments of minimum throughput, storage and distribution volumes as well as commitments to pay for all available capacity of certain assets. 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, terminals and marine operations. 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, store, distribute and market is directly affected by the production levels of, and user demand for, refined products in the markets served by our refined product pipelines and marine operations. 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.
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 that are beyond our control. 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. Commodity prices are a significant influence on the level of natural gas drilling by our producer customers, such prices also affect profitability.
RESULTS OF OPERATIONS
The following discussion includes comments and analysis relating to our results of operations for the years ended December 31, 2019, 2018 and 2017. These amounts include the results of Andeavor from the October 1, 2018 acquisition date forward. 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) | 2019 | 2018 | 2019 vs. 2018 Variance | 2017 | 2018 vs. 2017 Variance | |||||||||||||||
| Revenues and other income: | ||||||||||||||||||||
| Sales and other operating revenues(a) | $ | 123,949 | $ | 96,504 | $ | 27,445 | $ | 74,733 | $ | 21,771 | ||||||||||
| Income from equity method investments | 394 | 373 | 21 | 306 | 67 | |||||||||||||||
| Net gain on disposal of assets | 307 | 23 | 284 | 10 | 13 | |||||||||||||||
| Other income | 163 | 202 | (39 | ) | 320 | (118 | ) | |||||||||||||
| Total revenues and other income | 124,813 | 97,102 | 27,711 | 75,369 | 21,733 | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Cost of revenues (excludes items below) | 110,243 | 86,066 | 24,177 | 67,089 | 18,977 | |||||||||||||||
| Impairment expense | 1,197 | — | 1,197 | — | — | |||||||||||||||
| Depreciation and amortization | 3,638 | 2,490 | 1,148 | 2,114 | 376 | |||||||||||||||
| Selling, general and administrative expenses | 3,408 | 2,418 | 990 | 1,694 | 724 | |||||||||||||||
| Other taxes | 751 | 557 | 194 | 454 | 103 | |||||||||||||||
| Total costs and expenses | 119,237 | 91,531 | 27,706 | 71,351 | 20,180 | |||||||||||||||
| Income from operations | 5,576 | 5,571 | 5 | 4,018 | 1,553 | |||||||||||||||
| Net interest and other financial costs | 1,247 | 1,003 | 244 | 674 | 329 | |||||||||||||||
| Income before income taxes | 4,329 | 4,568 | (239 | ) | 3,344 | 1,224 | ||||||||||||||
| Provision (benefit) for income taxes | 1,074 | 962 | 112 | (460 | ) | 1,422 | ||||||||||||||
| Net income | 3,255 | 3,606 | (351 | ) | 3,804 | (198 | ) | |||||||||||||
| Less net income attributable to: | ||||||||||||||||||||
| Redeemable noncontrolling interest | 81 | 75 | 6 | 65 | 10 | |||||||||||||||
| Noncontrolling interests | 537 | 751 | (214 | ) | 307 | 444 | ||||||||||||||
| Net income attributable to MPC | $ | 2,637 | $ | 2,780 | $ | (143 | ) | $ | 3,432 | $ | (652 | ) |
| (a) | We adopted ASU 2014-09, Revenue - Revenue from Contracts with Customers (“ASC 606”), as of January 1, 2018, and elected to report certain taxes on a net basis. We adopted the standard using the modified retrospective method, and, therefore, comparative 2017 information continues to reflect certain taxes on a gross basis. See Item 8. Financial Statements and Supplementary Data - Note 2 for further information. |
2019 Compared to 2018
Net income attributable to MPC decreased $143 million primarily due to increases in net interest and other financial costs and provision for income taxes, partially offset by a decrease in net income attributable to noncontrolling interests in 2019. See Segment Results for additional information.
Total revenues and other income increased $27.71 billion in 2019 compared to 2018 primarily due to:
| • | increased sales and other operating revenues of $27.45 billion mainly due to an increase in our Refining & Marketing segment refined product sales volumes, which increased 1,032 mbpd largely due to the Andeavor acquisition on October 1, 2018, partially offset by lower averaged refined product sales prices, which decreased $0.10 per gallon; and |
| • | increased net gain on disposal of assets of $284 million mainly due to a $207 million gain recognized in connection with MPC’s exchange of its undivided interest in the Capline pipeline system for an equity ownership in Capline LLC. We also recognized a $52 million gain due to the formation of a new joint venture with The Andersons as the fair value of our interest in the new venture exceeded our contribution to the venture. |
Total costs and expenses increased $27.71 billion in 2019 compared to 2018 primarily due to:
| • | increased cost of revenues of $24.18 billion primarily due to the inclusion of costs related to the Andeavor operations following the acquisition; |
| • | increased impairment expense of $1.20 billion primarily related to MPLX goodwill associated with the ANDX gathering and processing businesses acquired as part of the Andeavor acquisition; |
| • | increased depreciation and amortization of $1.15 billion largely due to the depreciation of the fair value of the assets acquired in connection with the Andeavor acquisition; |
| • | increased selling, general and administrative expenses of $990 million mainly due to the inclusion of costs related to Andeavor operations following the acquisition and reflecting MPC’s classification of those costs and expenses; and |
| • | increased other taxes of $194 million primarily due to the inclusion of other taxes related to the acquired Andeavor operations. |
Income from operations was flat in 2019 compared to 2018 as a result of the changes noted above. See Segment Results for additional information.
Net interest and other financial costs increased $244 million mainly due to debt assumed in the acquisition of Andeavor and increased MPLX borrowings, partially offset by a decrease in pension settlement losses of $44 million. We capitalized interest of $158 million in 2019 and $80 million in 2018. See Item 8. Financial Statements and Supplementary Data – Note 19 for further details.
Provision for income taxes increased $112 million primarily due to non-deductible goodwill impairments partially offset by decreased income before taxes of $239 million. The effective tax rate of 25 percent in 2019 is higher than the U.S. statutory rate of 21 percent, primarily due to permanent tax differences related to goodwill impairment and state and local tax expense, partially offset by permanent tax differences related to net income attributable to noncontrolling interests. The effective tax rate of 21 percent in 2018 is consistent with the U.S. statutory rate of 21 percent, as permanent benefit differences related to income attributable to noncontrolling interest were offset by state and local tax expense. See Item 8. Financial Statements and Supplementary Data – Note 12 for further details.
Noncontrolling interests decreased $214 million primarily due lower MPLX net income primarily as a result of the $1.2 billion goodwill impairment charge recorded in 2019.
2018 Compared to 2017
Net income attributable to MPC decreased $652 million. Increased income from operations was more than offset by a tax benefit of $1.5 billion resulting from the TCJA in 2017 and increased income attributable to noncontrolling interests in 2018. See Segment Results for additional information.
Total revenues and other income increased $21.73 billion in 2018 compared to 2017 primarily due to:
| • | increased sales and other operating revenues of $21.77 billion mainly due to an increase in our Refining & Marketing segment refined product sales volumes, which increased 402 mbpd, and higher averaged refined product sales prices, which increased $0.34 per gallon. The increase in volume is largely due to the Andeavor acquisition on October 1, 2018. These increases were partially offset by our election to present revenues net of certain taxes under ASC 606 prospectively from January 1, 2018, which resulted in a decrease in revenues of $6.66 billion for the year. See Item 8. Financial Statements and Supplementary Data – Note 2 for additional information; |
| • | increased income from equity method investments of $67 million primarily due to an increase in income from midstream equity affiliates; and |
| • | decreased other income of $118 million primarily due to a decrease in RIN sales. |
Total costs and expenses increased $20.18 billion in 2018 compared to 2017 primarily due to:
| • | increased cost of revenues of $18.98 billion primarily due to: |
| ◦ | an increase in refined product cost of sales of $24.97 billion, primarily due to increased operations following the acquisition of Andeavor along with higher raw material costs attributable to an increase in our average crude oil costs of $13.87 per barrel; and |
| ◦ | a decrease in certain taxes of $6.66 billion as a result of our election to present revenues net of certain taxes under ASC 606 prospectively from January 1, 2018. For the year, certain |
taxes continue to be presented on a gross basis and are included in cost of revenues. See Item 8. Financial Statements and Supplementary Data – Note 2 for additional information;
| • | increased depreciation and amortization of $376 million, primarily due to the depreciation of the fair value of the assets acquired in connection with the Andeavor acquisition; |
| • | increased selling, general and administrative expenses of $724 million primarily due to approximately $197 million of transaction related costs for financial advisors, employee severance and other costs associated with the Andeavor acquisition in addition to including costs and expenses for the acquired operations; and |
| • | increased other taxes of $103 million primarily due to the inclusion of other taxes related to the acquired Andeavor operations. |
Net interest and other financial costs increased $329 million mainly due to increased MPLX borrowings and debt assumed in the acquisition of Andeavor. In addition, MPLX recognized $60 million of debt extinguishment costs in 2018 in connection with the redemption of its $750 million of senior notes due 2023. We capitalized interest of $80 million in 2018 and $63 million in 2017. See Item 8. Financial Statements and Supplementary Data – Note 19 for further details.
