filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
MANAGEMENT’S RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Marathon Petroleum Corporation and its subsidiaries (“MPC”) are the responsibility of management and have been prepared in conformity with accounting principles generally accepted in the United States of America. They necessarily include some amounts that are based on best judgments and estimates. The financial information displayed in other sections of this Annual Report on Form 10-K is consistent with these consolidated financial statements.
MPC seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization.
The board of directors pursues its oversight role in the area of financial reporting and internal control over financial reporting through its Audit Committee. This committee, composed solely of independent directors, regularly meets (jointly and separately) with the independent registered public accounting firm, management and internal auditors to monitor the proper discharge by each of their responsibilities relative to internal accounting controls and the consolidated financial statements.
| /s/ Gary R. Heminger | /s/ Donald C. Templin | /s/ John J. Quaid | ||
| Gary R. Heminger Chairman of the Board and Chief Executive Officer | Donald C. Templin Executive Vice President and Chief Financial Officer | John J. Quaid Vice President and Controller |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
MPC’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended). An evaluation of the design and effectiveness of our internal control over financial reporting, based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, was conducted under the supervision and with the participation of management, including our chief executive officer and chief financial officer. Based on the results of this evaluation, MPC’s management concluded that its internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of MPC’s internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
| /s/ Gary R. Heminger | /s/ Donald C. Templin | |||
| Gary R. Heminger Chairman of the Board and Chief Executive Officer | Donald C. Templin Executive Vice President and Chief Financial Officer |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Marathon Petroleum Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Marathon Petroleum Corporation and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, of comprehensive income, of equity and redeemable noncontrolling interest and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Tests - Certain Midstream Reporting Units
As described in Notes 2 and 16 to the consolidated financial statements, the Company’s consolidated goodwill balance was $20.0 billion as of December 31, 2019. As disclosed by management, within the midstream segment, the goodwill associated with the Eastern Gathering and Processing reporting unit amounted to $1.8 billion and goodwill associated with the Crude Gathering reporting unit amounted to $1.1 billion. In addition, an impairment charge of $1.2 billion was recorded in 2019 related to the Western Gathering and Processing reporting unit, which brought the amount of goodwill recorded within this reporting unit to zero. Management conducts impairment tests as of November 30 of each year or more frequently if events or circumstances indicate that reporting unit carrying values of goodwill may be impaired. As a result of a change in reporting units during 2019, management performed impairment tests on these reporting units prior to and immediately following the change in reporting units. The fair value of each reporting unit is determined using a combination of income and market approach methods. The significant assumptions that were used to develop the estimates of the fair values of each reporting unit under the income approach include the discount rate as well as estimates of future cash flows, which are impacted primarily by producer customers’ development plans, which impact future volumes and capital requirements.
The principal considerations for our determination that performing procedures relating to the goodwill impairment tests of the Company’s Eastern Gathering and Processing, Western Gathering and Processing, and Crude Gathering reporting units, as well as certain related reporting units prior to the change, is a critical audit matter are there was significant judgment by management when estimating the fair values of the reporting units. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing audit procedures and evaluating evidence related to management’s fair value estimates and significant assumptions related to producer customers’ development plans, which impact future volumes and capital requirements.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment tests, including controls over the estimation of the fair values of the Eastern Gathering and Processing, Western Gathering and Processing, and Crude Gathering reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the valuation methods used; testing the completeness and accuracy of underlying data used by management; and evaluating the reasonableness of significant assumptions related to producer customers’ development plans, which impact future volumes and capital requirements used in determining the fair values of each reporting unit under the income approach. Professionals with specialized skill and knowledge were utilized to assist in evaluating the appropriateness of the Company’s income and market approach methods. Evaluating the assumptions related to producer customers’ development plans, which impact future volumes and capital requirements involved (i) considering whether the assumptions used were reasonable based on past performance of each reporting unit, producer customers’ historical and future production volumes, historical and approved future capital projects, and
industry outlook reports, and (ii) considering whether the assumptions were consistent with evidence obtained in other areas of the audit.
/s/PricewaterhouseCoopers LLP
Toledo, Ohio
February 28, 2020
We have served as the Company’s auditor since 2010.
MARATHON PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| (In millions, except per share data) | 2019 | 2018 | 2017 | ||||||||
| Revenues and other income: | |||||||||||
| Sales and other operating revenues(a) | $ | 123,949 | $ | 96,504 | $ | 74,733 | |||||
| Income from equity method investments | 394 | 373 | 306 | ||||||||
| Net gain on disposal of assets | 307 | 23 | 10 | ||||||||
| Other income | 163 | 202 | 320 | ||||||||
| Total revenues and other income | 124,813 | 97,102 | 75,369 | ||||||||
| Costs and expenses: | |||||||||||
| Cost of revenues (excludes items below)(a) | 110,243 | 86,066 | 67,089 | ||||||||
| Impairment expense | 1,197 | — | — | ||||||||
| Depreciation and amortization | 3,638 | 2,490 | 2,114 | ||||||||
| Selling, general and administrative expenses | 3,408 | 2,418 | 1,694 | ||||||||
| Other taxes | 751 | 557 | 454 | ||||||||
| Total costs and expenses | 119,237 | 91,531 | 71,351 | ||||||||
| Income from operations | 5,576 | 5,571 | 4,018 | ||||||||
| Net interest and other financial costs | 1,247 | 1,003 | 674 | ||||||||
| Income before income taxes | 4,329 | 4,568 | 3,344 | ||||||||
| Provision (benefit) for income taxes | 1,074 | 962 | (460 | ) | |||||||
| Net income | 3,255 | 3,606 | 3,804 | ||||||||
| Less net income attributable to: | |||||||||||
| Redeemable noncontrolling interest | 81 | 75 | 65 | ||||||||
| Noncontrolling interests | 537 | 751 | 307 | ||||||||
| Net income attributable to MPC | $ | 2,637 | $ | 2,780 | $ | 3,432 | |||||
| Per Share Data (See Note 8) | |||||||||||
| Basic: | |||||||||||
| Net income attributable to MPC per share | $ | 4.00 | $ | 5.36 | $ | 6.76 | |||||
| Weighted average shares outstanding | 659 | 518 | 507 | ||||||||
| Diluted: | |||||||||||
| Net income attributable to MPC per share | $ | 3.97 | $ | 5.28 | $ | 6.70 | |||||
| Weighted average shares outstanding | 664 | 526 | 512 |
| (a) | The 2019 and 2018 periods reflect an election to present certain taxes on a net basis concurrent with our adoption of ASU 2014-09, Revenue - Revenue from Contracts with Customers (“ASC 606”). See Note 2 for further information. |
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| (Millions of dollars) | 2019 | 2018 | 2017 | ||||||||
| Net income | $ | 3,255 | $ | 3,606 | $ | 3,804 | |||||
| Other comprehensive income (loss): | |||||||||||
| Defined benefit plans: | |||||||||||
| Actuarial changes, net of tax of ($40), $14 and $17, respectively | (147 | ) | 75 | 29 | |||||||
| Prior service credit, net of tax of ($17), $12 and ($16), respectively | (27 | ) | 8 | (26 | ) | ||||||
| Other, net of tax of ($1), $1 and $0, respectively | (2 | ) | 4 | — | |||||||
| Other comprehensive income (loss) | (176 | ) | 87 | 3 | |||||||
| Comprehensive income | 3,079 | 3,693 | 3,807 | ||||||||
| Less comprehensive income attributable to: | |||||||||||
| Redeemable noncontrolling interest | 81 | 75 | 65 | ||||||||
| Noncontrolling interests | 537 | 751 | 307 | ||||||||
| Comprehensive income attributable to MPC | $ | 2,461 | $ | 2,867 | $ | 3,435 |
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 31, | |||||||
| (Millions of dollars, except share data) | 2019 | 2018 | |||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 1,527 | $ | 1,687 | |||
| Receivables, less allowance for doubtful accounts of $17 and $9, respectively | 7,872 | 5,853 | |||||
| Inventories | 10,243 | 9,837 | |||||
| Other current assets | 528 | 646 | |||||
| Total current assets | 20,170 | 18,023 | |||||
| Equity method investments | 6,898 | 5,898 | |||||
| Property, plant and equipment, net | 45,615 | 45,058 | |||||
| Goodwill | 20,040 | 20,184 | |||||
| Right of use assets(a) | 2,459 | — | |||||
| Other noncurrent assets | 3,374 | 3,777 | |||||
| Total assets | $ | 98,556 | $ | 92,940 | |||
| Liabilities | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 11,623 | $ | 9,366 | |||
| Payroll and benefits payable | 1,126 | 1,152 | |||||
| Accrued taxes | 1,186 | 1,446 | |||||
| Debt due within one year | 711 | 544 | |||||
| Operating lease liabilities(a) | 604 | — | |||||
| Other current liabilities | 897 | 708 | |||||
| Total current liabilities | 16,147 | 13,216 | |||||
| Long-term debt | 28,127 | 26,980 | |||||
| Deferred income taxes | 6,392 | 4,864 | |||||
| Defined benefit postretirement plan obligations | 1,643 | 1,509 | |||||
| Long-term operating lease liabilities(a) | 1,875 | — | |||||
| Deferred credits and other liabilities | 1,265 | 1,318 | |||||
| Total liabilities | 55,449 | 47,887 | |||||
| Commitments and contingencies (see Note 26) | |||||||
| Redeemable noncontrolling interest | 968 | 1,004 | |||||
| Equity | |||||||
| MPC stockholders’ equity: | |||||||
| Preferred stock, no shares issued and outstanding (par value $0.01 per share, 30 million shares authorized) | — | — | |||||
| Common stock: | |||||||
| Issued – 978 million and 975 million shares (par value $0.01 per share, 2 billion shares authorized) | 10 | 10 | |||||
| Held in treasury, at cost – 329 million and 295 million shares | (15,143 | ) | (13,175 | ) | |||
| Additional paid-in capital | 33,157 | 33,729 | |||||
| Retained earnings | 15,990 | 14,755 | |||||
| Accumulated other comprehensive loss | (320 | ) | (144 | ) | |||
| Total MPC stockholders’ equity | 33,694 | 35,175 | |||||
| Noncontrolling interests | 8,445 | 8,874 | |||||
| Total equity | 42,139 | 44,049 | |||||
| Total liabilities, redeemable noncontrolling interest and equity | $ | 98,556 | $ | 92,940 |
| (a) | We adopted ASU No. 2016-02, Leases (“ASC 842”), as of January 1, 2019. See Notes 3 and 25 for further information. |
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| (Millions of dollars) | 2019 | 2018 | 2017 | ||||||||
| Operating activities: | |||||||||||
| Net income | $ | 3,255 | $ | 3,606 | $ | 3,804 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Amortization of deferred financing costs and debt discount | 33 | 70 | 64 | ||||||||
| Impairment expense | 1,197 | — | — | ||||||||
| Depreciation and amortization | 3,638 | 2,490 | 2,114 | ||||||||
| Pension and other postretirement benefits, net | (64 | ) | 90 | 47 | |||||||
| Deferred income taxes | 1,023 | 47 | (1,233 | ) | |||||||
| Net gain on disposal of assets | (307 | ) | (23 | ) | (10 | ) | |||||
| Income from equity method investments | (394 | ) | (373 | ) | (306 | ) | |||||
| Distributions from equity method investments | 662 | 519 | 391 | ||||||||
| Changes in the fair value of derivative instruments | (8 | ) | (62 | ) | 116 | ||||||
| Changes in operating assets and liabilities, net of effects of businesses acquired: | |||||||||||
| Current receivables | (2,024 | ) | 1,589 | (1,093 | ) | ||||||
| Inventories | (366 | ) | 931 | 106 | |||||||
| Current accounts payable and accrued liabilities | 2,502 | (2,798 | ) | 2,814 | |||||||
| Right of use assets and operating lease liabilities, net | 14 | — | — | ||||||||
| All other, net | 280 | 72 | (202 | ) | |||||||
| Net cash provided by operating activities | 9,441 | 6,158 | 6,612 | ||||||||
| Investing activities: | |||||||||||
| Additions to property, plant and equipment | (5,374 | ) | (3,578 | ) | (2,732 | ) | |||||
| Acquisitions, net of cash acquired | (129 | ) | (3,822 | ) | (249 | ) | |||||
| Disposal of assets | 127 | 54 | 79 | ||||||||
| Investments – acquisitions, loans and contributions | (1,064 | ) | (409 | ) | (805 | ) | |||||
| – redemptions, repayments and return of capital | 98 | 16 | 62 | ||||||||
| All other, net | 81 | 69 | 247 | ||||||||
| Net cash used in investing activities | (6,261 | ) | (7,670 | ) | (3,398 | ) | |||||
| Financing activities: | |||||||||||
| Commercial paper – issued | — | — | 300 | ||||||||
| – repayments | — | — | (300 | ) | |||||||
| Long-term debt – borrowings | 14,274 | 13,476 | 2,911 | ||||||||
| – repayments | (13,073 | ) | (8,032 | ) | (642 | ) | |||||
| Debt issuance costs | (22 | ) | (86 | ) | (33 | ) | |||||
| Issuance of common stock | 10 | 24 | 46 | ||||||||
| Common stock repurchased | (1,950 | ) | (3,287 | ) | (2,372 | ) | |||||
| Dividends paid | (1,398 | ) | (954 | ) | (773 | ) | |||||
| Issuance of MPLX LP common units | — | — | 473 | ||||||||
| Distributions to noncontrolling interests | (1,245 | ) | (903 | ) | (694 | ) | |||||
| Contributions from noncontrolling interests | 97 | 12 | 129 | ||||||||
| Contingent consideration payment | — | — | (89 | ) | |||||||
| All other, net | (69 | ) | (28 | ) | (47 | ) | |||||
| Net cash provided by (used in) financing activities | (3,376 | ) | 222 | (1,091 | ) | ||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | (196 | ) | (1,290 | ) | 2,123 | ||||||
| Cash, cash equivalents and restricted cash at beginning of period | 1,725 | 3,015 | 892 | ||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 1,529 | $ | 1,725 | $ | 3,015 |
The accompanying notes are an integral part of these consolidated financial statements.
MARATHON PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
| MPC Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interest | ||||||||||||||||||||||||||||||
| (Shares in millions; amounts in millions of dollars) | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance as of December 31, 2016 | 731 | $ | 7 | (203 | ) | $ | (7,482 | ) | $ | 11,060 | $ | 10,206 | $ | (234 | ) | $ | 6,646 | $ | 20,203 | $ | 1,000 | ||||||||||||||||
| Net income | — | — | — | — | — | 3,432 | — | 307 | 3,739 | 65 | |||||||||||||||||||||||||||
| Dividends declared on common stock ($1.52 per share) | — | — | — | — | — | (774 | ) | — | — | (774 | ) | — | |||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | (629 | ) | (629 | ) | (65 | ) | ||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | — | — | 129 | 129 | — | |||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 3 | — | 3 | — | |||||||||||||||||||||||||||
| Shares repurchased | — | — | (44 | ) | (2,372 | ) | — | — | — | — | (2,372 | ) | — | ||||||||||||||||||||||||
| Stock-based compensation | 3 | — | (1 | ) | (15 | ) | 92 | — | — | 8 | 85 | — | |||||||||||||||||||||||||
| Equity transactions of MPLX | — | — | — | — | 110 | — | — | 334 | 444 | — | |||||||||||||||||||||||||||
| Balance as of December 31, 2017 | 734 | $ | 7 | (248 | ) | $ | (9,869 | ) | $ | 11,262 | $ | 12,864 | $ | (231 | ) | $ | 6,795 | $ | 20,828 | $ | 1,000 | ||||||||||||||||
| Cumulative effect of adopting new accounting standards | — | — | — | — | — | 66 | — | 2 | 68 | — | |||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 2,780 | — | 751 | 3,531 | 75 | |||||||||||||||||||||||||||
| Dividends declared on common stock ($1.84 per share) | — | — | — | — | — | (955 | ) | — | — | (955 | ) | — | |||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | (832 | ) | (832 | ) | (71 | ) | ||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | — | — | 12 | 12 | — | |||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 87 | — | 87 | — | |||||||||||||||||||||||||||
| Shares repurchased | — | — | (47 | ) | (3,287 | ) | — | — | — | — | (3,287 | ) | — | ||||||||||||||||||||||||
| Stock based compensation | 1 | 1 | — | (18 | ) | 345 | — | — | 14 | 342 | — | ||||||||||||||||||||||||||
| Equity transactions of MPLX & ANDX | — | — | — | — | 2,357 | — | — | (2,927 | ) | (570 | ) | — | |||||||||||||||||||||||||
| Issuance of shares for Andeavor acquisition | 240 | 2 | — | (1 | ) | 19,765 | — | — | — | 19,766 | — | ||||||||||||||||||||||||||
| Noncontrolling interest acquired from Andeavor | — | — | — | — | — | — | — | 5,059 | 5,059 | — | |||||||||||||||||||||||||||
| Balance as of December 31, 2018 | 975 | $ | 10 | (295 | ) | $ | (13,175 | ) | $ | 33,729 | $ | 14,755 | $ | (144 | ) | $ | 8,874 | $ | 44,049 | $ | 1,004 | ||||||||||||||||
| Net income | — | — | — | — | — | 2,637 | — | 537 | 3,174 | 81 | |||||||||||||||||||||||||||
| Dividends declared on common stock ($2.12 per share) | — | — | — | — | — | (1,402 | ) | — | — | (1,402 | ) | — | |||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | (1,164 | ) | (1,164 | ) | (81 | ) | ||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | — | — | 97 | 97 | — | |||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (176 | ) | — | (176 | ) | — | |||||||||||||||||||||||||
| Shares repurchased | — | — | (34 | ) | (1,950 | ) | — | — | — | — | (1,950 | ) | — | ||||||||||||||||||||||||
| Stock based compensation | 3 | — | — | (18 | ) | 112 | — | — | 7 | 101 | — | ||||||||||||||||||||||||||
| Equity transactions of MPLX & ANDX | — | — | — | — | (684 | ) | — | — | 94 | (590 | ) | (36 | ) | ||||||||||||||||||||||||
| Balance as of December 31, 2019 | 978 | $ | 10 | (329 | ) | $ | (15,143 | ) | $ | 33,157 | $ | 15,990 | $ | (320 | ) | $ | 8,445 | $ | 42,139 | $ | 968 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1**.** | DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION |
Description of the Business
We are a leading, integrated, downstream energy company headquartered in Findlay, Ohio. We operate the nation's largest refining system with more than 3 million barrels per day of crude oil capacity across 16 refineries. We sell refined products to wholesale marketing customers domestically and internationally, to buyers on the spot market, to consumers through our Retail business segment and to independent entrepreneurs who operate approximately 6,900 branded outlets. Our retail operations own and operate approximately 3,900 retail transportation fuel and convenience stores across the United States and also sell transportation fuel to consumers through approximately 1,070 direct dealer locations under long-term supply contracts. MPC’s midstream operations are primarily conducted through MPLX LP (“MPLX”), which owns and operates crude oil and refined product transportation and logistics infrastructure and natural gas and NGL gathering, processing, and fractionation assets. We own the general partner and a majority limited partner interest in MPLX.
Refer to Note 5 for further information on the Andeavor acquisition, which closed on October 1, 2018, and to Notes 4 and 10 for additional information about our operations.
On October 31, 2019, we announced plans 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 by year-end 2020, subject to market, regulatory and certain other conditions, including final approval by the MPC 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. Subsequent to the completion of the separation, the historical results of the Speedway business will be presented as discontinued operations in our consolidated financial statements.
Basis of Presentation
All significant intercompany transactions and accounts have been eliminated.
Certain prior period financial statement amounts have been reclassified to conform to current period presentation.
| 2**.** | SUMMARY OF PRINCIPAL ACCOUNTING POLICIES |
Principles Applied in Consolidation
These consolidated financial statements include the accounts of our majority-owned, controlled subsidiaries and MPLX. As of December 31, 2019, we owned the general partner and 63 percent of the outstanding MPLX common units. Due to our ownership of the general partner interest, we have determined that we control MPLX and therefore we consolidate MPLX and record a noncontrolling interest for the interest owned by the public. Changes in ownership interest in consolidated subsidiaries that do not result in a change in control are recorded as equity transactions.
Investments in entities over which we have significant influence, but not control, are accounted for using the equity method of accounting. This includes entities in which we hold majority ownership but the minority shareholders have substantive participating rights. Income from equity method investments represents our proportionate share of net income generated by the equity method investees.
Differences in the basis of the investments and the separate net asset values of the investees, if any, are amortized into net income over the remaining useful lives of the underlying assets and liabilities, except for any excess related to goodwill. Equity method investments are evaluated for impairment whenever changes in the facts and circumstances indicate an other than temporary loss in value has occurred. When the loss is deemed to be other than temporary, the carrying value of the equity method investment is written down to fair value.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management 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.
Revenue Recognition
We recognize revenue based on consideration specified in contracts or agreements with customers when we satisfy our performance obligations by transferring control over products or services to a customer. Concurrent with our adoption of ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), as of January 1, 2018, we made an accounting policy election that all taxes assessed by a governmental authority that are both imposed on and concurrent with a revenue-producing transaction and collected from our customers will be recognized on a net basis within sales and other operating revenues.
