Edgar Filing: Marathon Petroleum Corp

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

MPC-2014.09.30-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-35054

Marathon Petroleum Corporation

(Exact name of registrant as specified in its charter)



Delaware		27-1284632
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

539 South Main Street, Findlay, Ohio		45840-3229
(Address of principal executive offices)		(Zip code)

(419) 422-2121

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 280,192,743 shares of Marathon Petroleum Corporation common stock outstanding as of October 31, 2014.

Table of Contents

MARATHON PETROLEUM CORPORATION

Form 10-Q

Quarter Ended September 30, 2014

INDEX



	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income (Unaudited)	2
Consolidated Statements of Comprehensive Income (Unaudited)	3
Consolidated Balance Sheets (Unaudited)	4
Consolidated Statements of Cash Flows (Unaudited)	5
Consolidated Statements of Equity (Unaudited)	6
Notes to Consolidated Financial Statements (Unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures about Market Risk	48
Item 4. Controls and Procedures	49
Supplementary Statistics (Unaudited)	50

PART II – OTHER INFORMATION
Item 1. Legal Proceedings	53
Item 1A. Risk Factors	53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 6. Exhibits	55
Signatures	56

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.

Table of Contents

Part I – Financial Information

Item 1. Financial Statements

Marathon Petroleum Corporation

Consolidated Statements of Income (Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions, except per share data)	2014			2013			2014			2013
Revenues and other income:
Sales and other operating revenues (including consumer excise taxes)	$	25,438		$	26,256		$	75,567		$	75,263
Income from equity method investments	29			9			121			16
Net gain on disposal of assets	2			1			14			3
Other income	12			8			57			40
Total revenues and other income	25,481			26,274			75,759			75,322
Costs and expenses:
Cost of revenues (excludes items below)	21,935			23,553			65,571			65,907
Purchases from related parties	112			103			401			254
Consumer excise taxes	1,622			1,631			4,736			4,685
Depreciation and amortization	322			299			967			888
Selling, general and administrative expenses	342			305			1,004			912
Other taxes	86			82			288			259
Total costs and expenses	24,419			25,973			72,967			72,905
Income from operations	1,062			301			2,792			2,417
Net interest and other financial income (costs)	(50		)	(47		)	(144		)	(140		)
Income before income taxes	1,012			254			2,648			2,277
Provision for income taxes	333			81			898			775
Net income	679			173			1,750			1,502
Less net income attributable to noncontrolling interests	7			5			24			16
Net income attributable to MPC	$	672		$	168		$	1,726		$	1,486
Per Share Data (See Note 7)
Basic:
Net income attributable to MPC per share	$	2.38		$	0.54		$	5.99		$	4.63
Weighted average shares outstanding	282			309			288			321
Diluted:
Net income attributable to MPC per share	$	2.36		$	0.54		$	5.95		$	4.60
Weighted average shares outstanding	284			311			290			323
Dividends paid	$	0.50		$	0.42		$	1.34		$	1.12

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

Table of Contents

Marathon Petroleum Corporation

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2014			2013			2014			2013
Net income	$	679		$	173		$	1,750		$	1,502
Other comprehensive income (loss):
Defined benefit postretirement and post-employment plans:
Actuarial changes, net of tax of ($1), $34, $0 and $169	(2		)	57			—			282
Prior service costs, net of tax of ($5), ($5), ($14) and ($14)	(8		)	(8		)	(24		)	(23		)
Other comprehensive income (loss)	(10		)	49			(24		)	259
Comprehensive income	669			222			1,726			1,761
Less comprehensive income attributable to noncontrolling interests	7			5			24			16
Comprehensive income attributable to MPC	$	662		$	217		$	1,702		$	1,745

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

Table of Contents

Marathon Petroleum Corporation

Consolidated Balance Sheets (Unaudited)



(In millions, except share data)	September 30, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	1,854		$	2,292
Receivables, less allowance for doubtful accounts of $10 and $9	5,271			5,559
Inventories	5,608			4,689
Other current assets	154			197
Total current assets	12,887			12,737
Equity method investments	862			463
Property, plant and equipment, net	15,999			13,921
Goodwill	1,537			938
Other noncurrent assets	420			326
Total assets	$	31,705		$	28,385
Liabilities
Current liabilities:
Accounts payable	$	8,726		$	8,234
Payroll and benefits payable	345			406
Consumer excise taxes payable	365			373
Accrued taxes	586			513
Long-term debt due within one year	26			23
Other current liabilities	324			275
Total current liabilities	10,372			9,824
Long-term debt	6,238			3,373
Deferred income taxes	2,165			2,304
Defined benefit postretirement plan obligations	937			771
Deferred credits and other liabilities	727			781
Total liabilities	20,439			17,053
Commitments and contingencies (see Note 22)
Equity
MPC stockholders’ equity:
Preferred stock, no shares issued and outstanding (par value $0.01 per share, 30 million shares authorized)	—			—
Common stock:
Issued - 363 million and 362 million shares (par value $0.01 per share, 1 billion shares authorized)	4			4
Held in treasury, at cost - 82 million and 65 million shares	(5,616		)	(4,155		)
Additional paid-in capital	9,833			9,768
Retained earnings	6,856			5,507
Accumulated other comprehensive loss	(228		)	(204		)
Total MPC stockholders’ equity	10,849			10,920
Noncontrolling interests	417			412
Total equity	11,266			11,332
Total liabilities and equity	$	31,705		$	28,385

