10-Q 1 mpc-20180630x10q.htm 10-Q Document
                            

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-35054
Marathon Petroleum Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
27-1284632
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
539 South Main Street, Findlay, Ohio
 
45840-3229
(Address of principal executive offices)
 
(Zip code)
(419) 422-2121
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer 
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  ¨    No  x
There were 451,004,632 shares of Marathon Petroleum Corporation common stock outstanding as of August 1, 2018.
 


                            

MARATHON PETROLEUM CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
TABLE OF CONTENTS

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

1


GLOSSARY OF TERMS
Throughout this report, the following company or industry specific terms and abbreviations are used:
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
ATB
Articulated tug barges
barrel
One stock tank barrel, or 42 United States gallons liquid volume, used in reference to crude oil or other liquid hydrocarbons.
bcf/d
One billion cubic feet per day
EBITDA
Earnings Before Interest, Tax, Depreciation and Amortization, a non-GAAP financial measure
EPA
United States Environmental Protection Agency
FASB
Financial Accounting Standards Board
GAAP
Accounting principles generally accepted in the United States
IDR
Incentive Distribution Right
LCM
Lower of cost or market
LIFO
Last in, first out, an inventory costing method
LLS
Louisiana Light Sweet crude oil, an oil index benchmark price
mbpd
Thousand barrels per day
MMBtu
One million British thermal units, an energy measurement
MMcf/d
One million cubic feet of natural gas per day
NGL
Natural gas liquids, such as ethane, propane, butanes and natural gasoline
OTC
Over-the-Counter
ppm
Parts per million
RIN
Renewable Identification Number
SEC
United States Securities and Exchange Commission
TCJA
Tax Cuts and Jobs Act
ULSD
Ultra-low sulfur diesel
USGC
U.S. Gulf Coast
VIE
Variable interest entity
WTI
West Texas Intermediate crude oil, an oil index benchmark price

2



PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

MARATHON PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions, except per share data)
2018
 
2017
 
2018
 
2017
Revenues and other income:
 
 
 
 
 
 
 
Sales and other operating revenues(a)
$
22,118

 
$
18,033

 
$
40,812

 
$
34,167

Sales to related parties
199

 
147

 
371

 
301

Income from equity method investments
80

 
83

 
166

 
140

Net gain on disposal of assets
3

 
7

 
5

 
12

Other income
45

 
84

 
75

 
127

Total revenues and other income
22,445

 
18,354

 
41,429

 
34,747

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues (excludes items below)(a)
19,517

 
16,101

 
36,887

 
31,047

Purchases from related parties
138

 
150

 
279

 
272

Depreciation and amortization
533

 
521

 
1,061

 
1,057

Selling, general and administrative expenses
424

 
485

 
826

 
875

Other taxes
122

 
115

 
225

 
223

Total costs and expenses
20,734

 
17,372

 
39,278

 
33,474

Income from operations
1,711

 
982

 
2,151

 
1,273

Net interest and other financial costs
195

 
158

 
378

 
307

Income before income taxes
1,516

 
824

 
1,773

 
966

Provision for income taxes
281

 
250

 
303

 
291

Net income
1,235

 
574

 
1,470

 
675

Less net income attributable to:
 
 
 
 
 
 
 
Redeemable noncontrolling interest
20

 
17

 
36

 
33

Noncontrolling interests
160

 
74

 
342

 
129

Net income attributable to MPC
$
1,055

 
$
483

 
$
1,092

 
$
513

Per Share Data (See Note 8)
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net income attributable to MPC per share
$
2.30

 
$
0.94

 
$
2.34

 
$
0.99

Weighted average shares outstanding
459

 
513

 
467

 
519

Diluted:
 
 
 
 
 
 
 
Net income attributable to MPC per share
$
2.27

 
$
0.93

 
$
2.31

 
$
0.98

Weighted average shares outstanding
464

 
517

 
472

 
523

Dividends paid
$
0.46

 
$
0.36

 
$
0.92

 
$
0.72

(a) 
The 2018 period reflects an election to present certain taxes on a net basis. See Notes 2 and 3 for further information.

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

3

                            

MARATHON PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Net income
$
1,235

 
$
574

 
$
1,470

 
$
675

Other comprehensive income (loss):
 
 
 
 
 
 
 
Defined benefit postretirement and post-employment plans:
 
 
 
 
 
 
 
Actuarial changes, net of tax of $2, $4, $5 and $7, respectively
7

 
7

 
14

 
11

Prior service costs, net of tax of ($2), ($4), ($4) and ($8), respectively
(7
)
 
(6
)
 
(14
)
 
(13
)
Other, net of tax of $0, $0, ($1) and $0, respectively

 

 
(2
)
 

Other comprehensive income (loss)

 
1

 
(2
)
 
(2
)
Comprehensive income
1,235

 
575

 
1,468

 
673

Less comprehensive income attributable to:
 
 
 
 
 
 
 
Redeemable noncontrolling interest
20

 
17

 
36

 
33

Noncontrolling interests
160

 
74

 
342

 
129

Comprehensive income attributable to MPC
$
1,055

 
$
484

 
$
1,090

 
$
511

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

4

                            

MARATHON PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In millions, except share data)
June 30,
2018
 
December 31,
2017
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents (MPLX: $3 and $5, respectively)
$
4,999

 
$
3,011

Receivables, less allowance for doubtful accounts of $10 and $11 (MPLX: $370 and $299, respectively)
4,919

 
4,695

Inventories (MPLX: $73 and $65, respectively)
5,485

 
5,550

Other current assets (MPLX: $36 and $29, respectively)
145

 
145

Total current assets
15,548

 
13,401

Equity method investments (MPLX: $4,042 and $4,010, respectively)
4,838

 
4,787

Property, plant and equipment, net (MPLX: $13,642 and $12,187, respectively)
26,931