Provision for income taxes increased $1.42 billion primarily due to the absence of a tax benefit of $1.5 billion in 2017 resulting from the TCJA and an increase in our income before income taxes, which increased $1.22 billion. The effective tax rate of 21 percent in 2018 is consistent with the U.S. statutory rate of 21 percent, as permanent benefit differences related to income attributable to noncontrolling interest were offset by state and local tax expense. In 2017, our effective tax rate was impacted by 45 percentage points as a result of the TCJA which decreased our effective tax rate from 31 percent to (14) percent. The effective tax rate, excluding the TCJA, of 31 percent in 2017 was slightly less than the U.S. statutory rate of 35 percent primarily due to certain permanent benefit differences, including differences related to net income attributable to noncontrolling interests and 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.
Noncontrolling interests increased $454 million due to higher MPLX net income resulting primarily from the February 1, 2018 dropdown transaction, partially offset by the reduced ownership in MPLX held by noncontrolling interests following the general partner/incentive distribution rights exchange. Noncontrolling ownership in MPLX decreased to 36.4 percent at December 31, 2018 from 69.6 percent at December 31, 2017. In addition, 2018 reflects $68 million of net income attributable to the noncontrolling interest in ANDX of 36.4 percent for the period from October 1, 2018 through the end of the year.
Segment Results
Our segment income from operations was approximately $7.54 billion, $6.26 billion and $4.39 billion for the years ended December 31, 2019, 2018 and 2017, respectively. The following shows the percentage of segment income from operations by segment for the last three years.
Refining & Marketing
The following includes key financial and operating data for 2019, 2018 and 2017. Our results include the results of Andeavor from the October 1, 2018 acquisition date forward.
We revised our Refining & Marketing segment supplemental reporting in the second quarter of 2019 as shown in the table on the following page. Costs formerly included in Refining & Marketing’s direct operating costs category are now presented in three categories: refining operating costs, refining planned turnaround costs and depreciation and amortization. We also present distribution costs, formerly referred to as other operating expenses, which are primarily related to transportation and marketing of refined products, including fees paid to MPLX.
| (a) | We adopted ASC 606 (Revenue from Contracts with Customers), as of January 1, 2018, and elected to report certain taxes on a net basis. We applied the standard using the modified retrospective method, and, therefore, comparative information continues to reflect certain taxes on a gross basis. |
| (a) | Includes intersegment sales and sales destined for export. |
| (b) | For comparability purposes, these amounts exclude sales taxes for all periods presented. As noted above, Refining & Marketing revenues in 2019 and 2018 reflect these taxes on a net basis, while 2017 Refining & Marketing revenues continue to reflect these taxes on a gross basis. The average refined product sales price for 2017 included excise taxes of $0.18 per gallon before this adjustment. |
| Refining & Marketing Operating Statistics | 2019 | 2018 | 2017 | |||||||||
| Total refinery throughputs (mbpd) | 3,112 | 2,274 | 1,944 | |||||||||
| Refining & Marketing margin per barrel(a)(b) | $ | 14.23 | $ | 14.25 | $ | 12.60 | ||||||
| Less: | ||||||||||||
| Refining operating costs per barrel(c) | 5.66 | 4.99 | 5.08 | |||||||||
| Distribution costs per barrel(d) | 4.51 | 4.23 | 2.38 | |||||||||
| Refining planned turnaround costs per barrel | 0.65 | 0.80 | 0.71 | |||||||||
| Depreciation and amortization per barrel | 1.47 | 1.41 | 1.52 | |||||||||
| Plus: | ||||||||||||
| Purchase accounting-depreciation and amortization(e) | 0.01 | — | — | |||||||||
| Biodiesel tax credit(f) | 0.08 | — | — | |||||||||
| Other per barrel(g) | 0.05 | 0.17 | 0.36 | |||||||||
| Refining & Marketing segment income per barrel | $ | 2.08 | $ | 2.99 | $ | 3.27 |
| (a) | Sales revenue less cost of refinery inputs and purchased products, divided by total refinery throughputs. |
| (b) | See “Non-GAAP Measures” section for reconciliation and further information regarding this non-GAAP measure. |
| (c) | Includes refining operating and major maintenance costs. Excludes planned turnaround and depreciation and amortization expense. |
| (d) | Includes fees paid to MPLX. On a per barrel throughput basis, these fees were $2.84 and $2.74 for 2019 and 2018, respectively. Fees paid to MPLX for 2017 are prior to the dropdown of refining logistics and fuels distribution assets and are not comparable. Excludes depreciation and amortization expense. |
| (e) | Reflects the cumulative effects related to a measurement period adjustment arising from the finalization of purchase accounting. |
| (f) | Reflects a benefit of $93 million in 2019 for the biodiesel tax credit attributable to volumes blended in 2018. |
| (g) | Includes income from equity method investments, net gain on disposal of assets and other income. |
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. Following the acquisition of Andeavor in October 2018, we expanded the benchmark prices included in these tables to include market information for the West Coast region of the United States, including LA CARBOB and LA CARB diesel spot prices, ANS crude prices and a West Coast ANS 3-2-1 crack spread. The results of the Andeavor businesses are only included in our results from October 1, 2018 forward. The benchmark crack spreads below do not reflect the market cost of RINs necessary to meet EPA renewable volume obligations for attributable products under the Renewable Fuel Standard.
| Benchmark spot prices (dollars per gallon) | 2019 | 2018 | 2017 | |||||||||
| Chicago CBOB unleaded regular gasoline | $ | 1.67 | $ | 1.86 | $ | 1.58 | ||||||
| Chicago ultra-low sulfur diesel | 1.86 | 2.07 | 1.64 | |||||||||
| USGC CBOB unleaded regular gasoline | 1.63 | 1.83 | 1.55 | |||||||||
| USGC ultra-low sulfur diesel | 1.88 | 2.05 | 1.62 | |||||||||
| LA CARBOB | 1.98 | 2.06 | — | |||||||||
| LA CARB diesel | 2.01 | 2.14 | — | |||||||||
| Market Indicators (dollars per barrel) | ||||||||||||
| LLS | $ | 62.69 | $ | 69.93 | $ | 54.00 | ||||||
| WTI | 57.04 | 64.10 | 50.85 | |||||||||
| ANS | 65.04 | 68.46 | 54.44 | |||||||||
| Crack Spreads | ||||||||||||
| USGC LLS 3-2-1 | $ | 8.22 | $ | 7.91 | 8.55 | |||||||
| Mid-Continent WTI 3-2-1 | $ | 14.61 | $ | 14.02 | 12.71 | |||||||
| West Coast ANS 3-2-1 | 17.30 | 11.66 | 14.02 | |||||||||
| Blended 3-2-1(a) | 12.83 | 10.62 | 10.22 | |||||||||
| Crude Oil Differentials | ||||||||||||
| Sweet | $ | (2.35 | ) | $ | (3.83 | ) | $ | (1.04 | ) | |||
| Sour | (3.15 | ) | (7.60 | ) | (5.02 | ) |
| (a) | The blended crack spread for 2019 is weighted 38 percent of the USGC crack spread, 38 percent of the Mid-Continent crack spread and 24 percent of the West Coast crack spread. The blended crack spread for 2018 reflects the average of this same weighting for the fourth quarter of 2018 and a weighting of 60 percent of the USGC crack spread and 40 percent of the Mid-Continent crack spread for the first three quarters of 2018. The 2017 blended crack spread is weighted 60 percent of the USGC crack spread and 40 percent of the Mid-Continent crack spread for the period. These blends are based on MPC’s refining capacity by region in each period. |
2019 Compared to 2018
Refining & Marketing segment revenues increased $24.14 billion primarily due to higher refined product sales volumes, which increased 1,032 mbpd largely due to the acquisition of Andeavor on October 1, 2018, partially offset by decreased average refined product sales prices of $0.10 per gallon.
