Edgar Filing: Marathon Petroleum Corp

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Smaller reporting company

MPC-2015.03.31-10Q

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 March 31, 2015



¨	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 271,637,136 shares of Marathon Petroleum Corporation common stock outstanding as of April 30, 2015.

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MARATHON PETROLEUM CORPORATION

Form 10-Q

Quarter Ended March 31, 2015

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	24
Item 3. Quantitative and Qualitative Disclosures about Market Risk	42
Item 4. Controls and Procedures	43
Supplementary Statistics (Unaudited)	44

PART II – OTHER INFORMATION
Item 1. Legal Proceedings	47
Item 1A. Risk Factors	47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6. Exhibits	49
Signatures	50

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.

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Part I – Financial Information

Item 1. Financial Statements

Marathon Petroleum Corporation

Consolidated Statements of Income (Unaudited)



	Three Months Ended March 31,
(In millions, except per share data)	2015			2014
Revenues and other income:
Sales and other operating revenues (including consumer excise taxes)	$	17,191		$	23,285
Income from equity method investments	15			35
Net gain on disposal of assets	5			1
Other income	29			24
Total revenues and other income	17,240			23,345
Costs and expenses:
Cost of revenues (excludes items below)	13,044			20,540
Purchases from related parties	76			159
Consumer excise taxes	1,832			1,515
Depreciation and amortization	363			320
Selling, general and administrative expenses	358			346
Other taxes	97			104
Total costs and expenses	15,770			22,984
Income from operations	1,470			361
Net interest and other financial income (costs)	(81		)	(46		)
Income before income taxes	1,389			315
Provision for income taxes	486			108
Net income	903			207
Less net income attributable to noncontrolling interests	12			8
Net income attributable to MPC	$	891		$	199
Per Share Data (See Note 7)
Basic:
Net income attributable to MPC per share	$	3.26		$	0.68
Weighted average shares outstanding	273			293
Diluted:
Net income attributable to MPC per share	$	3.24		$	0.67
Weighted average shares outstanding	275			295
Dividends paid	$	0.50		$	0.42

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

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Marathon Petroleum Corporation

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended March 31,
(In millions)	2015			2014
Net income	$	903		$	207
Other comprehensive income (loss):
Defined benefit postretirement and post-employment plans:
Actuarial changes, net of tax of $5 and $4	8			7
Prior service costs, net of tax of ($5) and ($5)	(8		)	(8		)
Other comprehensive income (loss)	—			(1		)
Comprehensive income	903			206
Less comprehensive income attributable to noncontrolling interests	12			8
Comprehensive income attributable to MPC	$	891		$	198

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

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Marathon Petroleum Corporation

Consolidated Balance Sheets (Unaudited)



(In millions, except share data)	March 31, 2015			December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	2,078		$	1,494
Receivables, less allowance for doubtful accounts of $12 and $13	3,364			4,058
Inventories	5,437			5,642
Other current assets	174			145
Total current assets	11,053			11,339
Equity method investments	902			865
Property, plant and equipment, net	16,241			16,261
Goodwill	1,566			1,566
Other noncurrent assets	420			429
Total assets	$	30,182		$	30,460
Liabilities
Current liabilities:
Accounts payable	$	5,387		$	6,661
Payroll and benefits payable	474			427
Consumer excise taxes payable	455			463
Accrued taxes	933			647
Long-term debt due within one year	776			27
Other current liabilities	321			354
Total current liabilities	8,346			8,579
Long-term debt	5,967			6,610
Deferred income taxes	2,019			2,014
Defined benefit postretirement plan obligations	1,123			1,099
Deferred credits and other liabilities	747			768
Total liabilities	18,202			19,070
Commitments and contingencies (see Note 21)
Equity
MPC stockholders’ equity:
Preferred stock, no shares issued and outstanding (par value $0.01 per share, 30 million shares authorized)	—			—
Common stock:
Issued – 364 million and 363 million shares (par value $0.01 per share, 1 billion shares authorized)	4			4
Held in treasury, at cost – 92 million and 89 million shares	(6,512		)	(6,299		)
Additional paid-in capital	9,890			9,844
Retained earnings	8,269			7,515
Accumulated other comprehensive loss	(313		)	(313		)
Total MPC stockholders’ equity	11,338			10,751
Noncontrolling interests	642			639
Total equity	11,980			11,390
Total liabilities and equity	$	30,182		$	30,460

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

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Marathon Petroleum Corporation

Consolidated Statements of Cash Flows (Unaudited)



	Three Months Ended March 31,
(In millions)	2015			2014
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income	$	903		$	207
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	363			320
Pension and other postretirement benefits, net	26			82
Deferred income taxes	(2		)	(14		)
Net gain on disposal of assets	(5		)	(1		)
Equity method investments, net	2			6
Changes in the fair value of derivative instruments	(12		)	(25		)
Changes in:
Current receivables	691			139
Inventories	205			(1,000		)
Current accounts payable and accrued liabilities	(939		)	1,011
All other, net	(42		)	41
Net cash provided by operating activities	1,190			766
Investing activities:
Additions to property, plant and equipment	(389		)	(267		)
Disposal of assets	11			2
Investments – acquisitions, loans and contributions	(42		)	(123		)
– redemptions, repayments and return of capital	1			—
All other, net	31			28
Net cash used in investing activities	(388		)	(360		)
Financing activities:
Long-term debt – borrowings	528			270
– repayments	(421		)	(6		)
Debt issuance costs	(4		)	—
Issuance of common stock	21			13
Common stock repurchased	(209		)	(689		)
Dividends paid	(136		)	(123		)
Distributions to noncontrolling interests	(9		)	(6		)
All other, net	12			9
Net cash used in financing activities	(218		)	(532		)
Net increase (decrease) in cash and cash equivalents	584			(126		)
Cash and cash equivalents at beginning of period	1,494			2,292
Cash and cash equivalents at end of period	$	2,078		$	2,166

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

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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, 2013	$	4	$	(4,155	)	$	9,768	$	5,507		$	(204	)	$	412		$	11,332
Net income	—		—			—		199			—			8			207
Dividends declared	—		—			—		(124		)	—			—			(124		)
Distributions to noncontrolling interests	—		—			—		—			—			(6		)	(6		)
Other comprehensive income	—		—			—		—			(1		)	—			(1		)
Shares repurchased	—		(689		)	—		—			—			—			(689		)
Shares issued (returned) – stock-based compensation	—		(5		)	14		—			—			—			9
Stock-based compensation	—		—			21		—			—			—			21
Other	—		—			—		9			—			—			9
Balance as of March 31, 2014	$	4	$	(4,849	)	$	9,803	$	5,591		$	(205	)	$	414		$	10,758
Balance as of December 31, 2014	$	4	$	(6,299	)	$	9,844	$	7,515		$	(313	)	$	639		$	11,390
Net income	—		—			—		891			—			12			903
Dividends declared	—		—			—		(137		)	—			—			(137		)
Distributions to noncontrolling interests	—		—			—		—			—			(9		)	(9		)
Shares repurchased	—		(209		)	—		—			—			—			(209		)
Shares issued (returned) – stock-based compensation	—		(4		)	21		—			—			—			17
Stock-based compensation	—		—			25		—			—			—			25
Balance as of March 31, 2015	$	4	$	(6,512	)	$	9,890	$	8,269		$	(313	)	$	642		$	11,980