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

Table of Contents

Marathon Petroleum Corporation

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended September 30,
(In millions)	2014			2013
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income	$	1,750		$	1,502
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	967			888
Pension and other postretirement benefits, net	123			3
Deferred income taxes	(126		)	22
Net gain on disposal of assets	(14		)	(3		)
Equity method investments, net	(39		)	(4		)
Changes in the fair value of derivative instruments	(35		)	(54		)
Changes in:
Current receivables	424			(974		)
Inventories	(731		)	(1,330		)
Current accounts payable and accrued liabilities	318			2,028
All other, net	85			(28		)
Net cash provided by operating activities	2,722			2,050
Investing activities:
Additions to property, plant and equipment	(952		)	(733		)
Acquisitions, net of cash acquired	(2,831		)	(1,515		)
Disposal of assets	19			12
Investments—acquisitions, loans and contributions	(341		)	(113		)
—redemptions, repayments and return of capital	3			76
All other, net	78			22
Net cash used in investing activities	(4,024		)	(2,251		)
Financing activities:
Long-term debt – borrowings	2,903			—
– repayments	(32		)	(16		)
Debt issuance costs	(19		)	(2		)
Issuance of common stock	21			37
Common stock repurchased	(1,449		)	(2,341		)
Dividends paid	(386		)	(358		)
Distributions to noncontrolling interests	(20		)	(15		)
Tax settlement with Marathon Oil Corporation	—			39
Contingent consideration payment	(172		)	—
All other, net	18			15
Net cash provided by (used in) financing activities	864			(2,641		)
Net decrease in cash and cash equivalents	(438		)	(2,842		)
Cash and cash equivalents at beginning of period	2,292			4,860
Cash and cash equivalents at end of period	$	1,854		$	2,018

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

Table of Contents

Marathon Petroleum Corporation

Consolidated Statements of Equity (Unaudited)



	MPC Stockholders’ Equity
(In millions)	Common Stock		Treasury Stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total Equity
Balance as of December 31, 2012	$	4	$	(1,253	)	$	9,527	$	3,880		$	(464	)	$	411		$	12,105
Net income	—		—			—		1,486			—			16			1,502
Dividends declared	—		—			—		(359		)	—			—			(359		)
Distributions to noncontrolling interests	—		—			—		—			—			(15		)	(15		)
Other comprehensive income	—		—			—		—			259			—			259
Shares repurchased	—		(2,441		)	100		—			—			—			(2,341		)
Shares issued (returned) - stock based compensation	—		(9		)	37		—			—			—			28
Stock-based compensation	—		—			45		—			—			1			46
Tax settlement with Marathon Oil Corporation	—		—			39		—			—			—			39
Balance as of September 30, 2013	$	4	$	(3,703	)	$	9,748	$	5,007		$	(205	)	$	413		$	11,264
Balance as of December 31, 2013	$	4	$	(4,155	)	$	9,768	$	5,507		$	(204	)	$	412		$	11,332
Net income	—		—			—		1,726			—			24			1,750
Dividends declared	—		—			—		(386		)	—			—			(386		)
Distributions to noncontrolling interests	—		—			—		—			—			(20		)	(20		)
Other comprehensive loss	—		—			—		—			(24		)	—			(24		)
Shares repurchased	—		(1,449		)	—		—			—			—			(1,449		)
Shares issued (returned)—stock based compensation	—		(12		)	21		—			—			—			9
Stock-based compensation	—		—			44		—			—			1			45
Other	—		—			—		9			—			—			9
Balance as of September 30, 2014	$	4	$	(5,616	)	$	9,833	$	6,856		$	(228	)	$	417		$	11,266

(Shares in millions)	Common Stock		Treasury Stock
Balance as of December 31, 2012	361		(28		)
Shares repurchased	—		(31		)
Shares issued - stock-based compensation	1		—
Balance as of September 30, 2013	362		(59		)
Balance as of December 31, 2013	362		(65		)
Shares repurchased	—		(17		)
Shares issued—stock-based compensation	1		—
Balance as of September 30, 2014	363		(82		)

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

Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

1. Description of the Business and Basis of Presentation

Description of the Business—As used in this report, the terms “MPC,” “we,” “us,” “the Company” or “our” may refer to Marathon Petroleum Corporation, one or more of its consolidated subsidiaries or all of them taken as a whole.

Our business consists of refining and marketing, retail marketing and pipeline transportation operations conducted primarily in the Midwest, Gulf Coast, East Coast and Southeast regions of the United States, through subsidiaries, including Marathon Petroleum Company LP, Speedway LLC and MPLX LP and its subsidiaries (“MPLX”).

See Note 9 for additional information about our operations.

Basis of Presentation—All significant intercompany transactions and accounts have been eliminated.

These interim consolidated financial statements are unaudited; however, in the opinion of our management, these statements reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal, recurring nature unless otherwise disclosed. These interim consolidated financial statements, including the notes, have been prepared in accordance with the rules of the Securities and Exchange Commission applicable to interim period financial statements and do not include all of the information and disclosures required by United States generally accepted accounting principles (“U.S. 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, 2013. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year.

During the first quarter of 2014, we recorded an out-of-period adjustment for additional expenses related to the prior year's bonus programs of $29 million, included in total costs and expenses on the consolidated statements of income. The impact to our consolidated results of operations for the nine months ended September 30, 2014 and for the year ended December 31, 2013 was immaterial. We do not expect this adjustment to have a material impact to our results of operations for the year ended December 31, 2014.

2. Accounting Standards

Not Yet Adopted

In August 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update requiring management to assess an entity's ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Management will be required to assess if there is substantial doubt about an entity's ability to continue as a going concern within one year after the date that the financial statements are issued. Disclosures will be required if conditions give rise to substantial doubt and the type of disclosure will be determined based on whether management's plans will be able to alleviate the substantial doubt. The accounting standards update will be effective for the first annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early application permitted.

In June 2014, the FASB issued an accounting standards update for the elimination of the concept of development stage entity ("DSE") from U.S. GAAP and removes the related incremental reporting. The standards update eliminates the additional financial statement requirements specific to a DSE. In addition, it amends the consolidation model by eliminating the special provisions in the variable interest entity rules for assessing the sufficiency of the equity of a DSE. The portion of the accounting standards update related to the amendment to the consolidation guidance will be effective on a retrospective basis for annual reporting periods beginning after December 15, 2015, and interim periods within those years, with early adoption permitted. The portion of the accounting standards update related to the removal of the DSE reporting requirements will be effective on a retrospective basis for annual reporting periods beginning after December 15, 2014, and interim periods within those years, with early adoption permitted. Adoption of this standards update in the first quarters of 2015 and 2016 is not expected to have an impact on our consolidated results of operations, financial position or cash flows.