 
26,443

Goodwill (MPLX: $2,460 and $2,245, respectively)
3,586

 
3,586

Other noncurrent assets (MPLX: $472 and $479, respectively)
833

 
830

Total assets
$
51,736

 
$
49,047

Liabilities
 
 
 
Current liabilities:
 
 
 
Accounts payable (MPLX: $728 and $621, respectively)
$
8,113

 
$
8,297

Payroll and benefits payable (MPLX: $2 and $1, respectively)
432

 
591

Accrued taxes (MPLX: $46 and $38, respectively)
713

 
670

Debt due within one year (MPLX: $1 and $1, respectively)
26

 
624

Other current liabilities (MPLX: $222 and $130, respectively)
431

 
296

Total current liabilities
9,715

 
10,478

Long-term debt (MPLX: $11,874 and $6,945, respectively)
17,241

 
12,322

Deferred income taxes (MPLX: $11 and $5, respectively)
3,144

 
2,654

Defined benefit postretirement plan obligations
1,156

 
1,099

Deferred credits and other liabilities (MPLX: $246 and $230, respectively)
659

 
666

Total liabilities
31,915

 
27,219

Commitments and contingencies (see Note 22)

 

Redeemable noncontrolling interest
1,003

 
1,000

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

 

Common stock:
 
 
 
Issued – 735 million and 734 million shares (par value $0.01 per share, 1 billion shares authorized)
7

 
7

Held in treasury, at cost – 279 million and 248 million shares
(12,093
)
 
(9,869
)
Additional paid-in capital
13,688

 
11,262

Retained earnings
13,589

 
12,864

Accumulated other comprehensive loss
(233
)
 
(231
)
Total MPC stockholders’ equity
14,958

 
14,033

Noncontrolling interests
3,860

 
6,795

Total equity
18,818

 
20,828

Total liabilities, redeemable noncontrolling interest and equity
$
51,736

 
$
49,047

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

5

                            

MARATHON PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
Operating activities:
 
 
 
Net income
$
1,470

 
$
675

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of deferred financing costs and debt discount
35

 
30

Depreciation and amortization
1,061

 
1,057

Pension and other postretirement benefits, net
65

 
(59
)
Deferred income taxes
2

 
23

Net gain on disposal of assets
(5
)
 
(12
)
Income from equity method investments
(166
)
 
(140
)
Distributions from equity method investments
217

 
136

Changes in the fair value of derivative instruments
1

 
59

Changes in:
 
 
 
Current receivables
(225
)
 
344

Inventories
66

 
107

Current accounts payable and accrued liabilities
(231
)
 
(208
)
All other, net
(41
)
 
(51
)
Net cash provided by operating activities
2,249

 
1,961

Investing activities:
 
 
 
Additions to property, plant and equipment
(1,466
)
 
(1,265
)
Acquisitions, net of cash acquired

 
(220
)
Disposal of assets
14

 
37

Investments – acquisitions, loans and contributions
(118
)
 
(677
)
 – redemptions, repayments and return of capital
15

 
24

All other, net
37

 
89

Net cash used in investing activities
(1,518
)
 
(2,012
)
Financing activities:
 
 
 
Commercial paper – issued

 
300

                              – repayments

 
(300
)
Long-term debt – borrowings
9,610

 
2,241

                          – repayments
(5,270
)
 
(213
)
Debt issuance costs
(53
)
 
(21
)
Issuance of common stock
21

 
20

Common stock repurchased
(2,212
)
 
(1,170
)
Dividends paid
(430
)
 
(376
)
Issuance of MPLX LP common units

 
434

Distributions to noncontrolling interests
(394
)
 
(324
)
Contributions from noncontrolling interests
5

 
128

Contingent consideration payment

 
(89
)
All other, net
(19
)
 
(17
)
Net cash provided by financing activities
1,258

 
613

Net increase in cash, cash equivalents and restricted cash
1,989

 
562

Cash, cash equivalents and restricted cash at beginning of period
3,015

 
892

Cash, cash equivalents and restricted cash at end of period
$
5,004

 
$
1,454

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

6

                            

MARATHON PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMBALE NONCONTROLLING INTEREST
(Unaudited)

 
MPC Stockholders’ Equity
 
 
 
 
 
 
(In millions)
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-controlling
Interests
 
Total
Equity
 
Redeemable Non-controlling Interest
Balance as of December 31, 2016
$
7

 
$
(7,482
)
 
$
11,060

 
$
10,206

 
$
(234
)
 
$
6,646

 
$
20,203

 
$
1,000

Net income

 

 

 
513

 

 
129

 
642

 
33

Dividends declared

 

 

 
(375
)
 

 

 
(375
)
 

Distributions to noncontrolling interests

 

 

 

 

 
(291
)
 
(291
)
 
(33
)
Contributions from noncontrolling interests

 

 

 

 

 
128

 
128

 

Other comprehensive loss

 

 

 

 
(2
)
 

 
(2
)
 

Shares repurchased

 
(1,170
)
 

 

 

 

 
(1,170
)
 

Stock-based compensation

 
(12
)
 
47

 

 

 
1

 
36

 

Impact from equity transactions of MPLX LP

 

 
78

 

 

 
315

 
393

 

Balance as of June 30, 2017
$
7

 
$
(8,664
)
 
$
11,185

 
$
10,344

 
$
(236
)
 
$
6,928

 
$
19,564

 
$
1,000

Balance as of December 31, 2017
$
7

 
$
(9,869
)
 
$
11,262

 
$
12,864

 
$
(231
)
 
$
6,795

 
$
20,828

 
$
1,000

Cumulative effect of adopting new accounting standards

 

 

 
63

 

 
1

 
64

 

Net income

 

 

 
1,092

 

 
342

 
1,434

 
36

Dividends declared

 

 

 
(430
)
 

 