(Shares in millions)	Common Stock		Treasury Stock
Balance as of December 31, 2013	362		(65		)
Shares repurchased	—		(8		)
Shares issued – stock-based compensation	1		—
Balance as of March 31, 2014	363		(73		)
Balance as of December 31, 2014	363		(89		)
Shares repurchased	—		(3		)
Shares issued – stock-based compensation	1		—
Balance as of March 31, 2015	364		(92		)

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

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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 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 its subsidiaries (“Speedway”) 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, 2014. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year.

2. Accounting Standards

Recently Adopted

In June 2014, the Financial Accounting Standards Board (“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 and was adopted in the first quarter of 2015. In addition, the portion to amend the consolidation model that eliminates the special provisions in the variable interest entity ("VIE") rules for assessing the sufficiency of the equity of a DSE is effective in the first quarter of 2016. Adoption of this standard update in the first quarter of 2015 and 2016 has not and is not expected to have an 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 was effective prospectively for annual periods beginning on or after December 15, 2014, and interim periods within those years. Adoption of this standards update in the first quarter of 2015 did not have an impact on our consolidated results of operations, financial position or cash flows.

Not Yet Adopted

In April 2015, the FASB issued an accounting standards update clarifying whether a customer should account for a cloud computing arrangement as an acquisition of a software license or as a service arrangement by providing characteristics that a cloud computing arrangement must have in order to be accounted for as a software license acquisition. The change is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. Retrospective or prospective application is allowed and early adoption is permitted. Adoption of this standard is not expected to have a material impact on our consolidated results of operations, financial position or cash flows.

In April 2015, the FASB issued an update to simplify the presentation of debt issuance costs. The update requires that all debt issue costs be presented on the balance sheet as a direct reduction of the liability. The change is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. Retrospective application is required and early adoption is permitted. Adoption of this standard is not expected to have a material impact on our consolidated results of operations, financial position or cash flows.

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In February 2015, the FASB issued an accounting standards update making targeted changes to the current consolidation guidance. The new standard changes the way certain decisions are made related to substantive rights, related parties, and decision making fees when applying the VIE consolidation model and eliminates certain guidance for limited partnerships and similar entities under the voting interest consolidation model. The update is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. Early adoption is permitted. At this point, we have not determined the impact of the new standards update on our consolidated financial statements and related disclosures.

In August 2014, the 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 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, we have not determined the impact of the new standard on our consolidated financial statements.

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.

As of March 31, 2015, we owned a 71.5 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.

On March 1, 2014, we sold MPLX a 13 percent interest in MPLX Pipe Line Holdings LP (“Pipe Line Holdings”) for $310 million. MPLX financed this transaction with $40 million of cash on-hand and $270 million of borrowings on its bank revolving credit facility.

On December 1, 2014, we sold and contributed interests in Pipe Line Holdings totaling 30.5 percent to MPLX for $600 million in cash and 2.9 million MPLX common units valued at $200 million. MPLX financed the cash portion of this transaction with $600 million of borrowings on its bank revolving credit facility.

The sales and contribution of our interests in Pipe Line Holdings to MPLX resulted in a change in our ownership in Pipe Line Holdings, but not a change in control. We accounted for them as transactions between entities under common control and did not record a gain or loss.

On December 8, 2014, MPLX completed a public offering of 3.5 million common units at a price to the public of $66.68 per common unit, for aggregate net proceeds of $221 million. MPLX used the net proceeds from this offering to repay borrowings under its bank revolving credit facility and for general partnership purposes. On December 10, 2014, we exercised our right to maintain our two percent general partner interest in MPLX by purchasing 130 thousand general partner units for $9 million.

On February 12, 2015, MPLX completed a public offering of $500 million aggregate principal amount of four percent unsecured senior notes due February 15, 2025 (the “MPLX Senior Notes”). See Note 16 for more information.

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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 provided for an adjustment for working capital, which was finalized for $3 million during the first quarter of 2015, reducing our total consideration. This amount is consistent with the estimate we used in prior periods and therefore, the fair value of the assets acquired and liabilities assumed remain unchanged from year-end 2014.

The purchase price allocation resulted in the recognition of $629 million in goodwill by our Speedway segment. The goodwill 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 by utilizing Speedway’s marketing approach at the acquired locations. We also expect strategic benefits from the financial and operational scale we expect to realize across our entire retail network. The goodwill is deductible for tax purposes.

The following unaudited pro forma financial information presents consolidated results assuming 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 acquisition and is not necessarily indicative of the results of future operations.



	Three Months Ended March 31,
(In millions, except per share data)	2014
Sales and other operating revenues (including consumer excise taxes)	$	26,017
Net income attributable to MPC	182
Net income attributable to MPC per share – basic	$	0.62
Net income attributable to MPC per share – diluted	0.62

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, as well as the related income tax effects.

Acquisition of Biodiesel Facility

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

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

Assuming the acquisition 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 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 three months ended March 31, 2015, we made contributions of $37 million to Illinois Extension Pipeline to fund our portion of the construction costs for the SAX project. We have contributed $157 million since project inception. We account for our ownership interest in Illinois Extension Pipeline as an equity method investment. See Note 21 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.

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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 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 March 31, 2015 was $157 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 $1 million and $2 million for the three months ended March 31, 2015 and 2014, respectively.

Purchases from related parties were as follows:



	Three Months Ended March 31,
(In millions)	2015		2014
Centennial	$	—	$	9
Explorer	7		13
LOCAP	5		5
LOOP	13		53
TAAE	13		16
TACE	16		27
TAME	20		34
Other equity method investees	2		2
Total	$	76	$	159

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.

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



(In millions)	March 31, 2015		December 31, 2014
Centennial	$	—	$	2
Explorer	—		2
TAME	—		3
Other equity method investees	1		—
Total	$	1	$	7

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



(In millions)	March 31, 2015		December 31, 2014
Explorer	$	3	$	3
LOCAP	2		2
LOOP	5		4
TAAE	1		2
TACE	1		2
TAME	2		5
Total	$	14	$	18

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. The number of shares that were anti-dilutive was immaterial in the three months ended March 31, 2015 and 2014.