The adoption of ASC 606 did not materially change our revenue recognition patterns, which are described below by reportable segment:
| • | Refining & Marketing - The vast majority of our Refining & Marketing contracts contain pricing that is based on the market price for the product at the time of delivery. Our obligations to deliver product volumes are typically satisfied and revenue is recognized when control of the product transfers to our customers. Concurrent with the transfer of control, we typically receive the right to payment for the delivered product, the customer accepts the product and the customer has significant risks and rewards of ownership of the product. Payment terms require customers to pay shortly after delivery and do not contain significant financing components. |
| • | Retail - Revenue is recognized when our customers receive control of the transportation fuels or merchandise. Payments from customers are received at the time sales occur in cash or by credit or debit card at our company-owned and operated retail locations and shortly after delivery for our direct dealers. Speedway offers a loyalty rewards program to its customers. We defer a minor portion of revenue on sales to the loyalty program participants until the participants redeem their rewards. The related contract liability, as defined in ASC 606, is not material to our financial statements. |
| • | Midstream - Midstream revenue transactions typically are defined by contracts under which we sell a product or provide a service. Revenues from sales of product are recognized when control of the product transfers to the customer. Revenues from sales of services are recognized over time when the performance obligation is satisfied as services are provided in a series. We have elected to use the output measure of progress to recognize revenue based on the units delivered, processed or transported. The transaction prices in our Midstream contracts often have both fixed components, related to minimum volume commitments, and variable components, which are primarily dependent on volumes. Variable consideration will generally not be estimated at contract inception as the transaction price is specifically allocable to the services provided at each period end. |
Refer to Note 20 for disclosure of our revenue disaggregated by segment and product line and to Note 10 for a description of our reportable segment operations.
Crude Oil and Refined Product Exchanges and Matching Buy/Sell Transactions
We enter into exchange contracts and matching buy/sell arrangements whereby we agree to deliver a particular quantity and quality of crude oil or refined products at a specified location and date to a particular counterparty and to receive from the same counterparty the same commodity at a specified location on the same or another specified date. The exchange receipts and deliveries are nonmonetary transactions, with the exception of associated grade or location differentials that are settled in cash. The matching buy/sell purchase and sale transactions are settled in cash. No revenues are recorded for exchange and matching buy/sell transactions as they are accounted for as exchanges of inventory. The exchange transactions are recognized at the carrying amount of the inventory transferred.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities of three months or less.
Restricted Cash
Restricted cash consists of cash and investments that must be maintained as collateral for letters of credit issued to certain third-party producer customers. The balances will be outstanding until certain capital projects are completed and the third party releases the restriction.
Accounts Receivable and Allowance for Doubtful Accounts
Our receivables primarily consist of customer accounts receivable. Customer receivables are recorded at the invoiced amounts and generally do not bear interest. Allowances for doubtful accounts are generally recorded when it becomes probable the receivable will not be collected and are booked to bad debt expense. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in customer accounts receivable. We review the allowance quarterly and past-due balances over 180 days are reviewed individually for collectability.
We mitigate credit risk with master netting agreements with companies engaged in the crude oil or refinery feedstock trading and supply business or the petroleum refining industry. A master netting agreement generally provides for a once per month net cash settlement of the accounts receivable from and the accounts payable to a particular counterparty.
Inventories
Inventories are carried at the lower of cost or market value. Cost of inventories is determined primarily under the LIFO method. Costs for crude oil, refinery feedstocks and refined product inventories are aggregated on a consolidated basis for purposes of assessing if the LIFO cost basis of these inventories may have to be written down to market value.
Derivative Instruments
We use derivatives to economically hedge a portion of our exposure to commodity price risk and, historically, to interest rate risk. We also have limited authority to use selective derivative instruments that assume market risk. All derivative instruments (including derivative instruments embedded in other contracts) are recorded at fair value. Certain commodity derivatives are reflected on the consolidated balance sheets on a net basis by counterparty as they are governed by master netting agreements. Cash flows related to derivatives used to hedge commodity price risk and interest rate risk are classified in operating activities with the underlying transactions.
Derivatives not designated as accounting hedges – Derivatives that are not designated as accounting hedges may include commodity derivatives used to hedge price risk on (1) inventories, (2) fixed price sales of refined products, (3) the acquisition of foreign-sourced crude oil, (4) the acquisition of ethanol for blending with refined products, (5) the sale of NGLs and (6) the purchase of natural gas. Changes in the fair value of derivatives not designated as accounting hedges are recognized immediately in net income.
Concentrations of credit risk – All of our financial instruments, including derivatives, involve elements of credit and market risk. The most significant portion of our credit risk relates to nonperformance by counterparties. The counterparties to our financial instruments consist primarily of major financial institutions and companies within the energy industry. To manage counterparty risk associated with financial instruments, we select and monitor counterparties based on an assessment of their financial strength and on credit ratings, if available. Additionally, we limit the level of exposure with any single counterparty.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which range from two years to 51 years. Such assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. If the sum of the expected undiscounted future cash flows from the use of the asset group and its eventual disposition is less than the carrying amount of the asset group, an impairment assessment is performed and the excess of the book value over the fair value of the asset group is recorded as an impairment loss.
When items of property, plant and equipment are sold or otherwise disposed of, any gains or losses are reported in net income. Gains on the disposal of property, plant and equipment are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when the assets are classified as held for sale.
Interest expense is capitalized for qualifying assets under construction. Capitalized interest costs are included in property, plant and equipment and are depreciated over the useful life of the related asset.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized, but rather is tested for impairment annually and when events or changes in circumstances indicate that the fair value of a reporting unit with goodwill has been reduced below carrying value. The impairment test requires allocating goodwill and other assets and liabilities to reporting units. The fair value of each reporting unit is determined using an income and/or market approach which is compared to the carrying value of the reporting unit. The fair value under the income approach is calculated using the expected present value of future cash flows method. Significant assumptions used in the cash flow forecasts include future net operating margins, future volumes, discount rates, and future capital requirements. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
Amortization of intangibles with definite lives is calculated using the straight-line method, which is reflective of the benefit pattern in which the estimated economic benefit is expected to be received over the estimated useful life of the intangible asset. Intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible may not be recoverable. If the sum of the expected undiscounted future cash flows related to the asset is less than the carrying amount of the asset, an impairment loss is recognized based on the fair value of the asset. Intangibles not subject to amortization are tested for impairment annually and when circumstances indicate that the fair value is less than the carrying amount of the intangible. If the fair value is less than the carrying value, an impairment is recorded for the difference.
Major Maintenance Activities
Costs for planned turnaround and other major maintenance activities are expensed in the period incurred. These types of costs include contractor repair services, materials and supplies, equipment rentals and our labor costs.
Environmental Costs
Environmental expenditures for additional equipment that mitigates or prevents future contamination or improves environmental safety or efficiency of the existing assets are capitalized. We recognize remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. The timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted when the estimated amounts are reasonably fixed and determinable. If recoveries of remediation costs from third parties are probable, a receivable is recorded and is discounted when the estimated amount is reasonably fixed and determinable.
Asset Retirement Obligations
The fair value of asset retirement obligations is recognized in the period in which the obligations are incurred if a reasonable estimate of fair value can be made. The majority of our recognized asset retirement liability relates to conditional asset retirement obligations for removal and disposal of fire-retardant material from certain refining facilities. The remaining recognized asset retirement liability relates to other refining assets, the removal of underground storage tanks at our leased convenience stores, certain pipelines and processing facilities and other related pipeline assets. The fair values recorded for such obligations are based on the most probable current cost projections.
Asset retirement obligations have not been recognized for some assets because the fair value cannot be reasonably estimated since the settlement dates of the obligations are indeterminate. Such obligations will be recognized in the period when sufficient information becomes available to estimate a range of potential settlement dates. The asset retirement obligations principally include the hazardous material disposal and removal or dismantlement requirements associated with the closure of certain refining, terminal, retail, pipeline and processing assets.
Our practice is to keep our assets in good operating condition through routine repair and maintenance of component parts in the ordinary course of business and by continuing to make improvements based on technological advances. As a result, we believe that generally these assets have no expected settlement date
for purposes of estimating asset retirement obligations since the dates or ranges of dates upon which we would retire these assets cannot be reasonably estimated at this time.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their tax bases. Deferred tax assets are recorded when it is more likely than not that they will be realized. The realization of deferred tax assets is assessed periodically based on several factors, primarily our expectation to generate sufficient future taxable income.
Stock-Based Compensation Arrangements
The fair value of stock options granted to our employees is estimated on the date of grant using the Black-Scholes option pricing model. The model employs various assumptions based on management’s estimates at the time of grant, which impact the calculation of fair value and ultimately, the amount of expense that is recognized over the vesting period of the stock option award. Of the required assumptions, the expected life of the stock option award and the expected volatility of our stock price have the most significant impact on the fair value calculation. The average expected life is based on our historical employee exercise behavior. The assumption for expected volatility of our stock price reflects a weighting of 50 percent of our common stock implied volatility and 50 percent of our common stock historical volatility.
The fair value of restricted stock awards granted to our employees is determined based on the fair market value of our common stock on the date of grant. The fair value of performance unit awards granted to our employees is estimated on the date of grant using a Monte Carlo valuation model.
Our stock-based compensation expense is recognized based on management’s estimate of the awards that are expected to vest, using the straight-line attribution method for all service-based awards with a graded vesting feature. If actual forfeiture results are different than expected, adjustments to recognized compensation expense may be required in future periods. Unearned stock-based compensation is charged to equity when restricted stock awards are granted. Compensation expense is recognized over the vesting period and is adjusted if conditions of the restricted stock award are not met.
Business Combinations
We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or surplus of the purchase consideration when compared to the fair value of the net tangible assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. For material acquisitions, management engages an independent valuation specialist to assist with the determination of fair value of the assets acquired, liabilities assumed, noncontrolling interest, if any, and goodwill, based on recognized business valuation methodologies. An income, market or cost valuation method may be utilized to estimate the fair value of the assets acquired, liabilities assumed, and noncontrolling interest, if any, in a business combination. The income valuation method represents the present value of future cash flows over the life of the asset using: (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating expenses; (ii) long-term growth rates; and (iii) appropriate discount rates. The market valuation method uses prices paid for a reasonably similar asset by other purchasers in the market, with adjustments relating to any differences between the assets. The cost valuation method is based on the replacement cost of a comparable asset at prices at the time of the acquisition reduced for depreciation of the asset. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition date, and not later than one year from the acquisition date, we will record any material adjustments to the initial estimate based on new information obtained that would have existed as of the date of the acquisition. Any adjustment that arises from information obtained that did not exist as of the date of the acquisition will be recorded in the period of the adjustment. Acquisition-related costs are expensed as incurred in connection with each business combination.
Environmental Credits and Obligations
In order to comply with certain regulations, specifically the RFS2 requirements implemented by the EPA and the cap-and-trade emission reduction program and low carbon fuel standard implemented by the state of California, we are required to reduce our emissions, blend certain levels of biofuels or obtain allowances or credits to offset the obligations created by our operations. In regard to each program, we record an asset, included in other current or other noncurrent assets on the balance sheet, for allowances or credits owned in
excess of our anticipated current period compliance requirements. The asset value is based on the product of the excess allowances or credits as of the balance sheet date, if any, and the weighted average cost of those allowances or credits. We record a liability, included in other current or other noncurrent liabilities on the balance sheet, when we are deficient allowances or credits based on the product of the deficient amount as of the balance sheet date, if any, and the market price of the allowances or credits at the balance sheet date. The cost of allowances or credits used for compliance is reflected in cost of revenues on the income statement. Any gains or losses on the sale or expiration of allowances or credits are classified as other income on the income statement. Proceeds from the sale of allowances or credits are reported in investing activities - all other, net on the cash flow statement.
| 3**.** | ACCOUNTING STANDARDS |
Recently Adopted
ASU 2016-02, Leases
We adopted ASU No. 2016-02, Leases (“ASC 842”), as of January 1, 2019, electing the transition method which permits entities to adopt the provisions of the standard using the modified retrospective approach without adjusting comparative periods. We also elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to grandfather the historical accounting conclusions until a reassessment event is present. We have also elected the practical expedient to not recognize short-term leases on the balance sheet, the practical expedient related to right of way permits and land easements which allows us to carry forward our accounting treatment for those existing agreements, and the practical expedient to combine lease and non-lease components for the majority of our underlying classes of assets except for our third-party contractor service and equipment agreements and boat and barge equipment agreements in which we are the lessee. We did not elect the practical expedient to combine lease and non-lease components for arrangements in which we are the lessor. In instances where the practical expedient was not elected, lease and non-lease consideration is allocated based on relative standalone selling price.
Right of use (“ROU”) assets represent our right to use an underlying asset in which we obtain substantially all of the economic benefits and the right to direct the use of the asset during the lease term. Lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We recognize ROU assets and lease liabilities on the balance sheet for leases with a lease term of greater than one year. Payments that are not fixed at the commencement of the lease are considered variable and are excluded from the ROU asset and lease liability calculations. In the measurement of our ROU assets and lease liabilities, the fixed lease payments in the agreement are discounted using a secured incremental borrowing rate for a term similar to the duration of the lease, as our leases do not provide implicit rates. Operating lease expense is recognized on a straight-line basis over the lease term.
Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $2.8 billion and $2.9 billion, respectively, as of January 1, 2019. The standard did not materially impact our consolidated statements of income, cash flows or equity as a result of adoption.
As a lessor under ASC 842, MPLX may be required to re-classify existing operating leases to sales-type leases upon modification and related reassessment of the leases. Modifications may result in the de-recognition of existing assets and recognition of a receivable in the amount of the present value of fixed payments expected to be received by MPLX under the lease.
ASU 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment
In connection with our annual goodwill impairment test, we adopted ASU 2017-04 prospectively during the fourth quarter of 2019. Under ASU 2017-04, the recognition of an impairment charge is calculated based on the amount by which the carrying amount exceeds the reporting unit’s fair value, which could be different from the amount calculated under the former method using the implied fair value of the goodwill; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. During the fourth quarter of 2019, we recorded certain goodwill impairment charges as described in Note 16.
We also adopted the following ASUs during 2019, none of which had a material impact to our financial statements or financial statement disclosures:
| ASU | Effective Date | ||
| 2018-02 | Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | January 1, 2019 | |
| 2017-12 | Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities | January 1, 2019 |
Not Yet Adopted
ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued new guidance to simplify the accounting for income taxes. Amendments include removal of certain exceptions to the general principles of ASC 740 and simplification in several other areas such as accounting for a franchise tax or similar tax that is partially based on income. The change is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We do not expect the application of this ASU to have a material impact on our consolidated financial statements.
ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued an ASU related to the accounting for credit losses on certain financial instruments. The guidance requires that for most financial assets, losses be based on an expected loss approach which includes estimates of losses over the life of exposure that considers historical, current and forecasted information. Expanded disclosures related to the methods used to estimate the losses as well as a specific disaggregation of balances for financial assets are also required. The change is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The application of this ASU will not have a material impact on our consolidated financial statements.
| 4**.** | MASTER LIMITED PARTNERSHIP |
We own the general partner and a majority limited partner interest 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. We control MPLX through our ownership of the general partner interest and as of December 31, 2019, we owned approximately 63 percent of the outstanding MPLX common units.
MPLX’s Acquisition of ANDX
On July 30, 2019, MPLX completed its acquisition of Andeavor Logistics LP (“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 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 (“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.
MPC accounted for this transaction as a common control transaction, as defined by ASC 805, which resulted in an increase to noncontrolling interest and a decrease to additional paid-in capital of approximately $55 million, net of tax. During the third quarter of 2019, we pushed down to MPLX the portion of the goodwill attributable to ANDX as of October 1, 2018. Due to this push down of goodwill, we also recorded an incremental $642 million deferred tax liability associated with the portion of the non-deductible goodwill attributable to the noncontrolling interest in MPLX with an offsetting reduction of our additional paid-in capital balance.
As described in Notes 5 and 6, we have consolidated ANDX since the acquisition date of October 1, 2018 in accordance with ASC 810.
Dropdowns to MPLX and GP/IDR Exchange
On February 1, 2018, we contributed our refining logistics assets and fuels distribution services to MPLX in exchange for $4.1 billion in cash and approximately 112 million common units and 2 million general partner units from MPLX. MPLX financed the cash portion of the transaction with its $4.1 billion 364-day term loan facility, which was entered into on January 2, 2018. We agreed to waive approximately one-third of the first quarter 2018 distributions on the common units issued in connection with this transaction. The contributions of these assets were accounted for as transactions between entities under common control and we did not record a gain or loss.
Immediately following the February 1, 2018 dropdown to MPLX, our IDRs were cancelled and our economic general partner interest was converted into a non-economic general partner interest, all in exchange for 275 million newly issued MPLX common units (“GP/IDR Exchange”). As a result of this transaction, the general partner units and IDRs were eliminated, are no longer outstanding and no longer participate in distributions of cash from MPLX.
On September 1, 2017, we contributed our joint-interest ownership in certain pipelines and storage facilities to MPLX in exchange for $420 million in cash and approximately 19 million MPLX common units and 378 thousand general partner units from MPLX. We also agreed to waive approximately two-thirds of the third quarter 2017 common unit distributions, IDRs and general partner distributions with respect to the common units issued in this transaction. The contributions of these assets were accounted for as transactions between entities under common control and we did not record a gain or loss.
On March 1, 2017, we contributed certain terminal, pipeline and storage assets to MPLX in exchange for total consideration of $1.5 billion in cash and approximately 13 million common units and 264 thousand general partner units from MPLX. We also agreed to waive two-thirds of the first quarter 2017 common unit distributions, IDRs and general partner distributions with respect to the common units issued in the transaction. The contributions of these assets were accounted for as transactions between entities under common control and we did not record a gain or loss.
Agreements
We have various long-term, fee-based commercial agreements with MPLX. Under these agreements, MPLX provides transportation, storage, distribution and marketing services to us. With certain exceptions, these agreements generally contain minimum volume commitments. These transactions are eliminated in consolidation but are reflected as intersegment transactions between our Refining & Marketing and Midstream segments. We also have agreements with MPLX that establish fees for operational and management services provided between us and MPLX and for executive management services and certain general and administrative services provided by us to MPLX. These transactions are eliminated in consolidation but are reflected as intersegment transactions between our Corporate and Midstream segments.
Noncontrolling Interest
As a result of equity transactions of MPLX and ANDX, we are required to adjust non-controlling interest and additional paid-in capital to reflect these changes in ownership. Changes in MPC’s additional paid-in capital resulting from changes in its ownership interest in MPLX and ANDX were as follows:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Increase due to the issuance of MPLX common units and general partner units to MPC | $ | — | $ | 1,114 | $ | 114 | |||||
| Increase due to GP/IDR Exchange | — | 1,808 | — | ||||||||
| Increase (decrease) due to the issuance of MPLX & ANDX common units | (51 | ) | 6 | 25 | |||||||
| Increase (decrease) in MPC's additional paid-in capital | (51 | ) | 2,928 | 139 | |||||||
| Tax impact | (633 | ) | (571 | ) | (29 | ) | |||||
| Increase (decrease) in MPC's additional paid-in capital, net of tax | $ | (684 | ) | $ | 2,357 | $ | 110 |
| 5**.** | ACQUISITIONS |
Acquisition of Andeavor
On October 1, 2018, we acquired Andeavor. Under the terms of the merger agreement, Andeavor stockholders had the option to choose 1.87 shares of MPC common stock or $152.27 in cash per share of Andeavor common stock. The merger agreement included election proration provisions that resulted in approximately 22.9 million shares of Andeavor common stock being converted into cash consideration and the remaining 128.2 million shares of Andeavor common stock being converted into stock consideration. Andeavor stockholders received in the aggregate approximately 239.8 million shares of MPC common stock and approximately $3.5 billion in cash in connection with the Andeavor acquisition. The fair value of the MPC shares issued was determined on the basis of the closing market price of MPC’s common shares on the acquisition date. The cash portion of the purchase price was funded using cash on hand.
At the time of the acquisition, all Andeavor equity awards, with the exception of non-employee director units, were converted to MPC equity awards. The converted equity awards will continue to be governed by the same terms and conditions as were applicable to such Andeavor equity awards immediately prior to the acquisition. We recognized $203 million of purchase consideration to reflect the portion of the fair value of the time-based converted equity awards attributable to pre-combination service completed by the award holders. The non-employee director units were accelerated in full and cancelled and the holders of such units received an amount of cash equal to the number of shares of Andeavor common stock subject to such non-employee director units multiplied by the cash consideration per share.
Our financial results reflect the results of Andeavor from October 1, 2018, the date of the acquisition.