 
(430
)
 

Distributions to noncontrolling interests

 

 

 

 

 
(361
)
 
(361
)
 
(33
)
Contributions from noncontrolling interests

 

 

 

 

 
5

 
5

 

Other comprehensive loss

 

 

 

 
(2
)
 

 
(2
)
 

Shares repurchased

 
(2,212
)
 

 

 

 

 
(2,212
)
 

Stock-based compensation

 
(12
)
 
45

 

 

 
5

 
38

 

Impact from equity transactions of MPLX LP

 

 
2,381

 

 

 
(2,927
)
 
(546
)
 

Balance as of June 30, 2018
$
7

 
$
(12,093
)
 
$
13,688

 
$
13,589

 
$
(233
)
 
$
3,860

 
$
18,818

 
$
1,003

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Shares in millions)
Common
Stock
 
Treasury
Stock
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
731

 
(203
)
 
 
 
 
 
 
 
 
 
 
 
 
Shares repurchased

 
(23
)
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued – stock-based compensation
1

 

 
 
 
 
 
 
 
 
 
 
 
 
Balance as of June 30, 2017
732

 
(226
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
734

 
(248
)
 
 
 
 
 
 
 
 
 
 
 
 
Shares repurchased

 
(31
)
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued – stock-based compensation
1

 

 
 
 
 
 
 
 
 
 
 
 
 
Balance as of June 30, 2018
735

 
(279
)
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

7

                            

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Our business consists of refining and marketing, retail and midstream services conducted primarily in the Midwest, Gulf Coast, East Coast, Northeast and Southeast regions of the United States, through subsidiaries, including Marathon Petroleum Company LP (“MPC LP”), Speedway LLC and its subsidiaries (“Speedway”) and MPLX LP and its subsidiaries (“MPLX”).
See Note 10 for additional information about our operations.
Basis of Presentation
All significant intercompany transactions and accounts have been eliminated.
These interim consolidated financial statements are unaudited; however, in the opinion of our management, these statements reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal, recurring nature unless otherwise disclosed. These interim consolidated financial statements, including the notes, have been prepared in accordance with the rules of the SEC applicable to interim period financial statements and do not include all of the information and disclosures required by GAAP for complete financial statements.
These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the full year.
Certain prior period financial statement amounts have been reclassified to conform to current period presentation.

2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Revenue Recognition
As described in Note 3, we adopted ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”) effective January 1, 2018. 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 ASC 606, 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.
Speedway - 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. 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 the standard, 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 price in our Midstream contracts often has 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.

8

                            

Refer to Note 10 for disclosure of our revenue disaggregated by segment and product line, as well as a description of our reportable segment operations.
3. ACCOUNTING STANDARDS
Recently Adopted
ASU 2014-09, Revenue - Revenue from Contracts with Customers (ASC 606)
On January 1, 2018, we adopted the new revenue standard, applying the modified retrospective method, whereby a cumulative effect is recorded to opening retained earnings and ASC 606 is applied prospectively. We recorded a net increase of $1 million to our retained earnings balance as of January 1, 2018 due to the cumulative effect of applying the new revenue standard.
Impact of Adoption
The adoption of ASC 606 did not materially change our revenue recognition patterns. The most significant impacts of adopting ASC 606 for the period ended June 30, 2018 are as follows:
a reduction of “Sales and other operating revenues” of $1.36 billion for the three months ended June 30, 2018 and $2.61 billion for the six months ended June 30, 2018 due to our accounting policy election to present taxes incurred concurrently with revenue producing transactions and collected on behalf of our customers on a net basis. For the three and six months ended June 30, 2017, taxes are reflected on a gross basis in “Sales and other operating revenues” and “Cost of revenues”, and include $1.27 billion and $2.47 billion, respectively, of taxes that are now subject to our net basis accounting policy election.
an increase to both “Sales and other operating revenues” and “Cost of revenues” of $124 million for the three months ended June 30, 2018 and $240 million for the six months ended June 30, 2018 related to certain Midstream contract provisions for third-party reimbursements, non-cash consideration and imbalances that require gross presentation under ASC 606.  Comparative information continues to be reported under the accounting standards in effect for those periods.
Practical Expedients
We elected the completed contract practical expedient and only applied ASC 606 to contracts that were not completed as of January 1, 2018.
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 June 30, 2018, 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 June 30, 2018 include matching buy/sell receivables of $1.50 billion and income tax receivables of $117 million.
ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory
We adopted this accounting standards update in the first quarter of 2018 and recorded a $61 million cumulative-effect adjustment as an increase to retained earnings as of January 1, 2018 with the offset recorded as a reduction to “Deferred Income Taxes.”
We also adopted the following standards during the first six months of 2018, none of which had a material impact to our financial statements or financial statement disclosures:
ASU
 
 
Effective Date
2017-09
Stock Compensation - Scope of Modification Accounting
 
January 1, 2018
2017-07
Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost
 
January 1, 2018
2017-05
Gains and Losses from the Derecognition of Nonfinancial Assets - Clarifying the Scope of Asset Derecognition Guidance
 
January 1, 2018
2017-01
Business Combinations - Clarifying the Definition of a Business
 
January 1, 2018
2016-18
Statement of Cash Flows - Restricted Cash
 
January 1, 2018
2016-15
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
 
January 1, 2018
2016-01
Financial Instruments - Recognition and Measurement of Financial Assets and Liabilities
 
January 1, 2018

9

                            