Table of Contents

In May 2014, the FASB issued an accounting standards update for revenue recognition that is aligned with the International Accounting Standards Board's revenue recognition standard issued on the same day. The guidance in the update states that revenue is recognized when a customer obtains control of a good or service. Recognition of the revenue will involve a multiple step approach including identifying the contract, identifying the separate performance obligations, determining the transaction price, allocating the price to the performance obligations and then recognizing the revenue as the obligations are satisfied. Additional disclosures will be required to provide adequate information to understand the nature, amount, timing and uncertainty of reported revenues and revenues expected to be recognized. The accounting standards update will be effective on a retrospective or modified retrospective basis for annual reporting periods beginning after December 15, 2016, and interim periods within those years, with no early adoption permitted. At this point, a final determination has not been made as to the impact of the adoption of this standards update in the first quarter of 2017. However, we do not expect it to have a material impact on our consolidated results of operations, financial position or cash flows.

In April 2014, the FASB issued an accounting standards update that redefines the criteria for determining discontinued operations and introduces new disclosures related to these disposals. The updated definition of a discontinued operation is the disposal of a component (or components) of an entity or the classification of a component (or components) of an entity as held for sale that represents a strategic shift for an entity and has (or will have) a major impact on an entity's operations and financial results. The standard requires disclosure of additional financial information for discontinued operations and individually material components not qualifying for discontinued operation presentation, as well as information regarding an entity's continuing involvement with the discontinued operation. The accounting standards update is effective prospectively for annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted. Adoption of this standards update in the first quarter of 2015 is not expected to have an impact on our consolidated results of operations, financial position or cash flows.

3. MPLX LP

MPLX is a publicly traded master limited partnership that was formed by us to own, operate, develop and acquire pipelines and other midstream assets related to the transportation and storage of crude oil, refined products and other hydrocarbon-based products. We own a 73.6 percent interest in MPLX, including the two percent general partner interest. We consolidate this entity for financial reporting purposes since we have a controlling financial interest, and we record a noncontrolling interest for the interest owned by the public.

MPLX’s initial assets consisted of a 51 percent general partner interest in MPLX Pipe Line Holdings LP (“Pipe Line Holdings”), which owns a network of common carrier crude oil and product pipeline systems and associated storage assets in the Midwest and Gulf Coast regions of the United States, and a 100 percent interest in a butane storage cavern in West Virginia. On May 1, 2013, we sold a five percent interest in Pipe Line Holdings to MPLX for $100 million.

Effective March 1, 2014, we sold MPLX a 13 percent interest in Pipe Line Holdings for $310 million, increasing MPLX's ownership interest in Pipe Line Holdings to 69 percent. MPLX financed this transaction with $40 million of cash on-hand and $270 million of borrowings on its bank revolving credit agreement.

The sales of our interests in Pipeline Holdings to MPLX resulted in a change of our ownership in Pipeline Holdings, but not a change in control. We accounted for the sales as equity transactions and did not record a gain or loss.

4. Acquisitions and Investments

Acquisition of Hess' Retail Operations and Related Assets

On September 30, 2014, we acquired from Hess Corporation ("Hess") all of Hess' retail locations, transport operations and shipper history on various pipelines, including approximately 40,000 barrels per day on Colonial Pipeline for $2.82 billion. We refer to these assets as “Hess' Retail Operations and Related Assets.” The transaction was funded with a combination of debt and available cash.

The transaction provides for an adjustment for working capital, which has not been finalized with Hess. If a change is made for working capital, the fair value of the assets acquired will be revised.

Table of Contents

The estimated fair values of assets acquired and liabilities assumed at the acquisition date, pending the completion of an independent appraisal and other evaluations, are as follows:



(In millions)
Cash and cash equivalents	$	39
Receivables	132
Inventories	178
Other current assets	5
Property, plant and equipment, net	2,062
Other noncurrent assets	103
Total assets acquired	2,519
Accounts payable	77
Payroll and benefits payable	4
Consumer excise taxes payable	80
Other current liabilities	10
Defined benefit postretirement plan obligations	2
Deferred credits and other liabilities	122
Total liabilities assumed	295
Net assets acquired excluding goodwill	2,224
Goodwill	600
Net assets acquired	$	2,824

The purchase price allocation resulted in the recognition of $600 million in goodwill by our Speedway segment, which is deductible for tax purposes. Goodwill recognized for the acquisition primarily relates to the expected benefits of a significantly expanded retail platform that should enable growth in new markets, as well as the potential for higher merchandise sales. We also expect strategic benefits from the financial and operational scale we expect to realize across our entire retail network. This acquisition significantly expands our Speedway presence from nine to 22 states throughout the East Coast and Southeast and is aligned with our strategy to grow higher-valued, stable cash flow businesses. This acquisition also enables us to further leverage our integrated refining and transportation operations, providing an outlet for an incremental 200,000 barrels per day of assured sales from our refining system.

Other noncurrent assets includes a $22 million intangible asset related to a trade name and $60 million related to favorable lease contract terms. Deferred credits and other liabilities includes $80 million related to unfavorable lease contract terms. The trade name is being amortized over its estimated useful life of two years based on the utilization of the assets. The favorable and unfavorable lease contract amounts are being amortized over the terms of the leases.

We recognized $12 million of acquisition-related costs associated with Hess' Retail Operations and Related Assets acquisition. These costs were expensed and were included in selling, general and administrative expenses.