The components of the fair value of consideration transferred are as follows:
| (In millions) | ||||
| Fair value of MPC shares issued | $ | 19,766 | ||
| Cash payment to Andeavor stockholders | 3,486 | |||
| Cash settlement of non-employee director units | 7 | |||
| Fair value of converted equity awards | 203 | |||
| Total fair value of consideration transferred | $ | 23,462 |
We accounted for the Andeavor acquisition using the acquisition method of accounting, which requires Andeavor assets and liabilities to be recorded to our balance sheet at fair value as of the acquisition date. The size and the breadth of the Andeavor acquisition necessitated the use of the one year measurement period provided under ASC 805 to fully analyze all the factors used in establishing the asset and liability fair values as of the acquisition date. We completed a final determination of the fair value of certain assets and liabilities during the three months ended September 30, 2019 and recorded final adjustments to our preliminary purchase price allocation. These adjustments reflect the completion of valuation studies of the acquired property, plant and equipment in order to finalize assumptions used in their cost approach valuation methodology and finalization of specific valuation assumptions and data inputs for other individual asset valuation models. The fair value estimates of assets acquired and liabilities assumed as of the acquisition date are noted in the table below.
| (In millions) | As originally reported | Adjustments | As adjusted | ||||||||
| Cash and cash equivalents | $ | 382 | $ | — | $ | 382 | |||||
| Receivables | 2,744 | (5 | ) | 2,739 | |||||||
| Inventories | 5,204 | 37 | 5,241 | ||||||||
| Other current assets | 378 | (6 | ) | 372 | |||||||
| Equity method investments | 865 | (113 | ) | 752 | |||||||
| Property, plant and equipment, net | 16,545 | (1,021 | ) | 15,524 | |||||||
| Other noncurrent assets(a) | 3,086 | (11 | ) | 3,075 | |||||||
| Total assets acquired | 29,204 | (1,119 | ) | 28,085 |
| (In millions) | As originally reported | Adjustments | As adjusted | ||||||||
| Accounts payable | 4,003 | (41 | ) | 3,962 | |||||||
| Payroll and benefits payable | 348 | 9 | 357 | ||||||||
| Accrued taxes | 590 | (110 | ) | 480 | |||||||
| Debt due within one year | 34 | — | 34 | ||||||||
| Other current liabilities | 392 | 27 | 419 | ||||||||
| Long-term debt | 8,875 | 1 | 8,876 | ||||||||
| Deferred income taxes | 1,609 | (60 | ) | 1,549 | |||||||
| Defined benefit postretirement plan obligations | 432 | — | 432 | ||||||||
| Deferred credit and other liabilities | 714 | 33 | 747 | ||||||||
| Noncontrolling interests | 5,059 | 3 | 5,062 | ||||||||
| Total liabilities and noncontrolling interest assumed | 22,056 | (138 | ) | 21,918 | |||||||
| Net assets acquired excluding goodwill | 7,148 | (981 | ) | 6,167 | |||||||
| Goodwill | 16,314 | 981 | 17,295 | ||||||||
| Net assets acquired | $ | 23,462 | $ | — | $ | 23,462 |
| (a) | Includes intangible assets. |
Details of our valuation methodology and significant inputs for fair value measurements are included by asset class below. The fair value measurements for equity method investments, property, plant and equipment, intangible assets and long-term debt are based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements.
Goodwill
The purchase consideration allocation resulted in the recognition of $17.3 billion in goodwill, of which $1.0 billion is tax deductible due to a carryover basis from Andeavor. Our Refining & Marketing, Midstream and Retail segments recognized $5.2 billion, $8.1 billion and $3.9 billion of goodwill. The recognized goodwill represents the value expected to be created by further optimization of crude supply, a nationwide retail and marketing platform, diversification of our refining and midstream footprints and optimization of information systems and business processes.
Inventory
The fair value of inventory was determined by recognizing crude oil and feedstocks at market prices as of October 1, 2018 and recognizing refined product inventory at market prices less selling costs and profit margin associated with the remaining distribution process.
Equity Method Investments
The fair value of the equity method investments was determined based on applying income and market approaches. The income approach relied on the discounted cash flow method and the market approach relied on a market multiple approach considering historical and projected financial results. Discount rates for the discounted cash flow models were based on capital structures for similar market participants and included various risk premiums that account for risks associated with the specific investments. For more information about our equity method investments, see Note 14.
Property, Plant and Equipment
The fair value of property, plant and equipment was based primarily on the cost approach. Key assumptions in the cost approach included determining the replacement cost by evaluating recent purchases of similar assets or published data, and adjusting replacement cost for economic and functional obsolescence, location, normal useful lives, and capacity (if applicable).
Acquired Intangible Assets
The fair value of the acquired identifiable intangible assets is $2.8 billion, which represents the value of various customer contracts and relationships, brand rights and tradenames and other intangible assets. The fair value of customer contracts and relationships is $2.5 billion, which was valued by applying the multi-period excess
earnings method, which is an income approach. Key assumptions in the income approach include the underlying contract cash flow estimates, remaining contract term, probability of renewal, growth rates and discount rates. Brand rights and tradenames were valued by applying the relief of royalty method, which is an income approach. The intangible assets are all definite lived and will be amortized over 2 to 10 years.
Debt
The fair value of the Andeavor and ANDX unsecured notes was measured using a market approach, based upon the average of quotes for the acquired debt from major financial institutions and a third-party valuation service. Additionally, borrowings under revolving credit agreements and other debt were assumed to approximate fair value.
Noncontrolling Interest
Through the Andeavor acquisition, we acquired the general partnership interest of ANDX, which was a VIE because the limited partners of ANDX did not have substantive kick-out or substantive participating rights over the general partner. We were the primary beneficiary of ANDX because in addition to our significant economic interest, we also had the ability, through our 100 percent ownership of the general partner, to control the decisions that most significantly impact ANDX. The fair value of the noncontrolling interest in ANDX was based on the unit price, units outstanding and the percent of public unitholders of ANDX on October 1, 2018.
Acquisition Costs
We recognized $47 million in acquisition costs. Additionally, we recognized various other transaction-related costs, including employee-related costs associated with the Andeavor acquisition. All of these costs are reflected in selling, general and administrative expenses. The employee-related costs are primarily due to pre-existing Andeavor change in control and equity award agreements that create obligations and accelerated equity vesting upon MPC notifying employees of significant changes to or elimination of their responsibilities.
Andeavor Revenues and Income from Operations
Andeavor’s results have been included in MPC’s financial statements for the period subsequent to the date of the acquisition on October 1, 2018. Andeavor contributed revenues of approximately $11.3 billion for the period from October 1 through December 31, 2018. We do not believe it is practical to disclose Andeavor’s contribution to earnings for the period from October 1, 2018 through December 31, 2018 as our integration efforts have resulted in the elimination of Andeavor stand-alone discrete financial information due mainly to our inclusion of Andeavor inventory in our consolidated LIFO inventory pools, which does not allow us to objectively distinguish the cost of sales between the two historical reporting entities.
Pro Forma Financial Information
The following unaudited pro forma financial information presents consolidated results assuming the Andeavor acquisition occurred on January 1, 2017.
| (In millions, except per share data) | 2018 | 2017 | |||||
| Sales and other operating revenues(a) | $ | 131,921 | $ | 118,179 | |||
| Net income attributable to MPC | 4,218 | 4,712 |
| (a) | The 2018 period reflects an election to present certain taxes on a net basis concurrent with our adoption of ASC 606. |
The pro forma information includes adjustments to align accounting policies, an adjustment to depreciation expense to reflect the increased fair value of property, plant and equipment, increased amortization expense related to identifiable intangible assets and the related income tax effects. The pro forma information does not reflect the $727 million effect on net income attributable to MPC related to purchase accounting related inventory effects and transaction-related costs as these charges do not have a continuing impact on the consolidated results.
Acquisition of Terminal and Retail Locations in New York
During the third quarter of 2019, we acquired a 900,000-barrel capacity light product and asphalt terminal and 33 NOCO Express retail stores in Buffalo, Syracuse and Rochester, New York, from NOCO Incorporated for total consideration of $135 million.
Based on the final fair value estimates of assets acquired and liabilities assumed at the acquisition date, $38 million of the purchase price was allocated to property, plant and equipment, $3 million to inventory and $94 million to goodwill. Goodwill is tax deductible and represents the value expected to be created by geographically expanding our retail platform and the assembled workforce. The terminal is accounted for within the R&M segment and the retail stores are accounted for within the Retail segment.
The amount of revenue and income from operations associated with the acquisition from the acquisition date to December 31, 2019 did not have a material impact on the consolidated financial statements. In addition, assuming the acquisition had occurred on January 1, 2018, the consolidated pro forma results would not have been materially different from the reported results.
Acquisition of Express Mart
During the fourth quarter of 2018, Speedway acquired 78 transportation fuel and convenience store locations from Petr-All Petroleum Consulting Corporation for total consideration of $266 million. These stores are located primarily in the Syracuse, Rochester and Buffalo markets in New York and operate under the Express Mart brand.
Based on the final fair value estimates of assets acquired and liabilities assumed at the acquisition date, $97 million of the purchase price was allocated to property, plant and equipment, $9 million to inventory, $2 million to intangibles and $158 million to goodwill. Goodwill is tax deductible and represents the value expected to be created by geographically expanding our retail platform and the assembled workforce.
The amount of revenue and income from operations associated with the acquisition from the acquisition date to December 31, 2018 did not have a material impact on the consolidated financial statements. In addition, assuming the acquisition had occurred on January 1, 2017, the consolidated pro forma results would not have been materially different from the reported results.
Acquisition of Mt. Airy Terminal
On September 26, 2018, MPLX acquired an eastern U.S. Gulf Coast export terminal (“Mt. Airy Terminal”) from Pin Oak Holdings, LLC for total consideration of $451 million. At the time of the acquisition, the terminal included tanks with 4 million barrels of third-party leased storage capacity and a dock with 120 mbpd of capacity. The Mt. Airy Terminal is located on the Mississippi River between New Orleans and Baton Rouge, near several Gulf Coast refineries, including our Garyville Refinery, and numerous rail lines and pipelines. The Mt. Airy Terminal is accounted for within the Midstream segment. In the first quarter of 2019, an adjustment to the initial purchase price was made for approximately $5 million related to the final settlement of the acquisition. This reduced the total purchase price to $446 million and resulted in $336 million of property, plant and equipment, $121 million of goodwill and the remainder being attributable to net liabilities assumed.
Goodwill represents the significant growth potential of the terminal due to the multiple pipelines and rail lines which cross the property, the terminal’s position as an aggregation point for liquids growth in the region for both ocean-going vessels and inland barges, the proximity of the terminal to our Garyville refinery and other refineries in the region as well as the opportunity to construct an additional dock at the site. All of the goodwill recognized related to this transaction is tax deductible.
The amount of revenue and income from operations associated with the acquisition from the terminal acquisition date to December 31, 2018 did not have a material impact on the consolidated financial statements. In addition, assuming the terminal acquisition had occurred on January 1, 2017, the consolidated pro forma results would not have been materially different from the reported results.
Acquisition of Ozark Pipeline
On March 1, 2017, MPLX acquired the Ozark pipeline from Enbridge Pipelines (Ozark) LLC for approximately $219 million, including purchase price adjustments made in the second quarter of 2017. Based on the fair value of assets acquired and liabilities assumed at the acquisition date, the final purchase price was primarily allocated to property, plant and equipment. The Ozark pipeline is a 433-mile, 22-inch crude oil pipeline originating in Cushing, Oklahoma, and terminating in Wood River, Illinois, capable of transporting approximately 230 mbpd. We present the Ozark pipeline within the Midstream segment.
The amount of revenue and income from operations associated with the acquisition from the acquisition date to December 31, 2017 did not have a material impact on the consolidated financial statements. In addition,
assuming the acquisition of the Ozark pipeline had occurred on January 1, 2016, the consolidated pro forma results would not have been materially different from reported results.
Investment in Pipeline Company
On February 15, 2017, MPLX acquired a partial, indirect equity interest in the Dakota Access Pipeline (“DAPL”) and Energy Transfer Crude Oil Company Pipeline (“ETCOP”) projects, collectively referred to as the Bakken Pipeline system, through a joint venture with Enbridge Energy Partners L.P. (“Enbridge Energy Partners”). MPLX contributed $500 million of the $2 billion purchase price paid by the joint venture, MarEn Bakken Company LLC (“MarEn Bakken”), to acquire a 36.75 percent indirect equity interest in the Bakken Pipeline system from Energy Transfer Partners, L.P. (“ETP”) and Sunoco Logistics Partners, L.P. (“SXL”). MPLX holds, through a subsidiary, a 25 percent interest in MarEn Bakken, which equates to an approximate 9.2 percent indirect equity interest in the Bakken Pipeline system. We account for the investment in MarEn Bakken as part of our Midstream segment using the equity method of accounting.
Formation of Gathering and Processing Joint Venture
Effective January 1, 2017, MPLX and Antero Midstream formed a joint venture, Sherwood Midstream LLC (“Sherwood Midstream”), to support the development of Antero Resources Corporation’s Marcellus Shale acreage in West Virginia. MPLX has a 50 percent ownership interest in Sherwood Midstream. In connection with this transaction, MPLX contributed assets then under construction at the Sherwood Complex with a fair value of approximately $134 million and cash of approximately $20 million. Antero Midstream made an initial capital contribution of approximately $154 million.
Also effective January 1, 2017, MPLX converted all of its ownership interests in MarkWest Ohio Fractionation Company, L.L.C. (“Ohio Fractionation”), a previously wholly-owned subsidiary, to Class A Interests and amended its LLC Agreement to create Class B-3 Interests, which were sold to Sherwood Midstream for $126 million in cash. The Class B-3 Interests provide Sherwood Midstream with the right to fractionation revenue and the obligation to pay expenses related to 20 mbpd of capacity in the Hopedale 3 fractionator.
Effective January 1, 2017, MPLX and Sherwood Midstream formed a joint venture, Sherwood Midstream Holdings LLC (“Sherwood Midstream Holdings”), for the purpose of owning, operating and maintaining all of the shared assets for the benefit of and use in the operation of the gas plants and other assets owned by Sherwood Midstream and the gas plants and de-ethanization facilities owned by MPLX. MPLX contributed certain real property, equipment and facilities with a fair value of approximately $209 million to Sherwood Midstream Holdings in exchange for a 79 percent initial ownership interest. Sherwood Midstream contributed cash of approximately $44 million to Sherwood Midstream Holdings in exchange for a 21 percent initial ownership interest. The net book value of the contributed assets was approximately $203 million. The contribution was determined to be an in-substance sale of real estate. As such, MPLX only recognized a gain for the portion attributable to Antero Midstream’s indirect interest of approximately $2 million.
We account for our direct interests in Sherwood Midstream and Sherwood Midstream Holdings as part of our Midstream segment using the equity method of accounting. We continue to consolidate Ohio Fractionation and have recognized a noncontrolling interest for Sherwood Midstream’s interest in that entity.
See Note 6 for additional information related to the investments in Sherwood Midstream and Sherwood Midstream Holdings.
| 6**.** | VARIABLE INTEREST ENTITIES |
Consolidated VIE
We control MPLX through our ownership of the general partner. MPLX is a VIE because the limited partners do not have substantive kick-out or substantive participating rights over the general partner. We are the primary beneficiary of MPLX because in addition to our significant economic interest, we also have the ability, through our ownership of the general partner, to control the decisions that most significantly impact MPLX. We therefore consolidate MPLX and record a noncontrolling interest for the interest owned by the public. We also record a redeemable noncontrolling interest related to MPLX’s Series A preferred units.
The creditors of MPLX do not have recourse to MPC’s general credit through guarantees or other financial arrangements, except as noted. MPC has effectively guaranteed certain indebtedness of LOOP LLC (“LOOP”) and LOCAP LLC (“LOCAP”), in which MPLX holds an interest. See Note 26 for more information. The
assets of MPLX can only be used to settle its own obligations and its creditors have no recourse to our assets, except as noted earlier.
On July 30, 2019, MPLX acquired ANDX. We have consolidated ANDX since the acquisition date of October 1, 2018 in accordance with ASC 810. The ANDX balances at December 31, 2018 reflected in the table below are ANDX’s historical balances as the preliminary purchase accounting adjustments related to ANDX’s assets and liabilities in connection with the Andeavor acquisition had not yet been pushed down to ANDX. The MPLX balances at December 31, 2019 reflect the inclusion of ANDX’s balances at fair values determined in connection with MPC’s acquisition of Andeavor on October 1, 2018. See Notes 4 and 5 for additional information.
The following table presents balance sheet information for the assets and liabilities of MPLX and ANDX, which are included in our balance sheets.
| December 31, 2019 | December 31, 2018 | ||||||||||
| (In millions) | MPLX | MPLX | ANDX | ||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 15 | $ | 68 | $ | 10 | |||||
| Receivables, less allowance for doubtful accounts | 615 | 425 | 199 | ||||||||
| Inventories | 110 | 77 | 22 | ||||||||
| Other current assets | 110 | 45 | 57 | ||||||||
| Equity method investments | 5,275 | 4,174 | 602 | ||||||||
| Property, plant and equipment, net | 22,174 | 14,639 | 6,845 | ||||||||
| Goodwill | 9,536 | 2,586 | 1,051 | ||||||||
| Right of use assets | 365 | — | — | ||||||||
| Other noncurrent assets | 1,323 | 458 | 1,242 | ||||||||
| Liabilities | |||||||||||
| Accounts payable | $ | 744 | $ | 776 | $ | 215 | |||||
| Payroll and benefits payable | 5 | 2 | 10 | ||||||||
| Accrued taxes | 80 | 48 | 23 | ||||||||
| Debt due within one year | 9 | 1 | 504 | ||||||||
| Operating lease liabilities | 66 | — | — | ||||||||
| Other current liabilities | 259 | 177 | 77 | ||||||||
| Long-term debt | 19,704 | 13,392 | 4,469 | ||||||||
| Deferred income taxes | 12 | 13 | 1 | ||||||||
| Long-term operating lease liabilities | 302 | — | — | ||||||||
| Deferred credits and other liabilities | 409 | 276 | 68 |
Non-Consolidated VIEs
Crowley Coastal Partners
In May 2016, Crowley Coastal Partners LLC (“Crowley Coastal Partners”) was formed to own an interest in both Crowley Ocean Partners LLC (“Crowley Ocean Partners”) and Crowley Blue Water Partners LLC (“Crowley Blue Water Partners”). We have determined that Crowley Coastal Partners is a VIE based on the terms of the existing financing arrangements for Crowley Blue Water Partners and Crowley Ocean Partners and the associated debt guarantees by MPC and Crowley. Our maximum exposure to loss at December 31, 2019 was $440 million, which includes our equity method investment in Crowley Coastal Partners and the debt guarantees provided to each of the lenders to Crowley Blue Water Partners and Crowley Ocean Partners. We are not the primary beneficiary of this VIE because we do not have the ability to control the activities that significantly influence the economic outcomes of the entity and, therefore, do not consolidate the entity.
MPLX VIEs
As a result of MPLX’s acquisition of ANDX, MPLX acquired an ownership interest in Rendezvous Gas Services, L.L.C. (“RGS”), Minnesota Pipe Line Company, LLC and Andeavor Logistics Rio Pipeline LLC (“ALRP”), among others. RGS and ALRP have been deemed to be VIEs, however, neither MPLX nor any of
its subsidiaries have been deemed to be the primary beneficiary due to voting rights on significant matters. For all of the investments acquired through the merger, MPLX has the ability to exercise influence through participation in the management committees which make all significant decisions. However, since MPLX has equal or proportionate influence over each committee as a joint interest partner and all significant decisions require the consent of the other investors without regard to economic interest, we have determined that these entities should not be consolidated and we apply the equity method of accounting with respect to MPLX’s investment in each entity.
In addition to the investments above, MarkWest Utica EMG, L.L.C., Sherwood Midstream, MarkWest EMG Jefferson Dry Gas Gathering Company, L.L.C. and Sherwood Midstream Holdings are also deemed to be VIEs. Consistent with the investments above, neither MPLX nor any of its subsidiaries are deemed to be the primary beneficiary due to voting rights on significant matters. Sherwood Midstream has been deemed the primary beneficiary of Sherwood Midstream Holdings due to its controlling financial interest through its authority to manage the joint venture. As a result, Sherwood Midstream consolidates Sherwood Midstream Holdings.
MPLX’s maximum exposure to loss as a result of its involvement with equity method investments includes its equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of its compensation received for the performance of the operating services.
We account for our ownership interest in each of these investments as an equity method investment. See Note 14 for ownership percentages and investment balances related to these VIEs.
| 7**.** | RELATED PARTY TRANSACTIONS |
Transactions with related parties were as follows:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Sales to related parties | $ | 768 | $ | 754 | $ | 629 | |||||
| Purchases from related parties | 763 | 610 | 570 |
Sales to related parties, which are included in sales and other operating revenues, consist primarily of sales of refined products to PFJ Southeast, an equity affiliate which owns and operates travel plazas primarily in the Southeast region of the United States.