Refinery crude oil capacity utilization was 96 percent during 2019 and total refinery throughputs increased 838 mbpd primarily due to the refineries acquired from Andeavor.
Refining & Marketing segment income from operations decreased $114 million primarily driven by higher operating, distribution and depreciation and amortization costs in addition to a slight decrease in Refining & Marketing margin on a per barrel basis. The increases in costs and expenses were primarily due to increased sales and production volumes following the Andeavor acquisition.
Refining & Marketing margin was $14.23 per barrel for 2019 compared to $14.25 per barrel for 2018. Refining & Marketing margin is affected by our performance against the market indicators shown earlier, which use spot market values and an estimated mix of crude purchases and product sales. Based on the market indicators and our crude oil throughput, we estimate a net positive impact of $4.46 billion on Refining & Marketing margin, primarily due to an approximate $5.35 billion benefit from increased throughput volume, mainly attributed to the Andeavor acquisition, partially offset by narrower sour and sweet crude oil differentials. Our
reported Refining & Marketing margin differs from market indicators due to the mix of crudes purchased and their costs, the effects of market structure on our crude oil acquisition prices, RIN prices on the crack spread and other items like refinery yields and other feedstock variances. For 2019, the Refining & Marketing segment income from operations also reflects a benefit of $93 million for the biodiesel tax credit attributable to volumes blended in 2018. These factors had an estimated net negative impact on Refining & Marketing segment income from operations of $33 million in 2019 compared to 2018 resulting in a capture rate of 92 percent in 2019 compared to 91 percent in 2018.
The cost of inventories of crude oil and refinery feedstocks, refined products and merchandise is determined primarily under the LIFO method. There were no material liquidations of LIFO inventories in 2019 and 2018.
Refining operating costs, excluding depreciation and amortization, increased $0.67 per barrel and distribution costs, excluding depreciation and amortization, increased $0.28 per barrel primarily due to the inclusion of costs for the refining operations acquired from Andeavor. The per barrel increases, among other items, reflect the addition of Andeavor’s West Coast refineries, which generally have higher operating costs than other regions in which we operate due to specific geographical location and regulatory factors. Distribution costs, excluding depreciation and amortization, include fees paid to MPLX of $3.22 billion and $2.28 billion for 2019 and 2018, respectively. Refining planned turnaround costs decreased $0.15 per barrel due to the timing of turnaround activity. Depreciation and amortization per barrel increased by $0.06, primarily due to the fair value of assets acquired from Andeavor as of October 1, 2018. During 2019, we recorded a $0.01 per barrel adjustment to reduce depreciation and amortization, which reflects the cumulative effects related to a measurement period adjustment arising from the finalization of purchase accounting.
We purchase RINs to satisfy a portion of our RFS2 compliance. Our expenses associated with purchased RINs were $356 million in 2019 and $316 million in 2018. The increase in 2019 was primarily due to an increase in our RIN obligations resulting from the acquisition of Andeavor, partially offset by lower weighted average RIN costs.
2018 Compared to 2017
Refining & Marketing segment revenues increased $17.91 billion in 2018 compared to 2017 primarily due to higher refined product sales prices and volumes, which increased 402 mbpd, and higher refined product sales prices, which increased $0.34 per gallon. The increase in sales volumes is largely due to the acquisition of Andeavor on October 1, 2018. These increases were partially offset by our election to present revenues net of certain taxes under ASC 606 prospectively from January 1, 2018, which resulted in a decrease in Refining & Marketing segment revenues of $4.58 billion in 2019. See Item 8. Financial Statements and Supplementary Data – Note 2 for additional information.
Refining & Marketing segment income from operations increased $160 million primarily due to higher throughputs as a result of the Andeavor acquisition as well as wider sour and sweet crude differentials. For comparison purposes, as noted in the Market Indicators table, 2017 indicators have been included which reflect the new indicators we began using subsequent to the acquisition of Andeavor. Based on this, the USGC, Mid-Continent and West Coast blended 3-2-1 crack spread was $10.62 in 2018 compared to $10.22 in 2017. These crack spreads are net of RIN crack adjustments of $1.61 and $3.57 for 2018 and 2017, respectively.
Based on changes in the market indicators shown above and our refinery throughputs, we estimate a positive impact of $3.40 billion for 2018 compared to 2017 on Refining & Marketing segment income from operations, of which $1.81 billion and $1.59 billion are due to the effects of changes in price and volume, respectively. 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 an estimated negative impact on Refining & Marketing segment income from operations of $698 million in 2018 compared to 2017 resulting in a capture rate of 91 percent in 2018 compared to 93 percent in 2017. The significant elements of the negative impact were unfavorable crude acquisition costs and unfavorable product price realizations relative to the market indicators.
The cost of inventories of crude oil and refinery feedstocks, refined products and merchandise is determined primarily under the LIFO method. There were no material liquidations of LIFO inventories in 2018 and 2017.
Refining operating costs, excluding depreciation and amortization, decreased $0.09 per barrel and depreciation and amortization decreased by $0.11 per barrel primarily due to higher refinery throughput resulting from the addition of the refineries acquired from Andeavor. In addition, these costs decreased due to the dropdown of refining logistics and fuels distribution assets to MPLX on February 1, 2018. Distribution costs, excluding depreciation and amortization, increased $1.85 per barrel mainly due to fees paid to MPLX of $2.28 billion in 2018 for services provided related to the dropdown of refining logistics and fuels distribution assets. The per barrel increase, among other items, also reflects the addition of Andeavor’s West Coast refineries, which generally have higher operating costs than other regions in which we operate due to specific geographical location and regulatory factors. Refining planned turnaround costs increased $0.09 per barrel due to costs related to the additional refineries acquired from Andeavor as well as higher turnaround costs at our Detroit and Canton refineries, partially offset by lower turnaround costs at our Galveston Bay and Garyville refineries.
We purchase RINs to satisfy a portion of our RFS2 compliance. Our expenses associated with purchased RINs were $316 million in 2018 and $457 million in 2017. The decrease in 2018 was primarily due to lower weighted average RIN costs which more than offset the increase in our RIN obligations resulting from the acquisition of Andeavor.