Not Yet Adopted
ASU 2018-02, Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued an accounting standards update allowing an entity the choice to reclassify to retained earnings the tax effects related to the TCJA that are stranded in accumulated other comprehensive income. We do not expect adoption of this standard to have a material impact on our financial statements. The amendment is effective beginning in 2019 with early adoption permitted. 
ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued an accounting standards update to amend the hedge accounting rules to simplify the application of hedge accounting guidance and better portray the economic results of risk management activities in the financial statements. The guidance expands the ability to hedge nonfinancial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness and eases certain hedge effectiveness assessment requirements. The guidance is effective beginning in 2019 with early adoption permitted. We are currently evaluating the impact of this guidance, including transition elections and required disclosures, on our financial statements and the timing of adoption. However, since we have not historically designated our commodity derivatives as hedges, we do not expect the adoption of this accounting standards update to have a material impact on our consolidated financial statements.
ASU 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued an accounting standards update which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new guidance, 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 current 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. The guidance should be applied on a prospective basis, and is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued an accounting standards update 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. We do not expect application of this accounting standards update to have a material impact on our consolidated financial statements.
ASU 2016-02, Leases
In February 2016, the FASB issued an accounting standards update requiring lessees to record virtually all leases on their balance sheets. The accounting standards update also requires expanded disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. For lessors, this amended guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The change will be effective on a modified retrospective basis for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We continue to evaluate the impact of this standard on our financial statements and disclosures, internal controls and accounting policies. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population and analyzing the practical expedients in order to determine the best path of implementing changes to existing processes and controls. We are implementing a third-party supported lease accounting information system to account for our lease population in accordance with this new standard and establishing internal controls over the new system. We believe the adoption of the standard will have a material impact on our consolidated financial statements as virtually all leases will be recognized as a right of use asset and lease obligation.

10

                            

4. MPLX LP
MPLX is a diversified, growth-oriented publicly traded master limited partnership formed by us to own, operate, develop and acquire midstream energy infrastructure assets. MPLX is engaged in the gathering, processing and transportation of natural gas; the gathering, transportation, fractionation, storage and marketing of NGLs; and the transportation, storage, distribution and marketing of crude oil and refined petroleum products.
As of June 30, 2018, we owned 63.6 percent of the outstanding MPLX common units and control MPLX through our ownership of the general partner interest in MPLX. MPLX is a VIE because the limited partners of MPLX do not have substantive kick-out or substantive participating rights over the general partner. We are the primary beneficiary of MPLX because in addition to our significant economic interest, we also have the power, through our 100 percent ownership of the general partner, to control the decisions that most significantly impact MPLX. We therefore consolidate MPLX and record a noncontrolling interest for the 36.4 percent interest owned by the public. We also record a redeemable noncontrolling interest related to MPLX’s preferred units.
The creditors of MPLX do not have recourse to MPC’s general credit through guarantees or other financial arrangements. The assets of MPLX are the property of MPLX and cannot be used to satisfy the obligations of MPC. MPC has effectively guaranteed certain indebtedness of LOOP LLC (“LOOP”) and LOCAP LLC (“LOCAP”), in which MPLX holds an interest. See Note 22 for more information.
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 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 $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 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.
Noncontrolling Interest in MPLX
As a result of equity transactions of MPLX, we are required to adjust non-controlling interest and additional paid-in capital. Changes in MPC’s additional paid-in capital resulting from changes in its ownership interests in MPLX were as follows:
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
Increase due to the issuance of MPLX LP common units to the public
$
5

 
$
25

Increase due to the issuance of MPLX LP common units and general partner units to MPC
1,114

 
94

Increase due to GP/IDR Exchange
1,808

 

Increase in MPC's additional paid-in capital
2,927

 
119

Tax impact
(546
)
 
(41
)
Increase in MPC's additional paid-in capital, net of tax
$
2,381

 
$
78


11

                            

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. Under certain agreements, we commit to provide MPLX with minimum quarterly throughput and distribution volumes of crude oil and refined products and minimum storage volumes of crude oil, refined products and butane. Under certain other agreements, we commit to pay for 100 percent of available capacity for certain marine transportation and refining logistics assets. 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 Refining & Marketing and Midstream segments.
5. ACQUISITIONS AND INVESTMENTS
Pending Merger with Andeavor
On April 29, 2018, MPC and Andeavor (“ANDV”) entered into a definitive merger agreement under which MPC has agreed to acquire all of ANDV’s outstanding shares. Under the terms of the agreement, ANDV shareholders will have the option to choose 1.87 shares of MPC stock or $152.27 in cash per share of ANDV common stock. The merger agreement includes election proration provisions that will result in approximately 22.9 million Andeavor shares being converted into cash consideration and the remaining Andeavor shares of approximately 128.2 million being converted into stock consideration. The aggregate cash consideration will be approximately $3.5 billion. The transaction was unanimously approved by the boards of directors of both companies, and MPC’s joint proxy statement/prospectus with ANDV has been declared effective by the Securities and Exchange Commission. The closing of the transaction remains subject to, among other things, customary closing conditions, including receipt of the approval of shareholders at the special meetings of both MPC and ANDV, which are scheduled for September 24, 2018.
We recognized transaction costs related to the pending merger of $10 million, which are reflected in selling, general and administrative expenses for the three and six months ended June 30, 2018.
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 account for the Ozark pipeline within the Midstream segment.
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”). The Bakken Pipeline system is capable of transporting more than 520 mbpd of crude oil from the Bakken/Three Forks production area in North Dakota to the Midwest through Patoka, Illinois and ultimately to the Gulf Coast. 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

12

                            