Purchases from related parties are included in cost of revenues. We obtain utilities, transportation services and purchase ethanol from certain of our equity affiliates.
| 8**.** | EARNINGS PER SHARE |
We compute basic earnings per share by dividing net income attributable to MPC less income allocated to participating securities by the weighted average number of shares of common stock outstanding. Since MPC grants certain incentive compensation awards to employees and non-employee directors that are considered to be participating securities, we have calculated our earnings per share using the two-class method. Diluted income per share assumes exercise of certain stock-based compensation awards, provided the effect is not anti-dilutive.
| (In millions, except per share data) | 2019 | 2018 | 2017 | ||||||||
| Basic earnings per share: | |||||||||||
| Allocation of earnings: | |||||||||||
| Net income attributable to MPC | $ | 2,637 | $ | 2,780 | $ | 3,432 | |||||
| Income allocated to participating securities | 1 | 1 | 2 | ||||||||
| Income available to common stockholders – basic | $ | 2,636 | $ | 2,779 | $ | 3,430 | |||||
| Weighted average common shares outstanding | 659 | 518 | 507 | ||||||||
| Basic earnings per share | $ | 4.00 | $ | 5.36 | $ | 6.76 | |||||
| Diluted earnings per share: | |||||||||||
| Allocation of earnings: | |||||||||||
| Net income attributable to MPC | $ | 2,637 | $ | 2,780 | $ | 3,432 | |||||
| Income allocated to participating securities | 1 | 1 | 2 | ||||||||
| Income available to common stockholders – diluted | $ | 2,636 | $ | 2,779 | $ | 3,430 | |||||
| Weighted average common shares outstanding | 659 | 518 | 507 | ||||||||
| Effect of dilutive securities | 5 | 8 | 5 | ||||||||
| Weighted average common shares, including dilutive effect | 664 | 526 | 512 | ||||||||
| Diluted earnings per share | $ | 3.97 | $ | 5.28 | $ | 6.70 |
The following table summarizes the shares that were anti-dilutive, and therefore, were excluded from the diluted share calculation.
| (In millions) | 2019 | 2018 | 2017 | |||||
| Shares issuable under stock-based compensation plans | 3 | — | 1 |
| 9**.** | EQUITY |
As of December 31, 2019, we had $2.96 billion of remaining share repurchase authorizations from our board of directors. 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.
Total share repurchases were as follows for the respective periods:
| (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 |
| 10**.** | SEGMENT INFORMATION |
We have three reportable segments: Refining & Marketing, Retail and Midstream. Each of these segments is organized and managed based upon the nature of the products and services it offers.
| • | 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. |
On October 1, 2018, we acquired Andeavor and its results are included in each of our segments from the date of the acquisition. Also, on February 1, 2018, we contributed certain refining logistics assets and fuels distribution services to MPLX. The results of these new businesses are reported in the Midstream segment prospectively from February 1, 2018, resulting in a net reduction to Refining & Marketing segment results and a net increase to Midstream segment results of the same amount. No effect was given to prior periods as these entities were not considered businesses prior to February 1, 2018.
Segment income from operations represents income from operations attributable to the reportable segments. Corporate administrative expenses, except for those attributable to MPLX, and costs related to certain non-operating assets are not allocated to the Refining & Marketing and Retail segments. In addition, certain items that affect comparability (as determined by the chief operating decision maker) are not allocated to the reportable segments.
| (In millions) | Refining & Marketing | Retail | Midstream | Total | |||||||||||
| Year Ended December 31, 2019 | |||||||||||||||
| Revenues: | |||||||||||||||
| Third party(a) | $ | 87,056 | $ | 33,059 | $ | 3,834 | $ | 123,949 | |||||||
| Intersegment | 19,686 | 8 | 4,926 | 24,620 | |||||||||||
| Segment revenues | $ | 106,742 | $ | 33,067 | $ | 8,760 | $ | 148,569 | |||||||
| Segment income from operations | $ | 2,367 | $ | 1,582 | $ | 3,594 | $ | 7,543 | |||||||
| Supplemental Data | |||||||||||||||
| Depreciation and amortization(b) | 1,665 | 528 | 1,267 | 3,460 | |||||||||||
| Capital expenditures and investments(c) | 1,999 | 607 | 3,290 | 5,896 |
| (In millions) | Refining & Marketing | Retail | Midstream | Total | |||||||||||
| Year Ended December 31, 2018 | |||||||||||||||
| Revenues: | |||||||||||||||
| Third party(a) | $ | 69,685 | $ | 23,546 | $ | 3,273 | $ | 96,504 | |||||||
| Intersegment | 12,914 | 6 | 3,387 | 16,307 | |||||||||||
| Segment revenues | $ | 82,599 | $ | 23,552 | $ | 6,660 | $ | 112,811 | |||||||
| Segment income from operations | $ | 2,481 | $ | 1,028 | $ | 2,752 | $ | 6,261 | |||||||
| Supplemental Data | |||||||||||||||
| Depreciation and amortization(b) | 1,174 | 353 | 885 | 2,412 | |||||||||||
| Capital expenditures and investments(c) | 1,057 | 460 | 2,630 | 4,147 |
| (In millions) | Refining & Marketing | Retail | Midstream | Total | |||||||||||
| Year Ended December 31, 2017 | |||||||||||||||
| Revenues: | |||||||||||||||
| Third party(a) | $ | 53,382 | $ | 19,029 | $ | 2,322 | $ | 74,733 | |||||||
| Intersegment(d) | 11,309 | 4 | 1,443 | 12,756 | |||||||||||
| Segment revenues | $ | 64,691 | $ | 19,033 | $ | 3,765 | $ | 87,489 | |||||||
| Segment income from operations | $ | 2,321 | $ | 729 | $ | 1,339 | $ | 4,389 | |||||||
| Supplemental Data | |||||||||||||||
| Depreciation and amortization(b) | 1,082 | 275 | 699 | 2,056 | |||||||||||
| Capital expenditures and investments(c) | 832 | 381 | 1,755 | 2,968 |
| (a) | Includes related party sales. See Note 7 for additional information. |
| (b) | Differences between segment totals and MPC totals represent amounts related to unallocated items and are included in items not allocated to segment in the reconciliation below. |
| (c) | Includes changes in capital expenditure accruals and investments in affiliates. |
| (d) | Management believes intersegment transactions were conducted under terms comparable to those with unaffiliated parties. |
The following reconciles segment income from operations to income before income taxes as reported in the consolidated statements of income:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Segment income from operations | $ | 7,543 | $ | 6,261 | $ | 4,389 | |||||
| Items not allocated to segments: | |||||||||||
| Corporate and other unallocated items(a) | (805 | ) | (502 | ) | (365 | ) | |||||
| Equity method investment restructuring gains(b) | 259 | — | — | ||||||||
| Transaction-related costs(c) | (160 | ) | (197 | ) | — | ||||||
| Litigation | (22 | ) | — | (29 | ) | ||||||
| Impairments(d) | (1,239 | ) | 9 | 23 | |||||||
| Income from operations | 5,576 | 5,571 | 4,018 | ||||||||
| Net interest and other financial costs | 1,247 | 1,003 | 674 | ||||||||
| Income before income taxes | $ | 4,329 | $ | 4,568 | $ | 3,344 |
| (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. |
| (b) | Includes gains related to The Andersons Marathon Holdings LLC and Capline Pipeline Company LLC. See Note 14. |
| (c) | 2019 includes costs incurred in connection with the proposed Speedway separation, Midstream strategic review and other related efforts. Both 2019 and 2018 include employee severance, retention and other costs related to the acquisition of Andeavor. Effective October 1, 2019, we have discontinued reporting Andeavor transaction-related costs as one year has passed since the Andeavor acquisition. The post October 1, 2019 transaction costs are immaterial and reported in corporate and other unallocated items. |
| (d) | 2019 reflects impairments of goodwill and equity method investments. See Notes 16 and 14. 2018 and 2017 includes MPC’s share of gains from the sale of assets remaining from the Sandpiper pipeline project, which was cancelled and impaired in 2016. |
The following reconciles segment capital expenditures and investments to total capital expenditures:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Segment capital expenditures and investments | $ | 5,896 | $ | 4,147 | $ | 2,968 | |||||
| Less investments in equity method investees | 1,064 | 409 | 305 | ||||||||
| Plus items not allocated to segments: | |||||||||||
| Corporate | 100 | 77 | 83 | ||||||||
| Capitalized interest | 137 | 80 | 55 | ||||||||
| Total capital expenditures(a) | $ | 5,069 | $ | 3,895 | $ | 2,801 |
| (a) | Includes changes in capital expenditure accruals. See Note 21 for a reconciliation of total capital expenditures to additions to property, plant and equipment as reported in the consolidated statements of cash flows. |
No single customer accounted for more than 10 percent of annual revenues for the years ended December 31, 2019, 2018 and 2017. See Note 20 for the disaggregation of our revenue by segment and product line.
We do not have significant operations in foreign countries. Therefore, revenues in foreign countries and long-lived assets located in foreign countries, including property, plant and equipment and investments, are not material to our operations.
| 11**.** | NET INTEREST AND OTHER FINANCIAL COSTS |
Net interest and other financial costs was:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Interest income | $ | (40 | ) | $ | (87 | ) | $ | (27 | ) | ||
| Interest expense | 1,396 | 1,026 | 688 | ||||||||
| Interest capitalized | (158 | ) | (80 | ) | (63 | ) | |||||
| Pension and other postretirement non-service costs(a) | 3 | 53 | 49 | ||||||||
| Loss on extinguishment of debt | — | 64 | — | ||||||||
| Other financial costs | 46 | 27 | 27 | ||||||||
| Net interest and other financial costs | $ | 1,247 | $ | 1,003 | $ | 674 |
| (a) | See Note 23. |
| 12**.** | INCOME TAXES |
Income tax provision (benefit) was:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Current: | |||||||||||
| Federal | $ | (3 | ) | $ | 715 | $ | 681 | ||||
| State and local | 53 | 178 | 98 | ||||||||
| Foreign | 1 | 22 | (6 | ) | |||||||
| Total current | 51 | 915 | 773 | ||||||||
| Deferred: | |||||||||||
| Federal | 898 | 2 | (1,270 | ) | |||||||
| State and local | 116 | 61 | 33 | ||||||||
| Foreign | 9 | (16 | ) | 4 | |||||||
| Total deferred | 1,023 | 47 | (1,233 | ) | |||||||
| Income tax provision (benefit) | $ | 1,074 | $ | 962 | $ | (460 | ) |
A reconciliation of the federal statutory income tax rate applied to income before income taxes to the provision for income taxes follows:
| 2019 | 2018 | 2017 | ||||||
| Statutory rate applied to income before income taxes | 21 | % | 21 | % | 35 | % | ||
| State and local income taxes, net of federal income tax effects | 3 | 4 | 2 | |||||
| Goodwill impairment | 3 | — | — | |||||
| Noncontrolling interests | (3 | ) | (4 | ) | (4 | ) | ||
| TCJA legislation | — | — | (45 | ) | ||||
| Other | 1 | — | (2 | ) | ||||
| Provision for income taxes | 25 | % | 21 | % | (14 | )% |
Deferred tax assets and liabilities resulted from the following:
| December 31, | |||||||
| (In millions) | 2019 | 2018 | |||||
| Deferred tax assets: | |||||||
| Employee benefits | $ | 693 | $ | 660 | |||
| Environmental remediation | 99 | 111 | |||||
| Debt financing | 17 | 39 | |||||
| Net operating loss carryforwards | 18 | 17 | |||||
| Foreign currency | 15 | 28 | |||||
| Tax credit carryforwards | 14 | 21 | |||||
| Other | 57 | 88 | |||||
| Total deferred tax assets | 913 | 964 | |||||
| Deferred tax liabilities: | |||||||
| Property, plant and equipment | 3,444 | 2,830 | |||||
| Inventories | 652 | 678 | |||||
| Investments in subsidiaries and affiliates | 3,114 | 2,130 | |||||
| Intangibles | 56 | 97 | |||||
| Other | 19 | 64 | |||||
| Total deferred tax liabilities | 7,285 | 5,799 | |||||
| Net deferred tax liabilities | $ | 6,372 | $ | 4,835 |
Net deferred tax liabilities were classified in the consolidated balance sheets as follows:
| December 31, | |||||||
| (In millions) | 2019 | 2018 | |||||
| Assets: | |||||||
| Other noncurrent assets | $ | 20 | $ | 29 | |||
| Liabilities: | |||||||
| Deferred income taxes | 6,392 | 4,864 | |||||
| Net deferred tax liabilities | $ | 6,372 | $ | 4,835 |
At December 31, 2019 and 2018, federal operating loss carryforwards were $7 million and $7 million, respectively, which expire in 2022 through 2038. As of December 31, 2019 and 2018, state and local operating loss carryforwards were $11 million and $10 million, respectively, which expire in 2020 through 2038.
As of December 31, 2019 and 2018, $11 million and $10 million of valuation allowances have been recorded against foreign tax credits and state net operating losses due to the expectation that these deferred tax assets are not likely to be realized.
MPC is continuously undergoing examination of its U.S. federal income tax returns by the Internal Revenue Service (“IRS”). Since 2012, we have continued to participate in the Compliance Assurance Process (“CAP”). CAP is a real-time audit of the U.S. Federal income tax return that allows the IRS, working in conjunction with MPC, to determine tax return compliance with the U.S. Federal tax law prior to filing the return. This program provides us with greater certainty about our tax liability for years under examination by the IRS. While Andeavor also underwent continual IRS examination, it did not participate in the CAP for tax periods prior to the October 1, 2018 acquisition of Andeavor.
MPC’s IRS audits have been completed through the 2010 tax year. Andeavor and its subsidiaries’ IRS audits have been completed through the 2010 tax year. We believe adequate provision has been established for potential tax in periods not closed to examination. Further, we are routinely involved in U.S. state income tax audits. We believe all other audits will be resolved with the amounts provided for these liabilities. As of December 31, 2019, our income tax returns remain subject to examination in the following major tax jurisdictions for the tax years indicated:
| United States Federal | 2011 | - | 2018 |
| States | 2006 | - | 2018 |
The following table summarizes the activity in unrecognized tax benefits:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| January 1 balance | $ | 211 | $ | 19 | $ | 7 | |||||
| Additions for tax positions of prior years | 2 | — | 13 | ||||||||
| Reductions for tax positions of prior years | (2 | ) | (5 | ) | — | ||||||
| Settlements | (19 | ) | — | (1 | ) | ||||||
| Statute of limitations | (160 | ) | (12 | ) | — | ||||||
| Acquired from Andeavor | — | 209 | — | ||||||||
| December 31 balance | $ | 32 | $ | 211 | $ | 19 |
If the unrecognized tax benefits as of December 31, 2019 were recognized, $23 million would affect our effective income tax rate. There were $2 million of uncertain tax positions as of December 31, 2019 for which it is reasonably possible that the amount of unrecognized tax benefits would significantly decrease during the next twelve months. For tax years 2009 and 2010, Andeavor had asserted a federal income tax claim for $159 million resulting from the income tax effect of the receipt of the ethanol blender’s excise tax credit, for which the tax benefit was not recorded. The statute of limitations for the IRS appeal process was allowed to expire during the fourth quarter 2019 since the ability to obtain a refund was remote.
Prior to its spinoff on June 30, 2011, Marathon Petroleum Corporation was included in the Marathon Oil Corporation (“Marathon Oil”) U.S. federal income tax returns for all applicable years. During the third quarter of 2017, Marathon Oil received a notice of Final Partnership Administrative Adjustment (“FPAA”) from the IRS for taxable year 2010, relating to certain partnership transactions. Marathon Oil filed a U.S. Tax Court petition disputing these adjustments during the fourth quarter of 2017. We received an FPAA for taxable years 2011-2014 for items resulting from the Marathon Oil IRS dispute discussed above. We filed a U.S. Tax Court petition in the fourth quarter of 2017 for tax years 2011-2014 to dispute these corollary adjustments. In the third quarter of 2019, the U.S. Tax court entered a decision in favor of both Marathon Oil and us for all material items and the U.S. Internal Revenue Service is in the process of preparing the final reports for these tax years.
Pursuant to our tax sharing agreement with Marathon Oil, the unrecognized tax benefits related to pre-spinoff operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and we have indemnified Marathon Oil accordingly. See Note 26 for indemnification information.
Interest and penalties related to income taxes are recorded as part of the provision for income taxes. Such interest and penalties were net expenses (benefits) of $(2) million, $1 million and $3 million in 2019, 2018 and 2017, respectively. As of December 31, 2019 and 2018, $7 million and $18 million of interest and penalties were accrued related to income taxes.
| 13**.** | INVENTORIES |
| December 31, | |||||||
| (In millions) | 2019 | 2018 | |||||
| Crude oil | $ | 3,472 | $ | 3,655 | |||
| Refined products | 5,548 | 5,234 | |||||
| Materials and supplies | 996 | 720 | |||||
| Merchandise | 227 | 228 | |||||
| Total | $ | 10,243 | $ | 9,837 |
The LIFO method accounted for 90 percent and 92 percent of total inventory value at December 31, 2019 and 2018, respectively. Current acquisition costs of inventories were estimated to exceed the LIFO inventory value at December 31, 2019 by $871 million. There was no excess of replacement or current cost over our stated LIFO cost at December 31, 2018. There were no material liquidations of LIFO inventories in 2019, 2018 and 2017.
| 14**.** | EQUITY METHOD INVESTMENTS |
The Andersons Marathon Holdings LLC
Effective October 1, 2019, The Andersons, Inc. and MPC contributed jointly owned equity interests in three ethanol entities into a new legal entity, The Andersons Marathon Holdings LLC (“TAMH”). Concurrently, The Andersons, Inc. contributed a wholly-owned ethanol facility to TAMH. In accordance with ASC 845, we derecognized the historical cost of our equity method investments in the legacy entities amounting to $123 million and recognized the new equity method investment in TAMH at fair value. We used a combination of market, income and cost approaches to determine the fair value of our ownership interest in TAMH with more reliance on the market and income approaches. The estimated cash flows used in the income approach were discounted using a weighted average cost of capital estimate and the market approach utilized EBITDA and capacity multiples for similar companies and transactions. This is a nonrecurring fair value measurement and is recognized in Level 3 of the fair value hierarchy. We estimated the fair value of our ownership interest to be $175 million. The excess of the estimated fair value of our ownership interest over the carrying value of the derecognized net assets resulted in a $52 million non-cash net gain recorded as a net gain on disposal of assets in the accompanying consolidated statements of income.
Capline LLC
During the three months ended March 31, 2019, we executed agreements with Capline Pipeline Company LLC (“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. In connection with our execution of these agreements, Capline LLC initiated a binding open season for southbound service from Patoka, Illinois to St. James, Louisiana or Liberty, Mississippi with an additional origination point at Cushing, Oklahoma. Service from Cushing, Oklahoma is part of a joint tariff with Diamond pipeline. Crude oil service is expected to begin in the first half of 2021.
In accordance with ASC 810, we derecognized our undivided interest amounting to $143 million of net assets and recognized the Capline LLC ownership interest we received at fair value. We used an income approach to determine the fair value of our ownership interest under a Monte Carlo simulation method. We estimated the fair value of our ownership interest to be $350 million. This is a nonrecurring fair value measurement and is categorized in Level 3 of the fair value hierarchy. The Monte Carlo simulation inputs include ranges of tariff rates, operating volumes, operating cost and capital expenditure assumptions. The estimated cash flows were discounted using a Monte Carlo market participant weighted average cost of capital estimate. None of the inputs to the Monte Carlo simulation are individually significant. The excess of the estimated fair value of our ownership interest over the carrying value of the derecognized net assets resulted in a $207 million non-cash net gain recorded as a net gain on disposal of assets in the accompanying consolidated statements of income.
As the Capline system is currently idled, Capline LLC is unable to fund its operations without financial support from its equity owners and is a VIE. MPC is not deemed to be the primary beneficiary, due to our inability to unilaterally control significant decision-making rights. Our maximum exposure to loss as a result of our
involvement with Capline LLC includes our equity investment, any additional capital contribution commitments and any operating expenses incurred by Capline LLC in excess of compensation received for performance of the operating services.
Impairments
During the fourth quarter of 2019, two 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 expense during the fourth quarter related to this investment.