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 March 31,
(In millions, except per share data)	2015		2014
Basic earnings per share:
Allocation of earnings:
Net income attributable to MPC	$	891	$	199
Income allocated to participating securities	1		—
Income available to common stockholders – basic	$	890	$	199
Weighted average common shares outstanding	273		293
Basic earnings per share	$	3.26	$	0.68
Diluted earnings per share:
Allocation of earnings:
Net income attributable to MPC	$	891	$	199
Income allocated to participating securities	1		—
Income available to common stockholders – diluted	$	890	$	199
Weighted average common shares outstanding	273		293
Effect of dilutive securities	2		2
Weighted average common shares, including dilutive effect	275		295
Diluted earnings per share	$	3.24	$	0.67

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8. Equity

As of March 31, 2015, our board of directors had approved $8.0 billion in total share repurchase authorizations. Since January 1, 2012, we have repurchased a total of $6.48 billion of our common stock, leaving $1.52 billion available for repurchases. Through March 31, 2015, we have acquired 92 million shares at an average cost per share of $70.95 under these authorizations.

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 months ended March 31, 2015 and 2014:



	Three Months Ended March 31,
(In millions, except per share data)	2015		2014
Number of shares repurchased	2		8
Cash paid for shares repurchased	$	209	$	689
Effective average cost per delivered share	$	95.03	$	87.60

At March 31, 2015, we had agreements to acquire 88,394 common shares for $9 million, which were settled in early April 2015.

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 – sells transportation fuels and convenience products in retail markets in the Midwest, East Coast and Southeast regions of the United States.


•	Pipeline Transportation – transports crude oil and other feedstocks to our refineries and other locations, delivers refined products to wholesale and retail market areas. This segment includes the aggregated operations of MPLX.

On September 30, 2014, we acquired Hess’ Retail Operations and Related Assets, substantially all of which are part of the Speedway segment. Segment information for the periods prior to the 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 March 31, 2015
Revenues:
Customer	$	12,644	$	4,531	$	16	$	17,191
Intersegment^(a)	2,733		—		134		2,867
Segment revenues	$	15,377	$	4,531	$	150	$	20,058
Segment income from operations^(b)	$	1,316	$	168	$	67	$	1,551
Income from equity method investments	6		—		9		15
Depreciation and amortization^(c)	267		63		20		350
Capital expenditures and investments^(d)	229		45		81		355

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(In millions)	Refining & Marketing		Speedway		Pipeline Transportation		Total
Three Months Ended March 31, 2014
Revenues:
Customer	$	19,810	$	3,458	$	17	$	23,285
Intersegment^(a)	2,233		1		129		2,363
Segment revenues	$	22,043	$	3,459	$	146	$	25,648
Segment income from operations^(b)	$	362	$	58	$	72	$	492
Income from equity method investments	24		—		11		35
Depreciation and amortization^(c)	261		28		19		308
Capital expenditures and investments^(d)	178		32		130		340


^(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.

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



	Three Months Ended March 31,
(In millions)	2015			2014
Segment income from operations	$	1,551		$	492
Items not allocated to segments:
Corporate and other unallocated items^(a)(b)	(80		)	(67		)
Pension settlement expenses^(c)	(1		)	(64		)
Net interest and other financial income (costs)	(81		)	(46		)
Income before income taxes	$	1,389		$	315


^(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 19.

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



	Three Months Ended March 31,
(In millions)	2015		2014
Segment capital expenditures and investments	$	355	$	340
Less: Investments in equity method investees	42		123
Plus: Items not allocated to segments:
Capital expenditures not allocated to segments	21		25
Capitalized interest	8		6
Total capital expenditures^(a)	$	342	$	248


^(a)	Capital expenditures include changes in capital accruals. See Note 17 for a reconciliation of total capital expenditures to additions to property, plant and equipment as reported in the consolidated statements of cash flows.

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10. Other Items

Net interest and other financial income (costs) was:



	Three Months Ended March 31,
(In millions)	2015			2014
Interest income	$	1		$	2
Interest expense	(80		)	(49		)
Interest capitalized	8			6
Other financial costs	(10		)	(5		)
Net interest and other financial income (costs)	$	(81	)	$	(46	)

11. Income Taxes

The combined federal, state and foreign income tax rate was 35 percent and 34 percent for the three months ended March 31, 2015 and 2014, respectively. The effective tax rate for the three months ended March 31, 2015 and 2014 is equivalent to or 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.

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 $15 million of unrecognized tax benefits as of March 31, 2015. 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 21 for indemnification information.

12. Inventories



(In millions)	March 31, 2015		December 31, 2014
Crude oil and refinery feedstocks	$	2,107	$	2,219
Refined products	2,862		2,955
Materials and supplies	302		302
Merchandise	166		166
Total (at cost)	$	5,437	$	5,642

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. During the three months ended March 31, 2015, we recorded LIFO liquidations caused by permanently decreased levels in refined products inventory volumes. Cost of revenues increased and income from operations decreased by approximately $30 million for the three months ended March 31, 2015 as a result of the LIFO liquidations. There were no liquidations of LIFO inventories for the three months ended March 31, 2014.

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13. Property, Plant and Equipment



(In millions)	March 31, 2015		December 31, 2014
Refining & Marketing	$	18,225	$	18,001
Speedway	4,674		4,639
Pipeline Transportation	2,083		2,044
Corporate and Other	639		618
Total	25,621		25,302
Less accumulated depreciation	9,380		9,041
Property, plant and equipment, net	$	16,241	$	16,261

Included in construction in progress at March 31, 2015 is $136 million of costs associated with a residual fuel hydrocracker project at our Garyville refinery, intended to increase margins by upgrading residual fuel to ultra-low sulfur diesel and gas oil. We are deferring a final investment decision on this project as we further evaluate the implications of current market conditions on the project. If a decision is made to not pursue this project, there could be a future impairment of the costs incurred for the project.

14. Fair Value Measurements

Fair Values—Recurring

The following tables present assets and liabilities accounted for at fair value on a recurring basis as of March 31, 2015 and December 31, 2014 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.



	March 31, 2015
	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	$	94	$	—	$	—	$	(66	)	$	28	$	40
Other assets	2		—		—		N/A			2		—
Total assets at fair value	$	96	$	—	$	—	$	(66	)	$	30	$	40

Commodity derivative instruments, liabilities	$	79	$	—	$	—	$	(79	)	$	—	$	—
Contingent consideration, liability^(c)	—		—		490		N/A			490		—
Total liabilities at fair value	$	79	$	—	$	490	$	(79	)	$	490	$	—

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	December 31, 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	$	317	$	—	$	—	$	(258	)	$	59	$	—
Other assets	2		—		—		N/A			2		—
Total assets at fair value	$	319	$	—	$	—	$	(258	)	$	61	$	—

Commodity derivative instruments, liabilities	$	180	$	—	$	—	$	(180	)	$	—	$	—
Contingent consideration, liability^(c)	—		—		478		N/A			478		—
Total liabilities at fair value	$	180	$	—	$	478	$	(180	)	$	478	$	—


^(a)	Represents the impact of netting assets, liabilities and cash collateral when a legal right of offset exists. As of March 31, 2015, cash collateral of $13 million was netted with the mark-to-market derivative liabilities. As of December 31, 2014, $78 million was netted with mark-to-market derivative assets.