Supplemental Refining & Marketing Statistics
| 2019 | 2018 | 2017 | ||||||
| Refining & Marketing Operating Statistics | ||||||||
| Refined product export sales volumes (mbpd)(a) | 397 | 334 | 297 | |||||
| Crude oil capacity utilization percent(b) | 96 | 96 | 97 | |||||
| Refinery throughputs (mbpd):(c) | ||||||||
| Crude oil refined | 2,902 | 2,081 | 1,765 | |||||
| Other charge and blendstocks | 210 | 193 | 179 | |||||
| Total | 3,112 | 2,274 | 1,944 | |||||
| Sour crude oil throughput percent | 48 | 52 | 59 | |||||
| Sweet crude oil throughput percent | 52 | 48 | 41 | |||||
| Refined product yields (mbpd):(c) | ||||||||
| Gasoline | 1,560 | 1,107 | 932 | |||||
| Distillates | 1,087 | 773 | 641 | |||||
| Feedstocks and petrochemicals | 315 | 288 | 277 | |||||
| Asphalt | 87 | 69 | 63 | |||||
| Propane | 55 | 41 | 36 | |||||
| Heavy fuel oil | 49 | 38 | 37 | |||||
| Total | 3,153 | 2,316 | 1,986 |
| (a) | Represents fully loaded export cargoes for each time period. These sales volumes are included in the total sales volumes amounts. |
| (b) | Based on calendar-day capacity, which is an annual average that includes down time for planned maintenance and other normal operating activities. |
| (c) | Excludes inter-refinery volumes which totaled 110 mbpd, 61 mbpd and 78 mbpd for 2019, 2018 and 2017, respectively, for all regions. |
Retail
| (a) | The price paid by consumers or direct dealers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees (where applicable), divided by gasoline and distillate sales volume. Excludes LCM inventory valuation adjustments. |
| (b) | See “Non-GAAP Measures” section for reconciliation and further information regarding this non-GAAP measure. |
| Key Financial and Operating Data | 2019 | 2018 | 2017 | |||||||||
| Average fuel sales prices (dollars per gallon) | $ | 2.64 | $ | 2.71 | $ | 2.34 | ||||||
| Merchandise sales (in millions) | $ | 6,305 | $ | 5,232 | $ | 4,893 | ||||||
| Merchandise margin (in millions)(a)(b) | $ | 1,827 | $ | 1,486 | $ | 1,402 | ||||||
| Same store gasoline sales volume (period over period)(c) | (3.3 | )% | (1.5 | )% | (1.3 | )% | ||||||
| Same store merchandise sales (period over period)(c)(d) | 5.4 | % | 4.2 | % | 1.2 | % | ||||||
| Convenience stores at period-end | 3,898 | 3,923 | 2,744 | |||||||||
| Direct dealer locations at period-end | 1,068 | 1,065 | — |
| (a) | The price paid by the consumers less the cost of merchandise. |
| (b) | See “Non-GAAP Measures” section for reconciliation and further information regarding this non-GAAP measure. |
| (c) | Same store comparison includes only locations owned at least 13 months. |
| (d) | Excludes cigarettes. |
2019 Compared to 2018
Retail segment revenues increased $9.52 billion primarily due to increased fuel and merchandise sales resulting from the Andeavor acquisition on October 1, 2018. Total fuel sales increased 3.28 billion gallons primarily due to an increase in Speedway fuel sales volumes of 1.37 billion gallons and the addition of direct dealer fuel sales of 1.91 billion gallons, partially offset by a decrease in average gasoline and distillate selling prices of $0.07 per gallon. Merchandise sales increased $1.07 billion.
Retail segment income from operations increased $554 million primarily due to higher light product and merchandise margins largely related to the addition of the Andeavor retail operations. These increases were partially offset by increases in operating expenses and depreciation primarily resulting from the locations acquired from Andeavor.
2018 Compared to 2017
Retail segment revenues increased $4.52 billion. The majority of this increase is due to the acquisition of Andeavor on October 1, 2018, which added company-owned and operated retail locations, which are included in Speedway fuel sales, and direct dealer locations. The existing Retail business also saw a $1.18 billion increase in fuel and merchandise sales. Total fuel sales increased $5.21 billion primarily due to an increase in Speedway fuel sales volumes of 494 million gallons, the addition of direct dealer fuel sales of 644 million gallons and an increase in average gasoline and distillate selling prices of $0.37 per gallon. Merchandise sales increased $339 million. The increases in Speedway fuel sales and merchandise sales as well as the addition of sales to direct dealers were primarily due to the acquisition of Andeavor. These increases were partially offset by our election to present revenues net of certain taxes under ASC 606 prospectively from January 1, 2018, which resulted in a decrease in Retail segment revenues of $844 million in 2018. See Item 8. Financial Statements and Supplementary Data – Note 2 for additional information.
Retail segment income from operations increased $299 million primarily due to contributions from the Retail operations acquired in the Andeavor acquisition. For locations owned prior to the Andeavor acquisition, increased gasoline and distillate and merchandise margins were more than offset by increased operating expenses.
Midstream
| (a) | We adopted ASC 606 (Revenue from Contracts with Customers), as of January 1, 2018, and elected to report certain taxes on a net basis. We applied the standard using the modified retrospective method, and, therefore, comparative information continues to reflect certain taxes on a gross basis. |
| (a) | On owned common-carrier pipelines, excluding equity method investments. |
| (b) | Includes amounts related to unconsolidated equity method investments on a 100 percent basis. |
| Benchmark Prices | 2019 | 2018 | 2017 | |||||||||
| Natural Gas NYMEX HH ($ per MMBtu) | $ | 2.53 | $ | 3.07 | $ | 3.02 | ||||||
| C2 + NGL Pricing ($ per gallon)(a) | $ | 0.52 | $ | 0.78 | $ | 0.66 |
| (a) | 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. |
2019 Compared to 2018
Midstream segment revenue increased $2.10 billion primarily due to the inclusion of ANDX revenues subsequent to the Andeavor acquisition on October 1, 2018. On July 30, 2019, MPLX acquired ANDX. In addition, 2019 reflects an extra month of fees charged for fuels distribution and refining logistics services provided to our Refining & Marketing segment following the February 1, 2018 dropdown to MPLX. MPLX revenues from refining logistics and fuels distribution services provided to MPC were $1.48 billion and $1.36 billion for the years ended December 31, 2019, and 2018, respectively.
In 2019, Midstream segment income from operations increased $842 million largely due to contributions from ANDX in addition to growth across MPLX’s businesses.
2018 Compared to 2017
On February 1, 2018, we completed the dropdown of our refining logistics assets and fuels distribution services to MPLX, which is reported in our Midstream segment. Refining logistics contains the integrated tank farm assets that support MPC’s refining operations. Fuels distribution is structured to provide a broad range of scheduling and marketing services as MPC’s agent. These new businesses were reported in the Midstream segment prospectively from February 1, 2018. No effect was given to prior periods as these entities were not considered businesses prior to February 1, 2018.
Midstream segment revenue and income from operations increased $2.90 billion and $1.41 billion, respectively. Revenue increased $1.94 billion primarily due to fees charged for fuels distribution and refining logistics services following the February 1, 2018 dropdown to MPLX in addition to services provided by ANDX following the acquisition of Andeavor on October 1, 2018. Revenues also increased by approximately $502 million due to ASC 606 gross ups. See Item 8. Financial Statements and Supplementary Data – Note 2 for additional information.
In 2018, Midstream segment income from operations includes $230 million due to contributions from ANDX and $874 million from the refining logistics assets and fuels distribution services contributed to MPLX on February 1, 2018. Prior period Midstream segment results do not reflect the impact of these new businesses. The incremental $309 million increase in Midstream segment results in 2018, was driven by record gathered, processed and fractionated volumes and record pipeline throughput volumes for MPLX.
Items not Allocated to Segments
| Key Financial Information (in millions) | 2019 | 2018 | 2017 | |||||||||
| Items not allocated to segments: | ||||||||||||
| Corporate and other unallocated items(a) | $ | (805 | ) | $ | (502 | ) | $ | (365 | ) | |||
| Equity method investment restructuring gains | 259 | — | — | |||||||||
| Transaction-related costs | (160 | ) | (197 | ) | — | |||||||
| Litigation | (22 | ) | — | (29 | ) | |||||||
| Impairments | (1,239 | ) | 9 | 23 |
| (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 Retail segments. |
2019 Compared to 2018
Corporate and other unallocated expenses increased $303 million in 2019 compared to 2018 largely due to the inclusion of costs and expenses related to Andeavor operations.