Investments in Equity Method Affiliates
| Ownership as of | Carrying value at | ||||||||
| December 31, | December 31, | ||||||||
| (Dollars in millions) | 2019 | 2019 | 2018 | ||||||
| Refining & Marketing | |||||||||
| The Andersons Marathon Holdings LLC | 50% | $ | 177 | $ | — | ||||
| Watson Cogeneration Company | 51% | 26 | 84 | ||||||
| Other(a) | — | 121 | |||||||
| Refining & Marketing Total | $ | 203 | $ | 205 | |||||
| Retail | |||||||||
| PFJ Southeast LLC | 29% | $ | 330 | $ | 341 | ||||
| Retail Total | $ | 330 | $ | 341 | |||||
| Midstream | |||||||||
| MPLX | |||||||||
| Andeavor Logistics Rio Pipeline LLC | 67% | $ | 202 | $ | 181 | ||||
| Centrahoma Processing LLC | 40% | 153 | 160 | ||||||
| Explorer Pipeline Company | 25% | 83 | 90 | ||||||
| Illinois Extension Pipeline Company, L.L.C | 35% | 265 | 275 | ||||||
| LOOP LLC | 41% | 238 | 226 | ||||||
| MarEn Bakken Company LLC | 25% | 481 | 498 | ||||||
| MarkWest EMG Jefferson Dry Gas Gathering Company, L.L.C. | 67% | 302 | 236 | ||||||
| MarkWest Utica EMG, L.L.C. | 56% | 1,984 | 2,039 | ||||||
| Minnesota Pipe Line Company, LLC | 17% | 190 | 197 | ||||||
| Rendezvous Gas Services, L.L.C. | 78% | 170 | 248 | ||||||
| Sherwood Midstream Holdings LLC | 53% | 157 | 157 | ||||||
| Sherwood Midstream LLC | 50% | 537 | 366 | ||||||
| Whistler Pipeline LLC | 38% | 134 | — | ||||||
| Wink to Webster Pipeline LLC | 15% | 126 | — | ||||||
| Other | 253 | 228 | |||||||
| MPLX Total | $ | 5,275 | $ | 4,901 | |||||
| MPC-Retained | |||||||||
| Capline Pipeline Company LLC | 33% | $ | 374 | $ | — | ||||
| Crowley Coastal Partners, LLC | 50% | 188 | 190 | ||||||
| Gray Oak Pipeline, LLC | 25% | 298 | 73 | ||||||
| LOOP LLC | 10% | 59 | 56 | ||||||
| Other | 171 | 132 | |||||||
| MPC-Retained Total | $ | 1,090 | $ | 451 | |||||
| Midstream Total | $ | 6,365 | $ | 5,352 | |||||
| Total | $ | 6,898 | $ | 5,898 |
| (a) | 2018 represents our investment in three ethanol entities jointly owned with The Andersons, Inc. In 2019, these entities were contributed into a new legal entity, The Andersons Marathon Holdings, LLC. |
Summarized financial information for all equity method investments in affiliated companies, combined, was as follows:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Income statement data: | |||||||||||
| Revenues and other income | $ | 7,718 | $ | 7,726 | $ | 6,235 | |||||
| Income from operations | 1,472 | 1,375 | 1,075 | ||||||||
| Net income | 1,284 | 1,242 | 922 | ||||||||
| Balance sheet data – December 31: | |||||||||||
| Current assets | $ | 1,333 | $ | 1,443 | |||||||
| Noncurrent assets | 17,216 | 12,408 | |||||||||
| Current liabilities | 1,006 | 1,857 | |||||||||
| Noncurrent liabilities | 2,772 | 1,788 |
As of December 31, 2019, the carrying value of our equity method investments was $1.4 billion higher than the underlying net assets of investees. This basis difference is being amortized into net income over the remaining estimated useful lives of the underlying net assets, except for $700 million of excess related to goodwill and other non-depreciable assets. The basis difference reflects the preliminary purchase price allocation of Capline LLC, which will be completed in the one year measurement period as required by ASC 805, “Business Combinations”.
Dividends and partnership distributions received from equity method investees (excluding distributions that represented a return of capital previously contributed) were $662 million, $519 million and $391 million in 2019, 2018 and 2017.
| 15**.** | PROPERTY, PLANT AND EQUIPMENT |
| (In millions) | Estimated Useful Lives | December 31, | |||||||
| 2019 | 2018 | ||||||||
| Refining & Marketing | 4 - 30 years | $ | 29,037 | $ | 27,590 | ||||
| Retail | 4 - 25 years | 7,104 | 6,637 | ||||||
| Midstream | 2 - 51 years | 27,193 | 25,692 | ||||||
| Corporate and Other | 4 - 40 years | 1,289 | 1,294 | ||||||
| Total | 64,623 | 61,213 | |||||||
| Less accumulated depreciation | 19,008 | 16,155 | |||||||
| Property, plant and equipment, net | $ | 45,615 | $ | 45,058 |
Property, plant and equipment includes gross assets acquired under finance leases of $806 million and $786 million at December 31, 2019 and 2018, respectively, with related amounts in accumulated depreciation of $226 million and $202 million at December 31, 2019 and 2018. Property, plant and equipment includes construction in progress of $3.48 billion and $3.49 billion at December 31, 2019 and 2018, respectively, which primarily relates to capital projects at our refineries and midstream facilities.
| 16**.** | GOODWILL AND INTANGIBLES |
Goodwill
Goodwill is tested for impairment on an annual basis and when events or changes in circumstances indicate the fair value of a reporting unit with goodwill has been reduced below the carrying value of the net assets of the reporting unit. In 2019, we recorded an impairment of goodwill as outlined below based on MPLX’s annual evaluation. There were no other impairments of goodwill required based on our annual test of goodwill in 2019. In 2018, our annual testing did not indicate any impairment of goodwill.
MPLX annually evaluates goodwill for impairment as of November 30, as well as whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit with goodwill is less than the carrying amount. As a result of the merger of MPLX and ANDX and subsequent changes to MPLX’s internal organization structure, the number of reporting units within our Midstream segment was reduced from 16 to 7 in conjunction with the annual impairment test, however, this change in structure did not have any impact on MPC’s operating segments. Reporting units are determined based on the way in which segment management operates and reviews each operating segment. MPLX performed a goodwill impairment assessment prior to the change in reporting units in addition to performing an impairment assessment immediately following the change in their reporting units. Significant assumptions used to estimate the reporting units’ fair value include the discount rate as well as estimates of future cash flows, which are impacted primarily by producer customers’ development plans, which impact future volumes and capital requirements. After MPLX performed its evaluations related to the impairment of goodwill, we recorded an impairment of $1,156 million prior to the change in reporting units and additional impairment of $41 million subsequent to the change in reporting units. The remainder of the reporting units fair values were in excess of their carrying values. The impairment was primarily driven by the updated guidance related to the slowing of drilling activity which has reduced production growth forecasts from MPLX’s producer customers.
The fair value of the reporting units for the annual goodwill impairment analysis described above was determined based on applying both a discounted cash flow or income approach as well as a market approach. The discounted cash flow fair value estimate is based on known or knowable information at the measurement date. The significant assumptions that were used to develop the estimates of the fair values under the discounted cash flow method included management’s best estimates of the expected future results and discount rates, which range from 9.0 percent to 10.0 percent. 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 annual goodwill impairment test will prove to be an accurate prediction of the future. The fair value measurements for the individual reporting units’ overall fair values, and the fair values of the goodwill assigned thereto, represent Level 3 measurements.
The changes in the carrying amount of goodwill for 2018 and 2019 were as follows:
| (In millions) | Refining & Marketing | Retail | Midstream | Total | |||||||||||
| Balance at January 1, 2018 | $ | 519 | $ | 791 | $ | 2,276 | $ | 3,586 | |||||||
| Acquisitions | 4,717 | 4,050 | 7,831 | 16,598 | |||||||||||
| Dropdowns to MPLX | (216 | ) | — | 216 | — | ||||||||||
| Balance at December 31, 2018 | $ | 5,020 | $ | 4,841 | $ | 10,323 | $ | 20,184 | |||||||
| Acquisitions | 38 | 56 | — | 94 | |||||||||||
| Purchase price allocation adjustments | 514 | 54 | 408 | 976 | |||||||||||
| Impairments | — | — | (1,197 | ) | (1,197 | ) | |||||||||
| Dispositions | — | — | (17 | ) | (17 | ) | |||||||||
| Balance at December 31, 2019 | $ | 5,572 | $ | 4,951 | $ | 9,517 | $ | 20,040 |
Intangible Assets
Our definite lived intangible assets as of December 31, 2019 and 2018 are as shown below.
| December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
| (In millions) | Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||
| Customer contracts and relationships | $ | 3,273 | $ | 610 | $ | 2,663 | $ | 3,184 | $ | 261 | $ | 2,923 | |||||||||||
| Brand rights and tradenames | 155 | 55 | 100 | 208 | 33 | 175 | |||||||||||||||||
| Royalty agreements | 133 | 78 | 55 | 129 | 70 | 59 | |||||||||||||||||
| Other | 147 | 37 | 110 | 190 | 33 | 157 | |||||||||||||||||
| Total | $ | 3,708 | $ | 780 | $ | 2,928 | $ | 3,711 | $ | 397 | $ | 3,314 |
At December 31, 2019 and 2018, we had indefinite lived intangible assets of $94 million and $94 million, respectively, which are primarily emission allowance credits and trademarks.
Amortization expense for 2019 and 2018 was $372 million and $134 million, respectively. Estimated future amortization expense related to the intangible assets at December 31, 2019 is as follows:
| (In millions) | ||||
| 2020 | $ | 387 | ||
| 2021 | 380 | |||
| 2022 | 379 | |||
| 2023 | 363 | |||
| 2024 | 305 |
| 17**.** | FAIR VALUE MEASUREMENTS |
Fair Values – Recurring
The following tables present assets and liabilities accounted for at fair value on a recurring basis as of December 31, 2019 and 2018 by fair value hierarchy level. We have elected to offset the fair value amounts recognized for multiple derivative contracts executed with the same counterparty, including any related cash collateral as shown below; however, fair value amounts by hierarchy level are presented on a gross basis in the following tables.
| December 31, 2019 | |||||||||||||||||||||||
| Fair Value Hierarchy | |||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Netting and Collateral(a) | Net Carrying Value on Balance Sheet(b) | Collateral Pledged Not Offset | |||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Commodity contracts | $ | 57 | $ | 6 | $ | — | $ | (55 | ) | $ | 8 | $ | 73 | ||||||||||
| Liabilities: | |||||||||||||||||||||||
| Commodity contracts | $ | 95 | $ | 11 | $ | — | $ | (106 | ) | $ | — | $ | — | ||||||||||
| Embedded derivatives in commodity contracts | — | — | 60 | — | 60 | — |
| December 31, 2018 | |||||||||||||||||||||||
| Fair Value Hierarchy | |||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Netting and Collateral(a) | Net Carrying Value on Balance Sheet(b) | Collateral Pledged Not Offset | |||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Commodity contracts | $ | 370 | $ | 31 | $ | — | $ | (323 | ) | $ | 78 | $ | 2 | ||||||||||
| Liabilities: | |||||||||||||||||||||||
| Commodity contracts | $ | 255 | $ | 37 | $ | — | $ | (284 | ) | $ | 8 | $ | — | ||||||||||
| Embedded derivatives in commodity contracts | — | — | 61 | — | 61 | — |
| (a) | Represents the impact of netting assets, liabilities and cash collateral when a legal right of offset exists. As of December 31, 2019, $51 million was netted with mark-to-market liabilities. As of December 31, 2018, cash collateral of $52 million was netted with mark-to-market derivative assets and $13 million was netted with mark-to-market derivative liabilities. |
| (b) | We have no derivative contracts which are subject to master netting arrangements reflected gross on the balance sheet. |
Commodity derivatives in Level 1 are exchange-traded contracts for crude oil and refined products measured at fair value with a market approach using the close-of-day settlement prices for the market. Commodity derivatives are covered under master netting agreements with an unconditional right to offset. Collateral deposits in futures commission merchant accounts covered by master netting agreements related to Level 1 commodity derivatives are classified as Level 1 in the fair value hierarchy.
Level 2 instruments are valued based on quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices, such as liquidity, that are observable for the asset or liability. Commodity derivatives in Level 2 are OTC contracts, which are valued using market quotations from independent price reporting agencies, third-party brokers and commodity exchange price curves that are corroborated with market data.
Level 3 instruments are OTC NGL contracts and embedded derivatives in commodity contracts. The embedded derivative liability relates to a natural gas purchase agreement embedded in a keep‑whole processing agreement. The fair value calculation for these Level 3 instruments at December 31, 2019 used significant unobservable inputs including: (1) NGL prices interpolated and extrapolated due to inactive markets ranging from $0.43 to $1.23 per gallon and (2) the probability of renewal of 94 percent for the first five-year term and 83 percent for the second five-year term of the gas purchase agreement and the related keep-whole processing agreement. For these contracts, increases in forward NGL prices result in a decrease in the fair value of the derivative assets and an increase in the fair value of the derivative liabilities. Increases or decreases in the fractionation spread result in an increase or decrease in the fair value of the embedded derivative liability. An increase in the probability of renewal would result in an increase in the fair value of the related embedded derivative liability.
The following is a reconciliation of the net beginning and ending balances recorded for net liabilities classified as Level 3 in the fair value hierarchy.
| (In millions) | 2019 | 2018 | |||||
| Beginning balance | $ | 61 | $ | 66 | |||
| Unrealized and realized losses included in net income | 5 | 3 | |||||
| Settlements of derivative instruments | (6 | ) | (8 | ) | |||
| Ending balance | $ | 60 | $ | 61 | |||
| The amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to assets still held at the end of period: | $ | 5 | $ | 8 |
See Note 18 for the income statement impacts of our derivative instruments.
Fair Values – Reported
We believe the carrying value of our other financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and the expected insignificance of bad debt expense, which includes an evaluation of counterparty credit risk. The borrowings under our revolving credit facilities, which include variable interest rates, approximate fair value. The fair value of our fixed rate long-term debt is based on prices from recent trade activity and is categorized in Level 3 of the fair value hierarchy. The carrying and fair values of our debt were approximately $28.3 billion and $30.1 billion at December 31, 2019, respectively, and approximately $27.0 billion and $26.5 billion at December 31, 2018, respectively. These carrying and fair values of our debt exclude the unamortized issuance costs which are netted against our total debt.
| 18**.** | DERIVATIVES |
For further information regarding the fair value measurement of derivative instruments, including any effect of master netting agreements or collateral, see Note 17. See Note 2 for a discussion of the types of derivatives we use and the reasons for them. We do not designate any of our commodity derivative instruments as hedges for accounting purposes.
The following table presents the fair value of derivative instruments as of December 31, 2019 and 2018 and the line items in the balance sheets in which the fair values are reflected. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements including cash collateral on deposit with, or received from, brokers. We offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of offset exists. As a result, the asset and liability amounts below will not agree with the amounts presented in our consolidated balance sheets.
| (In millions) | December 31, 2019 | ||||||
| Balance Sheet Location | Asset | Liability | |||||
| Commodity derivatives | |||||||
| Other current assets | $ | 63 | $ | 106 | |||
| Other current liabilities(a) | — | 5 | |||||
| Deferred credits and other liabilities(a) | — | 55 |
| (In millions) | December 31, 2018 | ||||||
| Balance Sheet Location | Asset | Liability | |||||
| Commodity derivatives | |||||||
| Other current assets | $ | 400 | $ | 283 | |||
| Other current liabilities(a) | 1 | 16 | |||||
| Deferred credits and other liabilities(a) | — | 54 |
| (a) | Includes embedded derivatives. |
The table below summarizes open commodity derivative contracts for crude oil, refined products and blending products as of December 31, 2019.
| Percentage of contracts that expire next quarter | Position | ||||||
| (Units in thousands of barrels) | Long | Short | |||||
| Exchange-traded(a) | |||||||
| Crude oil | 85.7% | 26,287 | 27,237 | ||||
| Refined products | 94.7% | 15,298 | 12,519 | ||||
| Blending products | 99.5% | 1,976 | 3,770 |
| (a) | Included in exchange-traded are spread contracts in thousands of barrels: Crude oil - 5,130 long and 330 short; Refined products - 950 long and 450 short |
The following table summarizes the effect of all commodity derivative instruments in our consolidated statements of income:
| (In millions) | Gain (Loss) | ||||||||||
| Income Statement Location | 2019 | 2018 | 2017 | ||||||||
| Sales and other operating revenues | $ | (19 | ) | $ | 13 | $ | 5 | ||||
| Cost of revenues | (77 | ) | (59 | ) | (26 | ) | |||||
| Total | $ | (96 | ) | $ | (46 | ) | $ | (21 | ) |
| 19**.** | DEBT |
Our outstanding borrowings at December 31, 2019 and 2018 consisted of the following:
| (In millions) | December 31, 2019 | December 31, 2018 | |||||
| Marathon Petroleum Corporation: | |||||||
| Senior notes | $ | 8,474 | $ | 8,474 | |||
| Notes payable | 10 | 11 | |||||
| Finance lease obligations | 679 | 629 | |||||
| MPLX LP: | |||||||
| Term loan facility | 1,000 | — | |||||
| Senior notes | 19,100 | 13,850 | |||||
| Finance lease obligations | 19 | 6 | |||||
| ANDX LP:(a) | |||||||
| Revolving and dropdown credit facilities | — | 1,245 | |||||
| Senior notes | — | 3,750 | |||||
| Finance lease obligations | — | 15 | |||||
| Total debt | $ | 29,282 | $ | 27,980 | |||
| Unamortized debt issuance costs | (134 | ) | (128 | ) | |||
| Unamortized discount | (310 | ) | (328 | ) | |||
| Amounts due within one year | (711 | ) | (544 | ) | |||
| Total long-term debt due after one year | $ | 28,127 | $ | 26,980 |
| (a) | On July 30, 2019, MPLX acquired ANDX and assumed its debt obligations. See Note 4 and the discussion below for additional information. |
MPC Senior Notes
| December 31, | |||||||
| (In millions) | 2019 | 2018 | |||||
| Marathon Petroleum Corporation: | |||||||
| Senior notes, 3.400% due December 2020 | $ | 650 | $ | 650 | |||
| Senior notes, 5.125% due March 2021 | 1,000 | 1,000 | |||||
| Senior notes, 5.375% due October 2022 | 337 | 337 | |||||
| Senior notes, 4.750% due December 2023 | 614 | 614 | |||||
| Senior notes, 5.125% due April 2024 | 241 | 241 | |||||
| Senior notes, 3.625%, due September 2024 | 750 | 750 | |||||
| Senior notes, 5.125% due December 2026 | 719 | 719 | |||||
| Senior notes, 3.800% due April 2028 | 496 | 496 | |||||
| Senior notes, 6.500% due March 2041 | 1,250 | 1,250 | |||||
| Senior notes, 4.750% due September 2044 | 800 | 800 | |||||
| Senior notes, 5.850% due December 2045 | 250 | 250 | |||||
| Senior notes, 4.500% due April 2048 | 498 | 498 | |||||
| Andeavor senior notes, 3.800% - 5.375% due 2022 - 2048 | 469 | 469 | |||||
| Senior notes, 5.000%, due September 2054 | 400 | 400 | |||||
| Total | 8,474 | 8,474 |
In connection with the acquisition of Andeavor on October 1, 2018, we assumed an aggregate principal amount of $3.374 billion senior notes issued by Andeavor, with interest rates ranging from 3.800 percent to 5.375 percent and maturity dates ranging from 2022 to 2048. In October 2018, approximately $2.905 billion aggregate
principal amount of Andeavor’s outstanding senior notes were exchanged for new unsecured senior notes issued by MPC having the same maturity and interest rates as the Andeavor senior notes and cash in an exchange offer and consent solicitation undertaken by MPC and Andeavor. After giving effect to the exchange offer, approximately $469 million aggregate principal of outstanding senior notes issued by Andeavor remain outstanding.
Interest on each series of senior notes is payable semi-annually in arrears. The MPC senior notes are unsecured and unsubordinated obligations of MPC and rank equally with all of MPC’s other existing and future unsecured and unsubordinated indebtedness. The MPC senior notes are non-recourse and structurally subordinated to the indebtedness of our subsidiaries, including the outstanding indebtedness of Andeavor, MPLX and ANDX. The Andeavor senior notes are unsecured, unsubordinated obligations of Andeavor and are non-recourse to MPC and any of MPC’s subsidiaries other than Andeavor.
On March 15, 2018, we redeemed all of the $600 million outstanding aggregate principal amount of our 2.700 percent senior notes due on December 14, 2018. The 2018 senior notes were redeemed at a price equal to par plus a make whole premium and accrued and unpaid interest. The make whole premium of $2.5 million was calculated based on the market yield of the applicable treasury issue as of the redemption date as determined in accordance with the indenture governing the 2018 senior notes.
MPLX Term Loan
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/or for general business purposes. Amounts borrowed under the term loan agreement will be due and payable on September 26, 2021. As of December 31, 2019, MPLX had drawn $1 billion on the term loan at an average interest rate of 2.561 percent.
The term loan agreement contains representations and warranties, affirmative and negative covenants and events of default that we consider to be customary for an agreement of this type and are substantially similar to MPLX’s existing revolving credit facility, including a covenant that requires MPLX’s ratio of Consolidated Total Debt to Consolidated EBITDA (as both terms are defined in the term loan agreement) for the four prior fiscal quarters not to exceed 5.0 to 1.0 as of the last day of each fiscal quarter (or during the six-month period following certain acquisitions, 5.5 to 1.0). Consolidated EBITDA is subject to adjustments for certain acquisitions completed and capital projects undertaken during the relevant period.
On January 2, 2018, MPLX entered into a term loan agreement with a syndicate of lenders providing for a $4.1 billion, 364-day term loan facility. MPLX drew the entire amount of the term loan facility in a single borrowing to fund the cash portion of the consideration for the February 1, 2018 dropdown. On February 8, 2018, MPLX used $4.1 billion of the net proceeds from the issuance of MPLX senior notes to repay the 364-day term-loan facility.