Acquisition of Refinery and Related Logistics and Marketing Assets

On February 1, 2013, we acquired from BP Products North America Inc. and BP Pipelines (North America) Inc. (collectively, “BP”) the 451,000 barrel per calendar day refinery in Texas City, Texas, three intrastate natural gas liquid pipelines originating at the refinery, four light product terminals, branded-jobber marketing contract assignments for the supply of approximately 1,200 branded sites, a 1,040 megawatt electric cogeneration facility and a 50,000 barrel per day allocation of space on Colonial Pipeline. We refer to these assets as the “Galveston Bay Refinery and Related Assets.” We paid $1.49 billion for these assets, which included $935 million for inventory. The transaction was funded with cash on hand. Pursuant to the purchase and sale agreement, we may also be required to pay BP a contingent earnout of up to an additional $700 million over six years, subject to certain conditions. In July 2014, we paid BP $180 million for the first period's contingent earnout. On the consolidated statements of cash flows, $172 million of the contingent earnout payment is included as a financing activity with the remainder included as an operating activity. See Note 15 for additional information on the contingent consideration.

Table of Contents

The following unaudited pro forma financial information presents consolidated results assuming the Galveston Bay Refinery and Related Assets acquisition occurred on January 1, 2012 and Hess' Retail Operations and Related Assets acquisition occurred on January 1, 2013. The pro forma financial information does not give effect to potential synergies that could result from the acquisitions and is not necessarily indicative of the results of future operations.



	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions, except per share data)	2014		2013		2014		2013
Sales and other operating revenues (including consumer excise taxes)	$	28,284	$	29,317	$	84,232	$	86,386
Net income attributable to MPC	698		170		1,748		1,516
Net income attributable to MPC per share - basic	$	2.48	$	0.55	$	6.07	$	4.72
Net income attributable to MPC per share - diluted	2.46		0.55		6.03		4.69

The pro forma information includes adjustments to align accounting policies, an adjustment to depreciation expense to reflect the fair value of property, plant and equipment, increased amortization expense related to identifiable intangible assets, additional interest expense related to financing the acquisition of Hess' Retail Operations and Related Assets, as well as the related income tax effects.

Acquisitions of Convenience Stores

During 2013, Speedway acquired nine convenience stores located in Tennessee, western Indiana and western Pennsylvania. In connection with these acquisitions, our Speedway segment recorded $8 million of goodwill, which is deductible for income tax purposes.

The principal factors contributing to a purchase price resulting in goodwill included the acquired stores complementing our existing network in our Midwest market, access to our refined product transportation systems and the potential for higher merchandise sales.

Acquisition of Biodiesel Facility

On April 1, 2014, we purchased a facility in Cincinnati, Ohio from Felda Iffco Sdn Bhd, Malaysia for $40 million. The plant currently produces biodiesel, glycerin and other by-products. The capacity of the plant is approximately 60 million gallons per year.

Neither goodwill nor a gain from a bargain purchase was recognized in conjunction with the biodiesel facility acquisition.

Assuming the acquisitions of the convenience stores in 2013 and the biodiesel facility in 2014 had been made at the beginning of any period presented, the consolidated pro forma results would not be materially different from reported results.

Investments in Ethanol Companies

On August 1, 2013, we acquired from Mitsui & Co. (U.S.A.), Inc. its interests in three ethanol companies for $75 million. Under the purchase agreement, we acquired an additional 24 percent interest in The Andersons Clymers Ethanol LLC ("TACE"), bringing our ownership interest to 60 percent; a 34 percent interest in The Andersons Ethanol Investment LLC ("TAEI"), which holds a 50 percent ownership in The Andersons Marathon Ethanol LLC ("TAME"), bringing our direct and indirect ownership interest in TAME to 67 percent; and a 40 percent interest in The Andersons Albion Ethanol LLC ("TAAE"), which owns an ethanol production facility in Albion, Michigan. On October 1, 2013, our ownership interest in TAAE increased to 43 percent as a result of TAAE acquiring one of the owner's interest. We hold a noncontrolling interest in each of these entities and account for them using the equity method of accounting since the minority owners have substantive participating rights.

Table of Contents

Investments in Pipeline Companies

In July 2014, we exercised our option to acquire a 35 percent ownership interest in Enbridge Inc.'s Southern Access Extension pipeline ("SAX") through our investment in Illinois Extension Pipeline Company, LLC ("Illinois Extension Pipeline"). During the nine months ended September 30, 2014, we made contributions of $97 million to Illinois Extension Pipeline to fund our portion of the construction costs incurred-to-date on the SAX project. We account for our ownership interest in Illinois Extension Pipeline as an equity method investment. See Note 22 for information on future contributions to Illinois Extension Pipeline.

In March 2014, we acquired from Chevron Raven Ridge Pipe Line Company an additional seven percent interest in Explorer Pipeline Company ("Explorer") for $77 million, bringing our ownership interest to 25 percent. As a result of this increase in our ownership, we now account for our investment in Explorer using the equity method of accounting rather than the cost method. The cumulative impact of the change was applied as an adjustment to 2014 retained earnings.

In November 2013, we agreed to serve as an anchor shipper for the Sandpiper pipeline project and fund 37.5 percent of the construction costs of the project, which will become part of Enbridge Energy Partners L.P.'s ("Enbridge Energy Partners") North Dakota System. In exchange for these commitments, we will earn an approximate 27 percent equity interest in Enbridge Energy Partners' North Dakota System when the Sandpiper pipeline is placed into service. We also have the option to increase our ownership interest to approximately 30 percent through additional investments in future system improvements. We made contributions of $149 million to North Dakota Pipeline Company LLC ("North Dakota Pipeline") during the nine months ended September 30, 2014. We have contributed $173 million since project inception. We account for our interest in North Dakota Pipeline using the equity method of accounting. See Note 22 for information on future contributions to North Dakota Pipeline.