Other unallocated items in 2019 include $259 million of equity method investment restructuring gains which include a $207 million gain resulting from the agreements executed with Capline LLC to contribute our 33 percent undivided interest in the Capline pipeline system in exchange for a 33 percent ownership interest in
Capline LLC. We also recognized a $52 million gain due to the formation of a new joint venture with The Andersons as the fair value of our interest in the new venture exceeded our contribution to the venture. See Item 8. Financial Statements and Supplementary Data –Note 14 for additional information.
Other unallocated items also include transaction-related costs of $160 million and a litigation reserve adjustment of $22 million. The transaction-related costs recognized during the year include the recognition of an obligation for vacation benefits provided to former Andeavor employees in the first quarter as well as employee retention, severance and other costs. Beginning in the fourth quarter of 2019, transaction costs also include costs incurred in connection with the Speedway separation, Midstream strategic review and other related efforts. Effective October 1, 2019, we discontinued reporting Andeavor transaction-related costs separately as one year has passed since the Andeavor acquisition and any remaining costs are immaterial.
Impairment charges of $1.24 billion primarily relate to MPLX goodwill associated with the ANDX gathering and processing businesses acquired as part of the Andeavor acquisition. See Item 8. Financial Statements and Supplementary Data – Note 16 for additional information.
2018 Compared to 2017
Corporate and other unallocated expenses increased $137 million in 2018 compared to 2017 largely due to increased costs and expenses for the combined company after the Andeavor acquisition on October 1, 2018.
Other unallocated items in 2018 include $197 million of transaction-related costs for financial advisors, employee severance and other costs associated with the Andeavor acquisition and MPC’s share of gains from the sale of assets remaining from the canceled Sandpiper pipeline project. 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.
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. 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 any LCM inventory market adjustment and other items reflected in the table below.
| Reconciliation of Refining & Marketing income from operations to Refining & Marketing margin (in millions) | 2019 | 2018 | 2017 | ||||||||||
| Refining & Marketing income from operations | $ | 2,367 | $ | 2,481 | $ | 2,321 | |||||||
| Plus (Less): | |||||||||||||
| Refining operating costs(a) | 6,421 | 4,137 | 3,612 | ||||||||||
| Refining depreciation and amortization | 1,465 | 1,089 | 1,013 | ||||||||||
| Refining planned turnaround costs | 740 | 664 | 501 | ||||||||||
| Distribution costs(b) | 5,117 | 3,512 | 1,686 | ||||||||||
| Distribution depreciation and amortization | 200 | 85 | 69 | ||||||||||
| Income from equity method investments | (11 | ) | (15 | ) | (17 | ) | |||||||
| Net gain on disposal of assets | (6 | ) | (4 | ) | 5 | ||||||||
| Other income | (43 | ) | (125 | ) | (249 | ) | |||||||
| Biodiesel tax credit | (93 | ) | — | — | |||||||||
| Refining & Marketing margin | $ | 16,157 | $ | 11,824 | $ | 8,941 |
| (a) | Includes refining operating and major maintenance costs. Excludes planned turnaround and depreciation and amortization expense. |
| (b) | Includes fees paid to MPLX of $3.22 billion and $2.28 billion for the years ended December 31, 2019, and 2018, respectively. Fees paid to MPLX for 2017 are prior to the dropdown of refining logistics and fuels distribution assets and are not comparable. Excludes depreciation and amortization expense. |
Retail Fuel Margin
Retail fuel margin is defined as the price paid by consumers or direct dealers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees (where applicable) and excluding any LCM inventory market adjustment.
Retail Merchandise Margin
Retail merchandise margin is defined as the price paid by consumers less the cost of merchandise.
| Reconciliation of Retail income from operations to Retail total margin (in millions) | 2019 | 2018 | 2017 | ||||||||||
| Retail income from operations | $ | 1,582 | $ | 1,028 | $ | 729 | |||||||
| Plus (Less): | |||||||||||||
| Operating, selling, general and administrative expenses | 2,456 | 1,796 | 1,533 | ||||||||||
| Depreciation and amortization | 528 | 353 | 275 | ||||||||||
| Income from equity method investments | (82 | ) | (74 | ) | (69 | ) | |||||||
| Net gain on disposal of assets | (31 | ) | (17 | ) | (14 | ) | |||||||
| Other income | (44 | ) | (7 | ) | (14 | ) | |||||||
| Retail total margin | $ | 4,409 | $ | 3,079 | $ | 2,440 | |||||||
| Retail total margin: | |||||||||||||
| Fuel margin | $ | 2,478 | $ | 1,547 | $ | 1,008 | |||||||
| Merchandise margin | 1,827 | 1,486 | 1,402 | ||||||||||
| Other margin | 104 | 46 | 30 | ||||||||||
| Retail total margin | $ | 4,409 | $ | 3,079 | $ | 2,440 |
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our cash and cash equivalents balance was $1.53 billion at December 31, 2019 compared to $1.69 billion at December 31, 2018. 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) | 2019 | 2018 | 2017 | |||||||||
| Net cash provided by (used in): | ||||||||||||
| Operating activities | $ | 9,441 | $ | 6,158 | $ | 6,612 | ||||||
| Investing activities | (6,261 | ) | (7,670 | ) | (3,398 | ) | ||||||
| Financing activities | (3,376 | ) | 222 | (1,091 | ) | |||||||
| Total | $ | (196 | ) | $ | (1,290 | ) | $ | 2,123 |
Net cash provided by operating activities increased $3.28 billion in 2019 compared to 2018, primarily due to an increase in operating results, excluding impairment expenses, and favorable change in working capital of $458 million. Net cash provided by operating activities decreased $454 million in 2018 compared to 2017, primarily due to an unfavorable change in working capital of $2.28 billion partially offset by an increase in operating results. The above changes in working capital exclude changes in short-term debt.
For 2019, changes in working capital were a net $118 million source of cash, primarily due to the effect of increases in energy commodity prices and volumes on working capital. Accounts payable increased primarily due to higher crude oil payable price and volumes. Current receivables increased primarily due to increases in crude and refined product receivable volumes and prices. Inventories increased primarily due to increases in refined product and materials & supplies inventories partially offset by a decrease in crude inventory.
For 2018, changes in working capital were a net $340 million use of cash, primarily due to the effect of decreases in energy commodity prices on working capital. Accounts payable decreased primarily due to lower crude oil payable prices. Inventories decreased primarily due to a decrease in crude and refined product inventories. Current receivables decreased primarily due to lower crude oil receivable prices. All of these effects exclude the working capital acquired in connection with the acquisition of Andeavor.
For 2017, changes in working capital were a net $1.94 billion source of cash, primarily due to the effect of increases in energy commodity prices on working capital. Accounts payable increased primarily due to higher crude oil payable volumes and prices; current receivables increased primarily due to higher crude oil and refined product receivable prices and volumes; and inventories decreased primarily due to lower crude oil inventory volumes.