MPLX Senior Notes
| Average | December 31, | |||||||
| (In millions) | Rate | 2019 | 2018 | |||||
| MPLX LP: | ||||||||
| Floating rate notes due September 2021 | 2.948 | % | 1,000 | — | ||||
| Floating rate notes due September 2022 | 3.148 | % | 1,000 | — | ||||
| Senior notes, 6.250% due October 2022 | 266 | — | ||||||
| Senior notes, 3.500% due December 2022 | 486 | — | ||||||
| Senior notes, 3.375% due March 2023 | 500 | 500 | ||||||
| Senior notes, 4.500% due July 2023 | 989 | 989 | ||||||
| Senior notes, 6.375% due May 2024 | 381 | — | ||||||
| Senior notes, 4.875% due December 2024 | 1,149 | 1,149 | ||||||
| Senior notes, 5.250% due January 2025 | 708 | — | ||||||
| Senior notes, 4.000% due February 2025 | 500 | 500 | ||||||
| Senior notes, 4.875% due June 2025 | 1,189 | 1,189 | ||||||
| MarkWest senior notes, 4.500% - 5.500% due 2023 - 2025 | 23 | 23 | ||||||
| Senior notes, 4.125% due March 2027 | 1,250 | 1,250 | ||||||
| Senior notes, 4.250% due December 2027 | 732 | — | ||||||
| Senior notes, 4.000% due March 2028 | 1,250 | 1,250 | ||||||
| Senior notes, 4.800% due February 2029 | 750 | 750 | ||||||
| Senior notes, 4.500% due April 2038 | 1,750 | 1,750 | ||||||
| Senior notes, 5.200% due March 2047 | 1,000 | 1,000 | ||||||
| Senior notes, 5.200% due December 2047 | 487 | — | ||||||
| ANDX senior notes, 3.500% - 6.375% due 2019 - 2047 | 190 | — | ||||||
| Senior notes, 4.700% due April 2048 | 1,500 | 1,500 | ||||||
| Senior notes, 5.500% due February 2049 | 1,500 | 1,500 | ||||||
| Senior notes, 4.900% due April 2058 | 500 | 500 | ||||||
| Total | 19,100 | 13,850 |
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. Net proceeds from the issuance of the floating rate senior notes were used to repay MPLX’s existing indebtedness and/or 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.
On November 15, 2018, MPLX issued $2.25 billion in aggregate principal amount of senior notes in a public offering. On December 10, 2018, a portion of the net proceeds from the offering was used to redeem the $750 million in aggregate principal amount of 5.500 percent unsecured notes due February 2023 issued by MPLX and MarkWest. These notes were redeemed at 101.833 percent of the principal amount. The make whole premium plus the write off of unamortized deferred financing costs resulted in a loss on extinguishment of debt of $60 million. The remaining net proceeds were used to repay borrowings under MPLX’s revolving credit facility and intercompany loan agreement with MPC and for general partnership purposes.
On February 8, 2018, MPLX issued $5.5 billion in aggregate principal amount of senior notes in a public offering. On February 8, 2018, $4.1 billion of the net proceeds were used to repay the 364-day term-loan facility entered into on January 2, 2018. The remaining proceeds were used to repay outstanding borrowings under MPLX’s revolving credit facility and intercompany loan agreement with MPC and for general partnership purposes.
Interest on each series of MPLX fixed rate senior notes is payable semi-annually in arrears. The MPLX senior notes are unsecured, unsubordinated obligations of MPLX and are non-recourse to MPC and its subsidiaries other than MPLX and MPLX GP LLC, as the general partner of MPLX except as otherwise noted.
Schedule of Maturities
Principal maturities of long-term debt, excluding finance lease obligations, as of December 31, 2019 for the next five years are as follows:
| (In millions) | |||
| 2020 | $ | 650 | |
| 2021 | 3,008 | ||
| 2022 | 2,275 | ||
| 2023 | 2,350 | ||
| 2024 | 2,652 |
Available Capacity under our Facilities
| (Dollars in millions) | Total Capacity | Outstanding Borrowings | Outstanding Letters of Credit | Available Capacity | Weighted Average Interest Rate | Expiration | ||||||||||||||
| MPC 364-day bank revolving credit facility | $ | 1,000 | $ | — | $ | — | $ | 1,000 | — | September 2020 | ||||||||||
| MPC bank revolving credit facility | 5,000 | — | 1 | 4,999 | — | October 2023 | ||||||||||||||
| MPC trade receivables securitization facility | 750 | — | — | 750 | — | July 2021 | ||||||||||||||
| MPLX bank revolving credit facility | 3,500 | — | — | 3,500 | — | July 2024 |
Commercial Paper
On February 26, 2016, 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. During 2019, we had no borrowings or repayments under the commercial paper program. At December 31, 2019, we had no amounts outstanding under the commercial paper program.
MPC Revolving Credit Agreements
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.
MPC has an option under its $5 billion five-year credit agreement to increase the aggregate commitments by up to an additional $1 billion, subject to, among other conditions, the consent of the lenders whose commitments would be increased. In addition, MPC may request up to two one-year extensions of the maturity date of the five-year credit agreement subject to, among other conditions, the consent of lenders holding a majority of the commitments, provided that the commitments of any non-consenting lenders will terminate on the then-effective maturity date. The five-year credit agreement includes sub-facilities for swing-line loans of up to $250 million and letters of credit of up to $2.2 billion (which may be increased to up to $3 billion upon receipt of additional letter of credit issuing commitments).
Borrowings under the MPC credit agreements bear interest, at our election, at either the Adjusted LIBO Rate or the Alternate Base Rate (both as defined in the MPC credit agreements), plus an applicable margin. We are charged various fees and expenses under the MPC credit agreements, including administrative agent fees, commitment fees on the unused portion of the commitments and fees related to issued and outstanding letters of credit. The applicable margins to the benchmark interest rates and the commitment fees payable under the MPC credit agreements fluctuate based on changes, if any, to our credit ratings.
The MPC credit agreements contain certain representations and warranties, affirmative and restrictive covenants and events of default that we consider to be usual and customary for arrangements of this type, including a financial covenant that requires us to maintain a ratio of Consolidated Net Debt to Total Capitalization (each as defined in the MPC credit agreements) of no greater than 0.65 to 1.00 as of the last day of each fiscal quarter. The covenants also restrict, among other things, our ability and/or the ability of certain of our subsidiaries to incur debt, create liens on assets or enter into transactions with affiliates. As of December 31, 2019, we were in compliance with the covenants contained in the MPC credit agreements.
Trade Receivables Securitization Facility
The trade receivables facility consists of one of our wholly-owned subsidiaries, Marathon Petroleum Company LP (“MPC LP”), selling or contributing on an on-going basis all of its trade receivables (including trade receivables acquired from Marathon Petroleum Trading Canada LLC, a wholly-owned subsidiary of MPC LP), together with all related security and interests in the proceeds thereof, without recourse, to another wholly-owned, bankruptcy-remote special purpose subsidiary, MPC Trade Receivables Company LLC (“TRC”), in exchange for a combination of cash, equity and/or borrowings under a subordinated note issued by TRC to MPC LP. TRC, in turn, has the ability to sell undivided ownership interests in qualifying trade receivables, together with all related security and interests in the proceeds thereof, without recourse, to the purchasing group in exchange for cash proceeds. The trade receivables facility also provides for the issuance of letters of credit up to $750 million, provided that the aggregate credit exposure of the purchasing group, including outstanding letters of credit, may not exceed the lesser of $750 million or the balance of qualifying trade receivables at any one time.
To the extent that TRC retains an ownership interest in the receivables it has purchased or received from MPC LP, such interest will be included in our consolidated financial statements solely as a result of the consolidation of the financial statements of TRC with those of MPC. The receivables sold or contributed to TRC are available first and foremost to satisfy claims of the creditors of TRC and are not available to satisfy the claims of creditors of MPC. TRC has granted a security interest in all of its assets to the purchasing group to secure its obligations under the Receivables Purchase Agreement.
Proceeds from the sale of undivided percentage ownership interests in qualifying receivables under the trade receivables facility are reflected as debt on our consolidated balance sheet. We remain responsible for servicing the receivables sold to the purchasing group. TRC pays floating-rate interest charges and usage fees on amounts outstanding under the trade receivables facility, if any, unused fees on the portion of unused commitments and certain other fees related to the administration of the facility and letters of credit that are issued and outstanding under the trade receivables facility.
The receivables purchase agreement and receivables sale agreement contain representations and covenants that we consider usual and customary for arrangements of this type. Trade receivables are subject to customary criteria, limits and reserves before being deemed to qualify for sale by TRC pursuant to the trade receivables facility. In addition, further purchases of qualified trade receivables under the trade receivables facility are subject to termination, and TRC may be subject to default fees, upon the occurrence of certain amortization
events that are included in the receivables purchase agreement, all of which we consider to be usual and customary for arrangements of this type. As of December 31, 2019, we were in compliance with the covenants contained in the receivables purchase agreement and receivables sale agreement.
MPLX Credit Agreement
Upon the completion of the merger of MPLX and 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.
The MPLX credit agreement includes letter of credit issuing capacity of up to approximately $300 million and swingline loan capacity of up to $150 million. The revolving borrowing capacity may be increased by up to an additional $1 billion, subject to certain conditions, including the consent of the lenders whose commitments would increase.
Borrowings under the MPLX credit agreement bear interest, at MPLX’s election, at the Adjusted LIBO Rate or the Alternate Base Rate (both as defined in the MPLX credit agreement) plus an applicable margin. MPLX is charged various fees and expenses in connection with the agreement, including administrative agent fees, commitment fees on the unused portion of the commitments and fees with respect to issued and outstanding letters of credit. The applicable margins to the benchmark interest rates and the commitment fees payable under the MPLX credit agreement fluctuate based on changes, if any, to MPLX’s credit ratings.
The MPLX credit agreement contains certain representations and warranties, affirmative and restrictive covenants and events of default that we consider to be usual and customary for an agreement of this type, including a financial covenant that requires MPLX to maintain a ratio of Consolidated Total Debt as of the end of each fiscal quarter to Consolidated EBITDA (both as defined in the MPLX credit agreement) for the prior four fiscal quarters of no greater than 5.0 to 1.0 (or 5.5 to 1.0 for up to two fiscal quarters following certain acquisitions). Consolidated EBITDA is subject to adjustments for certain acquisitions completed and capital projects undertaken during the relevant period. The covenants also restrict, among other things, MPLX’s ability and/or the ability of certain of its subsidiaries to incur debt, create liens on assets and enter into transactions with affiliates. As of December 31, 2019, MPLX was in compliance with the covenants contained in the MPLX credit agreement.
20**.** REVENUE
The following table presents our revenues disaggregated by segment and product line:
| (In millions) | Refining & Marketing | Retail | Midstream | Total | |||||||||||
| Year Ended December 31, 2019 | |||||||||||||||
| Refined products | $ | 82,169 | $ | 26,681 | $ | 809 | $ | 109,659 | |||||||
| Merchandise | 4 | 6,281 | — | 6,285 | |||||||||||
| Crude oil | 4,402 | — | — | 4,402 | |||||||||||
| Midstream services and other | 481 | 97 | 3,025 | 3,603 | |||||||||||
| Sales and other operating revenues | $ | 87,056 | $ | 33,059 | $ | 3,834 | $ | 123,949 |
| (In millions) | Refining & Marketing | Retail | Midstream | Total | |||||||||||
| Year Ended December 31, 2018 | |||||||||||||||
| Refined products | $ | 65,916 | $ | 18,279 | $ | 887 | $ | 85,082 | |||||||
| Merchandise | 11 | 5,227 | — | 5,238 | |||||||||||
| Crude oil | 3,345 | — | — | 3,345 | |||||||||||
| Midstream services and other | 413 | 40 | 2,386 | 2,839 | |||||||||||
| Sales and other operating revenues | $ | 69,685 | $ | 23,546 | $ | 3,273 | $ | 96,504 |
| (In millions) | Refining & Marketing | Retail | Midstream | Total | |||||||||||
| Year Ended December 31, 2017 | |||||||||||||||
| Refined products | $ | 50,193 | $ | 14,113 | $ | 889 | $ | 65,195 | |||||||
| Merchandise | 4 | 4,893 | — | 4,897 | |||||||||||
| Crude oil | 2,862 | — | — | 2,862 | |||||||||||
| Midstream services and other | 323 | 23 | 1,433 | 1,779 | |||||||||||
| Sales and other operating revenues | $ | 53,382 | $ | 19,029 | $ | 2,322 | $ | 74,733 |
We do not disclose information on the future performance obligations for any contract with expected duration of one year or less at inception. As of December 31, 2019, we do not have future performance obligations that are material to future periods.
Receivables
On the accompanying consolidated balance sheets, receivables, less allowance for doubtful accounts primarily consists of customer receivables. Significant, non-customer balances included in our receivables at December 31, 2019 include matching buy/sell receivables of $2.24 billion.
| 21**.** | SUPPLEMENTAL CASH FLOW INFORMATION |
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Net cash provided by operating activities included: | |||||||||||
| Interest paid (net of amounts capitalized) | $ | 1,174 | $ | 887 | $ | 525 | |||||
| Net income taxes paid to taxing authorities | 491 | 424 | 904 | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||
| Payments on operating leases(a) | 764 | — | — | ||||||||
| Interest payments under finance lease obligations(a) | 34 | — | — | ||||||||
| Net cash provided by financing activities included: | |||||||||||
| Principal payments under finance lease obligations(a) | 55 | — | — | ||||||||
| Non-cash investing and financing activities: | |||||||||||
| Capital leases | — | 172 | 71 | ||||||||
| Right of use assets obtained in exchange for new operating lease obligations(a) | 352 | — | — | ||||||||
| Right of use assets obtained in exchange for new finance lease obligations(a) | 96 | — | — | ||||||||
| Contribution of assets(b) | 266 | — | 337 | ||||||||
| Fair value of assets acquired(c) | 525 | — | 45 | ||||||||
| Acquisition: | |||||||||||
| Fair value of MPC shares issued | — | 19,766 | — | ||||||||
| Fair value of converted equity awards | — | 203 | — |
| (a) | Disclosure added in 2019 following the adoption of ASC 842. |
| (b) | 2019 includes the contribution of net assets to The Andersons Marathon Holdings LLC and Capline LLC. See Note 14. 2017 includes MPLX’s contribution of assets to Sherwood Midstream and Sherwood Midstream Holdings. See Note 5. |
| (c) | 2019 includes the recognition of The Andersons Marathon Holdings LLC and Capline LLC equity method investments. See Note 14. 2017 represents emission allowance credits received as part of a litigation settlement agreement. |
| (In millions) | December 31, 2019 | December 31, 2018 | |||||
| Cash and cash equivalents | $ | 1,527 | $ | 1,687 | |||
| Restricted cash(a) | 2 | 38 | |||||
| Cash, cash equivalents and restricted cash | $ | 1,529 | $ | 1,725 |
| (a) | The restricted cash balance is included within other current assets on the consolidated balance sheets. |
The consolidated statements of cash flows exclude changes to the consolidated balance sheets that did not affect cash. The following is a reconciliation of additions to property, plant and equipment to total capital expenditures:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Additions to property, plant and equipment per the 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 |
22**.** ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table shows the changes in accumulated other comprehensive loss by component.
| (In millions) | Pension Benefits | Other Benefits | Gain on Cash Flow Hedge | Workers Compensation | Total | ||||||||||||||
| Balance as of December 31, 2017 | $ | (190 | ) | $ | (48 | ) | $ | 4 | $ | 3 | $ | (231 | ) | ||||||
| Other comprehensive income (loss) before reclassifications, net of tax of $23 | 14 | 27 | (1 | ) | 9 | 49 | |||||||||||||
| Amounts reclassified from accumulated other comprehensive loss: | |||||||||||||||||||
| Amortization – prior service credit(a) | (33 | ) | (3 | ) | — | — | (36 | ) | |||||||||||
| – actuarial loss(a) | 31 | (1 | ) | — | — | 30 | |||||||||||||
| – settlement loss(a) | 53 | — | — | — | 53 | ||||||||||||||
| Other | — | — | — | (5 | ) | (5 | ) | ||||||||||||
| Tax effect | (7 | ) | 2 | (1 | ) | 2 | (4 | ) | |||||||||||
| Other comprehensive income (loss) | 58 | 25 | (2 | ) | 6 | 87 | |||||||||||||
| Balance as of December 31, 2018 | $ | (132 | ) | $ | (23 | ) | $ | 2 | $ | 9 | $ | (144 | ) |
| (In millions) | Pension Benefits | Other Benefits | Gain on Cash Flow Hedge | Workers Compensation | Total | ||||||||||||||
| Balance as of December 31, 2018 | $ | (132 | ) | $ | (23 | ) | $ | 2 | $ | 9 | $ | (144 | ) | ||||||
| Other comprehensive income (loss) before reclassifications, net of tax of ($52) | (71 | ) | (92 | ) | — | 1 | (162 | ) | |||||||||||
| Amounts reclassified from accumulated other comprehensive loss: | |||||||||||||||||||
| Amortization – prior service credit(a) | (45 | ) | — | — | — | (45 | ) | ||||||||||||
| – actuarial loss(a) | 22 | (1 | ) | — | — | 21 | |||||||||||||
| – settlement loss(a) | 9 | — | — | — | 9 | ||||||||||||||
| Other | — | — | (1 | ) | (4 | ) | (5 | ) | |||||||||||
| Tax effect | 5 | — | — | 1 | 6 | ||||||||||||||
| Other comprehensive loss | (80 | ) | (93 | ) | (1 | ) | (2 | ) | (176 | ) | |||||||||
| Balance as of December 31, 2019 | $ | (212 | ) | $ | (116 | ) | $ | 1 | $ | 7 | $ | (320 | ) |
| (a) | These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 23. |
| 23**.** | PENSION AND OTHER POSTRETIREMENT BENEFITS |
We have noncontributory defined benefit pension plans covering substantially all employees. Benefits under these plans have been based primarily on age, years of service and final average pensionable earnings. The years of service component of this formula was frozen as of December 31, 2009. Benefits for service beginning January 1, 2010 are based on a cash balance formula with an annual percentage of eligible pay credited based upon age and years of service. Eligible employees in our Retail segment accrue benefits under a defined contribution plan for service years beginning January 1, 2010.
We also have other postretirement benefits covering most employees. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions subject to various cost-sharing features. Retiree life insurance benefits are provided to a closed group of retirees. Other postretirement benefits are not funded in advance.
In connection with the Andeavor acquisition, we assumed a number of additional qualified and nonqualified noncontributory benefit pension plans, covering substantially all former Andeavor employees. Benefits under these plans are determined based on final average compensation and years of service through December 31, 2010 and a cash balance formula for service beginning January 1, 2011. These plans were frozen as of December 31, 2018. Further, as of December 31, 2019, the qualified plans were merged with our existing qualified plans in which the actuarial assumptions were materially the same between the plans. We also assumed a number of additional postretirement benefits covering eligible employees. These benefits were merged with our existing benefits beginning January 1, 2019.
Obligations and Funded Status
The accumulated benefit obligation for all defined benefit pension plans was $3,031 million and $2,632 million as of December 31, 2019 and 2018.