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 deethanization 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 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. During the six months ended June 30, 2018, MPLX sold to Sherwood Midstream six percent of its equity ownership in Sherwood Midstream Holdings for $15 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, Ohio Fractionation and Sherwood Midstream Holdings.
6. VARIABLE INTEREST ENTITIES
In addition to MPLX, as described in Note 4, the following entities are also VIEs.
Crowley Coastal Partners
In May 2016, Crowley Coastal Partners was formed to own an interest in both Crowley Ocean Partners and 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 June 30, 2018 was $483 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 power to control the activities that significantly influence the economic outcomes of the entity and, therefore, do not consolidate the entity.
MarkWest Utica EMG
On January 1, 2012, MarkWest Utica Operating Company, LLC (“Utica Operating”), a wholly-owned and consolidated subsidiary of MarkWest, and EMG Utica, LLC ("EMG Utica") (together the "Members"), executed agreements to form a joint venture, MarkWest Utica EMG LLC (“MarkWest Utica EMG”), to develop significant natural gas gathering, processing and NGL fractionation, transportation and marketing infrastructure in eastern Ohio.
As of June 30, 2018, MarkWest had a 56 percent ownership interest in MarkWest Utica EMG. MarkWest Utica EMG's inability to fund its planned activities without subordinated financial support qualify it as a VIE. Utica Operating is not deemed to be the primary beneficiary due to EMG Utica’s voting rights on significant matters. We account for our ownership interest in MarkWest Utica EMG as an equity method investment. Our maximum exposure to loss as a result of our involvement with MarkWest Utica EMG includes our equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of compensation received for the performance of the operating services. Our equity investment in MarkWest Utica EMG at June 30, 2018 was $2.1 billion.
Ohio Gathering
Ohio Gathering Company, L.L.C. (“Ohio Gathering”) is a subsidiary of MarkWest Utica EMG and is engaged in providing natural gas gathering services in the Utica Shale in eastern Ohio. Ohio Gathering is a joint venture between MarkWest Utica EMG and Summit Midstream Partners, LLC. As of June 30, 2018, we had a 34 percent indirect ownership interest in Ohio Gathering. As this entity is a subsidiary of MarkWest Utica EMG, which is accounted for as an equity method investment, MPLX reports its portion of Ohio Gathering’s net assets as a component of its investment in MarkWest Utica EMG.
Sherwood Midstream
As described in Note 5, MPLX and Antero Midstream formed a joint venture, Sherwood Midstream, to support the development of Antero Resources Corporation’s Marcellus Shale acreage in West Virginia. As of June 30, 2018, MPLX had a 50 percent ownership interest in Sherwood Midstream. Sherwood Midstream’s inability to fund its planned activities without additional subordinated financial support qualify it as a VIE. MPLX is not deemed to be the primary beneficiary, due to Antero Midstream’s voting rights on significant matters. We account for our ownership interest in Sherwood Midstream using the

13

                            

equity method of accounting. Our maximum exposure to loss as a result of our involvement with Sherwood Midstream includes our equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of compensation received for the performance of the operating services. Our equity investment in Sherwood Midstream at June 30, 2018 was $291 million.
Ohio Fractionation
As described in Note 5, MPLX converted all of its ownership interests in Ohio Fractionation to Class A Interests and amended its LLC Agreement to create Class B-3 Interests, which were sold to Sherwood Midstream, providing it with the right to fractionation revenue and the obligation to pay expenses related to 20 mbpd of capacity in the Hopedale 3 fractionator. Ohio Fractionation’s inability to fund its operations without additional subordinated financial support qualify it as a VIE. MPLX has been deemed to be the primary beneficiary of Ohio Fractionation because it has control over decisions that could significantly impact its financial performance, and as a result, consolidates Ohio Fractionation.
Sherwood Midstream Holdings
As described in Note 5, MPLX and Sherwood Midstream entered into a joint venture, 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 deethanization facilities owned by MPLX. MPLX had an initial 79 percent direct ownership in Sherwood Midstream Holdings, in addition to a 10.5 percent indirect interest through its ownership in Sherwood Midstream. Sherwood Midstream Holdings’ inability to fund its operations without additional subordinated financial support qualify it as a VIE. We account for our ownership interest in Sherwood Midstream Holdings using the equity method of accounting as Sherwood Midstream is considered to be the general partner and controls all decisions related to Sherwood Midstream Holdings. Our maximum exposure to loss as a result of our involvement with Sherwood Midstream Holdings includes our equity investment, any additional capital contribution commitments and any operating expenses incurred by the subsidiary operator in excess of compensation received for the performance of the operating services. Our equity investment in Sherwood Midstream Holdings at June 30, 2018 was $155 million.
7. RELATED PARTY TRANSACTIONS
Our related parties include:
Crowley Blue Water Partners, in which we have a 50 percent indirect noncontrolling interest. Crowley Blue Water Partners owns and operates three Jones Act ATB vessels.
Crowley Ocean Partners, in which we have a 50 percent indirect noncontrolling interest. Crowley Ocean Partners owns and operates Jones Act product tankers.
Illinois Extension Pipeline Company, L.L.C. (“Illinois Extension Pipeline”), in which we have a 35 percent noncontrolling interest. Illinois Extension Pipeline owns and operates the Southern Access Extension (“SAX”) crude oil pipeline.
LOCAP, in which we have a 59 percent noncontrolling interest. LOCAP owns and operates a crude oil pipeline.
LOOP, in which we have a 51 percent noncontrolling interest. LOOP owns and operates the only U.S. deepwater crude oil port.
MarkWest Utica EMG, in which we have a 56 percent noncontrolling interest. MarkWest Utica EMG is engaged in natural gas processing and NGL fractionation, transportation and marketing in Ohio.
Ohio Gathering, in which we have a 34 percent indirect noncontrolling interest. Ohio Gathering is a subsidiary of MarkWest Utica EMG providing natural gas gathering service in the Utica Shale region of eastern Ohio.
PFJ Southeast, in which we have a 29 percent noncontrolling interest. PFJ Southeast owns and operates travel plazas primarily in the Southeast region of the United States.
Sherwood Midstream, in which we have a 50 percent noncontrolling interest. Sherwood Midstream supports the development of Antero Resources Corporation’s Marcellus Shale acreage in West Virginia.
Sherwood Midstream Holdings, in which we have an 81 percent direct and indirect noncontrolling interest. Sherwood Midstream Holdings owns certain infrastructure at the Sherwood Complex that is shared by and supports the operation of both the Sherwood Midstream and MarkWest gas processing plants and deethanization facilities.
The Andersons Albion Ethanol LLC (“TAAE”), in which we have a 45 percent noncontrolling interest, The Andersons Clymers Ethanol LLC (“TACE”), in which we have a 61 percent noncontrolling interest and The Andersons Marathon Ethanol LLC (“TAME”), in which we have a 67 percent noncontrolling interest. These companies each own and operate an ethanol production facility.
Other equity method investees.