5. Variable Interest Entity

As stated in Note 4, we have a 35 percent ownership interest in Illinois Extension Pipeline through our contributions to the SAX project. Illinois Extension Pipeline Company LLC is considered a variable interest entity ("VIE") because it is a development stage entity and the equity in the entity is not sufficient to fund the current stage of development, which is the construction of the SAX pipeline. Our maximum exposure to loss due to this VIE at September 30, 2014 was $97 million, which equates to our contributions to-date to fund our portion of the construction costs for the project.

We are not the primary beneficiary of this VIE and, therefore, do not consolidate it because we do not have the power to control the activities that significantly influence the economic activities of the entity. The activities that most significantly impact the VIE's economic performance during the construction phase are the actual construction costs and risks associated with the construction process. Through our vote, we have shared power to direct the construction activities, but do not have the sole ability to control the construction activities.

6. Related Party Transactions

Our related parties include:


•	Centennial Pipeline LLC (“Centennial”), in which we have a 50 percent noncontrolling interest. Centennial owns a refined products pipeline and storage facility.


•	Explorer, in which we have a 25 percent interest. Explorer owns and operates a refined products pipeline.


•	LOCAP LLC ("LOCAP"), in which we have a 59 percent noncontrolling interest. LOCAP owns and operates a crude oil pipeline.


•	LOOP LLC (“LOOP”), in which we have a 51 percent noncontrolling interest. LOOP owns and operates the only U.S. deepwater oil port.


•	TAAE, in which we have a 43 percent noncontrolling interest, TACE, in which we have a 60 percent noncontrolling interest and TAME, in which we have a 67 percent direct and indirect noncontrolling interest. These companies each own an ethanol production facility.


•	Other equity method investees.

Sales to related parties, which are included in sales and other operating revenues (including consumer excise taxes) on the consolidated statements of income, were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2014		2013		2014		2013
Other equity method investees	$	2	$	3	$	6	$	7

Table of Contents

Fees received for operating Centennial's pipeline, which are included in other income on the consolidated statements of income, were $1 million for the nine months ended September 2014 and 2013.

Purchases from related parties were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2014		2013		2014		2013
Centennial	$	—	$	4	$	7	$	4
Explorer	10		—		32		—
LOCAP	6		5		16		13
LOOP	12		11		77		32
TAAE	19		8		61		8
TACE	33		42		90		92
TAME	29		31		111		98
Other equity method investees	3		2		7		7
Total	$	112	$	103	$	401	$	254

Related party purchases from Centennial consist primarily of refinery feedstocks and refined product transportation costs. Related party purchases from Explorer consist primarily of refined product transportation costs. Related party purchases from LOCAP, LOOP and other equity method investees consist primarily of crude oil transportation costs and crude oil purchases. Related party purchases from TAAE, TACE and TAME consist of ethanol purchases.

Receivables from related parties, which are included in receivables, less allowance for doubtful accounts on the consolidated balance sheets, were as follows:



(In millions)	September 30, 2014		December 31, 2013
Centennial	$	2	$	1
TAME	2		1
Total	$	4	$	2

We also had a long-term receivable from Centennial of $1 million at September 30, 2014 and of $2 million at December 31, 2013, which is included in other noncurrent assets on the consolidated balance sheets.

Payables to related parties, which are included in accounts payable on the consolidated balance sheets, were as follows:



(In millions)	September 30, 2014		December 31, 2013
Explorer	$	5	$	—
LOCAP	2		2
LOOP	4		3
TAAE	1		2
TACE	2		4
TAME	2		5
Other equity method investees	1		—
Total	$	17	$	16

7. Income per Common Share

We compute basic earnings per share by dividing net income attributable to MPC by the weighted average number of shares of common stock outstanding. Diluted income per share assumes exercise of certain stock-based compensation awards, provided the effect is not anti-dilutive.

Table of Contents

MPC grants certain incentive compensation awards to employees and non-employee directors that are considered to be participating securities. Due to the presence of participating securities, we have calculated our earnings per share using the two-class method.



	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions, except per share data)	2014		2013		2014		2013
Basic earnings per share:
Allocation of earnings:
Net income attributable to MPC	$	672	$	168	$	1,726	$	1,486
Income allocated to participating securities	1		—		3		2
Income available to common stockholders - basic	$	671	$	168	$	1,723	$	1,484
Weighted average common shares outstanding	282		309		288		321
Basic earnings per share	$	2.38	$	0.54	$	5.99	$	4.63
Diluted earnings per share:
Allocation of earnings:
Net income attributable to MPC	$	672	$	168	$	1,726	$	1,486
Income allocated to participating securities	1		—		3		2
Income available to common stockholders - diluted	$	671	$	168	$	1,723	$	1,484
Weighted average common shares outstanding	282		309		288		321
Effect of dilutive securities	2		2		2		2
Weighted average common shares, including dilutive effect	284		311		290		323
Diluted earnings per share	$	2.36	$	0.54	$	5.95	$	4.60

The following table summarizes the shares that were anti-dilutive and, therefore, were excluded from the diluted share calculation.



	Three Months Ended September 30,		Nine Months Ended September 30,
(In millions)	2014	2013	2014	2013
Shares issued under stock-based compensation plans	—	1	—	1

8. Equity

On July 30, 2014, our board of directors approved an additional $2.0 billion share repurchase authorization expiring in July 2016. As of September 30, 2014, our board of directors had approved $8.0 billion in total share repurchase authorizations since January 1, 2012 and we have repurchased a total of $5.59 billion of our common stock, leaving $2.41 billion available for repurchases. Under these authorizations, we have acquired 82 million shares at an average cost per share of $68.41.

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 for the three and nine months ended September 30, 2014 and 2013:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions, except per share data)	2014		2013		2014		2013
Number of shares repurchased^(a)	4		14		17		31
Cash paid for shares repurchased	$	301	$	1,028	$	1,449	$	2,341
Effective average cost per delivered share	$	85.15	$	70.73	$	87.25	$	76.01


^(a)	The nine months ended September 30, 2013 includes one million shares received under the November 2012 accelerated share repurchase program, which were paid for in 2012.