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


^(c)	Includes $189 million and $174 million classified as current at March 31, 2015 and December 31, 2014, 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.

The contingent consideration represents the fair value as of March 31, 2015 and December 31, 2014 of the amount we expect to pay to BP related to the earnout provision associated with our 2013 acquisition of BP’s refinery in Texas City, Texas and related logistics and marketing assets. We refer to these assets as the “Galveston Bay Refinery and Related Assets.” 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 earnout 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 commencing in 2014. 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 monthly refinery throughput volumes; (2) a range of internal and external monthly crack spread forecasts from $9 to $18 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.

In 2015, we expect to pay BP approximately $189 million for the second year’s contingent earnout. We paid BP $180 million in the third quarter of 2014 for the first year’s contingent earnout.

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 March 31,
(In millions)	2015		2014
Beginning balance	$	478	$	625
Unrealized and realized losses included in net income	12		14
Ending balance	$	490	$	639

We did not hold any Level 3 derivative instruments during the three months ended March 31, 2015 and 2014. See Note 15 for the income statement impacts of our derivative instruments.

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Fair Values – Reported

The following table summarizes financial instruments on the basis of their nature, characteristics and risk at March 31, 2015 and December 31, 2014, excluding the derivative financial instruments and contingent consideration reported above.



	March 31, 2015				December 31, 2014
(In millions)	Fair Value		Carrying Value		Fair Value		Carrying Value
Financial assets:
Investments	$	27	$	2	$	26	$	2
Other	31		30		32		32
Total financial assets	$	58	$	32	$	58	$	34
Financial liabilities:
Long-term debt^(a)	$	6,843	$	6,377	$	6,571	$	6,265
Deferred credits and other liabilities	20		20		17		17
Total financial liabilities	$	6,863	$	6,397	$	6,588	$	6,282


^(a)	Excludes capital leases, however, includes amount classified as short-term debt.

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.

15. Derivatives

For further information regarding the fair value measurement of derivative instruments, including any effect of master netting agreements or collateral, see Note 14. 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 March 31, 2015 and December 31, 2014:



	March 31, 2015
(In millions)	Asset		Liability		Balance Sheet Location
Commodity derivatives	$	94	$	79	Other current assets

	December 31, 2014
(In millions)	Asset		Liability		Balance Sheet Location
Commodity derivatives	$	317	$	180	Other current assets

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The table below summarizes open commodity derivative contracts as of March 31, 2015.



	Position	Total Barrels (In thousands)
Crude oil^(a)
Exchange-traded	Long	11,454
Exchange-traded	Short	(23,733	)
Refined Products^(b)
Exchange-traded	Long	3,378
Exchange-traded	Short	(2,402	)


^(a)	96 percent of these contracts expire in the second quarter of 2015.


^(b)	100 percent of these contracts expire in the second quarter of 2015.

The following table summarizes the effect of all commodity derivative instruments in our consolidated statements of income:



	Gain (Loss)
(In millions)	Three Months Ended March 31,
Income Statement Location	2015		2014
Sales and other operating revenues	$	14	$	10
Cost of revenues	45		(61		)
Total	$	59	$	(51	)

16. Debt

Our outstanding borrowings at March 31, 2015 and December 31, 2014 consisted of the following:



(In millions)	March 31, 2015			December 31, 2014
Marathon Petroleum Corporation:
Revolving credit agreement due 2017	$	—		$	—
Term loan agreement due 2019	700			700
3.500% senior notes due March 1, 2016	750			750
5.125% senior notes due March 1, 2021	1,000			1,000
3.625% senior notes due September 15, 2024	750			750
6.500% senior notes due March 1, 2041	1,250			1,250
4.750% senior notes due September 15, 2044	800			800
5.000% senior notes due September 15, 2054	400			400
Consolidated subsidiaries:
Capital lease obligations due 2015-2028	366			372
MPLX bank revolving credit facility due 2019	—			385
MPLX term loan facility due 2019	250			250
MPLX 4.000% senior notes due February 15, 2025	500			—
Trade receivables securitization facility due 2016	—			—
Total	6,766			6,657
Unamortized discount	(28		)	(26		)
Fair value adjustments^(a)	5			6
Amounts due within one year	(776		)	(27		)
Total long-term debt due after one year	$	5,967		$	6,610


^(a)	The $20 million gain on the termination of our interest rate swap agreements in 2012 is being amortized over the remaining life of the 3.50 percent senior notes.

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MPLX Senior Notes – On February 12, 2015, MPLX completed a public offering of $500 million aggregate principal amount of MPLX Senior Notes, the net proceeds of which were approximately $495 million, after deducting underwriting discounts. The net proceeds of this offering were used to repay the amounts outstanding under the MPLX revolving credit agreement (the “MPLX Credit Agreement”), as well as for general partnership purposes. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2015.

There were no borrowings or letters of credit outstanding under the MPC revolving credit facility or the trade receivables securitization facility at March 31, 2015. As of March 31, 2015, eligible trade receivables supported available borrowings of $978 million under the $1.3 billion trade receivables facility. During the three months ended March 31, 2015, MPLX borrowed $30 million under the MPLX Credit Agreement at an average interest rate of 1.5 percent, per annum, and repaid $415 million of these borrowings. At March 31, 2015, MPLX had no borrowings and no letters of credit outstanding under the MPLX Credit Agreement, resulting in total unused loan availability of $1 billion, or 100 percent of the borrowing capacity.

17. Supplemental Cash Flow Information



	Three Months Ended March 31,
(In millions)	2015		2014
Net cash provided by operating activities included:
Interest paid (net of amounts capitalized)	$	128	$	80
Net income taxes paid to taxing authorities	160		5

The consolidated statements of cash flows exclude changes to the consolidated balance sheets that did not affect cash. The following is a reconciliation of additions to property, plant and equipment to total capital expenditures:



	Three Months Ended March 31,
(In millions)	2015			2014
Additions to property, plant and equipment	$	389		$	267
Decrease in capital accruals	(47		)	(19		)
Total capital expenditures	$	342		$	248

18. Accumulated Other Comprehensive Loss

The following table shows the changes in accumulated other comprehensive loss by component. Amounts in parentheses indicate debits.