14

                            


We believe that transactions with related parties were conducted on terms comparable to those with unaffiliated parties.
Sales to related parties were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
 
2018
 
2017
PFJ Southeast
$
196

 
$
145

 
$
365

 
$
296

Other equity method investees
3

 
2

 
6

 
5

Total
$
199

 
$
147

 
$
371

 
$
301

Sales to related parties consists primarily of sales of refined products.
Other income from related parties, which is included in “Other income” on the accompanying consolidated statements of income, was as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
 
2018
 
2017
MarkWest Utica EMG
$
4

 
$
4

 
$
8

 
$
8

Ohio Gathering
4

 
4

 
8

 
8

Sherwood Midstream
2

 
3

 
5

 
4

Other equity method investees
4

 
4

 
6

 
6

Total
$
14

 
$
15

 
$
27

 
$
26

Other income from related parties consists primarily of fees received for operating transportation assets for our related parties.
Purchases from related parties were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Crowley Blue Water Partners
$
14

 
$
14

 
$
30

 
$
28

Crowley Ocean Partners
20

 
20

 
40

 
39

Illinois Extension Pipeline
23

 
24

 
47

 
49

LOCAP
3

 
6

 
7

 
11

LOOP
14

 
26

 
31

 
39

TAAE
22

 
23

 
41

 
31

TACE
10

 
9

 
18

 
25

TAME
25

 
21

 
45

 
38

Other equity method investees
7

 
7

 
20

 
12

Total
$
138

 
$
150

 
$
279

 
$
272

Related party purchases from Crowley Blue Water Partners and Crowley Ocean Partners consist of leasing marine equipment primarily used to transport refined products. Related party purchases from Illinois Extension Pipeline, LOCAP, LOOP and other equity method investees consist primarily of crude oil transportation costs. Related party purchases from TAAE, TACE and TAME consist of ethanol purchases.

15

                            

Receivables from related parties, which are included in “Receivables, less allowance for doubtful accounts” on the accompanying consolidated balance sheets, were as follows:
(In millions)
June 30,
2018
 
December 31,
2017
PFJ Southeast
$
30

 
$
28

Other equity method investees
8

 
8

Total
$
38

 
$
36

Payables to related parties, which are included in “Accounts payable” on the accompanying consolidated balance sheets, were as follows: 
(In millions)
June 30,
2018
 
December 31,
2017
Illinois Extension Pipeline
$
8

 
$
8

LOOP
4

 
3

MarkWest Utica EMG
26

 
29

Ohio Gathering

 
9

Sherwood Midstream
8

 
8

Other equity method investees
10

 
12

Total
$
56

 
$
69

8. INCOME PER COMMON 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.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions, except per share data)
2018
 
2017
 
2018
 
2017
Basic earnings per share:
 
 
 
 
 
 
 
Allocation of earnings:
 
 
 
 
 
 
 
Net income attributable to MPC
$
1,055

 
$
483

 
$
1,092

 
$
513

Income allocated to participating securities
1

 

 
1

 

Income available to common stockholders – basic
$
1,054

 
$
483

 
$
1,091

 
$
513

Weighted average common shares outstanding
459

 
513

 
467

 
519

Basic earnings per share
$
2.30

 
$
0.94

 
$
2.34

 
$
0.99

Diluted earnings per share:
 
 
 
 
 
 
 
Allocation of earnings:
 
 
 
 
 
 
 
Net income attributable to MPC
$
1,055

 
$
483

 
$
1,092

 
$
513

Income allocated to participating securities
1

 

 
1

 

Income available to common stockholders – diluted
$
1,054

 
$
483

 
$
1,091

 
$
513

Weighted average common shares outstanding
459

 
513

 
467

 
519

Effect of dilutive securities
5

 
4

 
5

 
4

Weighted average common shares, including dilutive effect
464

 
517

 
472

 
523

Diluted earnings per share
$
2.27

 
$
0.93

 
$
2.31

 
$
0.98



16

                            

The following table summarizes the shares that were anti-dilutive and, therefore, were excluded from the diluted share calculation.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Shares issued under stock-based compensation plans
1

 

 
1

 
2

9. EQUITY
As of June 30, 2018, we had $5.98 billion of share repurchase authorization remaining under authorizations from our board of directors. We may utilize various methods to effect the repurchases, which could include open market repurchases, negotiated block transactions, accelerated share repurchases or open market solicitations for shares, some of which may be effected through Rule 10b5-1 plans. The timing and amount of future repurchases, if any, will depend upon several factors, including market and business conditions, and such repurchases may be discontinued at any time.
Total share repurchases were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions, except per share data)
2018
 