The following summarizes our defined benefit pension plans that have accumulated benefit obligations in excess of plan assets.
| December 31, | |||||||
| (In millions) | 2019 | 2018 | |||||
| Projected benefit obligations | $ | 3,239 | $ | 2,779 | |||
| Accumulated benefit obligations | 3,031 | 2,632 | |||||
| Fair value of plan assets | 2,531 | 2,089 |
The following summarizes the projected benefit obligations and funded status for our defined benefit pension and other postretirement plans:
| Pension Benefits | Other Benefits | ||||||||||||||
| (In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
| Change in benefit obligations: | |||||||||||||||
| Benefit obligations at January 1 | $ | 2,779 | $ | 2,164 | $ | 884 | $ | 826 | |||||||
| Service cost | 234 | 159 | 31 | 30 | |||||||||||
| Interest cost | 108 | 83 | 37 | 30 | |||||||||||
| Actuarial (gain) loss | 401 | (159 | ) | 125 | (71 | ) | |||||||||
| Benefits paid | (283 | ) | (273 | ) | (45 | ) | (36 | ) | |||||||
| Plan amendments | — | (90 | ) | (1 | ) | 34 | |||||||||
| Acquisitions | — | 895 | — | 71 | |||||||||||
| Benefit obligations at December 31 | 3,239 | 2,779 | 1,031 | 884 | |||||||||||
| Change in plan assets: | |||||||||||||||
| Fair value of plan assets at January 1 | 2,089 | 1,840 | — | — | |||||||||||
| Actual return on plan assets | 436 | (115 | ) | — | — | ||||||||||
| Employer contributions | 289 | 115 | 45 | 36 | |||||||||||
| Benefits paid from plan assets | (283 | ) | (273 | ) | (45 | ) | (36 | ) | |||||||
| Acquisitions | — | 522 | — | — | |||||||||||
| Fair value of plan assets at December 31 | 2,531 | 2,089 | — | — | |||||||||||
| Funded status of plans at December 31 | $ | (708 | ) | $ | (690 | ) | $ | (1,031 | ) | $ | (884 | ) | |||
| Amounts recognized in the consolidated balance sheets: | |||||||||||||||
| Current liabilities | $ | (49 | ) | $ | (21 | ) | $ | (47 | ) | $ | (44 | ) | |||
| Noncurrent liabilities | (659 | ) | (669 | ) | (984 | ) | (840 | ) | |||||||
| Accrued benefit cost | $ | (708 | ) | $ | (690 | ) | $ | (1,031 | ) | $ | (884 | ) | |||
| Pretax amounts recognized in accumulated other comprehensive loss:(a) | |||||||||||||||
| Net actuarial loss | $ | 579 | $ | 517 | $ | 135 | $ | 9 | |||||||
| Prior service cost (credit) | (250 | ) | (295 | ) | 33 | 35 |
| (a) | Amounts exclude those related to LOOP and Explorer, equity method investees with defined benefit pension and postretirement plans for which net losses of $17 million and less than $1 million were recorded in accumulated other comprehensive loss in 2019, reflecting our ownership share. |
Components of Net Periodic Benefit Cost and Other Comprehensive Loss
The following summarizes the net periodic benefit costs and the amounts recognized as other comprehensive loss for our defined benefit pension and other postretirement plans.
| Pension Benefits | Other Benefits | ||||||||||||||||||||||
| (In millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||
| Components of net periodic benefit cost: | |||||||||||||||||||||||
| Service cost | $ | 234 | $ | 159 | $ | 132 | $ | 31 | $ | 30 | $ | 25 | |||||||||||
| Interest cost | 108 | 83 | 75 | 37 | 30 | 30 | |||||||||||||||||
| Expected return on plan assets | (127 | ) | (109 | ) | (100 | ) | — | — | — | ||||||||||||||
| Amortization – prior service credit | (45 | ) | (33 | ) | (39 | ) | — | (3 | ) | (3 | ) | ||||||||||||
| – actuarial (gain) loss | 22 | 31 | 36 | (1 | ) | (1 | ) | (2 | ) | ||||||||||||||
| – settlement loss | 9 | 53 | 52 | — | — | — | |||||||||||||||||
| Net periodic benefit cost(a) | $ | 201 | $ | 184 | $ | 156 | $ | 67 | $ | 56 | $ | 50 | |||||||||||
| Other changes in plan assets and benefit obligations recognized in other comprehensive loss (pretax): | |||||||||||||||||||||||
| Actuarial (gain) loss | $ | 93 | $ | 64 | $ | (20 | ) | $ | 125 | $ | (71 | ) | $ | 61 | |||||||||
| Prior service cost (credit) | — | (90 | ) | — | (1 | ) | 34 | — | |||||||||||||||
| Amortization of actuarial gain (loss) | (31 | ) | (84 | ) | (88 | ) | 1 | 1 | 2 | ||||||||||||||
| Amortization of prior service credit | 45 | 33 | 39 | — | 3 | 3 | |||||||||||||||||
| Total recognized in other comprehensive loss | $ | 107 | $ | (77 | ) | $ | (69 | ) | $ | 125 | $ | (33 | ) | $ | 66 | ||||||||
| Total recognized in net periodic benefit cost and other comprehensive loss | $ | 308 | $ | 107 | $ | 87 | $ | 192 | $ | 23 | $ | 116 |
| (a) | Net periodic benefit cost reflects a calculated market-related value of plan assets which recognizes changes in fair value over three years. |
For certain of our pension plans, lump sum payments to employees retiring in 2019, 2018 and 2017 exceeded the plan’s total service and interest costs expected for those years. Settlement losses are required to be recorded when lump sum payments exceed total service and interest costs. As a result, pension settlement expenses were recorded in 2019, 2018 and 2017.
The estimated net actuarial loss and prior service credit for our defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2020 are $33 million and $45 million, respectively. The estimated amount that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2020 is $3 million for net actuarial loss and less than $1 million for prior service cost for our other defined benefit postretirement plans.
Plan Assumptions
The following summarizes the assumptions used to determine the benefit obligations at December 31, and net periodic benefit cost for the defined benefit pension and other postretirement plans for 2019, 2018 and 2017.
| Pension Benefits | Other Benefits | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||
| Weighted-average assumptions used to determine benefit obligation: | |||||||||||||||||
| Discount rate | 3.03 | % | 4.21 | % | 3.55 | % | 3.00 | % | 4.26 | % | 3.70 | % | |||||
| Rate of compensation increase | 4.90 | % | 5.00 | % | 5.00 | % | 4.90 | % | 5.00 | % | 5.00 | % | |||||
| Weighted-average assumptions used to determine net periodic benefit cost: | |||||||||||||||||
| Discount rate | 4.05 | % | 3.88 | % | 3.85 | % | 4.30 | % | 3.72 | % | 4.25 | % | |||||
| Expected long-term return on plan assets | 6.00 | % | 6.15 | % | 6.50 | % | — | % | — | % | — | % | |||||
| Rate of compensation increase | 4.90 | % | 4.80 | % | 5.00 | % | 4.90 | % | 5.00 | % | 5.00 | % |
Expected Long-term Return on Plan Assets
The overall expected long-term return on plan assets assumption is determined based on an asset rate-of-return modeling tool developed by a third-party investment group. The tool utilizes underlying assumptions based on actual returns by asset category and inflation and takes into account our asset allocation to derive an expected long-term rate of return on those assets. Capital market assumptions reflect the long-term capital market outlook. The assumptions for equity and fixed income investments are developed using a building-block approach, reflecting observable inflation information and interest rate information available in the fixed income markets. Long-term assumptions for other asset categories are based on historical results, current market characteristics and the professional judgment of our internal and external investment teams.
Assumed Health Care Cost Trend
The following summarizes the assumed health care cost trend rates.
| December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Health care cost trend rate assumed for the following year: | ||||||||
| Medical: Pre-65 | 6.20 | % | 6.80 | % | 6.75 | % | ||
| Prescription drugs | 8.10 | % | 9.50 | % | 8.75 | % | ||
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate): | ||||||||
| Medical: Pre-65 | 4.50 | % | 4.50 | % | 4.50 | % | ||
| Prescription drugs | 4.50 | % | 4.50 | % | 4.50 | % | ||
| Year that the rate reaches the ultimate trend rate: | ||||||||
| Medical: Pre-65 | 2027 | 2027 | 2026 | |||||
| Prescription drugs | 2027 | 2027 | 2026 |
Increases in the post-65 medical plan premium for the Marathon Petroleum Health Plan and the Marathon Petroleum Retiree Health Plan are the lower of the trend rate or four percent.
Assumed health care cost trend rates effect the amounts reported for defined benefit retiree health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
| 1-Percentage- | 1-Percentage- | ||||||
| (In millions) | Point Increase | Point Decrease | |||||
| Effect on total of service and interest cost components | $ | 6 | $ | (5 | ) | ||
| Effect on other postretirement benefit obligations | 52 | (45 | ) |
Plan Investment Policies and Strategies
The investment policies for our pension plan assets reflect the funded status of the plans and expectations regarding our future ability to make further contributions. Long-term investment goals are to: (1) manage the assets in accordance with the legal requirements of all applicable laws; (2) diversify plan investments across asset classes to achieve an optimal balance between risk and return and between income and growth of assets through capital appreciation; and (3) source benefit payments primarily through existing plan assets and anticipated future returns.
The investment goals are implemented to manage the plans’ funded status volatility and minimize future cash contributions. The asset allocation strategy will change over time in response to changes primarily in funded status, which is dictated by current and anticipated market conditions, the independent actions of our investment committee, required cash flows to and from the plans and other factors deemed appropriate. Such changes in asset allocation are intended to allocate additional assets to the fixed income asset class should the funded status improve. The fixed income asset class shall be invested in such a manner that its interest rate sensitivity correlates highly with that of the plans’ liabilities. Other asset classes are intended to provide additional return with associated higher levels of risk. Investment performance and risk is measured and monitored on an ongoing basis through quarterly investment meetings and periodic asset and liability studies. At December 31, 2019, the primary plan’s targeted asset allocation was 42 percent equity, private equity, real estate, and timber securities and 58 percent fixed income securities.
Fair Value Measurements
Plan assets are measured at fair value. The following provides a description of the valuation techniques employed for each major plan asset category at December 31, 2019 and 2018.
Cash and cash equivalents – Cash and cash equivalents include a collective fund serving as the investment vehicle for the cash reserves and cash held by third-party investment managers. The collective fund is valued at net asset value (“NAV”) on a scheduled basis using a cost approach, and is considered a Level 2 asset. Cash and cash equivalents held by third-party investment managers are valued using a cost approach and are considered Level 2.
Equity – Equity investments includes common stock, mutual and pooled funds. Common stock investments are valued using a market approach, which are priced daily in active markets and are considered Level 1. Mutual and pooled equity funds are well diversified portfolios, representing a mix of strategies in domestic, international and emerging market strategies. Mutual funds are publicly registered, valued at NAV on a daily basis using a market approach and are considered Level 1 assets. Pooled funds are valued at NAV using a market approach and are considered Level 2.
Fixed Income – Fixed income investments include corporate bonds, U.S. dollar treasury bonds and municipal bonds. These securities are priced on observable inputs using a combination of market, income and cost approaches. These securities are considered Level 2 assets. Fixed income also includes a well diversified bond portfolio structured as a pooled fund. This fund is valued at NAV on a daily basis using a market approach and is considered Level 2. Other investments classified as Level 1 include mutual funds that are publicly registered, valued at NAV on a daily basis using a market approach.
Private Equity – Private equity investments include interests in limited partnerships which are valued using information provided by external managers for each individual investment held in the fund. These holdings are considered Level 3.
Real Estate – Real estate investments consist of interests in limited partnerships. These holdings are either appraised or valued using the investment manager’s assessment of assets held. These holdings are considered Level 3.
Other – Other investments include two limited liability companies (“LLCs”) with no public market. The LLCs were formed to acquire timberland in the northwest U.S. These holdings are either appraised or valued using the investment manager’s assessment of assets held. These holdings are considered Level 3. Other investments classified as Level 1 include publicly traded depository receipts.
The following tables present the fair values of our defined benefit pension plans’ assets, by level within the fair value hierarchy, as of December 31, 2019 and 2018.
| December 31, 2019 | |||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
| Cash and cash equivalents | $ | — | $ | 22 | $ | — | $ | 22 | |||||||
| Equity: | |||||||||||||||
| Common stocks | 125 | 135 | — | 260 | |||||||||||
| Mutual funds | 188 | — | — | 188 | |||||||||||
| Pooled funds | — | 442 | — | 442 | |||||||||||
| Fixed income: | |||||||||||||||
| Corporate | 160 | 815 | — | 975 | |||||||||||
| Government | 113 | 217 | — | 330 | |||||||||||
| Pooled funds | — | 229 | — | 229 | |||||||||||
| Private equity | — | — | 30 | 30 | |||||||||||
| Real estate | — | — | 24 | 24 | |||||||||||
| Other | 58 | (46 | ) | 19 | 31 | ||||||||||
| Total investments, at fair value | $ | 644 | $ | 1,814 | $ | 73 | $ | 2,531 |
| December 31, 2018 | |||||||||||||||
| (In millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
| Cash and cash equivalents | $ | — | $ | 25 | $ | — | $ | 25 | |||||||
| Equity: | |||||||||||||||
| Common stocks | 89 | 86 | — | 175 | |||||||||||
| Mutual funds | 159 | — | — | 159 | |||||||||||
| Pooled funds | — | 297 | — | 297 | |||||||||||
| Fixed income: | |||||||||||||||
| Corporate | 176 | 684 | — | 860 | |||||||||||
| Government | 98 | 141 | — | 239 | |||||||||||
| Pooled funds | — | 201 | — | 201 | |||||||||||
| Private equity | — | — | 41 | 41 | |||||||||||
| Real estate | — | — | 29 | 29 | |||||||||||
| Other | 45 | — | 18 | 63 | |||||||||||
| Total investments, at fair value | $ | 567 | $ | 1,434 | $ | 88 | $ | 2,089 |
The following is a reconciliation of the beginning and ending balances recorded for plan assets classified as Level 3 in the fair value hierarchy:
| 2019 | |||||||||||||||
| (In millions) | Private Equity | Real Estate | Other | Total | |||||||||||
| Beginning balance | $ | 41 | $ | 29 | $ | 18 | $ | 88 | |||||||
| Actual return on plan assets: | |||||||||||||||
| Realized | 5 | 2 | — | 7 | |||||||||||
| Unrealized | (3 | ) | (2 | ) | 1 | (4 | ) | ||||||||
| Purchases | 1 | 1 | — | 2 | |||||||||||
| Sales | (14 | ) | (6 | ) | — | (20 | ) | ||||||||
| Ending balance | $ | 30 | $ | 24 | $ | 19 | $ | 73 |
| 2018 | |||||||||||||||
| (In millions) | Private Equity | Real Estate | Other | Total | |||||||||||
| Beginning balance | $ | 51 | $ | 34 | $ | 20 | $ | 105 | |||||||
| Actual return on plan assets: | |||||||||||||||
| Realized | 9 | 2 | — | 11 | |||||||||||
| Unrealized | 2 | (1 | ) | — | 1 | ||||||||||
| Purchases | 1 | 1 | — | 2 | |||||||||||
| Sales | (22 | ) | (7 | ) | (2 | ) | (31 | ) | |||||||
| Ending balance | $ | 41 | $ | 29 | $ | 18 | $ | 88 |
Cash Flows
Contributions to defined benefit plans – Our funding policy with respect to the funded pension plans is to contribute amounts necessary to satisfy minimum pension funding requirements, including requirements of the Pension Protection Act of 2006, plus such additional, discretionary, amounts from time to time as determined appropriate by management. 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. Cash contributions to be paid from our general assets for the unfunded pension and postretirement plans are estimated to be approximately $49 million and $47 million, respectively, in 2020.
Estimated future benefit payments – The following gross benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated.
| (In millions) | Pension Benefits | Other Benefits | |||||
| 2020 | $ | 248 | $ | 47 | |||
| 2021 | 216 | 49 | |||||
| 2022 | 218 | 50 | |||||
| 2023 | 220 | 51 | |||||
| 2024 | 233 | 52 | |||||
| 2025 through 2029 | 1,187 | 283 |
Contributions to defined contribution plans – We also contribute to several defined contribution plans for eligible employees. Contributions to these plans totaled $217 million, $144 million and $116 million in 2019, 2018 and 2017, respectively.
Multiemployer Pension Plan
We contribute to one multiemployer defined benefit pension plan under the terms of a collective-bargaining agreement that covers some of our union-represented employees. The risks of participating in this multiemployer plan are different from single-employer plans in the following aspects:
| • | Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. |
| • | If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. |
| • | If we choose to stop participating in the multiemployer plan, we may be required to pay that plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability. |
Our participation in this plan for 2019, 2018 and 2017 is outlined in the table below. The “EIN” column provides the Employee Identification Number for the plan. The most recent Pension Protection Act zone status available in 2019 and 2018 is for the plan’s year ended December 31, 2018 and December 31, 2017, respectively. The zone status is based on information that we received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65 percent funded. The “FIP/RP Status Pending/Implemented” column indicates a financial improvement plan or a rehabilitation plan has been implemented. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject. There have been no significant changes that affect the comparability of 2019, 2018 and 2017 contributions. Our portion of the contributions does not make up more than five percent of total contributions to the plan.
| Pension Protection Act Zone Status | FIP/RP Status Pending/Implemented | MPC Contributions (In millions) | Surcharge Imposed | Expiration Date of Collective – Bargaining Agreement | ||||||||||||||||||||
| Pension Fund | EIN | 2019 | 2018 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Central States, Southeast and Southwest Areas Pension Plan(a) | 366044243 | Red | Red | Implemented | $ | 4 | $ | 4 | $ | 4 | No | January 31, 2024 |
| (a) | This agreement has a minimum contribution requirement of $328 per week per employee for 2020. A total of 263 employees participated in the plan as of December 31, 2019. |
Multiemployer Health and Welfare Plan
We contribute to one multiemployer health and welfare plan that covers both active employees and retirees. Through the health and welfare plan employees receive medical, dental, vision, prescription and disability coverage. Our contributions to this plan totaled $6 million, $6 million and $7 million for 2019, 2018 and 2017, respectively.
| 24**.** | STOCK-BASED COMPENSATION |
Description of the Plans
Effective April 26, 2012, our employees and non-employee directors became eligible to receive equity awards under the Amended and Restated Marathon Petroleum Corporation 2012 Incentive Compensation Plan (“MPC 2012 Plan”). The MPC 2012 Plan authorizes the Compensation Committee of our board of directors (“Committee”) to grant non-qualified or incentive stock options, stock appreciation rights, stock awards (including restricted stock and restricted stock unit awards), cash awards and performance awards to our employees and non-employee directors. Under the MPC 2012 Plan, no more than 50 million shares of our common stock may be delivered and no more than 20 million shares of our common stock may be the subject of awards that are not stock options or stock appreciation rights. In the sole discretion of the Committee, 20 million shares of our common stock may be granted as incentive stock options. Shares issued as a result of awards granted under these plans are funded through the issuance of new MPC common shares.
Prior to April 26, 2012, our employees and non-employee directors were eligible to receive equity awards under the Marathon Petroleum Corporation 2011 Second Amended and Restated Incentive Compensation Plan (“MPC 2011 Plan”).
In connection with the Andeavor acquisition in October of 2018, we converted the outstanding option and equity incentive awards (other than awards held by non-employee directors of Andeavor, which awards were paid out in connection with the acquisition) under the Andeavor plans to awards that provide for rights to
acquire (in the case of options) or be settled in or otherwise determined in reference to shares of MPC common stock in place of shares of Andeavor common stock (in the case of equity incentive awards). As part of that conversion, we used an exchange ratio for the respective share prices of Andeavor common stock and MPC common stock to ensure that the award holders’ economic opportunity remained constant, and for converted awards, which included a performance component, performance was determined at the time of the conversion and the awards became subject to a time-based vesting only design. The converted awards otherwise continue to be subject to the terms and conditions of their award agreements and the applicable Andeavor plan under which such awards were granted.
Stock-Based Awards under the Plans
We expense all share-based payments to employees and non-employee directors based on the grant date fair value of the awards over the requisite service period, adjusted for estimated forfeitures.
Stock Options – We grant stock options to certain officer and non-officer employees. All of the stock options granted in 2019 were granted under the MPC 2012 Plan. Stock options awarded under the MPC 2011 Plan and the MPC 2012 Plan represent the right to purchase shares of our common stock at its fair market value, which is the closing price of MPC’s common stock on the date of grant. Stock options have a maximum term of ten years from the date they are granted, and vest over a requisite service period of three years. We use the Black Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of subjective assumptions.
Restricted Stock and Restricted Stock Units – We grant restricted stock and restricted stock units to employees and non-employee directors. In general, restricted stock and restricted stock units granted to employees vest over a requisite service period of three years. Restricted stock and restricted stock unit awards granted after 2011 to officers are subject to an additional one year holding period after the three-year vesting period. Restricted stock recipients who received grants in 2012 and after have the right to vote such stock; however, dividends are accrued and will be paid upon vesting. Restricted stock units granted to non-employee directors are considered to vest immediately at the time of the grant for accounting purposes, as they are non-forfeitable, but are not issued until the director’s departure from the board of directors. Restricted stock unit recipients do not have the right to vote such shares and receive dividend equivalents payable upon vesting. The non-vested shares are not transferable and are held by our transfer agent. The fair values of restricted stock are equal to the market price of our common stock on the grant date.
Performance Units – We grant performance unit awards to certain officer employees. Performance units are dollar denominated. The target value of all performance units is $1.00, with actual payout up to $2.00 per unit (up to 200 percent of target). Performance units issued under the MPC 2012 Plan have a 36-month requisite service period. The payout value of these awards will be determined by the relative ranking of the total shareholder return (“TSR”) of MPC common stock compared to the TSR of a select group of peer companies, as well as the Standard & Poor’s 500 Energy Index fund over an average of four measurement periods. These awards will be settled 25 percent in MPC common stock and 75 percent in cash. The number of shares actually distributed will be determined by dividing 25 percent of the final payout by the closing price of MPC common stock on the day the Committee certifies the final TSR rankings, or the next trading day if the certification is made outside of normal trading hours. The performance units paying out in cash are accounted for as liability awards and recorded at fair value with a mark-to-market adjustment made each quarter. The performance units that settle in shares are accounted for as equity awards and do not receive dividend equivalents.