(In millions)	Pension Benefits			Other Benefits			Gain on Cash Flow Hedge		Workers Compensation		Total
Balance as of December 31, 2013	$	(161	)	$	(50	)	$	4	$	3	$	(204	)
Other comprehensive income (loss) before reclassifications	(43		)	1			—		—		(42		)
Amounts reclassified from accumulated other comprehensive loss:
Amortization – prior service credit^(a)	(12		)	(1		)	—		—		(13		)
– actuarial loss^(a)	13			1			—		—		14
– settlement loss^(a)	64			—			—		—		64
Tax effect	(24		)	—			—		—		(24		)
Other comprehensive income (loss)	(2		)	1			—		—		(1		)
Balance as of March 31, 2014	$	(163	)	$	(49	)	$	4	$	3	$	(205	)

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(In millions)	Pension Benefits			Other Benefits			Gain on Cash Flow Hedge		Workers Compensation		Total
Balance as of December 31, 2014	$	(217	)	$	(104	)	$	4	$	4	$	(313	)
Other comprehensive loss before reclassifications	(1		)	(1		)	—		—		(2		)
Amounts reclassified from accumulated other comprehensive loss:
Amortization – prior service credit^(a)	(12		)	(1		)	—		—		(13		)
– actuarial loss^(a)	13			3			—		—		16
– settlement loss^(a)	1			—			—		—		1
Tax effect	(1		)	(1		)	—		—		(2		)
Other comprehensive income (loss)	—			—			—		—		—
Balance as of March 31, 2015	$	(217	)	$	(104	)	$	4	$	4	$	(313	)


^(a)	These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 19.

19. Defined Benefit Pension and Other Postretirement Plans

The following summarizes the components of net periodic benefit costs:



	Three Months Ended March 31,
	Pension Benefits						Other Benefits
(In millions)	2015			2014			2015			2014
Components of net periodic benefit cost:
Service cost	$	23		$	23		$	8		$	7
Interest cost	18			20			8			8
Expected return on plan assets	(26		)	(28		)	—			—
Amortization – prior service credit	(12		)	(12		)	(1		)	(1		)
– actuarial loss	13			13			3			1
– settlement loss	1			64			—			—
Net periodic benefit cost	$	17		$	80		$	18		$	15

During the three months ended March 31, 2015, we made no contributions to our funded pension plans. We have no required funding for 2015, but may make voluntary contributions at our discretion. Current benefit payments related to unfunded pension and other postretirement benefit plans were $4 million and $5 million, respectively, during the three months ended March 31, 2015.

During the three months ended March 31, 2015 and 2014, we determined that lump sum payments to employees retiring in the respective years will exceed the plans’ total service and interest costs for the year. Settlement losses are required to be recorded when lump sum payments exceed total service and interest costs. As a result, during the three months ended March 31, 2015 and 2014, we recorded pension settlement expenses of $1 million and $64 million related to our lump sum payments made during the first three months of 2015 and 2014, respectively.

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20. Stock-Based Compensation Plans

Stock Option Awards

The following table presents a summary of our stock option award activity for the three months ended March 31, 2015:



	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2014	4,751,438		$	45.47
Granted	354,001		101.78
Exercised	(577,831	)	36.13
Forfeited, canceled or expired	(24,383	)	79.69
Outstanding at March 31, 2015	4,503,225		50.91

The grant date fair value of stock option awards granted during the three months ended March 31, 2015 was $27.00 per share. The fair value of stock options granted to our employees is estimated on the date of the grant using the Black Scholes option-pricing model, which employs various assumptions.

Restricted Stock Awards

The following table presents a summary of restricted stock award activity for the three months ended March 31, 2015:



	Shares of Restricted Stock (“RS”)				Restricted Stock Units (“RSU”)
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Units		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2014	515,073		$	77.23	411,093		$	37.30
Granted	47,969		101.57		6,204		93.19
RS’s Vested/RSU’s Issued	(68,011	)	63.45		—		—
Forfeited	(15,374	)	77.07		(425	)	89.54
Outstanding at March 31, 2015	479,657		81.63		416,872		38.08

Performance Unit Awards

The following table presents a summary of the activity for performance unit awards to be settled in shares for the three months ended March 31, 2015:



	Number of Units		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2014	5,791,825		$	0.88
Granted	2,389,450		0.95
Settled	(2,035,833	)	0.85
Outstanding at March 31, 2015	6,145,442		0.92

The performance unit awards granted during the three months ended March 31, 2015 have a grant date fair value of $0.95 per unit, as calculated using a Monte Carlo valuation model.

MPLX Awards

During the three months ended March 31, 2015, MPLX granted equity-based compensation awards under the MPLX LP 2012 Incentive Compensation Plan. The compensation expense for these awards is not material to our consolidated financial statements.

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21. Commitments and Contingencies

We are the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Some of these matters are discussed below. For matters for which we have not recorded an accrued liability, we are unable to estimate a range of possible loss because the issues involved have not been fully developed through pleadings and discovery. However, the ultimate resolution of some of these contingencies could, individually or in the aggregate, be material.

Environmental matters—We are subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites and certain other locations including presently or formerly owned or operated retail marketing sites. Penalties may be imposed for noncompliance.

At March 31, 2015 and December 31, 2014, accrued liabilities for remediation totaled $177 million and $185 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties if any that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in clean-up efforts related to underground storage tanks at presently or formerly owned or operated retail marketing sites, was $66 million and $67 million at March 31, 2015 and December 31, 2014, respectively.

We are involved in a number of environmental enforcement matters arising in the ordinary course of business. While the outcome and impact on us cannot be predicted with certainty, management believes the resolution of these environmental matters will not, individually or collectively, have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Lawsuits—In May 2007, the Kentucky attorney general filed a lawsuit against us and Marathon Oil in state court in Franklin County, Kentucky for alleged violations of Kentucky’s emergency pricing and consumer protection laws following Hurricanes Katrina and Rita in 2005. The lawsuit alleges that we overcharged customers by $89 million during September and October 2005. The complaint seeks disgorgement of these sums, as well as penalties, under Kentucky’s emergency pricing and consumer protection laws. We are vigorously defending this litigation. We believe that this is the first lawsuit for damages and injunctive relief under the Kentucky emergency pricing laws to progress this far and it contains many novel issues. In May 2011, the Kentucky attorney general amended his complaint to include a request for immediate injunctive relief as well as unspecified damages and penalties related to our wholesale gasoline pricing in April and May 2011 under statewide price controls that were activated by the Kentucky governor on April 26, 2011 and which have since expired. The court denied the attorney general’s request for immediate injunctive relief, and the remainder of the 2011 claims likely will be resolved along with those dating from 2005. If the lawsuit is resolved unfavorably in its entirety, it could materially impact our consolidated results of operations, financial position or cash flows. However, management does not believe the ultimate resolution of this litigation will have a material adverse effect.