2017
 
2018
 
2017
Number of shares repurchased
12

 
14

 
31

 
23

Cash paid for shares repurchased
$
885

 
$
750

 
$
2,212

 
$
1,170

Average cost per share
$
76.30

 
$
52.35

 
$
71.58

 
$
51.53

As of June 30, 2018, we had agreements to acquire 495,702 common shares for $35 million, which were settled in early July 2018.
10. SEGMENT INFORMATION
We have three reportable segments: Refining & Marketing; Speedway; 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 six refineries in the Gulf Coast and Midwest regions of the United States, purchases refined products and ethanol for resale and distributes refined products through transportation, storage, distribution and marketing services provided by our Midstream segment. We sell refined products to wholesale marketing customers domestically and internationally, to buyers on the spot market, to our Speedway business segment and to independent entrepreneurs who operate Marathon® retail outlets.
Speedway – sells transportation fuels and convenience merchandise in retail markets in the Midwest, East Coast, Southeast and Gulf Coast regions of the United States.
Midstream – gathers, processes and transports natural gas; gathers, transports, fractionates, stores and markets NGLs; and 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. The Midstream segment primarily reflects the results of MPLX, our sponsored master limited partnership.
As discussed in Note 4, 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 of $232 million and $413 million to Refining & Marketing segment results and a net increase to Midstream segment results of the same amount for the three and six months ended June 30, 2018, respectively. No effect was given to prior periods as these entities were not considered businesses prior to February 1, 2018.
Segment income 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 reportable segments. In addition, certain items that affect comparability (as determined by the chief operating decision maker) are not allocated to the reportable segments.


17

                            

(In millions)
Refining & Marketing
 
Speedway
 
Midstream
 
Total
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Third party
$
16,105

 
$
5,263

 
$
750

 
$
22,118

Intersegment
2,871

 
2

 
762

 
3,635

Related party
197

 
2

 

 
199

Segment revenues
$
19,173

 
$
5,267

 
$
1,512

 
$
25,952

Segment income from operations
$
1,025

 
$
159

 
$
617

 
$
1,801

Income from equity method investments(b)
4

 
19

 
56

 
79

Depreciation and amortization(b)
252

 
73

 
191

 
516

Capital expenditures and investments(c)
196

 
88

 
601

 
885


(In millions)
Refining & Marketing
 
Speedway
 
Midstream
 
Total
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Third party
$
12,691

 
$
4,794

 
$
548

 
$
18,033

Intersegment(a)
2,808

 
1

 
363

 
3,172

Related party
145

 
2

 

 
147

Segment revenues
$
15,644

 
$
4,797

 
$
911

 
$
21,352

Segment income from operations
$
562

 
$
238

 
$
332

 
$
1,132

Income from equity method investments(b)
2

 
21

 
40

 
63

Depreciation and amortization(b)
272

 
65

 
168

 
505

Capital expenditures and investments(c)
180

 
78

 
494

 
752

(In millions)
Refining & Marketing
 
Speedway
 
Midstream
 
Total
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Third party
$
29,517

 
$
9,832

 
$
1,463

 
$
40,812

Intersegment
5,250

 
3

 
1,393

 
6,646

Related party
367

 
4

 

 
371

Segment revenues
$
35,134

 
$
9,839

 
$
2,856

 
$
47,829

Segment income from operations
$
892

 
$
254

 
$
1,184

 
$
2,330

Income from equity method investments(b)
7

 
33

 
125

 
165

Depreciation and amortization(b)
504

 
152

 
372

 
1,028

Capital expenditures and investments(c)
387

 
127

 
1,083

 
1,597



18

                            

(In millions)
Refining & Marketing
 
Speedway
 
Midstream
 
Total
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Third party
$
23,912

 
$
9,175

 
$
1,080

 
$
34,167

Intersegment(a)
5,398

 
2

 
707

 
6,107

Related party
297

 
4

 

 
301

Segment revenues
$
29,607

 
$
9,181

 
$
1,787

 
$
40,575

Segment income from operations
$
492

 
$
373

 
$
641

 
$
1,506

Income from equity method investments(b)
4

 
34

 
82

 
120

Depreciation and amortization(b)
539

 
129

 
359

 
1,027

Capital expenditures and investments(c)(d)
372

 
113

 
1,564

 
2,049

(a) 
Management believes intersegment transactions were conducted under terms comparable to those with unaffiliated parties.
(b) 
Differences between segment totals and MPC totals represent amounts related to corporate and other unallocated items and are included in “Items not allocated to segments” in the reconciliation below.
(c) 
Capital expenditures include changes in capital accruals, acquisitions and investments in affiliates. See reconciliation from segment totals to MPC total capital expenditures below.
(d) 
The Midstream segment includes $220 million for the acquisition of the Ozark pipeline and an investment of $500 million in MarEn Bakken related to the Bakken Pipeline system for the six months ended June 30, 2017.


The following reconciles segment income from operations to income before income taxes as reported in the consolidated statements of income:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Segment income from operations
$
1,801

 
$
1,132

 
$
2,330

 
$
1,506

Items not allocated to segments:
 
 
 
 
 
 
 
Corporate and other unallocated items(a)
(91
)
 
(83
)
 
(180
)
 
(166
)
Litigation

 
(86
)
 

 
(86
)
Impairments(b)
1

 
19

 
1

 
19

Income from operations
1,711

 
982

 
2,151

 
1,273

Net interest and other financial costs
195

 
158

 
378

 
307

Income before income taxes
$
1,516

 
$
824

 
$
1,773

 
$
966

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


19

                            

The following reconciles segment capital expenditures and investments to total capital expenditures:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Segment capital expenditures and investments
$
885

 
$
752

 
$
1,597

 
$
2,049

Less investments in equity method investees(a)
77

 
111

 
118

 
677

Plus items not allocated to segments:
 
 
 
 
 
 
 
Corporate
17

 
18

 
35

 
34

Capitalized interest
16

 
14

 
34

 
26

Total capital expenditures(b)
$
841

 
$
673

 
$
1,548

 
$
1,432

(a) 
The six months ended June 30, 2017 includes an investment of $500 million in MarEn Bakken related to the Bakken Pipeline system.
(b) 
Capital expenditures include changes in capital accruals. See Note 18 for a reconciliation of total capital expenditures to additions to property, plant and equipment as reported in the consolidated statements of cash flows.