Total Stock-Based Compensation Expense
The following table reflects activity related to our stock-based compensation arrangements, including the converted awards related to the acquisition of Andeavor:
| (In millions) | 2019 | 2018 | 2017 | ||||||||
| Stock-based compensation expense | $ | 161 | $ | 133 | $ | 51 | |||||
| Tax benefit recognized on stock-based compensation expense | 37 | 32 | 19 | ||||||||
| Cash received by MPC upon exercise of stock option awards | 10 | 24 | 46 | ||||||||
| Tax (expense)/benefit received for tax deductions for stock awards exercised | (3 | ) | 14 | 25 |
Stock Option Awards
The Black Scholes option-pricing model values used to value stock option awards granted were determined based on the following weighted average assumptions:
| 2019 | 2018 | 2017 | |||||||||
| Weighted average exercise price per share | $ | 61.92 | $ | 67.71 | $ | 50.57 | |||||
| Expected life in years | 6.0 | 6.2 | 6.3 | ||||||||
| Expected volatility | 32 | % | 34 | % | 35 | % | |||||
| Expected dividend yield | 3.4 | % | 3.0 | % | 3.0 | % | |||||
| Risk-free interest rate | 2.4 | % | 2.7 | % | 2.1 | % | |||||
| Weighted average grant date fair value of stock option awards granted | $ | 13.65 | $ | 17.21 | $ | 13.42 |
The expected life of stock options granted is based on historical data and represents the period of time that options granted are expected to be held prior to exercise. The 2019 assumption for expected volatility of our stock price reflects a weighting of 50 percent of our common stock implied volatility and 50 percent of our common stock historical volatility. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The following is a summary of our common stock option activity in 2019:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Terms (in years) | Aggregate Intrinsic Value (in millions) | |||||||||
| Outstanding at December 31, 2018 | 8,724,595 | $ | 37.07 | |||||||||
| Granted | 1,952,324 | 61.92 | ||||||||||
| Exercised | (529,706 | ) | 19.12 | |||||||||
| Forfeited or expired | (128,846 | ) | 61.29 | |||||||||
| Outstanding at December 31, 2019 | 10,018,367 | 42.55 | ||||||||||
| Vested and expected to vest at December 31, 2019 | 9,987,326 | 26.84 | 5.2 | $ | 187 | |||||||
| Exercisable at December 31, 2019 | 7,404,952 | 35.85 | 4.0 | 183 |
The intrinsic value of options exercised by MPC employees during 2019, 2018 and 2017 was $23 million, $44 million and $75 million, respectively.
As of December 31, 2019, unrecognized compensation cost related to stock option awards was $14 million, which is expected to be recognized over a weighted average period of 1.4 years.
Restricted Stock and Restricted Stock Unit Awards
The following is a summary of restricted stock award activity of our common stock in 2019:
| Restricted Stock | Restricted Stock Units | ||||||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | Number of Units | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested at December 31, 2018 | 989,019 | $ | 57.19 | 3,120,116 | $ | 82.40 | |||||||
| Granted | 1,059,837 | 61.14 | 36,391 | 58.30 | |||||||||
| Vested | (595,440 | ) | 52.16 | (1,527,145 | ) | 81.84 | |||||||
| Forfeited | (103,618 | ) | 61.20 | (147,616 | ) | 82.37 | |||||||
| Unvested at December 31, 2019 | 1,349,798 | 62.20 | 1,481,746 | 82.39 |
The following is a summary of the values related to restricted stock and restricted stock unit awards held by MPC employees and non-employee directors:
| Restricted Stock | Restricted Stock Units | ||||||||||||||
| Intrinsic Value of Awards Vested During the Period (in millions) | Weighted Average Grant Date Fair Value of Awards Granted During the Period | Intrinsic Value of Awards Vested During the Period (in millions) | Weighted Average Grant Date Fair Value of Awards Granted During the Period | ||||||||||||
| 2019 | $ | 32 | $ | 61.14 | $ | 120 | $ | 58.30 | |||||||
| 2018 | 49 | 71.19 | 39 | 72.43 | |||||||||||
| 2017 | 28 | 50.25 | 5 | 53.19 |
As of December 31, 2019, unrecognized compensation cost related to restricted stock awards was $56 million, which is expected to be recognized over a weighted average period of 1.46 years. Unrecognized compensation cost related to restricted stock unit awards was $28 million, which is expected to be recognized over a weighted average period of 0.66 years.
Performance Unit Awards
The following table presents a summary of the 2019 activity for performance unit awards to be settled in shares:
| Number of Units | Weighted Average Grant Date Fair Value | |||||
| Unvested at December 31, 2018 | 8,607,250 | $ | 0.79 | |||
| Granted | 6,256,250 | 0.72 | ||||
| Vested | (3,494,000 | ) | 0.62 | |||
| Forfeited | (170,000 | ) | 0.81 | |||
| Unvested at December 31, 2019 | 11,199,500 | 0.80 |
The number of shares that would be issued upon target vesting, using the closing price of our common stock on December 31, 2019 would be 206,216 shares.
As of December 31, 2019, unrecognized compensation cost related to equity-classified performance unit awards was $2 million, which is expected to be recognized over a weighted average period of 0.82 years.
Performance units to be settled in MPC shares have a grant date fair value calculated using a Monte Carlo valuation model, which requires the input of subjective assumptions. The following table provides a summary of these assumptions:
| 2019 | 2018 | 2017 | |||||||||
| Risk-free interest rate | 2.5 | % | 2.3 | % | 1.5 | % | |||||
| Look-back period (in years) | 2.8 | 2.8 | 2.8 | ||||||||
| Expected volatility | 29.7 | % | 34.0 | % | 36.1 | % | |||||
| Grant date fair value of performance units granted | $ | 0.72 | $ | 0.83 | $ | 0.92 |
The risk-free interest rate for the remaining performance period as of the grant date is based on the U.S. Treasury yield curve in effect at the time of the grant. The look-back period reflects the remaining performance period at the grant date. The assumption for the expected volatility of our stock price reflects the average MPC common stock historical volatility.
MPLX and ANDX Awards
Compensation expense for awards of MPLX and ANDX units are not material to our consolidated financial statements for 2019.
| 25**.** | LEASES |
For further information regarding the adoption of ASC 842, including the method of adoption and practical expedients elected, see Note 3.
Lessee
We lease a wide variety of facilities and equipment including land and building space, office and field equipment, storage facilities and transportation equipment. Our remaining lease terms range from less than one year to 59 years. Most long-term leases include renewal options ranging from less than one year to 50 years and, in certain leases, also include purchase options. The lease term included in the measurement of right of use assets and lease liabilities includes options to extend or terminate our leases that we are reasonably certain to exercise. Options were included in the lease term primarily for retail store sites where we constructed property, plant and equipment on leased land that is expected to exist beyond the initial lease term.
Under ASC 842, the components of lease cost were as follows:
| (In millions) | 2019 | ||
| Finance lease cost: | |||
| Amortization of right of use assets | $ | 64 | |
| Interest on lease liabilities | 43 | ||
| Operating lease cost | 793 | ||
| Variable lease cost | 91 | ||
| Short-term lease cost | 746 | ||
| Total lease cost | $ | 1,737 |
Supplemental balance sheet data related to leases were as follows:
| (In millions) | December 31, 2019 | ||
| Operating leases | |||
| Assets | |||
| Right of use assets | $ | 2,459 | |
| Liabilities | |||
| Operating lease liabilities | $ | 604 | |
| Long-term operating lease liabilities | 1,875 | ||
| Total operating lease liabilities | $ | 2,479 | |
| Weighted average remaining lease term (in years) | 6.2 | ||
| Weighted average discount rate | 4.02 | % | |
| Finance leases | |||
| Assets | |||
| Property, plant and equipment, gross | $ | 807 | |
| Accumulated depreciation | 227 | ||
| Property, plant and equipment, net | $ | 580 | |
| Liabilities | |||
| Debt due within one year | $ | 62 | |
| Long-term debt | 636 | ||
| Total finance lease liabilities | $ | 698 | |
| Weighted average remaining lease term (in years) | 11.9 | ||
| Weighted average discount rate | 6.50 | % |
As of December 31, 2019, maturities of lease liabilities for operating lease obligations and finance lease obligations having initial or remaining non-cancellable lease terms in excess of one year are as follows:
| (In millions) | Operating | Finance | |||||
| 2020 | $ | 698 | $ | 96 | |||
| 2021 | 590 | 87 | |||||
| 2022 | 402 | 95 | |||||
| 2023 | 287 | 98 | |||||
| 2024 | 222 | 84 | |||||
| 2025 and thereafter | 634 | 527 | |||||
| Gross lease payments | 2,833 | 987 | |||||
| Less: imputed interest | 354 | 289 | |||||
| Total lease liabilities | $ | 2,479 | $ | 698 |
Presented in accordance with ASC 840, future minimum commitments as of December 31, 2018 for operating lease obligations and capital lease obligations having initial or remaining non-cancellable lease terms in excess of one year were as follows:
| (In millions) | Operating | Capital | |||||
| 2019 | $ | 709 | $ | 70 | |||
| 2020 | 619 | 71 | |||||
| 2021 | 553 | 66 | |||||
| 2022 | 389 | 75 | |||||
| 2023 | 295 | 82 | |||||
| 2024 and thereafter | 858 | 586 | |||||
| Total minimum lease payments | $ | 3,423 | 950 | ||||
| Less: imputed interest costs | 301 | ||||||
| Present value of net minimum lease payments | $ | 649 |
Lessor
MPLX has certain natural gas gathering, transportation and processing agreements in which it is considered to be the lessor under several operating lease arrangements in accordance with GAAP. MPLX’s primary natural gas lease operations relate to a natural gas gathering agreement in the Marcellus region for which it earns a fixed-fee for providing gathering services to a single producer using a dedicated gathering system. As the gathering system is expanded, the fixed-fee charged to the producer is adjusted to include the additional gathering assets in the lease. The primary term of the natural gas gathering arrangement expires in 2038 and will continue thereafter on a year-to-year basis until terminated by either party. Other significant natural gas implicit leases relate to a natural gas processing agreement in the Marcellus region and a natural gas processing agreement in the Southern Appalachia region for which MPLX earns minimum monthly fees for providing processing services to a single producer using a dedicated processing plant. The primary terms of these natural gas processing agreements expire during 2023 and 2033 and will continue thereafter on a year-to-year basis until terminated by either party.
MPLX did not elect to use the practical expedient to combine lease and non-lease components for lessor arrangements. The tables below represent the portion of the contract allocated to the lease component based on relative standalone selling price. Lessor agreements are currently deemed operating, as MPLX elected the practical expedient to carry forward historical classification conclusions. If and when a modification of an existing agreement occurs and the agreement is required to assessed under ASC 842, MPLX assesses the amended agreement and makes a determination as to whether a reclassification of the lease is required.
Under ASC 840, our revenue from implicit lease arrangements, excluding executory costs, totaled approximately $254 million, $221 million and $218 million in 2019, 2018 and 2017, respectively. The following is a schedule of minimum future rentals on the non‑cancellable operating leases as of December 31, 2019:
| (In millions) | |||
| 2020 | $ | 186 | |
| 2021 | 179 | ||
| 2022 | 177 | ||
| 2023 | 170 | ||
| 2024 | 167 | ||
| 2025 and thereafter | 1,072 | ||
| Total minimum future rentals | $ | 1,951 |
The following schedule summarizes our investment in assets held for operating lease by major classes as of December 31, 2019:
| (In millions) | |||
| Natural gas gathering and NGL transportation pipelines and facilities | $ | 1,121 | |
| Natural gas processing facilities | 686 | ||
| Terminals and related assets | 83 | ||
| Land, building, office equipment and other | 45 | ||
| Property, plant and equipment | 1,935 | ||
| Less accumulated depreciation | 327 | ||
| Total property, plant and equipment, net | $ | 1,608 |
| 26**.** | COMMITMENTS AND CONTINGENCIES |
We are the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Some of these matters are discussed below. For matters for which we have not recorded an accrued liability, we are unable to estimate a range of possible loss because the issues involved have not been fully developed through pleadings and discovery. However, the ultimate resolution of some of these contingencies could, individually or in the aggregate, be material.
Environmental Matters
We are subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites and certain other locations including presently or formerly owned or operated retail marketing sites. Penalties may be imposed for noncompliance.
At December 31, 2019 and 2018, accrued liabilities for remediation totaled $433 million and $455 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties if any that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in clean-up efforts related to underground storage tanks at presently or formerly owned or operated retail marketing sites, were $29 million and $35 million at December 31, 2019 and 2018, respectively.
Governmental and other entities in California, New York, Maryland and Rhode Island have filed lawsuits against coal, gas, oil and petroleum companies, including the Company. The lawsuits allege damages as a result of climate change and the plaintiffs are seeking unspecified damages and abatement under various tort theories. Similar lawsuits may be filed in other jurisdictions. At this early stage, the ultimate outcome of these matters remain uncertain, and neither the likelihood of an unfavorable outcome nor the ultimate liability, if any, can be determined.
We are involved in a number of environmental enforcement matters arising in the ordinary course of business. While the outcome and impact on us cannot be predicted with certainty, management believes the resolution
of these environmental matters will not, individually or collectively, have a material adverse effect on our consolidated results of operations, financial position or cash flows.
Asset Retirement Obligations
Our short-term asset retirement obligations were $24 million and $30 million at December 31, 2019 and 2018, respectively, which are included in other current liabilities in our consolidated balance sheets. Our long-term asset retirement obligations were $206 million and $222 million at December 31, 2019 and 2018, respectively, which are included in deferred credits and other liabilities in our consolidated balance sheets.
Lawsuits
In May 2015, the Kentucky attorney general filed a lawsuit against our wholly-owned subsidiary, MPC LP, in the United States District Court for the Western District of Kentucky asserting claims under federal and state antitrust statutes, the Kentucky Consumer Protection Act, and state common law. The complaint, as amended in July 2015, alleges that MPC LP used deed restrictions, supply agreements with customers and exchange agreements with competitors to unreasonably restrain trade in areas within Kentucky and seeks declaratory relief, unspecified damages, civil penalties, restitution and disgorgement of profits. At this stage, the ultimate outcome of this litigation remains uncertain, and neither the likelihood of an unfavorable outcome nor the ultimate liability, if any, can be determined, and we are unable to estimate a reasonably possible loss (or range of loss) for this matter. We intend to vigorously defend ourselves in this matter.
We are also a party to a number of other lawsuits and other proceedings arising in the ordinary course of business. While the ultimate outcome and impact to us cannot be predicted with certainty, we believe that the resolution of these other lawsuits and proceedings will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Guarantees
We have provided certain guarantees, direct and indirect, of the indebtedness of other companies. Under the terms of most of these guarantee arrangements, we would be required to perform should the guaranteed party fail to fulfill its obligations under the specified arrangements. In addition to these financial guarantees, we also have various performance guarantees related to specific agreements.
Guarantees related to indebtedness of equity method investees – MPC and MPLX hold interests in an offshore oil port, LOOP, and MPLX holds an interest in a crude oil pipeline system, LOCAP. Both LOOP and LOCAP have secured various project financings with throughput and deficiency agreements. Under the agreements, MPC, as a shipper, is required to advance funds if the investees are unable to service their debt. Any such advances are considered prepayments of future transportation charges. The duration of the agreements vary but tend to follow the terms of the underlying debt, which extend through 2037. Our maximum potential undiscounted payments under these agreements for the debt principal totaled $171 million as of December 31, 2019.
In connection with our 25 percent interest in Gray Oak Pipeline, LLC (“Gray Oak Pipeline”), we have entered into an Equity Contribution Agreement obligating us to make certain equity contributions to Gray Oak Pipeline to support its obligations under a construction loan facility. Gray Oak oil pipeline is a crude oil transportation system from West Texas and the Eagle Ford formation to destinations in the Ingleside, Corpus Christi and Sweeney, Texas markets. Gray Oak Pipeline entered into the construction loan facility with a syndicate of banks to finance a portion of the construction costs of the pipeline project.
The Equity Contribution Agreement requires us to contribute our pro rata share of any amounts necessary to allow Gray Oak Pipeline to cure any payment defaults under the construction loan facility or to repay all amounts outstanding under the facility, including principal, accrued interest, fees and expenses, in certain circumstances, including the failure of Gray Oak Pipeline to repay or refinance the construction loan facility prior to its scheduled maturity date of June 3, 2022. Gray Oak may borrow up to $1.43 billion under the construction loan facility (after giving effect to the exercise of all options to increase its borrowing capacity). As of December 31, 2019, our maximum potential undiscounted payments under the Equity Contribution Agreement for the debt principal totaled $292 million.
In connection with MPLX’s approximate 9 percent indirect interest in a joint venture that owns and operates the Dakota Access Pipeline and Energy Transfer Crude Oil Pipeline projects, collectively referred to as the Bakken Pipeline system, MPLX entered into a Contingent Equity Contribution Agreement. MPLX, along with the other joint venture owners in the Bakken Pipeline system, have agreed to make equity contributions to the
joint venture upon certain events occurring to allow the entities that own and operate the Bakken Pipeline system to satisfy their senior note payment obligations. The senior notes were issued to repay amounts owed by the pipeline companies to fund the cost of construction of the Bakken Pipeline system. As of December 31, 2019, our maximum potential undiscounted payments under the Contingent Equity Contribution Agreement was approximately $230 million.
In connection with our 50 percent ownership in Crowley Ocean Partners, we have agreed to conditionally guarantee our portion of the obligations of the joint venture and its subsidiaries under a senior secured term loan agreement. The term loan agreement provides for loans of up to $325 million to finance the acquisition of four product tankers. MPC’s liability under the guarantee for each vessel is conditioned upon the occurrence of certain events, including if we cease to maintain an investment-grade credit rating or the charter for the relevant product tanker ceases to be in effect and is not replaced by a charter with an investment-grade company on certain defined commercial terms. As of December 31, 2019, our maximum potential undiscounted payments under this agreement for debt principal totaled $130 million.
In connection with our 50 percent indirect interest in Crowley Blue Water Partners, we have agreed to provide a conditional guarantee of up to 50 percent of its outstanding debt balance in the event there is no charter agreement in place with an investment-grade customer for the entity’s three vessels as well as other financial support in certain circumstances. As of December 31, 2019, our maximum potential undiscounted payments under this arrangement was $122 million.
Marathon Oil indemnifications – The separation and distribution agreement and other agreements with Marathon Oil to effect our spinoff provide for cross-indemnities between Marathon Oil and us. In general, Marathon Oil is required to indemnify us for any liabilities relating to Marathon Oil’s historical oil and gas exploration and production operations, oil sands mining operations and integrated gas operations, and we are required to indemnify Marathon Oil for any liabilities relating to Marathon Oil’s historical refining, marketing and transportation operations. The terms of these indemnifications are indefinite and the amounts are not capped.
Other guarantees – We have entered into other guarantees with maximum potential undiscounted payments totaling $121 million as of December 31, 2019, which consist primarily of a commitment to contribute cash to an equity method investee for certain catastrophic events in lieu of procuring insurance coverage, a commitment to fund a share of the bonds issued by a government entity for construction of public utilities in the event that other industrial users of the facility default on their utility payments and leases of assets containing general lease indemnities and guaranteed residual values.
General guarantees associated with dispositions – Over the years, we have sold various assets in the normal course of our business. Certain of the related agreements contain performance and general guarantees, including guarantees regarding inaccuracies in representations, warranties, covenants and agreements, and environmental and general indemnifications that require us to perform upon the occurrence of a triggering event or condition. These guarantees and indemnifications are part of the normal course of selling assets. We are typically not able to calculate the maximum potential amount of future payments that could be made under such contractual provisions because of the variability inherent in the guarantees and indemnities. Most often, the nature of the guarantees and indemnities is such that there is no appropriate method for quantifying the exposure because the underlying triggering event has little or no past experience upon which a reasonable prediction of the outcome can be based.
Contractual Commitments and Contingencies
At December 31, 2019 and 2018, our contractual commitments to acquire property, plant and equipment and advance funds to equity method investees totaled $1.6 billion and $1.8 billion, respectively.
Certain natural gas processing and gathering arrangements require us to construct natural gas processing plants, natural gas gathering pipelines and NGL pipelines and contain certain fees and charges if specified construction milestones are not achieved for reasons other than force majeure. In certain cases, certain producer customers may have the right to cancel the processing arrangements if there are significant delays that are not due to force majeure.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
| 2019 | |||||||||||||||
| Quarter Ended | |||||||||||||||
| (In millions, except per share data) | March 31 | June 30 | September 30 | December 31 | |||||||||||
| Sales and other operating revenues(a) | $ | 28,267 | $ | 33,547 | $ | 31,043 | $ | 31,092 | |||||||
| Income from operations | 669 | 2,042 | 2,024 | 841 | |||||||||||
| Net income | 259 | 1,367 | 1,367 | 262 | |||||||||||
| Net income (loss) attributable to MPC | (7 | ) | 1,106 | 1,095 | 443 | ||||||||||
| Net income (loss) attributable to MPC per share(b): | |||||||||||||||
| Basic | $ | (0.01 | ) | $ | 1.67 | $ | 1.67 | $ | 0.68 | ||||||
| Diluted | (0.01 | ) | 1.66 | 1.66 | 0.68 |
| 2018 | |||||||||||||||
| Quarter Ended | |||||||||||||||
| (In millions, except per share data) | March 31 | June 30 | September 30 | December 31 | |||||||||||
| Sales and other operating revenues(a) | $ | 18,866 | $ | 22,317 | $ | 22,988 | $ | 32,333 | |||||||
| Income from operations | 440 | 1,711 | 1,403 | 2,017 | |||||||||||
| Net income | 235 | 1,235 | 941 | 1,195 | |||||||||||
| Net income attributable to MPC | 37 | 1,055 | 737 | 951 | |||||||||||
| Net income attributable to MPC per share(b): | |||||||||||||||
| Basic | $ | 0.08 | $ | 2.30 | $ | 1.63 | $ | 1.38 | |||||||
| Diluted | 0.08 | 2.27 | 1.62 | 1.35 |
| (a) | Includes sales to related parties. |
| (b) | The sum of the per-share amounts for the four quarters may not always equal the annual per-share amounts due to differences in the average number of shares outstanding during the respective periods. |
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