Table of Contents

At September 30, 2014, we had agreements to acquire additional common shares for $9 million, which were settled in early October 2014.

9. Segment Information

We have three reportable segments: Refining & Marketing; Speedway; and Pipeline Transportation. Each of these segments is organized and managed based upon the nature of the products and services it offers.

•

Refining & Marketing – refines crude oil and other feedstocks at our refineries in the Gulf Coast and Midwest regions of the United States, purchases ethanol and refined products for resale and distributes refined products through various means, including barges, terminals and trucks that we own or operate. We sell refined products to wholesale marketing customers domestically and internationally, to buyers on the spot market, to our Speedway segment and to independent entrepreneurs who operate Marathon^® retail outlets.


•	Speedway – with the acquisition of Hess' retail operations effective September 30, 2014, sells transportation fuels and convenience products in retail markets in the Midwest, East Coast and Southeast.


•	Pipeline Transportation – transports crude oil and other feedstocks to our refineries and other locations, delivers refined products to wholesale and retail market areas and includes the aggregated operations of MPLX and MPC’s retained pipeline assets and investments.

On February 1, 2013, we acquired the Galveston Bay Refinery and Related Assets, which are part of the Refining & Marketing and Pipeline Transportation segments. On September 30, 2014, we acquired Hess' Retail Operations and Related Assets, which are part of the Speedway and Refining & Marketing segments. Segment information for the periods prior to each acquisition do not include amounts for these operations. See Note 4.

Segment income represents income from operations attributable to the reportable segments. Corporate administrative expenses and costs related to certain non-operating assets are not allocated to the reportable segments. In addition, certain items that affect comparability (as determined by the chief operating decision maker) are not allocated to the reportable segments.



(In millions)	Refining & Marketing		Speedway		Pipeline Transportation		Total
Three Months Ended September 30, 2014
Revenues:
Customer	$	21,568	$	3,854	$	16	$	25,438
Intersegment^(a)	2,400		2		136		2,538
Segment revenues	$	23,968	$	3,856	$	152	$	27,976
Segment income from operations^(b)	$	971	$	119	$	69	$	1,159
Income from equity method investments	17		—		12		29
Depreciation and amortization^(c)	257		33		20		310
Capital expenditures and investments^(d)(f)	318		2,707		224		3,249



(In millions)	Refining & Marketing		Speedway		Pipeline Transportation		Total
Three Months Ended September 30, 2013
Revenues:
Customer	$	22,481	$	3,755	$	20	$	26,256
Intersegment^(a)	2,439		1		117		2,557
Segment revenues	$	24,920	$	3,756	$	137	$	28,813
Segment income from operations^(b)	$	227	$	102	$	54	$	383
Income from equity method investments	8		—		1		9
Depreciation and amortization^(c)	246		29		19		294
Capital expenditures and investments^(d)	243		65		42		350

Table of Contents



(In millions)	Refining & Marketing		Speedway		Pipeline Transportation		Total
Nine Months Ended September 30, 2014
Revenues:
Customer	$	64,295	$	11,220	$	52	$	75,567
Intersegment^(a)	7,223		4		396		7,623
Segment revenues	$	71,518	$	11,224	$	448	$	83,190
Segment income from operations^(b)	$	2,593	$	271	$	222	$	3,086
Income from equity method investments	76		—		45		121
Depreciation and amortization^(c)	782		90		58		930
Capital expenditures and investments^(d)(f)	731		2,783		418		3,932



(In millions)	Refining & Marketing		Speedway		Pipeline Transportation		Total
Nine Months Ended September 30, 2013
Revenues:
Customer	$	64,245	$	10,964	$	60	$	75,269
Intersegment^(a)	7,072		3		340		7,415
Segment revenues	$	71,317	$	10,967	$	400	$	82,684
Segment income from operations^(b)	$	2,235	$	292	$	163	$	2,690
Income from equity method investments	7		—		9		16
Depreciation and amortization^(c)	734		83		55		872
Capital expenditures and investments^(d)(e)	1,797		177		173		2,147


^(a)	Management believes intersegment transactions were conducted under terms comparable to those with unaffiliated parties.


^(b)	Corporate overhead expenses attributable to MPLX are included in the Pipeline Transportation segment. Corporate overhead expenses are not allocated to the Refining & Marketing and Speedway segments.


^(c)	Differences between segment totals and MPC totals represent amounts related to unallocated items and are included in “Items not allocated to segments” in the reconciliation below.


^(d)	Capital expenditures include changes in capital accruals, acquisitions and investments in affiliates.


^(e)	The Refining & Marketing and Pipeline Transportation segments include $1.29 billion and $70 million, respectively, for the acquisition of the Galveston Bay Refinery and Related Assets. See Note 4.


^(f)	The Speedway and Refining & Marketing segments include $2.63 billion and $54 million, respectively, for the acquisition of Hess' Retail Operations and Related Assets. See Note 4.

The following reconciles segment income from operations to income before income taxes as reported in the consolidated statements of income:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2014			2013			2014			2013
Segment income from operations	$	1,159		$	383		$	3,086		$	2,690
Items not allocated to segments:
Corporate and other unallocated items^(a)(b)	(76		)	(59		)	(204		)	(190		)
Pension settlement expenses^(c)	(21		)	(23		)	(90		)	(83		)
Net interest and other financial income (costs)	(50		)	(47		)	(144		)	(140		)
Income before income taxes	$	1,012		$	254		$	2,648		$	2,277


^(a)	Corporate and other unallocated items consists primarily of MPC’s corporate administrative expenses and costs related to certain non-operating assets.


^(b)	Corporate overhead expenses attributable to MPLX are included in the Pipeline Transportation segment. Corporate overhead expenses are not allocated to the Refining & Marketing and Speedway segments.


^(c)	See Note 20.