Revenues by product line were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Refined products
$
19,292

 
$
15,439

 
$
35,450

 
$
29,315

Merchandise
1,286

 
1,343

 
2,416

 
2,535

Crude oil and refinery feedstocks
978

 
824

 
1,861

 
1,511

Midstream services, transportation and other
562

 
427

 
1,085

 
806

Sales and other operating revenues
$
22,118

 
$
18,033

 
$
40,812

 
$
34,167

11. OTHER ITEMS
Net interest and other financial costs were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Interest income
$
(25
)
 
$
(4
)
 
$
(45
)
 
$
(9
)
Interest expense
229

 
173

 
442

 
336

Interest capitalized
(16
)
 
(18
)
 
(34
)
 
(33
)
Loss on extinguishment of debt

 

 
4

 

Other financial costs
7

 
7

 
11

 
13

Net interest and other financial costs
$
195

 
$
158

 
$
378

 
$
307

12. INCOME TAXES
The combined federal, state and foreign income tax rate was 19 percent and 30 percent for the three months ended June 30, 2018 and 2017, respectively, and 17 percent and 30 percent for the six months ended June 30, 2018 and 2017, respectively. The effective tax rate for the three and six months ended June 30, 2018 was less than the U.S. statutory rate of 21 percent primarily due to certain permanent tax differences related to net income attributable to noncontrolling interest and equity compensation offset by state and local tax expense. The effective tax rate for the three and six months ended June 30, 2017 was less than the then applicable U.S. statutory rate of 35 percent primarily due to certain permanent tax differences related to net income attributable to noncontrolling interest, the domestic manufacturing deduction and equity compensation offset by state and local tax expense.
We are continuously undergoing examination of our income tax returns, which have been completed through the 2007 tax year for state returns and the 2009 tax year for our U.S. federal return. As of June 30, 2018, we had $21 million of unrecognized tax benefits.

20

                            

Prior to its spin-off on June 30, 2011, Marathon Petroleum Corporation was included in the Marathon Oil Corporation (“Marathon Oil”) federal income tax returns for all applicable years. During the third quarter 2017, Marathon Oil received a notice of Final Partnership Administrative Adjustment (“FPAA”) from the IRS for taxable year 2010, relating to certain pre-spinoff 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 this matter and filed a U.S. Tax Court petition for tax years 2011-2014 to dispute these corollary adjustments in the fourth quarter of 2017. We continue to believe that the issue in dispute is more likely than not to be fully sustained and therefore, no liability has been accrued for this matter.
Pursuant to our tax sharing agreement with Marathon Oil, the unrecognized tax benefits related to pre-spinoff operations for which Marathon Oil was the taxpayer remain the responsibility of Marathon Oil and we have indemnified Marathon Oil accordingly. See Note 22 for indemnification information.
13. INVENTORIES
(In millions)
June 30,
2018
 
December 31,
2017
Crude oil and refinery feedstocks
$
2,059

 
$
2,056

Refined products
2,811

 
2,839

Materials and supplies
455

 
494

Merchandise
160

 
161

Total
$
5,485

 
$
5,550

Inventories are carried at the lower of cost or market value. The cost of inventories of crude oil and refinery feedstocks, refined products and merchandise is determined primarily under the LIFO method. There were no material liquidations of LIFO inventories for the six months ended June 30, 2018.
14. PROPERTY, PLANT AND EQUIPMENT
(In millions)
June 30,
2018
 
December 31,
2017
Refining & Marketing(a)
$
18,314

 
$
19,490

Speedway
5,433

 
5,358

Midstream(a)
17,411

 
14,898

Corporate and Other
827

 
792

Total
41,985

 
40,538

Less accumulated depreciation
15,054

 
14,095

Property, plant and equipment, net
$
26,931

 
$
26,443

(a) 
On February 1, 2018, we contributed certain refining logistics assets and fuels distribution services to MPLX. In connection with this transaction, approximately $830 million of net property, plant and equipment was recorded to the Midstream segment with an offsetting reduction to the Refining & Marketing segment.
We own a 33 percent undivided joint interest in the Capline Pipeline System (“Capline”), a crude oil pipeline that runs from St. James, LA to Patoka, IL. We account for this undivided joint interest by recognizing our proportionate share of Capline’s assets on our balance sheet, which are primarily classified as property, plant and equipment. Capline experienced a significant reduction in shipment volumes in the second quarter of 2018 primarily due to recently completed competing pipelines. The pipeline`s owners are proceeding with planning for the reversal of the pipeline to support southbound movements of crude oil as supported by shipper interest indicated during a non-binding open season conducted in 2017. Pending agreement among the owners, southbound service is estimated to commence by the second half of 2022. In the second quarter of 2018, we evaluated our share of Capline assets for impairment in accordance with ASC 360, and determined no impairment existed due to the probability of continuing future cash flows associated with a reversed Capline. As of June 30, 2018, our carrying value was $155 million.

21

                            

15. FAIR VALUE MEASUREMENTS
Fair Values—Recurring
The following tables present assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 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.
 
 
June 30, 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
Commodity derivative instruments, assets
$
134

 
$

 
$

 
$
(134
)
 
$

 
$
16

Other assets
3

 

 

 
 N/A

 
3

 

Total assets at fair value
$
137

 
$

 
$

 
$
(134
)
 
$
3

 
$
16

 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative instruments, liabilities
$
171

 
$

 
$
2

 
$
(171
)
 
$
2

 
$

Embedded derivatives in commodity contracts(c)

 

 
66

 

 
66

 

Total liabilities at fair value
$
171

 
$

 
$
68

 
$
(171
)
 
$
68

 
$

 
 
December 31, 2017
 
Fair Value Hierarchy
 
 
 
 
 
 
(In millions)
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral(a)
 
Net Carrying Value on Balance Sheet(b)
 
Collateral Pledged Not Offset
Commodity derivative instruments, assets
$
127

 
$