We are a defendant in a number of other lawsuits and other proceedings arising in the ordinary course of business. While the ultimate outcome and impact to us cannot be predicted with certainty, we believe that the resolution of these other lawsuits and proceedings will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Guarantees—We have provided certain guarantees, direct and indirect, of the indebtedness of other companies. Under the terms of most of these guarantee arrangements, we would be required to perform should the guaranteed party fail to fulfill its obligations under the specified arrangements. In addition to these financial guarantees, we also have various performance guarantees related to specific agreements.

Guarantees related to indebtedness of equity method investees—We hold interests in an offshore oil port, LOOP, and a crude oil pipeline system, LOCAP. Both LOOP and LOCAP have secured various project financings with throughput and deficiency agreements. Under the agreements, we are required to advance funds if the investees are unable to service their debt. Any such advances are considered prepayments of future transportation charges. The duration of the agreements vary but tend to follow the terms of the underlying debt, which extend through 2037. Our maximum potential undiscounted payments under these agreements for the debt principal totaled $172 million as of March 31, 2015.

We hold an interest in a refined products pipeline through our investment in Centennial, and have guaranteed our portion of the payment of Centennial’s principal, interest and prepayment costs, if applicable, under a Master Shelf Agreement, which is scheduled to expire in 2024. The guarantee arose in order for Centennial to obtain adequate financing. Our maximum potential undiscounted payments under this agreement for debt principal totaled $37 million as of March 31, 2015.

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Marathon Oil indemnifications—In conjunction with our spinoff from Marathon Oil, we have entered into arrangements with Marathon Oil providing indemnities and guarantees with recorded values of $2 million as of March 31, 2015, which consist of unrecognized tax benefits related to MPC, its consolidated subsidiaries and the refining, marketing and transportation business operations prior to our spinoff which are not already reflected in the unrecognized tax benefits described in Note 11, and other contingent liabilities Marathon Oil may incur related to taxes. Furthermore, the separation and distribution agreement and other agreements with Marathon Oil to effect our spinoff provide for cross-indemnities between Marathon Oil and us. In general, Marathon Oil is required to indemnify us for any liabilities relating to Marathon Oil’s historical oil and gas exploration and production operations, oil sands mining operations and integrated gas operations, and we are required to indemnify Marathon Oil for any liabilities relating to Marathon Oil’s historical refining, marketing and transportation operations. The terms of these indemnifications are indefinite and the amounts are not capped.

Other guarantees—We have entered into other guarantees with maximum potential undiscounted payments totaling $82 million as of March 31, 2015, which primarily consist of a commitment to contribute cash to an equity method investee for certain catastrophic events, up to $50 million per event, in lieu of procuring insurance coverage and leases of assets containing general lease indemnities and guaranteed residual values.

General guarantees associated with dispositions – Over the years, we have sold various assets in the normal course of our business. Certain of the related agreements contain performance and general guarantees, including guarantees regarding inaccuracies in representations, warranties, covenants and agreements, and environmental and general indemnifications that require us to perform upon the occurrence of a triggering event or condition. These guarantees and indemnifications are part of the normal course of selling assets. We are typically not able to calculate the maximum potential amount of future payments that could be made under such contractual provisions because of the variability inherent in the guarantees and indemnities. Most often, the nature of the guarantees and indemnities is such that there is no appropriate method for quantifying the exposure because the underlying triggering event has little or no past experience upon which a reasonable prediction of the outcome can be based.

Contractual commitments—At March 31, 2015, our contractual commitments to acquire property, plant and equipment and advance funds to equity method investees totaled $2.0 billion, which includes $520 million of contingent consideration associated with the acquisition of the Galveston Bay Refinery and Related Assets, $703 million for contributions to North Dakota Pipeline Company LLC and $148 million for contributions to Illinois Extension Pipeline. See Note 4 for additional information on our investments in the SAX project. See Note 14 for additional information on the contingent consideration.


22.	Subsequent Events

On April 29, 2015, our board of directors authorized the sale of its marine business to MPLX. Subject to the approval of the MPLX board of directors, the negotiation of a definitive agreement and the satisfaction of customary closing conditions, the transaction is expected to close in the next several months. Upon completion, we will account for this sale as a transaction between entities under common control and will not record a gain or loss.

On April 29, 2015, our Board of Directors approved a two-for-one stock split in the form of a stock dividend, which will be distributed on June 10, 2015 to shareholders of record at the close of business on May 20, 2015. The total number of authorized shares of common stock and common stock par value per share remain unchanged. The stock split will require retroactive restatement of all historical share and per share data beginning in the second quarter ending June 30, 2015. All share and per share data information included in this report are presented on a pre-split basis. The pro forma basic earnings per share on a post-split basis were $1.63 and $0.34 for the three months ended March 31, 2015 and March 31, 2014, respectively, and diluted earnings per share were $1.62 and $0.34 for the same time periods. The stock is expected to trade on a split-adjusted basis beginning June 11, 2015.

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited financial statements and accompanying footnotes included under Item 1. Financial Statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014.

Management’s Discussion and Analysis of Financial Condition and Results of Operations includes various forward-looking statements concerning trends or events potentially affecting our business. You can identify our forward-looking statements by words such as “anticipate,” “believe,” “estimate,” “objective,” “expect,” “forecast,” “goal,” “intend,” “plan,” “predict,” “project,” “potential,” “seek,” “target,” “could,” “may,” “should,” “would,” “will” or other similar expressions that convey the uncertainty of future events or outcomes. In accordance with “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, which could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting our business, see Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2014.

Corporate Overview

We are an independent petroleum refining and marketing, retail marketing and pipeline transportation company. We currently own and operate seven refineries, all located in the United States, with an aggregate crude oil refining capacity of approximately 1.7 million barrels per calendar day. Our refineries supply refined products to resellers and consumers within our market areas, including the Midwest, Gulf Coast, East Coast and Southeast regions of the United States. We distribute refined products to our customers through one of the largest private domestic fleets of inland petroleum product barges, one of the largest terminal operations in the United States, and a combination of MPC-owned and third-party-owned trucking and rail assets. We are one of the largest wholesale suppliers of gasoline and distillates to resellers within our market area.

We have two strong retail brands: Speedway^® and Marathon^®. We believe that Speedway LLC, a wholly-owned subsidiary, operates the second largest chain of company-owned and operated retail gasoline and convenience stores in the United States, with approximately 2,750 convenience stores in 22 states throughout the Midwest, East Coast and Southeast. The Marathon brand is an established motor fuel brand in the Midwest and Southeast regions of the United States, and is available through approximately 5,500 retail outlets operated by independent entrepreneurs in 19 states.

We currently own, lease or have ownership interests in approximately 8,300 miles of crude oil and refined product pipelines to deliver crude oil to our refineries and other locations and refined products to wholesale and retail market areas. We are one of the largest petroleum pipeline companies in the United States on the basis of total volumes delivered.