Cash flows used in investing activities decreased $1.41 billion in 2019 compared to 2018 and increased $4.27 billion in 2018 compared to 2017.
| • | 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. |
| • | Cash used for acquisitions of $3.82 billion in 2018 primarily includes cash paid to Andeavor stockholders of $3.5 billion in connection with the acquisition of Andeavor on October 1, 2018. |
| • | Net investments were a use of cash of $966 million in 2019 compared to $393 million in 2018 and $743 million in 2017. Investments in 2019 are largely due to investments in connection with the Gray Oak Pipeline, which began initial start-up in the fourth quarter, the Wink to Webster Pipeline, the Whistler Pipeline and other Midstream projects. Investments in 2017 primarily include MPLX’s $500 million investment to acquire a partial interest in the Bakken Pipeline system. |
| • | Cash provided by disposal of assets totaled $127 million, $54 million and $79 million in 2019, 2018 and 2017, respectively. The increase in 2019 is primarily due to proceeds from the sale of assets in our Retail segment. |
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) | 2019 | 2018 | 2017 | |||||||||
| Additions to property, plant and equipment per consolidated statements of cash flows | $ | 5,374 | $ | 3,578 | $ | 2,732 | ||||||
| Asset retirement expenditures | 1 | 8 | 2 | |||||||||
| Increase (decrease) in capital accruals | (306 | ) | 309 | 67 | ||||||||
| Total capital expenditures | 5,069 | 3,895 | 2,801 | |||||||||
| Investments in equity method investees | 1,064 | 409 | 305 | |||||||||
| Total capital expenditures and investments | $ | 6,133 | $ | 4,304 | $ | 3,106 |
Financing activities were a use of cash of $3.38 billion in 2019, a source of cash of $222 million in 2018 and a use of cash of $1.09 billion in 2017.
| • | Long-term debt borrowings and repayments, including debt issuance costs, were a net $1.18 billion source of cash in 2019 compared to a $5.36 billion source of cash in 2018 and a $2.24 billion source of cash in 2017. During 2019, MPLX issued $2 billion of floating rate notes, the proceeds of which were used to repay various outstanding MPLX borrowings and for general business purposes, and had net borrowings of $1 billion under its term loan agreement. In addition, MPLX repaid $500 million of senior notes. During 2018, MPLX issued $7.75 billion of senior notes, redeemed $750 million of senior notes, borrowed and repaid $4.1 billion under the MPLX term loan, and borrowed and repaid $1.41 billion and $1.92 billion, respectively, under the MPLX Credit Agreement. In addition, MPC redeemed $600 million of senior notes. 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. See Item 8. Financial Statements and Supplementary Data – Note 19 for additional information on our long-term debt. |
| • | Cash used in common stock repurchases totaled $1.95 billion in 2019, $3.29 billion in 2018, and $2.37 billion in 2017. See the “Capital Requirements” section for further discussion of our stock repurchases. |
| • | Cash used in dividend payments totaled $1.40 billion in 2019, $954 million in 2018 and $773 million in 2017. The increase in 2019 was primarily due a net increase in the number of shares outstanding due to the approximate 239.8 million shares issued in connection with the Andeavor acquisition and a $0.28 per share increase in our base dividend, partially offset by a reduction of shares resulting from share repurchases. The increase in 2018 was primarily due to an increase in our base dividend in addition to a net increase in the number of shares of our common stock outstanding due to issuances related to the Andeavor acquisition, partially offset by share repurchases. Dividends per share were $2.12 in 2019, $1.84 in 2018 and $1.52 in 2017. |
| • | Distributions to noncontrolling interests increased $342 million in 2019 compared to 2018 and $209 million in 2018 compared to 2017, primarily due to an increases in MPLX units outstanding and MPLX’s distribution per common unit. Distributions to noncontrolling interests included ANDX’s distribution per common unit paid in the first and second quarter of 2019, prior to the merger of ANDX and MPLX, and the fourth quarter of 2018 subsequent to the acquisition of Andeavor on October 1, 2018. |
| • | Cash proceeds from the issuance of MPLX common units were $473 million in 2017. See Item 8. Financial Statements and Supplementary Data – Note 4 for further discussion of MPLX. |
| • | Cash used in financing activities in 2017 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
MPC, Excluding MPLX
We control MPLX through our ownership of the general partner, however, the creditors of MPLX do not have recourse to MPC’s general credit through guarantees or other financial arrangements. The assets of MPLX can only be used to settle its own obligations and its creditors have no recourse to our assets. Therefore, in the following table, we present the liquidity of MPC, excluding MPLX. MPLX liquidity is discussed in the following section.
Our liquidity, excluding MPLX, totaled $8.3 billion at December 31, 2019 consisting of:
| December 31, 2019 | ||||||||||||
| (In millions) | Total Capacity | Outstanding Borrowings | Available Capacity | |||||||||
| Bank revolving credit facility(a) | $ | 5,000 | $ | 1 | $ | 4,999 | ||||||
| 364 day bank revolving credit facility | 1,000 | — | 1,000 | |||||||||
| Trade receivables facility | 750 | — | 750 | |||||||||
| Total | $ | 6,750 | $ | 1 | $ | 6,749 | ||||||
| Cash and cash equivalents(b) | 1,512 | |||||||||||
| Total liquidity | $ | 8,261 |
| (a) | Outstanding borrowings include $1 million in letters of credit outstanding under this facility. Excludes MPLX’s $3.5 billion bank revolving credit facility, which had no borrowings and no of letters of credit outstanding as of December 31, 2019. |
| (b) | Excludes $15 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.
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, 2019, we had no amounts outstanding under the commercial paper program.
MPC Bank Revolving Credit Facilities – On August 28, 2018, in connection with the Andeavor acquisition, MPC entered into a credit agreement with a syndicate of lenders providing for a $5 billion five-year revolving credit facility that expires in 2023. The five-year credit agreement became effective on October 1, 2018. On July 26, 2019, MPC entered into a credit agreement with a syndicate of lenders providing for a new $1 billion 364-day revolving credit facility that became effective upon the expiration of MPC’s previously existing $1 billion 364-day revolving credit facility in September 2019. The new 364-day credit agreement contains substantially the same terms and conditions as our previously existing 364-day revolving credit facility and will expire in September 2020. There were no borrowings and approximately $1 million of letters of credit outstanding under these facilities at December 31, 2019.
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). On July 19, 2019, we amended our trade receivables facility to extend the maturity date to July 16, 2021. As of December 31, 2019, eligible trade receivables supported borrowings of $750 million. There were no borrowings outstanding at December 31, 2019. Availability under our trade receivables facility is primarily a function of refined product selling prices.
The MPC credit agreements and our trade receivables facility 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 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, 2019, we were in compliance with the covenants contained in the MPC credit agreements and our trade receivables facility, including the financial covenant with a ratio of Consolidated Net Debt to Total Capitalization of 0.21 to 1.00.
Our intention is to maintain an investment-grade credit profile. As of February 1, 2020, the credit ratings on our senior unsecured debt are as follows.
| Company | Rating Agency | Rating |
| MPC | Moody’s | Baa2 (negative 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 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 could increase the applicable interest rates, yields and other fees payable under such agreements and may limit our flexibility to obtain financing in the future, including to refinance existing indebtedness. 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 or other agreements.
See Item 8. Financial Statements and Supplementary Data – Note 19 for further discussion of our debt.
MPLX
MPLX’s liquidity totaled $4.42 billion at December 31, 2019 consisting of:
| December 31, 2019 | ||||||||||||
| (In millions) | Total Capacity | Outstanding Borrowings | Available Capacity | |||||||||
| MPLX LP - bank revolving credit facility | $ | 3,500 | $ | — | $ | 3,500 | ||||||
| MPLX Term Loan Agreement | 1,000 | 1,000 | — | |||||||||
| MPC Intercompany Loan Agreement | 1,500 | 594 | 906 | |||||||||
| Total | $ | 6,000 | $ | 1,594 | $ | 4,406 | ||||||
| Cash and cash equivalents | 15 | |||||||||||
| Total liquidity | $ | 4,421 |
On September 26, 2019, MPLX entered into a term loan agreement which provides for a committed term loan facility for up to an aggregate of $1 billion available to be drawn in up to four separate borrowings, subject to the satisfaction or waiver of certain customary conditions. Borrowings under the term loan agreement bear interest, at MPLX’s election, at either the Adjusted LIBO Rate (as defined in the term loan agreement) plus a margin or the Alternate Base Rate (as defined in the term loan agreement) plus a margin. The applicable margins to the benchmark interest rates fluctuate from time-to-time based on our credit ratings. The proceeds from borrowings under the term loan agreement were used to fund the repayment of MPLX’s existing indebtedness and for general business purposes. Amounts borrowed under the term loan agreement will be due and payable on September 26, 2021.