Table of Contents

The following reconciles segment capital expenditures and investments to total capital expenditures:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2014		2013		2014		2013
Segment capital expenditures and investments	$	3,249	$	350	$	3,932	$	2,147
Less: Investments in equity method investees	177		75		341		86
Plus: Items not allocated to segments:
Capital expenditures not allocated to segments	22		54		60		106
Capitalized interest	7		7		20		15
Total capital expenditures^(a)(b)	$	3,101	$	336	$	3,671	$	2,182


^(a)	Capital expenditures include changes in capital accruals and acquisitions.


^(b)	See Note 18 for a reconciliation of total capital expenditures to additions to property, plant and equipment as reported in the consolidated statements of cash flows.

The following reconciles customer revenues to sales and other operating revenues (including consumer excise taxes) as reported in the consolidated statements of income:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2014		2013		2014		2013
Customer revenues (as reported above)	$	25,438	$	26,256	$	75,567	$	75,269
Corporate and other unallocated items	—		—		—		(6		)
Sales and other operating revenues (including consumer excise taxes)	$	25,438	$	26,256	$	75,567	$	75,263

Total assets by reportable segment were:



(In millions)	September 30, 2014		December 31, 2013
Refining & Marketing	$	20,207	$	19,573
Speedway	5,203		2,064
Pipeline Transportation	2,329		1,947
Corporate and Other	3,966		4,801
Total consolidated assets	$	31,705	$	28,385

10. Other Items

Net interest and other financial income (costs) was:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2014			2013			2014			2013
Interest:
Interest income	$	2		$	2		$	5		$	7
Interest expense	(56		)	(50		)	(154		)	(147		)
Interest capitalized	7			7			20			15
Total net interest	(47		)	(41		)	(129		)	(125		)
Other:
Net foreign currency gains (losses)	1			(1		)	—			—
Bank service and other fees	(4		)	(5		)	(15		)	(15		)
Total other	(3		)	(6		)	(15		)	(15		)
Net interest and other financial income (costs)	$	(50	)	$	(47	)	$	(144	)	$	(140	)

Table of Contents

11. Income Taxes

The combined federal, state and foreign income tax rate was 33 percent and 32 percent for the three months ended September 30, 2014 and 2013, respectively, and 34 percent for both the nine months ended September 30, 2014 and 2013. The effective tax rate for the three and nine months ended September 30, 2014 and 2013 is slightly less than the U.S. statutory rate of 35 percent primarily due to certain permanent benefit differences, including the domestic manufacturing deduction, partially offset by state and local tax expense.

Prior to the June 30, 2011 spinoff transaction from Marathon Oil Corporation (“Marathon Oil”), we were included in Marathon Oil’s income tax returns for all applicable years. During 2011, we anticipated a future settlement between Marathon Oil and us upon the filing of Marathon Oil’s consolidated U.S. federal and state income tax returns for the period prior to June 30, 2011. During the second quarter of 2013, we settled with Marathon Oil for the 2011 period based on filed tax returns, resulting in a $39 million increase to additional paid-in capital.

We are continuously undergoing examination of our income tax returns, which have been completed for our U.S. federal and state income tax returns through the 2009 and 2003 tax years, respectively. We had $16 million of unrecognized tax benefits as of September 30, 2014. 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.

12. Inventories



(In millions)	September 30, 2014		December 31, 2013
Crude oil and refinery feedstocks	$	2,405	$	1,797
Refined products	2,731		2,367
Materials and supplies	308		425
Merchandise	164		100
Total (at cost)	$	5,608	$	4,689

Inventories are carried at the lower of cost or market value. The cost of inventories of crude oil and refinery feedstocks, refined products and merchandise is determined primarily under the last-in, first-out (“LIFO”) method. There were no liquidations of LIFO inventories for the nine months ended September 30, 2014 and 2013.

13. Property, Plant and Equipment



(In millions)	September 30, 2014		December 31, 2013
Refining & Marketing	$	17,646	$	16,982
Speedway	4,477		2,344
Pipeline Transportation	1,995		1,921
Corporate and Other	594		546
Total	24,712		21,793
Less accumulated depreciation	8,713		7,872
Property, plant and equipment, net	$	15,999	$	13,921

Table of Contents

14. Goodwill

The changes in the carrying amount of goodwill for nine months ended September 30, 2014 were as follows:



(In millions)	Refining & Marketing			Speedway		Pipeline Transportation		Total
Balance as of December 31, 2013	$	551		$	225	$	162	$	938
Acquisition^(a)	—			600		—		600
Disposition	(1		)	—		—		(1		)
Balance as of September 30, 2014	$	550		$	825	$	162	$	1,537


^(a)	See Note 4 for information on the acquisitions.

15. Fair Value Measurements

Fair Values—Recurring

The following tables present assets and liabilities accounted for at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 by fair value hierarchy level. We have elected to offset the fair value amounts recognized for multiple derivative contracts executed with the same counterparty, including any related cash collateral as shown below; however, fair value amounts by hierarchy level are presented on a gross basis in the following tables.



	September 30, 2014
	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	$	87	$	—	$	—	$	(55	)	$	32	$	60
Other assets	2		—		—		N/A			2		—
Total assets at fair value	$	89	$	—	$	—	$	(55	)	$	34	$	60

Commodity derivative instruments, liabilities	$	55	$	—	$	—	$	(55	)	$	—	$	—
Contingent consideration, liability^(c)	—		—		475		N/A			475		—
Total liabilities at fair value	$	55	$	—	$	475	$	(55	)	$	475	$	—



	December 31, 2013
	Fair Value Hierarchy
(In millions)	Level 1		Level 2		Level 3		Netting and Collateral^(a)			Net Carrying Value on Balance Sheet^(b)		Collateral Pledged Not Offset
Commodity derivative instruments, assets	$	21	$	—	$	—	$	(21	)	$	—	$	61
Other assets	2		—		—		N/A			2		—
Total assets at fair value	$	23	$	—	$	—	$	(21	)	$	2	$	61

Commodity derivative instruments, liabilities	$	53	$	—	$	—	$	(53	)	$	—	$	—
Contingent consideration, liability^(c)	—		—		625		N/A			625		—
Total liabilities at fair value	$	53	$	—	$	625	$	(53	)	$	625	$	—


^(a)	Represents the impact of netting assets, liabilities and cash collateral when a legal right of offset exists. As of September 30, 2014 and December 31, 2013, cash collateral of $0 million and $32 million, respectively, was netted with mark-to-market derivative liabilities.