Our operations consist of three reportable operating 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 seven refineries in the Gulf Coast and Midwest regions of the United States, purchases refined products and ethanol for resale and distributes refined products through various means, including barges, terminals and trucks that we own or operate. We sell refined products to wholesale marketing customers domestically and internationally, buyers on the spot market, our Speedway business segment and to independent entrepreneurs who operate Marathon^® retail outlets.


•	Speedway—sells transportation fuels and convenience products in the retail market in the Midwest, East Coast and Southeast regions of the United States.


•	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.

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Executive Summary

Results

Select results for the three months ended March 31, 2015 and 2014 are reflected in the following table.



	Three Months Ended March 31,
(In millions, except per share data)	2015		2014
Income from Operations by segment
Refining & Marketing	$	1,316	$	362
Speedway	168		58
Pipeline Transportation	67		72
Net income attributable to MPC	$	891	$	199
Net income attributable to MPC per diluted share	$	3.24	$	0.67

Net income attributable to MPC was $891 million, or $3.24 per diluted share, in the first quarter of 2015 compared to $199 million, or $0.67 per diluted share in the first quarter of 2014.

Refining & Marketing segment income from operations increased $954 million in the first quarter of 2015 compared to the first quarter of 2014, primarily due to higher U.S. Gulf Coast (“USGC”) and Chicago crack spreads and lower turnaround and other direct operating costs.

Speedway segment income from operations increased $110 million in the first quarter of 2015 compared to the first quarter of 2014. The increase was primarily due to increases in our gasoline, distillate and merchandise gross margins, partially offset by higher operating expenses, all of which reflect the results of the recently acquired Hess convenience stores.

Pipeline Transportation segment income from operations decreased $5 million in the first quarter of 2015 compared to the the first quarter of 2014, primarily due to an increase in operating expenses and lower pipeline affiliate income, partially offset by higher transportation revenue.

MPLX LP

We own a 71.5 percent interest in MPLX, including the two percent general partner interest. Effective March 1, 2014, we sold MPLX a 13 percent interest in Pipe Line Holdings for $310 million. MPLX financed this transaction with $40 million of cash on-hand and $270 million of borrowings on its bank revolving credit agreement. On December 1, 2014, we sold and contributed interests in Pipe Line Holdings totaling 30.5 percent to MPLX for $600 million in cash and 2.9 million MPLX common units valued at $200 million. MPLX financed the sales portion of this transaction with $600 million of borrowings on its bank revolving credit facility. See Note 3 to the unaudited consolidated financial statements for additional information on MPLX.

On April 20, 2015, MPLX declared a quarterly cash distribution of $0.4100 per unit, totaling $37 million. This distribution will be paid on May 15, 2015. MPC’s portion of this cash distribution is approximately $27 million.

On February 12, 2015, MPLX completed a public offering of $500 million aggregate principal amount of MPLX Senior Notes. See Note 16 to the unaudited consolidated financial statements for more information.

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The following table summarizes the cash distributions we received from MPLX during the first quarter of 2015 and 2014.



	Three Months Ended March 31,
(In millions)	2015		2014
Cash distributions received from MPLX:
General partner distributions, including incentive distribution rights	$	2	$	1
Limited partner distributions	22		17
Total	$	24	$	18

The market value of the 19,980,619 MPLX common units and 36,951,515 MPLX subordinated units we owned at March 31, 2015 was $4.2 billion based on the March 31, 2015 closing unit price of $73.26. Over time, we believe there will be substantial value attributable to our general partnership interests.

Acquisitions and Investments

On September 30, 2014, we acquired from Hess all of its 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” and substantially all of these assets are part of our Speedway segment. 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 mbpd of assured sales from our refining system. The transaction was funded with a combination of debt and available cash. Our financial results and operating statistics for the periods prior to the acquisition do not include amounts for Hess’ Retail Operations and Related Assets. See Note 4 to the unaudited consolidated financial statements for additional information on this acquisition.

In July 2014, we exercised our option to acquire a 35 percent ownership interest in Enbridge Inc.’s SAX pipeline through our investment in Illinois Extension Pipeline. During the three months ended March 31, 2015, we made contributions of $37 million to Illinois Extension Pipeline to fund our portion of the construction costs for the SAX project. We have contributed $157 million since project inception.

In March 2014, we acquired from Chevron Raven Ridge Pipe Line Company an additional seven percent interest in Explorer for $77 million, bringing our ownership interest to 25 percent. Due to this increase in our ownership percentage, we now account for our investment in Explorer using the equity method of accounting and report Explorer as a related party. Explorer owns approximately 1,900 miles of refined products pipeline from Lake Charles, Louisiana to Hammond, Indiana.

See Note 21 to the unaudited consolidated financial statements for information regarding our future contributions to the SAX pipeline project.

Share Repurchases

Liquidity

As of March 31, 2015, we had cash and cash equivalents of $2.08 billion, an unused $2.5 billion revolving credit agreement, and $978 million of availability under our $1.3 billion trade receivables securitization facility based on eligible trade receivables. At March 31, 2015, MPLX had no borrowings and no letters of credit outstanding under its $1 billion credit agreement.

Employees

New collective bargaining agreements for the hourly refinery workers at our Canton, Catlettsburg and Texas City refineries were ratified in March and April, 2015, and are scheduled to expire on January 31, 2019 in Canton and Catlettsburg, and March 31, 2019 in Texas City. The labor agreement for our Galveston Bay refinery expired on January 31, 2015 and no successor agreement has been finalized. The work stoppage continues at this facility.

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Stock Split

On April 29, 2015, our Board of Directors approved a two-for-one stock split in the form of a stock dividend, which will be distributed on June 10, 2015 to shareholders of record at the close of business on May 20, 2015. The total number of authorized common shares and common stock par value remain unchanged. The stock split will require retroactive restatement of all historical shares and per share data beginning in the second quarter ending June 30, 2015. All shares and per share data information included in this report are presented on a pre-split basis. The pro forma basic earnings per share on a post-split basis were $1.63 and $0.34 for the three months ended March 31, 2015 and March 31, 2014, respectively, and diluted earnings per share were $1.62 and $0.34 for the same time periods. The stock is expected to trade on a split-adjusted basis beginning June 11, 2015.

The above discussion contains forward-looking statements with respect to the estimated construction costs and completion of the SAX pipeline project and the share repurchase authorizations. Factors that could affect the estimated construction costs, timing and completion of the SAX pipeline project, include, but are not limited to, availability of materials and labor, unforeseen hazards such as weather conditions, delays in obtaining or conditions imposed by necessary government and third-party approvals and other risks customarily associated with construction projects. Factors that could affect the share repurchase authorizations and the timing of any repurchases include, but are not limited to, business conditions, availability of liquidity and the market price of our common stock. These factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements.