On September 9, 2019, MPLX issued $2 billion aggregate principal amount of floating rate senior notes in a public offering, consisting of $1 billion aggregate principal amount of notes due September 2021 and $1 billion aggregate principal amount of notes due September 2022. The proceeds were used to repay various outstanding MPLX borrowings and for general business purposes. The interest rate applicable to the floating rate senior notes due September 2021 is LIBOR plus 0.9 percent per annum while the interest rate applicable to the
floating rate senior notes due September 2022 is LIBOR plus 1.1 percent per annum. Interest is payable in March, June, September and December, commencing on December 9, 2019. Both series of floating rate notes are callable, in whole or in part, at par plus accrued and unpaid interest at any time on or after September 10, 2020.
In connection with MPLX’s acquisition of ANDX on July 30, 2019, MPLX assumed ANDX’s outstanding senior notes, which had an aggregate principal amount of $3.75 billion, with interest rates ranging from 3.500 percent to 6.375 percent and maturity dates ranging from 2019 to 2047. On September 23, 2019, approximately $3.06 billion aggregate principal amount of ANDX’s outstanding senior notes were exchanged for new unsecured senior notes issued by MPLX having the same maturity and interest rates as the ANDX senior notes in an exchange offer and consent solicitation undertaken by MPLX, leaving approximately $690 million aggregate principal of outstanding senior notes issued by ANDX. Of this, $500 million was related to the 5.500 percent unsecured senior notes due 2019. The principal amount of $500 million and accrued interest of $14 million was paid on October 15, 2019, which included interest through the payoff date.
MPLX Credit Agreement – Upon the completion of MPLX’s acquisition of ANDX on July 30, 2019, the MPLX bank revolving credit facility was amended and restated to increase the borrowing capacity to $3.5 billion and to extend the maturity date to July 30, 2024. The ANDX revolving and dropdown credit facilities were terminated and all outstanding balances were repaid and funded with borrowings under the amended and restated MPLX $3.5 billion bank revolving credit facility. There were no borrowings or letters of credit outstanding under this facility at December 31, 2019.
The MPLX credit agreement and term loan agreement contain 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 financial covenant 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, 2019, MPLX was in compliance with the covenants, including the financial covenant with a ratio of Consolidated Total Debt to Consolidated EBITDA of 3.9 to 1.0.
Our intention is to maintain an investment-grade credit profile for MPLX. As of February 1, 2020, the credit ratings on MPLX’s senior unsecured debt are as follows.
| Company | Rating Agency | Rating |
| MPLX | Moody’s | Baa2 (negative 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 for MPLX, 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.
Neither the MPLX credit agreement or term loan agreement contains credit rating triggers that would result in the acceleration of interest, principal or other payments in the event that MPLX credit ratings are downgraded. However, any downgrades of MPLX senior unsecured debt could increase the applicable interest rates, yields and other fees payable under such agreements. In addition, a downgrade of MPLX senior unsecured debt ratings to below investment-grade levels may limit MPLX’s ability to obtain future financing, including to refinance existing indebtedness.
See Item 8. Financial Statements and Supplementary Data – Note 19 for further discussion of MPLX’s debt.
Capital Requirements
Capital Spending
MPC’s capital investment plan for 2020 totals approximately $2.6 billion for capital projects and investments, excluding MPLX, capitalized interest and acquisitions. MPC’s 2020 capital investment plan includes all of the planned capital spending for Refining & Marketing, Retail and Corporate as well as a portion of the planned capital investments in Midstream. The remainder of the planned capital spending for Midstream reflects the capital investment plan for MPLX. We continuously evaluate our capital plan and make changes as conditions warrant. The 2020 capital investment plan for MPC and MPLX and capital expenditures and investments for each of the last three years are summarized by segment below.
| (In millions) | 2020 Plan | 2019 | 2018 | 2017 | ||||||||||||
| Capital expenditures and investments:(a) | ||||||||||||||||
| MPC, excluding MPLX | ||||||||||||||||
| Refining & Marketing | $ | 1,550 | $ | 1,999 | $ | 1,057 | $ | 832 | ||||||||
| Retail | 550 | 607 | 460 | 381 | ||||||||||||
| Midstream - Other | 300 | 360 | 70 | 36 | ||||||||||||
| Corporate and Other(b) | 200 | 237 | 157 | 138 | ||||||||||||
| Total MPC, excluding MPLX | $ | 2,600 | $ | 3,203 | $ | 1,744 | $ | 1,387 | ||||||||
| Midstream - MPLX | $ | 1,750 | $ | 2,930 | $ | 2,560 | $ | 1,719 |
| (a) | Capital expenditures include changes in capital accruals. |
| (b) | Includes capitalized interest of $137 million, $80 million and $55 million for 2019, 2018 and 2017, respectively. The 2020 capital investment plan excludes capitalized interest. |
Refining & Marketing
The Refining & Marketing segment’s forecasted 2020 capital spending and investments is approximately $1.6 billion. This amount includes approximately $1.1 billion of growth capital focused on refinery optimization, production of higher value products, increased capacity to upgrade residual fuel oil and expanded export capacity. Maintenance capital is expected to be $450 million.
Major capital projects completed over the last three years have prepared us to increase our diesel production, process light crude oil, increase our export capabilities and meet the transportation fuel regulatory mandate (Tier 3 fuel standards). In addition, the STAR investment project to transform our Galveston Bay refinery into a world-class refining complex is progressing according to plan and is scheduled to complete in 2022.
Retail
The Retail segment’s 2020 capital forecast of approximately $550 million is focused on continued conversion of acquired locations to the Speedway brand and systems, growth in existing and new markets, dealer sites, commercial fueling/diesel expansion, food service through store remodels and high quality acquisitions.
Major capital projects over the last three years included converting recently acquired locations to the Speedway brand and systems, 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.
Midstream
MPLX’s capital investment plan includes $1.5 billion of organic growth capital and approximately $250 million of maintenance capital. This growth plan includes the continued expansion of the Mt. Airy terminal in addition to projects which increase MPLX’s long-haul crude oil, natural gas and NGL pipeline transportation capabilities. Many of MPLX’s projects also increase its export capabilities which provides for additional flexibility and competitive advantages. MPLX’s growth plan also includes the addition of approximately 580 MMcf/d of processing capacity at three gas processing plants, one in the Marcellus and two in the Southwest, and approximately 80 mbpd of fractionation capacity in the Marcellus and Utica basins.
Major capital projects over the 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 remaining Midstream segment’s forecasted 2020 capital spend, excluding MPLX, is approximately $300 million which primarily relates to investments in equity affiliates.
Corporate and Other
The 2020 capital forecast includes approximately $200 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.
Dividends
On January 27, 2020, we announced our board of directors approved a $0.58 per share dividend, payable March 10, 2020 to shareholders of record at the close of business on February 19, 2020.
Share Repurchases
Since January 1, 2012, our board of directors has approved $18.0 billion in total share repurchase authorizations and we have repurchased a total of $15.0 billion of our common stock, leaving approximately $3.0 billion available for repurchases as of December 31, 2019. Under these authorizations, we have acquired 327 million shares at an average cost per share of $46.05. 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) | 2019 | 2018 | 2017 | ||||||||
| Number of shares repurchased | 34 | 47 | 44 | ||||||||
| Cash paid for shares repurchased | $ | 1,950 | $ | 3,287 | $ | 2,372 | |||||
| Average cost per share | $ | 58.87 | $ | 69.46 | $ | 53.85 |
We may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, tender offers, 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.
Other Capital Requirements
In 2019, we made contributions totaling $270 million to our funded pension plans. For 2020, we have an immaterial amount of required funding, but we may also make voluntary contributions to our funded pension plans at our discretion.
We may, from time to time, repurchase notes in the open market, in tender offers, in privately-negotiated transactions or otherwise in such volumes, at such prices and upon such other terms as we deem appropriate.