^(b)	We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.


^(c)	Includes $193 million and $159 million classified as current at September 30, 2014 and December 31, 2013, respectively.

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.

Table of Contents

The contingent consideration represents the fair value as of September 30, 2014 of the amount we expect to pay to BP related to the earnout provision for the Galveston Bay Refinery and Related Assets acquisition. See Note 4. The fair value of the contingent consideration was estimated using an income approach and is therefore a Level 3 liability. The amount of cash to be paid under the arrangement is based on both a market-based crack spread and refinery throughput volumes for the months during which the contract applies, as well as established thresholds that cap the annual and total payment. The earnout payment cannot exceed $200 million per year for the first three years of the arrangement or $250 million per year for the last three years of the arrangement, with the total cumulative payment capped at $700 million over the six-year period. Any excess or shortfall from the annual cap for a current year’s earnout calculation will not affect subsequent years’ calculations. The fair value calculation used significant unobservable inputs, including (1) an estimate of refinery throughput volumes; (2) a range of internal and external crack spread forecasts from $14 to $15 per barrel; and (3) a range of risk-adjusted discount rates from five percent to 10 percent. An increase or decrease in crack spread forecasts or refinery throughput volume expectations may result in a corresponding increase or decrease in the fair value. Increases to the fair value as a result of increasing forecasts for both of these unobservable inputs, however, are limited as the earnout payment is subject to annual caps. An increase or decrease in the discount rate may result in a decrease or increase to the fair value, respectively. The fair value of the contingent consideration is reassessed each quarter, with changes in fair value recorded in cost of revenues.

The following is a reconciliation of the beginning and ending balances recorded for liabilities classified as Level 3 in the fair value hierarchy.



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2014			2013			2014			2013
Beginning balance	$	647		$	611		$	625		$	—
Contingent consideration agreement	—			—			—			600
Contingent consideration payment	(180		)	—			(180		)	—
Unrealized (gains) losses included in net income	8			(5		)	30			6
Ending balance	$	475		$	606		$	475		$	606

We did not hold any Level 3 derivative instruments during the three and nine months ended September 30, 2014 and 2013. See Note 16 for the income statement impacts of our derivative instruments.

Fair Values – Nonrecurring

The following table shows the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.



	Nine Months Ended September 30,
	2014				2013
(In millions)	Fair Value		Impairment		Fair Value		Impairment
Property, plant and equipment, net	$	—	$	—	$	1	$	8
Other noncurrent assets	—		11		—		—

Based on the financial and operational status of a company in which we have an interest, we fully impaired our $11 million investment in that company during the second quarter of 2014. Our investment in this company was accounted for using the cost method and was included in our Refining & Marketing segment. The impairment is included in other income on the consolidated statements of income. The fair value of our investment in this cost company was measured using an income approach. This measurement is classified as Level 3.

Due to changing market conditions, we assessed one of our light products terminals for impairment. The terminal is operated by our Refining & Marketing segment. We recorded an impairment charge of $8 million for this terminal in 2013. The impairment is included in depreciation and amortization on the consolidated statements of income. The fair value of the terminal was measured using a market approach based on comparable area property values, which are Level 3 inputs.

Table of Contents

Fair Values – Reported

The following table summarizes financial instruments on the basis of their nature, characteristics and risk at September 30, 2014 and December 31, 2013, excluding the derivative financial instruments and contingent consideration reported above.



	September 30, 2014				December 31, 2013
(In millions)	Fair Value		Carrying Value		Fair Value		Carrying Value
Financial assets:
Investments	$	23	$	2	$	336	$	14
Other	31		29		31		30
Total financial assets	$	54	$	31	$	367	$	44
Financial liabilities:
Long-term debt^(a)	$	6,224	$	5,886	$	3,306	$	3,001
Deferred credits and other liabilities	20		20		21		21
Total financial liabilities	$	6,244	$	5,906	$	3,327	$	3,022


^(a)	Excludes capital leases

Our current assets and liabilities include financial instruments, the most significant of which are trade accounts receivable and payables. We believe the carrying values of our current assets and liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments, (2) our investment-grade credit rating and (3) our historical incurrence of and expected future insignificance of bad debt expense, which includes an evaluation of counterparty credit risk.

Fair values of our financial assets included in investments and other financial assets and of our financial liabilities included in deferred credits and other liabilities are measured primarily using an income approach and most inputs are internally generated, which results in a Level 3 classification. Estimated future cash flows are discounted using a rate deemed appropriate to obtain the fair value. Other financial assets primarily consist of environmental remediation receivables. Deferred credits and other liabilities primarily consist of insurance liabilities and environmental remediation liabilities.

Fair value of fixed-rate long-term debt is measured using a market approach, based upon the average of quotes from major financial institutions and a third-party service for our debt. Because these quotes cannot be independently verified to the market, they are considered Level 3 inputs. Fair value of variable-rate long-term debt approximates the carrying value.

16. Derivatives

For further information regarding the fair value measurement of derivative instruments, including any effect of master netting agreements or collateral, see Note 15. We do not designate any of our commodity derivative instruments as hedges for accounting purposes.

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 and (4) the acquisition of ethanol for blending with refined products.

The following table presents the gross fair values of derivative instruments, excluding cash collateral, and where they appear on the consolidated balance sheets as of September 30, 2014 and December 31, 2013:



	September 30, 2014
(In millions)	Asset