Overview of Segments

Refining & Marketing

Refining & Marketing segment income from operations depends largely on our Refining & Marketing gross margin and refinery throughputs.

Our Refining & Marketing gross margin is the difference between the prices of refined products sold and the costs of crude oil and other charge and blendstocks refined, including the costs to transport these inputs to our refineries and the costs of products purchased for resale. The crack spread is a measure of the difference between market prices for refined products and crude oil, commonly used by the industry as a proxy for the refining margin. Crack spreads can fluctuate significantly, particularly when prices of refined products do not move in the same relationship as the cost of crude oil. As a performance benchmark and a comparison with other industry participants, we calculate Midwest (Chicago) and USGC crack spreads that we believe most closely track our operations and slate of products. Light Louisiana Sweet (“LLS”) prices and a 6-3-2-1 ratio of products (6 barrels of LLS crude oil producing 3 barrels of unleaded regular gasoline, 2 barrels of ultra-low sulfur diesel and 1 barrel of three percent residual fuel oil) are used for these crack-spread calculations.

Refined product prices have historically moved relative to international crude oil prices like Brent crude. In recent years, domestic U.S. crude oils, such as West Texas Intermediate (“WTI”) and LLS, traded at prices less than Brent due to the growth in U.S. crude oil production, logistical constraints and other market factors. These price discounts compared to Brent favorably impacted the LLS 6-3-2-1 crack spread. During 2011 and continuing through the first half of 2013, WTI traded at prices significantly less than Brent and LLS, which favorably impacted our Refining & Marketing gross margin. The differential between WTI and LLS significantly narrowed during the second half of 2013 with a further narrowing broadly continuing until late 2014. Since late 2014, LLS has seen volatile differentials to both WTI and Brent. The spread between domestic crude oils and Brent could narrow if there is a change in existing U.S. energy policy regarding crude oil exports, or if low crude oil prices reduce U.S. crude oil production growth substantially. If either were to occur, it could reduce our Refining & Marketing gross margin.

Our refineries can process significant amounts of sour crude oil, which typically can be purchased at a discount to sweet crude oil. The amount of this discount, the sweet/sour differential, can vary significantly, causing our Refining & Marketing gross margin to differ from crack spreads based on sweet crude oil. In general, a larger sweet/sour differential will enhance our Refining & Marketing gross margin.

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

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



(In millions, after-tax)
LLS 6-3-2-1 crack spread sensitivity^(a)(per $1.00/barrel change)	$	450
Sweet/sour differential sensitivity^(b) (per $1.00/barrel change)	200
LLS-WTI differential sensitivity^(c) (per $1.00/barrel change)	100
Natural gas price sensitivity (per $1.00/million British thermal unit change)	140


^(a)	Weighted 38 percent Chicago and 62 percent USGC LLS 6-3-2-1 crack spreads and assumes all other differentials and pricing relationships remain unchanged.


^(b)	LLS (prompt) - [delivered cost of sour crude oil: Arab Light, Kuwait, Maya, Western Canadian Select and Mars].


^(c)	Assumes 20 percent of crude oil throughput volumes are WTI-based domestic crude oil.

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


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


•	our refinery yields;


•	the selling prices realized for refined products;


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


•	the cost of products purchased for resale;


•	the potential impact of lower of cost or market adjustments to inventories in periods of declining prices; and


•	the impact of liquidations of last in, first out (“LIFO”) inventory layers with costs significantly above current market prices.

Inventories are stated at the lower of cost or market. The cost of our crude oil and refined product inventories is determined under the LIFO method. During periods of rapidly declining prices, the LIFO cost basis of our crude oil and refined product inventories may have to be written down to market value. During the first quarter of 2015, we recognized a permanent reduction in our refined product inventories for LIFO accounting purposes. The cost of these inventories was based on prices in early 2014, which were much higher than current prices. As a result, we recognized a pre-tax charge of approximately $30 million in connection with this LIFO inventory reduction.

Refining & Marketing segment income from operations is also affected by changes in refinery direct operating costs, which include turnaround and major maintenance, depreciation and amortization and other manufacturing expenses. Changes in manufacturing costs are primarily driven by the cost of energy used by our refineries, including purchased natural gas, and the level of maintenance costs. Planned major maintenance activities, or turnarounds, requiring temporary shutdown of certain refinery operating units, are periodically performed at each refinery. We had significantly less planned turnaround and major maintenance activities at our Galveston Bay, Texas and Garyville, Louisiana refineries during the first quarter of 2015 compared to activities at our Galveston Bay, Texas; Garyville, Louisiana; Robinson, Illinois and Catlettsburg, Kentucky refineries during the first quarter of 2014.

Speedway

Our retail marketing gross margin for gasoline and distillate, which is the price paid by consumers less the cost of refined products, including transportation, consumer excise taxes and bankcard processing fees, impacts the Speedway segment profitability. Numerous factors impact gasoline and distillate demand, including local competition, seasonal demand fluctuations, the available wholesale supply, the level of economic activity in our marketing areas and weather conditions. Market demand increases for gasoline and distillate generally increase the product margin we can realize.

The gross margin on merchandise sold at convenience stores historically has been less volatile and has contributed substantially to Speedway’s gross margin. During the first quarter of 2015, approximately half of Speedway’s gross margin was derived from merchandise sales as compared to two-thirds during the same period in 2014. This change is the result of higher light product gross margins during the first quarter of 2015 and the effect of the recently acquired Hess convenience stores. Speedway’s convenience stores offer a wide variety of merchandise, including prepared foods, beverages and non-food items.

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Pipeline Transportation

The profitability of our pipeline transportation operations primarily depends on tariff rates and the volumes shipped through the pipelines. A majority of the crude oil and refined product shipments on our common carrier pipelines serve our Refining & Marketing segment. The volume of crude oil that we transport is directly affected by the supply of, and refiner demand for, crude oil in the markets served directly by our crude oil pipelines. Key factors in this supply and demand balance are the production levels of crude oil by producers in various regions or fields, the availability and cost of alternative modes of transportation, the volumes of crude oil processed at refineries and refinery and transportation system maintenance levels. The volume of refined products that we transport is directly affected by the production levels of, and user demand for, refined products in the markets served by our refined product pipelines. In most of our markets, demand for gasoline and distillate peaks during the summer driving season, which extends from May through September of each year, and declines during the fall and winter months. As with crude oil, other transportation alternatives and system maintenance levels influence refined product movements.

Results of Operations

Consolidated Results of Operations



	Three Months Ended March 31,
(In millions)	2015		2014		Variance
Revenues and other income:
Sales and other operating revenues (including consumer excise taxes)	$	17,191	$	23,285	$	(6,094	)
Income from equity method investments	15		35		(20		)
Net gain on disposal of assets	5		1		4