Contractual Cash Obligations
The table below provides aggregated information on our consolidated obligations to make future payments under existing contracts as of December 31, 2019. 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 | 2020 | 2021-2022 | 2023-2024 | Later Years | |||||||||||||||
| Long-term debt(a) | $ | 46,013 | $ | 1,971 | $ | 7,711 | $ | 7,051 | $ | 29,280 | ||||||||||
| Finance lease obligations(b) | 987 | 96 | 182 | 182 | 527 | |||||||||||||||
| Operating lease obligations | 2,833 | 698 | 992 | 509 | 634 | |||||||||||||||
| Purchase obligations:(c) | ||||||||||||||||||||
| Crude oil, feedstock, refined product and renewable fuel contracts(d) | 10,011 | 9,645 | 225 | 47 | 94 | |||||||||||||||
| Transportation and related contracts | 2,298 | 468 | 829 | 532 | 469 | |||||||||||||||
| Contracts to acquire property, plant and equipment | 1,617 | 1,558 | 59 | — | — | |||||||||||||||
| Service, materials and other contracts(e) | 2,693 | 644 | 779 | 505 | 765 | |||||||||||||||
| Total purchase obligations | 16,619 | 12,315 | 1,892 | 1,084 | 1,328 | |||||||||||||||
| Other long-term liabilities reported in the consolidated balance sheet(f) | 2,889 | 311 | 552 | 555 | 1,471 | |||||||||||||||
| Total contractual cash obligations | $ | 69,341 | $ | 15,391 | $ | 11,329 | $ | 9,381 | $ | 33,240 |
| (a) | Includes interest payments of $17.21 billion for our senior notes and the MPLX senior notes, commitment and administrative fees for our credit agreements, the MPLX credit agreement and term loan agreement and our trade receivables facility. |
| (b) | Finance 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 2029. See Item 8. Financial Statements and Supplementary Data – Note 23. |
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 our spinoff from Marathon Oil, we entered into various indemnities and guarantees to Marathon Oil. These arrangements are described in Item 8. Financial Statements and Supplementary Data – Note 26.
TRANSACTIONS WITH RELATED PARTIES
We believe that transactions with related parties were conducted on terms comparable to those with unaffiliated 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) | 2019 | 2018 | 2017 | |||||||||
| Capital | $ | 555 | $ | 380 | $ | 343 | ||||||
| Compliance:(a) | ||||||||||||
| Operating and maintenance | 580 | 525 | 413 | |||||||||
| Remediation(b) | 78 | 52 | 36 | |||||||||
| Total | $ | 1,213 | $ | 957 | $ | 792 |
| (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. 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 11 percent, 10 percent and 12 percent of capital expenditures, for 2019, 2018 and 2017, respectively, excluding acquisitions. Our environmental capital expenditures are expected to approximate $160 million, or 4 percent, of total planned capital expenditures in 2020. 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 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 financial information prepared using significant assumptions including:
| • | 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, Retail and Midstream segments operations personnel. Assumptions about our customers’ drilling activity are inherently subjective and contingent upon a number of variable factors (including future or |
expected pricing considerations), many of which are difficult to forecast. Management considers these volume forecasts and other factors when developing our forecasted cash flows.
| • | 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 materially 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 or retail fuel margins, other changes to contracts or changes in the regulatory environment.
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, company-owned convenience store locations for Retail segment assets, 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.
Unlike long-lived assets, goodwill is subject to annual, or more frequent if necessary, impairment testing at the reporting unit level. A goodwill impairment loss is measured as the amount by which a reporting unit's carrying value exceeds its fair value, without exceeding the recorded amount of goodwill. As of December 31, 2019, we had a total of $20.04 billion of goodwill recorded on our consolidated balance sheet, which was associated with eight of our ten reporting units.
Prior to performing our annual impairment assessment as of November 30, 2019, MPC had goodwill totaling approximately $21.28 billion associated with nine reporting units. As part of this assessment, MPLX recorded approximately $1.2 billion of impairment expense in the fourth quarter of 2019 related to its Western Gathering & Processing (“G&P”) reporting unit, which brought the amount of goodwill recorded within this reporting unit to zero. The impairment was primarily driven by updated guidance related to the slowing of drilling activity, which has reduced production growth forecasts from MPLX’s producer customers. For the eight remaining reporting units with goodwill, we determined that no significant adjustments to the carrying value of goodwill were necessary. The annual impairment assessment for these eight reporting units resulted in the fair value of the reporting units exceeding their carrying value by percentages ranging from approximately 8 percent to 457 percent. The reporting unit for which fair value exceeded its carrying amount by 8 percent, our Midstream Crude Gathering reporting unit, had goodwill totaling $1.1 billion at December 31, 2019. The operations which make up this reporting unit were acquired through our acquisition of Andeavor and were subsequently acquired by MPLX on July 30, 2019 through a common control transaction. We accounted for the October 1, 2018 acquisition of Andeavor, including acquiring control of ANDX, using the acquisition method of accounting, which required Andeavor assets and liabilities to be recorded by us at the acquisition date fair value. As such, given the short amount of time from when fair value was established to the date of the annual impairment test, the amount by which the fair value exceeded the carrying value within this reporting unit is not unexpected. Also, our Midstream Eastern G&P reporting unit had fair value exceeding its carrying value of approximately 18 percent and had goodwill totaling $1.8 billion as of December 31, 2019. An increase of one percentage point to the discount rate used to estimate the fair value of this reporting unit would not have resulted in goodwill impairment as of November 30, 2019. No other MPC reporting units had fair values exceeding carrying values of less than 19 percent.
Significant assumptions used to estimate the reporting units’ fair value included estimates of future cash flows and market information for comparable assets. If estimates for future cash flows, which are impacted by producer customers’ development plans, which impact future volumes and capital requirements, 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. During the fourth quarter of 2019, two of the joint ventures in which MPLX has an interest recorded impairments, which impacted the amount of income from equity method investments during the period by approximately $28 million. For one of the joint ventures, MPLX also had a basis difference which was being amortized over the life of the underlying assets. As a result of the impairment recorded by the joint venture, MPLX also assessed this basis difference for impairment and recorded approximately $14 million of impairment during the quarter related to this investment, which was recorded through “Income from equity method investments”. This impairment was largely due to a reduction in forecasted volumes of the joint venture related to the loss of one of its customers. At December 31, 2019, we had $6.90 billion of investments in equity method investments recorded on our consolidated balance sheet.
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.
See Item 8. Financial Statements and Supplementary Data – Note 14 for additional information on our equity method investments. See Item 8. Financial Statements and Supplementary Data – Note 16 for additional information on our goodwill and intangibles, including a table summarizing our recorded goodwill by segment.
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 valuation 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 future cash flows 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 materially 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 each of our pension plans and retiree health and welfare based on the projected benefit payment patterns of each individual plan. The selected rates are compared to various similar bond indexes for reasonableness. In determining the assumed discount rates, we use our third-party actuaries’ discount rate models. These models calculate an equivalent single discount rate for the projected benefit plan cash flows using yield curves derived from Aa or higher bond yields. The yield curves represent 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 3.20 percent for our pension plans and 3.25 percent for our other postretirement benefit plans by 0.25 percent would increase pension obligations and other postretirement benefit plan obligations by $90 million and $37 million, respectively, and would increase defined benefit pension expense and other postretirement benefit plan expense by $12 million and $3 million, respectively.
The long-term asset rate of return assumption considers the asset mix of the plans (currently targeted at approximately 42 percent equity securities and 58 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 6.15 percent long-term rate of return to determine our 2019 defined benefit pension expense. After evaluating activity in the capital markets, along with the current and projected plan investments, we decreased the asset rate of return for our primary plan to 6.00 percent effective for 2020. Decreasing the 6.00 percent asset rate of return assumption by 0.25 percent would increase our defined benefit pension expense by $5 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 2019 mortality tables from the U.S. Society of Actuaries.
Item 8. Financial Statements and Supplementary Data – Note 23 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.
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.
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